Market Structure Maximize Profits

Only available on StudyMode
  • Download(s) : 728
  • Published : November 30, 2008
Open Document
Text Preview
Market Structure Maximize Profits
The goal of a firm is to maximize profits, to get as much for the firm as possible. In the perfect competition, each firm maximizes profits where marginal revenue (MR) equals marginal cost (MC). That is, the additional revenue from producing additional quantity equals the additional cost incurred in producing that quantity. At an output where MR is greater than MC, increasing production increases profits. If MR is less than MC, decreasing production increases profits. Therefore, MR=MC is the profit-maximization condition. In perfect competition, the price is a given for each firm, P=MR. This is because the fixed price per unit is the additional revenue the firm can expect to earn by selling additional quantity. The firm’s profit- maximization condition becomes P=MR=MC. In the long run, however, all costs are variable. All firms in a perfectly competitive market make zero economic profit in the long run, because if profit was being made, more firms would enter the market and market prices would decline until all firms made zero profit (University of Phoenix, 2008). In the monopoly there are no price taker- a monopolist sets the price for the product or service to maximize profits. The profit-maximizing price and output is at the point where MC=MR. The output is less than what it is in the perfect competition. In the long run, it is possible for a monopolist to earn some economic profits, if to entry of new firms exist (University of Phoenix, 2008). In the oligopoly there are few firms, pricing and output decisions are strategic; that is each firm considers the reaction of the other firms while taking any decision. The prices set by all firms are nearly identical, because any effort to change the price by one firm will induce other firms to follow suit. For this reason, prices, once fixed, tend to change very little in oligopoly. Firms in oligopoly can expect to make some profit in the long run (University of...
tracking img