Chapter Summary

In this chapter, we examine managerial decisions in three market environments: perfect competition, monopoly, and monopolistic competition. Each of these market structures provides a manager with a different set of variables that can influence the firm's profits. A manager may need to pay particularly close attention to different decision parameters because different market structures allow control of only certain variables. Managers who recognize which variables are relevant for a particular industry will make more profits for their firms.

Managers in perfectly competitive markets should concentrate on producing the proper quantity and keeping costs low. Because perfectly competitive markets contain a very large number of firms that produce perfect substitutes, a manager in this market has no control over price. A manager in a monopoly, in contrast, needs to recognize the relation between price and quantity. By setting a quantity where marginal revenue equals marginal cost, the manager of a monopoly will maximize profits. This is also true for the manager in a monopolistically competitive market, who must also evaluate the firm's product periodically to ensure that it is differentiated from other products in the market.