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Xeco212 Maximizing Profits in Market Structures

In: Business and Management

Submitted By pacamaro
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Market Structure is defined by the number of firms who are competing in that market, the factors that differentiate the firms from each other, the similarities between the firms, and any obstacles that would exist to any firm that wanted to enter the market. The level of competition exerts significant influence over the type of market structure that emerges and leads to what payoffs, if any, would result from entering that market. This paper will go into detail on the many distinctions between the different market structures, the obstacles to entering these markets, and how each type of structure maximizes profits. Markets are broken down into a few various categories. These categories are perfect competition, monopolies, monopolistic competition and oligopolies. An economist, citing economic theory, may express a preference to one type of structure based on the outcomes they can yield. The structure of each structure type is based on the traits of its business types. The attributes a business will display changes with the number of companies in that particular market. Management of prices, product types and entry barriers for new companies and market competition that do not depend on price are the attributes of a market. The capacity to control the prices of a company’s goods is price management. This is a critical element in market structure. Any company that can enjoy the benefits of a monopoly structure has ultimate price control for its goods. Those in a perfect competition have no control over their prices since they are controlled by competition and the consumer. Oligopolies and those companies in monopolistic competition have some control over their prices. Market structures foundation is based on how many companies are offering the same goods or services and the range of competition in the market. A monopoly occurs when there is

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Maximizing Profits in Market Structures

...Maximizing Profits in Market Structures XECO212 October 9, 2011 Dale Schwieterman Maximizing Profits in Market Structures Competitive Market A competitive market is a market with many buyers and sellers trading identical products so each buyer and seller is a price taker (Mankiw, 2007). There are two characteristics o f a competitive market: (1) There are many buyers and sellers in the market, (2) the goods offered by the various sellers are largely the same. In addition to the previous two characteristics, there is a third condition that is sometimes thought to characterize competitive markets; firms can freely enter or exit the market. For example if someone decides to start an egg farm, and another existing egg farm decided to leave the market, this condition would be satisfied. Any firm in a competitive market, just like any other firm in the economy, tries to maximize profit (which equals total revenue minus total cost). Because marginal revenue for a competitive firm chooses quantity so that price equals marginal cost (Mankiw, 2007). In short, the firm’s marginal-cost curve is a supply curve. When a firm cannot recover its fixed cost, the firm will choose to shut down temporarily if the price of the good is less than the average variable cost. However, in the long run when the firm is able to recover both fixed and variable costs it will choose to exit if the price is less than average total cost. In a competitive market the free entry and exit...

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