Maximizing Profits in Market Structures
Maximizing Profits in Market Structures
Competitive markets, monopolies, and oligopolies play a big role in the economy. We will be discussing the characteristics, price determination, output determination, barriers to entry, and the role in economy of each market structure.
In a competitive market there are many firms that supply the same product, such as local gas stations. Mankiw (2007) stated, “You may recall that a market is competitive if each buyer and seller is small compared to the size of the market and, therefore, has little ability to influence market prices” (p. 289). A firm has market power when it is capable of influencing the market price. In a competitive market, the market determines the price the sellers will charge. Mankiw (2007) stated, “In particular, if firms are competitive and profit maximizing, the price of a good equals the marginal cost of making that good” (p. 306). If the seller charges less than the market price, they may sell more. If they raise the cost, they risk losing customers. The output in a competitive market is determined by what will make them have the largest profit. Firms figure this out be comparing the marginal revenue and marginal cost of each unit they produce. When marginal revenue is greater than the marginal cost, the output should be increased so the firm can make a larger profit. They should produce less when the marginal revenue is less than the marginal cost because they will not be making a profit at all. In a competitive market, there is a free entry and exit in the market. The only thing that would keep a firm from entering the market in a competitive firm is if the decision is not profitable to them. The firm will know the decision to enter is profitable if the average total cost of producing the good is less than the price of the good. Mankiw (2007) stated, “In this long-run equilibrium, all firms produce at the efficient scale, price equals the minimum of average total cost, and the number of firms
Competitive markets, monopolies, and oligopolies play a big role in the economy. We will be discussing the characteristics, price determination, output determination, barriers to entry, and the role in economy of each market structure.
In a competitive market there are many firms that supply the same product, such as local gas stations. Mankiw (2007) stated, “You may recall that a market is competitive if each buyer and seller is small compared to the size of the market and, therefore, has little ability to influence market prices” (p. 289). A firm has market power when it is capable of influencing the market price. In a competitive market, the market determines the price the sellers will charge. Mankiw (2007) stated, “In particular, if firms are competitive and profit maximizing, the price of a good equals the marginal cost of making that good” (p. 306). If the seller charges less than the market price, they may sell more. If they raise the cost, they risk losing customers. The output in a competitive market is determined by what will make them have the largest profit. Firms figure this out be comparing the marginal revenue and marginal cost of each unit they produce. When marginal revenue is greater than the marginal cost, the output should be increased so the firm can make a larger profit. They should produce less when the marginal revenue is less than the marginal cost because they will not be making a profit at all. In a competitive market, there is a free entry and exit in the market. The only thing that would keep a firm from entering the market in a competitive firm is if the decision is not profitable to them. The firm will know the decision to enter is profitable if the average total cost of producing the good is less than the price of the good. Mankiw (2007) stated, “In this long-run equilibrium, all firms produce at the efficient scale, price equals the minimum of average total cost, and the number of firms
References: Mankiw, N. G. (2007). Principles of economics (4th ed.). Mason, OH: South-Western Cengage Learning.