Maximizing Profits in Market Structures
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The three important market structures in economics are competitive markets, monopolies, and oligopolies. Each market plays a different role in the economy. Competitive markets are when no firm has the power to affect the market price of a good and “many buyers and sellers trading identical products so that each buyer and seller is a price taker” (Mankiw, 290). A monopolistic market is when a specific person or enterprise is the only supplier of a certain good. An oligopoly is a market in which a good has only a few “similar or identical” (Mankiw, 346) products for sale.
There are three characteristics of a competitive market: “There are many buyers and many sellers in the market, the goods offered by the various sellers are largely the same, and firms can freely enter or exit the market” (Mankiw, 290). Because of this, Competitive markets determine the price in terms of “maximizing profits, which equals total revenue minus total cost” (Mankiw, 292). Total revenue is calculated by multiplying price by quantity. Output is determined in a competitive market in terms of maximizing profits by following three general rules: “If marginal revenue is greater than marginal cost, the firm should increase its output, if marginal cost is greater than marginal revenue, the firm should decrease its output, and at the profit-maximizing level of output, marginal revenue and marginal cost are exactly equal” (Mankiw, 294-295). Barriers to entry in a competitive market are non-existent. This is because of the characteristic of competitive markets which states that “firms can freely enter or exit the market” (Mankiw, 290). Competitive markets are the basis of capitalism and market-oriented economy.
One characteristic of a monopoly is that it can influence the price of its output, unlike a competitive market. Also, “The...
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