Economics for Managers

Running head: ECONOMICS FOR MANAGERS
Economics for Managers
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1ECONOMICS FOR MANAGERS
Question a
Perfectly competitive market
Perfectly competitive market is a special form of market characterized by large
number of buyers and sellers competing in the marketplace with a homogenous product. The
main characteristics of perfectly competitive market are as follows
Number of buyers and sellers
In the perfectly competitive market, there is a considerably large number of buyers
and sellers in the market. The presence of large number of buyers indicate intense
competition among them.
Type of product
All the sellers in the perfectly competitive market sells a homogenous or identical
product.
Market power
As there are large number of buyers and sellers in the market, each enjoys a very
small share in the market (Baumol & Blinder, 2015) Neither sellers nor buyers have any
market power. Sellers are price takers and have to accept the price determined in the market.
Free entry and exit
Firms are allowed to freely enter or exit the market. This feature of perfectly
competitive market eliminates all the supernormal profits or loss from the market in the long
run. Firms enjoy only normal profit in the market.
Monopoly

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Monopoly is market condition characterized by a single seller in the market with no
close substitute (Sloman & Jones, 2017) The main characteristics of monopoly market are
given as follows
Single seller and large number of buyers
In a monopoly market, only one firm exits in the market. The number of buyers in the
market are however large. The single seller serves the large group of buyers.
Nature of the product
In order to sustain monopoly power in the market, the monopolist has to sell a unique
product having no close substitute.
Barriers to entry
In the monopoly market there are significant barriers for entry of new firms. The entry
barriers in the market are either natural or artificial.
Market power
Being the single firm in the market, monopolist has the maximum market power (Hill
& Schiller, 2015) The monopolist can influence the market price and acts as a price maker.
Short run and long run profit and losses under perfect competition
Short run
Competitive firms face an elastic demand curve which given by a horizontal line. As
sellers are price takers in the market both average and marginal revenue are same as price
line. The first order condition for short run equilibrium is price is equal to the marginal cost
of production. In order to satisfy the second order condition for maximizing profit under
perfect competition marginal cost curve should cut the marginal revenue curve from below

3ECONOMICS FOR MANAGERS
(Cowen & Tabarrok, 2015) In the short run, the competitive firms have the opportunity to
enjoy profit above the normal profit or economic loss or to earn just normal profit.
Figure 1: Above normal profit in competitive market
Figure 2: Economic loss in competitive market

4ECONOMICS FOR MANAGERS
Figure 3: Normal profit in short run
Long run
In contrast to short run, competitive firms in the long-run earns a normal profit. As
firms are free to enter or exit the industry, above normal profit or economic loss eliminates
and there is only normal profit in the industry (Mochrie, 2015).
Figure 4: Long run equilibrium under perfect competition

5ECONOMICS FOR MANAGERS
The figure above shows the long run equilibrium for both a firm and industry in a
competitive market. Suppose in the short run price for competitive firm is at P. At this price,
firms earn a supernormal profit. The profit prospective profits attract new firms in the
industry. As new firms enter the industry, supply increases shifting the supply curve to the
right (Maurice & Thomas, 2015). This lowers the price. Firms continue to enter the industry
unless profit reduces to normal profit.
Short run and long run profit and losses under monopoly
Short run
In the short run, the monopolist acts like any other firms. The monopolist either
maximizes profit or minimizes loss by producing output where marginal revenue equals to
the marginal cost. The two conditions for short run profit maximization marginal revenue
equals to the marginal cost and marginal cost curve should cut the marginal revenue curve
from the below at equilibrium (McKenzie & Lee, 2016) Like competitive firms, monopolist
in the short run operates with either supernormal profit or normal profit or loss.
Figure 5: Supernormal profit under monopoly