Maximizing_Profits_in_Market_Structures

Maximizing Profits in Market Structures Axia College of University of Phoenix Maximizing Profits in Market Structures What are market structures' Market structures are different characteristics of a market, including its size and value, the number of providers and their market share, consumer and business purchasing behavior, and growth forecasts. There are different types of market structures and in this paper they will be discussed and how it is possible to maximize profits in them. Varying degrees of competition lead to different market structures. The market structures that will be discussed are monopolies, oligopolies, and competitive market. Each one of these market structures goes a different route to maximize profits. In a monopoly, there is only one producer/seller for a product. In other words, the single business is the industry. It is difficult to access this type of market because it is very costly and there are other obstacles that may get in the way. Some may be economical, political, or social. An example of this is the government having control over electricity. They want to have sole control over it and be the only entity to have exclusive rights over this resource. Another reason is that a company may have a copyright that prevents others from getting involved such as Pfizer had on Viagra. A monopoly makes its prices based on the market demand. This is because if they raise the price of their good, the consumer will purchase less of it whereas if the monopolist lowers the quantity of the output it sells the price of its output increases. They would prefer to charge a lot for their good and sell a significant amount at that price but because of the market demand curve that is unattainable. In a monopoly, if it produces one good it can be sold at a higher price but once more goods are produced, the price must be dropped in order to sell more. Since all of this is about maximizing their profit, the goal is to increase production to the level where the marginal cost is the same as the marginal revenue. The production and the demand determine the price. This is an easy way to understand how a monopoly maximizes their profit. Monopolies affect the economy in a negative way because they overcharge so they are taking money out of the economy that could go to other things. Monopolies accrue so much money that they could possibly become dominant in the economy. Once they acquire political power they use for the monopoly and not the society. On the other hand, an oligopoly has a few firms that make up the industry. They are price setters and not price takers unlike a competitive market. Like a monopoly, it also has hurdles to jump over in order to gain entry. They range from economics of scale, patents, access to expensive and complex technology, and strategic actions to discourage them. These barriers prevent others from entering into the market to take excess profits. Most of the products that these firms produce are identical and since they are all competing for market share, they are interdependent because of market forces. For example, if the economy needs a 100 of a particular product and one company makes 50 of them and the other company makes the other 50, then the prices of the two brands will be similar. However, if one company starts to sell the product at a lower price, they will receive a bigger market share. This will compel the other company to drop their prices (Investopedia, n.d.). Some oligopolies form an agreement or collusion on their prices and production. Several would like to do this but there are laws that forbid it because of public policy. Production is an important aspect to maximizing their profit because a rise in production reduces the price of their product. Their price equals the marginal cost and it is less than the monopoly price but more than the competitive market. If the output is more than the price then they will increase production but if the price is larger than the output, the production will drop. If the oligopoly cultivates, the enormity of the price descends but it will then be a competitive market. The bottom line is oligopolies choose prices and production to maximize profit. They will take several avenues to increase market shares such as include guaranteed delivery times and low cost service agreements, stay open longer, offer 24 hour customer support and online support, offer discounts on product upgrades, and start contractual relationships with suppliers (Riley, 2006). What effects does this market structure have on the economy' It has some negative effects and some positive ones. Oligopolies are general contributors to national income and exports. They also provide people with important necessities. They increase economic development and optimize the quality of production. The negative is that they strive for dominance which leads to inflation. A competitive market has many buyers and sellers in the market and the goods offered by them are virtually the same. However, it is relatively easy to enter and exit this market. This simple fact makes it to whereas any seller or buyer can have a negative impact on the market price. The buyers and sellers in a competitive market must accept the price the market determines and that is why they are said to be price takers. The price is the same no matter how much the company produces. In a competitive market, total revenue minus total cost is the way they maximize profit. The first step to seeing how this is done is to look at the revenue. In a competitive market, marginal revenue equals the price of the good. In order to maximize profit, a company would increase production as long as the marginal revenue surpasses the marginal cost. However, if marginal cost is greater than marginal revenue, the company should decrease its production. Competitive markets have an excellent affect on the economy because they encourage enterprise and efficiency and provide the best means of ensuring that the economy’s resources are put to their best. They encourage companies to boost productivity, reduce prices, and to innovate. They reward consumers with lower prices, higher quality and wider choice. They also contribute to international competitiveness (Scholasticus, 2010). There was a great deal of information within this essay. The different types of market structures were discussed and the characteristics of each one. Also, information on how they maximize their profit was provided as well what type of effect each structure has on the economy. It was broken down step by step how their price and output is determined and the obstacles that are faced to enter each one. References Investopedia, (2010), Economic Basics, Retrieved on June 14, 2010 from http://www.investopedia.com/university/economics/economics6.asp Riley, G., (2006), Perfect competition, Retrieved on June 14, 2010 from http://tutor2u.net/economics/revision-notes/a2-micro-perfect-competition.html Scholasticus, K,. (2010), Oligopoly market structure, Retrieved on June 14, 2010 from http://www.buzzle.com/articles/oligopoly-market-structure.html