XECO/212 Principles of Economics (Axia)
May 8, 2011
Market Structures and Maximizing Profits
There are three major types of market. Competitive markets, which is where numerous buyers and sellers offer products or services that are basically the same. Monopolies, where there is only one seller of a product, and oligopolies, where there are only a few firms that sell products that are similar or identical. From society’s stand point competitive markets are the most favorable and monopolies are the least favorable.
According to Mankiw, “a competitive market, sometimes called a perfectly competitive market, has two characteristics: (!) There are many buyers and sellers in the market, and (2) The goods offered by the various sellers are largely the same.” (p.290) Because of these conditions each buyer and seller takes the market price as given. No single buyer can influence the price because each consumer purchases only a small quantity relative to the size of the market. Since there are many other sellers with basically the same product an individual seller has little control over the price. Buyers and sellers in competitive markets are considered price takers. A competitive firm’s goal is to maximize profit; which is the total revenue minus the total cost. To find the profit maximizing quantity, they must compare the marginal revenue and marginal cost from each unit produced. As long as the marginal revenue is greater than the marginal cost, increasing the quantity of units produced increases the profit. This is also how a competitive firm determines its output. Firms can enter or exit a competitive market freely. Competitive markets play a major role in keeping the price of similar items at a reasonable level. It also makes it possible for anyone to enter or exit the market if they desire to start a business. Examples of competitive market firms would be Barber’s milk and Lay’s potato... [continues]
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