Maximizing Profit in Various Market Structures
The presence of increasing or decreasing returns to a variable input (or to scale in the long run) determines the shapes of the firm's cost curves. Revenues are determined by the slope and location of the demand curve. If demand is high relative to costs, the profit-maximizing firm will earn positive economic profits. If demand falls, the firm may experience zero or negative economic profits, or may shut down. Appropriately adjusting the curves illustrates each of these outcomes for a firm in perfect competition, monopoly, monopolistic competition, or natural monopoly.