Maximizing_Profits

Maximizing Profits in Market Structures The definition of market structure is how the market is organized, based largely on the number of firms in the industry. There are four basic models which are: monopoly, oligopoly, monopolistic competition, and perfect competition. A firm’s goal is to maximize their profits, and to acquire as much as they can. In the perfect world, each of the firm’s will maximize their profits where marginal revenue equals marginal cost. This is when the additional revenue from producing additional quantity equals the additional cost incurred in producing that quantity. When you have an output where the marginal revenue is greater than the marginal cost, increasing production increases profits. If the marginal revenue is less than the marginal cost, decreasing production increases profits. So when the marginal revenue equals the marginal cost it is the prime profit-maximization condition. The type of products sold in the market is also a key characteristic. The difference between the firm’s products is also a characteristic that is used in classifying market structures. When all firms sell the same products, this is perfect competition. In monopolistic competition firms make products that vary slightly, while firms with an oligopolistic market structure produce products that are the same. Finally, with a monopoly the difference between products is not an issue due to the fact that there is only one firm that is in control of all of the products. A monopoly can be considered to be the opposite of perfect competition. In a monopoly there are no price takers. The price is set by a monopolist so the profit is maximized for a product. The profit-maximizing price and output is at the point where marginal cost equals the marginal revenue. It is possible for a monopolist to earn some economic profits if the entry of a new firm exists. The monopoly concept comes up when one of the firms becomes the only producer and the only marketer of a given product or service. With oligopoly there are several firms in which the goals are strategic. This happens when each of the firms takes into consideration the other firms reactions before making any final decisions. A very important characteristic of the oligopolistic market structure is the inter-dependence of firms that are in the industry. When a firm that is oligopolistic decides to change their price it has an effect on its competitor’s and their competitor’s sales and that causes more competition. This makes it to where an oligopolistic firm has to consider the other firms reaction when figuring out their decisions. All of the firms set their prices at the same rate, because if one of the firms changes their price then it will cause the other firms to do the same. Since this happens with the prices, once they are fixed, the oligopoly changes very little. Profits within firms in oligopoly are made but not right away. With monopolistic competition, there are many sellers and buyers involved in which there are few barriers to the entry of new firms. Individual firms sell products that are different and they invest with making their products different from their competitions. Each firm’s profits are maximized where the marginal revenue equals the marginal cost. Over time though all firms involved do not earn any economic profit. Perfect competition seems to be the perfect market structure when it comes to explaining and understanding how market structures work in a capitalist economy. There can also be a better understanding of the other market structures when the perfect competition market structure is used as a base reference. The general public still has a hard time fully understanding the perfect competition concept and still struggles with fully understanding it. A good example would be when a business person speaks of intense competition in the market for a product; they are more than likely talking about their rival suppliers, in which they have a lot of information. How it is perceived can change though when economists talk about perfect competition. When economists talk about it they are particularly referring to the impersonal nature of this market structure. The impersonality of the market organization is due to the existence of a large number of suppliers of the product—there are so many suppliers in the industry that no firm views another supplier as a competitor. Thus, the competition under perfect competition is impersonal. Perfect competition is common and desired for society for a couple of reasons. The first reason would be how the price that is charged to an individual equals the marginal cost of production to each firm. The second reason would be how the output that is produced under a perfectly competitive market structure is larger than other market organizations. These two reasons combined make perfect competition a very desirable market structure. REFRENCES Colander, D.C., (2004). Economics, 5th edition. Irwin/McGraw-Hill, Burr Ridge, Il. Chapter 13. Forgang, William G., Einolf, Karl W. (2006). Management Economics: An Accelerated Approach. M.E. Sharpe Competition (2007). Encyclopedia of Business, 2nd Edition from Encyclopedia of Business, Clo-con website: http://www.referenceforbusiness.com/encyclopedia/Clo-Con/Competition.html