Maximizing Profits in Market Structures
The subject matter of competitive markets can be complex with many extraneous details that can make all the difference between being a perfect competition, monopolistic competition, a monopoly, or an oligopoly. Each of these types of markets have specific characteristics and economic market effects that include entry barriers, price and output determination to produce the most profits for any given business or company. Even though these differences may seem small, they can determine whether a business can succeed in today’s economy or forever become part of human history.
To be categorized as a perfect competition, it must have two of three traits. A perfect competition market has many sellers and buyers and those goods offered by the sellers are mostly the same (Mankiw, 2007). A third trait may be present in the form of free entry in the market by another company producing a similar good. There is a bit of a drawback to this market. Sellers are not able to control the price. The price depends on what the consumers want and are willing to pay or what is called the “market price” (Mankiw, 2007). Determining the output to maximize profits follows “three general rules…: 1.
If marginal revenue is greater than marginal cost, the firm should increase its output. 2.
If marginal cost is greater than marginal revenue, the firm should decrease its output. 3.
At the profit-maximizing level of output, marginal revenue and marginal cost are exactly the same” (Mankiw, 2007, p. 295). At first perusal, this may seem like a convoluted system, but it does help to achieve an economic balance. Simply stated this means the least amount of the entire cost of a good is equal to the price of the good and this stabilizes the market. In addition, because of the similar choices available of the good, the demand curve remains elastic.
Related to a perfect competition market, is a monopolistic competitive market. This market...
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