Module 4 Reflections and Self Assessment

Profit maximization in short run and long run are two similar profit maximization strategies. First off with profit maximization in the short run, managers must make two decisions. The first decision is to decide whether to produce or to shut down during that period. After managers make the decision to produce rather then shut down, its next decision is about choosing the optimal level of output. Deciding to produce depends if P>ATC, if P>ATC then it is beneficial to produce, but if P<ATC then the firm has to decide if producing some output will be more beneficial then producing no output and shutting down. The long run profit maximization strategy is similar to the short run but in the short run the manager’s production decisions are limited because some of the inputs used in the short run are fixed costs. In the long run, all inputs are variable so a manager can choose to employ any amounts of capital or plant size. The choice of capital can be referred to as “scale of operation.” It can be fixed in the short run but in the long run it can be altered. Once the firm has decided on a particular size plant or amount of capital, the firm operates in a short-run situation. You can definitely see how they are different. You can say the long run is viewed as the planning stage to the operations. The firm is trying to decide how large of a production facility to create that provides an optimal scale of operations. There aren’t many forms of monopoly pricing but if there is they are subject to some form of government regulation. An example of a firm that employs monopoly pricing in my opinion would be Microsoft with its Windows operating system. Microsoft Windows software runs on almost 90 percent of the worlds PC’s which can be worrisome. If you buy a PC that isn’t Apple, you have Microsoft Windows on your computer. Microsoft can charge almost any price to these computer companies to use the Microsoft Windows operation system because which Microsoft does not have very much competition in the operating system industry with the high barriers to enter (price to develop the operating systems) and Microsoft most likely operates at an economy of scale compared to newer companies in the industry since they probably have better technology to produce these operating systems. If I owned a small business, I would prefer to operate in a monopolistic competition since firms in a monopolistic competition has more market power then a firm in a perfect competition. So a firm in a monopolistic competition have some sort of price-setting ability instead of perfect competition firms that are price-takers. It is important to analyze the different market structures and profit maximization outcomes since each market structure can lead to different profit maximization outcomes. In a perfect competition, the profit maximization depends on the market demand since those firms are price-takers. They cannot choose the price of their product so those firms split demand for those products. A Monopoly is not as worried about profit maximization since they can choose whichever price for their product but at the same time it is a goal for them since maximizing profit is always a goal. In an oligopoly, those firms have some kind of market power so they are sort of price-setters but in an oligopoly there are many substitutes so a drastic rise in price will cause that firms demand to drop for their product.