Maximizing Profits in Market Structures

Maximizing Profits in Market Structures

Tim Crosby

Student

XECO212, University of Phoenix

June 8, 2013

Abstract

The business of businesses is managed and organized into different types of market structures that are the foundation of each specific form of an economic market. To completely understand the need for various structures of a market, you must understand the definition of economics and markets. Economics is defined as, “… the study of how society manages its scarce resources. A market is a group of buyers and sellers of a particular good or service” (Mankiw, 2007). The form of each market variation is based on a number of principles, such as the types of goods, the size of the industry’s producers, or the number of consumers available for that market. This paper discusses the different forms of markets, their effects on society, and the differences between them.

Maximizing Profits in Market Structures

Within the foundation of economics, the structure of a market is made up of the number of firms competing in the same market. These firms may share similarities that categorize the firms together in a shared market. However, the same firms must have differences in order to set them apart from their competition. Some of these market firms have little competition and so they not influenced by competition while firms are in markets where there is little competition to compete with. The three main forms of market firms, in our society, are competitive markets, monopolies, and oligopolies.

Competitive markets have certain characteristics that make up the infrastructure of the competitive market, such as each firm in the market sell an identical product or service, knowledge of the product, price, and costs, as well as all buyers and sellers are not big enough to influence the market price on any good or service. Mankiw (2007) describes this type of competitive market as a “perfectly competitive market”. The buyers in this type of market do not have any influence or choice in the market price and so they are referred to as “price takers”. With a firmly-defined market price, the buyers and sellers can buy and sell in any amount of quantities without affecting the market or price. The economy surrounding sellers in a competitive market is affected only by the volume of product sold. The more products there are to sell, the more labor that is required to sell, stock, and maintain quality of the product. This provides that local economy with a reduction in unemployment. In a competitive market, there are no barriers when a new seller wants to enter the market since the market price is not influenced by the sellers or buyers. However, not all markets are in perfect competition with each other.

In a monopoly - a market firm who maximizes profits, there is only one seller and since this one seller has control of the supply curve, that seller can set the price of their goods and services. The success of a monopoly, however, is greatly influenced by the demand curve for their goods and services. In chapter 4 of the Principles of Economics, one example of a monopoly utilized was the local cable television provider. In some small towns, residents may be limited to one provider for their cable television needs and this creates a monopoly over those cable services. The only area where a monopoly really has to focus is continually creating a demand for their product supply. If their services become obsolete, the local cable television provider will not be able to grow and reinvest its capital back into the company. In that instance, the cable provider will fail to sustain itself. A synonymous feature to consider would be a monopsony (a market with only one buyer) which is similar to a monopoly, but only affecting the labor market. A monopsony, much like the monopoly controls the price and supply of