Market_Structures

Market Structures and Maximizing Profits Brian Bates XECO/212 Friday, June 4, 2010 Dr. Steve Hoagland Different factors can be discussed when determining the different roles competitive markets, monopolies, and oligopolies play in the economy. In the following paragraphs I will explain the different roles of these markets, and how they determine price and their output to maximize profits. The characteristics of a competitive market structure are: a large amount of buyers and sellers in the same market, and goods offered by a variety of sellers that are the same. According to Mankiw (2007), “a competitive market is a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker” (p. 290). An example of a firm in a competitive market is Krogers. Krogers is a competitive firm because there are a variety of sellers and buyers with identical products. Price in a competitive market is controlled by the supply curve of the product or products offered. A firm maximizes its profits by producing the quantity of a good that makes profit as large as possible. For a firm to maximize profit in a competitive market marginal revenues must exceed marginal costs, increasing the quantity produced raises profit (Mankiw, 2007). In order for Krogers to maximize their profits, they manipulate their list prices of their product with the highest profit while selling the most goods at that price. No barriers exist in a competitive market because firms can enter or exit the market freely. A competitive market plays an important role in the economy by allowing competition, which allows consumers to receive the best value for their money. The characteristics of a monopoly structure are if a firm is the only seller of a product and there are no close substitutes of the product sold (Mankiw, 2007). An example of a monopoly firm is DP&L (Dayton Power and Light), which is the sole provider of electric for a number of small towns near where I live. DP&L has no competition in many of these towns so they can set the rates at any rate they choose. Many utility services in rural areas have a monopoly over their consumers do to no other options within the local market for those same services. The percentage a firm owns of the market for a product will have substantial influence over the market price for a product. An example is the electrical company mentioned earlier in this paper, if the electrical company owns 100% of the rights to market the product of electricity in a town the company can set the price of the product as high or low as the firm wants. Their market share influences the product or service price and at what level it will be set. With the electric company owning the sole rights to market electricity in the town it controls the market price for the product. According to Mankiw (2007), “because a monopoly is the sole provider in its market, it can alter the price of its good by adjusting the quantity supplies to the market” (p. 316). In a monopoly a firms output is set by marginal cost of a product. According to Mankiw (2007), “when marginal cost is less than marginal revenue, the firm can increase profit by producing more units (p. 320). If costs are greater than revenue, firms will have to reduce production to make a profit. According to Mankiw (2007), “the monopolist’s profit-maximizing quantity of output is determined by the intersection of the marginal-revenue curve and the marginal-cost curve” (p. 320). In a monopoly structure there are three main barriers: a key resource is owned by a single firm, the government gives a single firm the exclusive right to produce a good or service, and the cost of production make a single producer more efficient than a large number of producers (Mankiw, 2007). The role of a monopoly structure is bad for the economy because it restricts free trade, which allows the market to set prices for itself. Characteristics of oligopoly market structure are a handful of firms that sell the same product or service or offer a similar product or service. Oligopoly market is different from monopoly and competitive market because monopoly market only has one firm selling a product or service that the firm has the sole rights over, and competitive market has several firms selling the same product or service. An example of oligopoly firms are: Direct TV, Time Warner Cable, and Dish Network. These firms offer the same product and services and are the only firms that offer these products and services. In an oligopoly structure the price of a product is bound by the marginal cost of the product. If the marginal cost of the product is zero, then any amount the firm sales the product for is a profit. Output in oligopoly market is set by an agreement between firms on the quantity of a product or service offered and the amount to charge for the good or service. Doing this firms can maximize their profits. The role oligopoly market structure plays on the economy is that it causes inflation. According to Merriam-Webster, Incorporated (2010), “inflation is a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services” (inflation, para. 2). In conclusion there are a variety of different characteristics of the three different market structures. Price is set in different ways for all three market structures. Maximizing profits from output is also determined in different ways for all three market structures. All three market structures play an important role in the economy, and they all affect the economy differently. References Mankiw, N.G. (2007). Principles of economics (4th ed.). Mason, OH: South-Western Cengage Learning. Merriam-Webster, Incorporated. (2010). Merriam-Webster. Retrieved from http://www.merriam-webster.com/dictionary/inflation