October 30, 2011
Week Four Assignment: Market Structures and Maximizing Profits
Three market structures involving monopolies, oligopolies, and competitive markets make up the economy in the United States. Each market has different characteristics making each an important part of the economy. Maximum profits are received in a monopoly market because of its control over the market, an oligopoly market also has a large amount of control but profits are reduced because some competition is present, and a competitive market realizes the least profit potential for any company though it is the largest market structure. Each market has its own method of determining how much of a product or service to produce, how much money the product or service is worth, and the level of difficulty for another company to enter that particular market structure. Monopoly Market
A monopoly is when one company has control over a resource needed to produce a product or service because of ownership of the resource, the government giving one company the rights to a resource, or the demand for the product or service is not large enough to support more than one company (Mankiw, 2007). To maximize the profit in a monopoly the company sets the price above the marginal cost of production while only producing enough of the product to meet the demand (AmosWEB LLC, 2011). If the company sets the price to high the demand for its product will decrease causing a negative profit, to avoid this, companies set the price low enough to keep the demand high while still pricing the product or service above the marginal cost of production. Most monopolies exist because the demand for the product is not large enough to support two or more companies, one company owns the rights to a product such as Microsoft’s Windows programs (Mankiw, 2007), or the government controls or assigns a resource to a...