Maximizing_Profits_in_Market_Structures

Maximizing Profits in Market Structure Your Name XECO/212 July 18, 2010 James Nzokah Maximizing Profits in Market Structures What is a competitive market' According to Mankiw (2007), “A competitive market has many sellers and buyers who trade products that are identical or similar. There are three characteristics of a competitive market and they are: there are many sellers and buyers in the market, the goods offered by the various sellers are largely the same, and firms can freely enter or exit the market. However, as a result of these conditions, the actions of any single buyer or seller in the market have a negligible impact on the market price. Each buyer and seller takes the market price as given (pg 290). In a competitive market both buyers and sellers must agree upon or accept the price that the market determines. This is why the buyers and sellers are referred to as price takers. However, the goal of any competitive firm is to maximize its profit, which equals total revenue minus total costs. Wikipedia (2010) states, “Any profit-maximizing producer faces a market price equal to its marginal cost. This implies that a factor’s price equals the factor’s marginal revenue product. This allows for derivation of the supply curve” (para 2). In a competitive market the price of goods would equal marginal revenue. If a company would want to maximize their profits they would have to increase their production making sure that marginal revenue surpassed marginal cost. A company would have to cut its production if marginal cost were to be greater than marginal revenue. According to Wikipedia (2010), “Perfectly competitive markets are not productively inefficient as output will not occur where marginal cost is equal to average cost, but efficient, as output will always occur where marginal cost equals average revenue. In long term, such markets are both allocatively and productively efficient” (para 2). Barriers of entry in this case are relatively easy. It is easy to enter and exit a competitive market. Mankiw (2007) states, “Decisions about entry and exit in a market of this type depend on the incentives facing the owners of existing firms and the entrepreneurs who could start new firms. If firms already in the market are profitable, then new firms will have an incentive to enter the market. This entry will expand the number of firms, increase the quantity of good supplied, and drive down prices and profits. Conversely, if firms in the market are making losses, then some existing firms will exit the market. Their exit will reduce the number of firms, decrease the quantity of the good supplied, and drive up prices and profits (pg. 302). In the economy a competitive market helps with the economy’s productivity, provides consumers with a wider variety of goods at lower prices, and ensures that buyers receive the best value for their money. A monopoly exists when an individual or company has control over particular products or services, and they determine whether or not anyone else can have access to it. According to Wikipedia (2010), “A monopoly has two characteristics which are: a monopoly has one seller of a good who produces all the output, and market power. Market power is the ability to affect the terms and conditions of exchange so that the price of the product is set by the firm. Although a monopoly’s market power is high it is still limited by the demand side of the market. A monopoly faces a negatively sloped demand curve not a perfectly inelastic curve. Any price increase will result in the loss of customers (para 8). Monopolies have very high barriers to entry. It is difficult to access this market, because the barriers are strong enough to prevent potential competitors from entering into the market. They want to have complete control over a service or product. If a company were to raise the prices on their goods, then a consumer would purchase less in quantity. If a monopolist were to lower the amount of the output it sells then the price of its output would increase. If a monopolist produces only one item they can sell it at a high price, but once they produce more of the same item the price has to be marked down in order to sell more. In order to maximize their profit a monopolist goal is to increase their production rate until both the marginal cost and marginal revenue are the same. Demand and production determines the price. Monopolies can have a negative impact on the economy because they overcharge consumers and take money out of the economy. It is more about them than it is about us the consumers. An oligopoly is an imperfect competitive market, which has only a few sellers or firms who offer similar products. Oligopolies also have barriers to entry that keeps others from making excess profits in the market. According to Mankiw (2007), “Oligopolists maximize their total profits by forming a cartel and acting like a monopolist. Yet if Oligopolists make decisions about production levels individually, the result is a greater quantity and a lower price than under the monopoly outcome. The larger the number of firms in the oligopoly, the closer the quantity and price will be to the levels that would prevail under competition (pg 312). In oligopolies maximizing their profit is important because the prices of their products decrease as the products quantity increase. If the price is less than the output then production will rise. If the output is less than the price then production will decrease. If there are a large number of sellers, then they will not be too concerned about their impact on market price. In an oligopoly the firms will continue to increase their production as long as the price stays above marginal cost. According to Mankiw (2007), “Oligopolies would rather act like monopolies, but because they have self-interest which drives them closer to competition. Thus, oligopolies can end up looking either more like monopolies or more like competitive markets, depending on the number of firms in the oligopoly and how cooperative the firms are (pg 365). In an economy, oligopolies can have both positive and negative effects. References Mankiw, N.G. (2007). Principles of Economics (4th. Ed.) Mason, OH: South – Western Cenage Learning Wikipedia (2010). Perfect Competition. Retrieved from http://en.wikipedia.org/wiki/Competitive_market