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Maximizing Profits In Market Structures Essay

1344 words - 6 pages

Maximizing Profits in Market Structures

XECO/212 Principles of Economics

Maximizing Profits in Market Structures

There are several types of market structures that influence the goods consumers buy and at what price is set for each good. There are three main market structures which are the competitive markets, monopolies, and oligopolies. Each of which has unique characteristics that determine what role each will play in an economy. The different ways price and output effect maximizing profits in each market structure, along with any entry barriers that may exist for each market structure is also a topic to be discussed.

The unique characteristic each market structure ...view middle of the document...

For instance, if the cost of producing one extra unit of a good exceeds what the company will make from the sale, the profits are not maximized. Therefore, the firm will have to adjust their production to reach the maximum sell of that one said good. Along with maximum profits firms in any market structure must consider the entry and exit barriers facing them in their chosen market. In a competitive market any firm can enter but this is not always a good thing for the other firms already within those markets. The reason for this is because if there are too many companies selling the same goods then the quantity of the good will rise, which in turn will cause the profits to fall causing some firms to fail. On the other hand, if there is a small amount of firms the quantity will fall causing the prices to rise, which in turn will push up the profits. So in other words there is a delicate balance desired for a competitive market in terms of entry and exit. While each market structure has its own unique characteristics each plays its own role in the economy. Competitive markets for example play the role of an equalizer for products that may be scarce or needed for everyday life, such as water, milk, or gasoline. Completely different from competitive markets are monopolies which also play a role in an economy.

Mankiw ((2007)) stated, “A firm is a monopoly if it is the sole seller of its product and if its product does not have close substitutes. The fundamental cause of monopoly is barriers to entry. A monopoly remains the only seller in its markets because other firms cannot enter the market and compete with it. Barriers to entry, in turn, have three main sources: a key resource is owned by a single firm, the government gives a single firm the exclusive right to produce some good or service, or the costs of production make a single producer more efficient than a large number of producers ” (p. 290). The barriers of entry and exit set for by the market are the characteristics that make a firm a monopoly. The fact that a monopoly consist of a firm offering a good not offered by any other firm allows them to generally make more profit. The profit made is determined by the price and output of said good. The firm must consider the value of the good that the consumer considers it to hold to determine the price a monopoly will charge for said good. Even though a firm may be the only one producing a certain good, if the price is set to high the consumers will simply go without that product. If a product is not an everyday item that is needed the chances are that the consumer will not be willing to pay the high price for something that could be lived without. On the other hand if the firm has a set price that the consumers are willing to pay that cannot be purchased elsewhere, then the firm has to decide on how much of the said good they...

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