Maximizing Profits in Market Structures Paper

LaKeshia Wardlaw

Axia College

Shon Kraley

XECO 212

January 16, 2010

 The economy is crucial in our daily lives and one important thing that we should

considered studying, is the principles and roles of the markets, more specifically, the competitive

markets, monopolies, and oligopolies.

The competitive market is defined by as a ‘market with many buyers and sellers trading

identical products so that each buyer and seller is a price taker’ (Principles of Economics, p.290).

In the competitive market each and every seller and buyer accepts the predetermined for that

particular good; The cost of a product is determined by how much the buyers are willing to pay,

as well as how much the and sellers are willing to sell the products for. Another characteristic of

competitive market is that any seller or the firm that offers the product can enter or exit the

market without any restraint (Principles of Economics, p.290). A firm is competitive if the prices

they charge for products, is equivalent to the marginal cost which makes that good’ and is, or

very close to the equilibrium (Mankiw, p.306). Typically speaking, the market is competitive,

and due to the fluctuating prices of goods, products and services, the market will remain

competitive. This is the reason there are fewer businesses that are going out of business.

Another important market structure is the monopolistic market. Mankiw describes that

the firm as a monopoly ‘if it is sole seller of its product and if its product does not have close

substitutes’ (Mankiw, p.312). When a single product is traded or made, the competitors will

begin to decrease their prices in order to attract potential consumers, the monopolies market will

set the prices that will serve as a guide in the market.

The competitive market set spending and buying limits that creates the optimal contrast

in the monopoly market. Although price control begins with the monopolistic structures, the cost

per product does not automatically create unlimited profit. One reason that they set prices as high
as they do, is because there are a lot of people that will not be able to afford certain products,

causing the supply to increase and the demand of the product to decrease.

Even though the monopolistic company decides the prices of a product, it still depends on

how much the consumer is willing to pay for that product in order for it to be effective. However,

it still depends on the product and the need for that product to determine whether or not the

product will sell at all.

As stated in the Ten Principles of Economics, some governmental agencies can set

regulations for monopolistic companies, which can improve better market outcomes. However,

there are several barriers that could slow down the other companies and one barrier is the

ongoing access to the products. Another key factor is that occasionally, the government may

award the exclusive right to certain products, that way other businesses and companies can

openly and legally provide and produce the same type of products. There are two laws that cover

the monopolistic structures as it covers the interest of the public and they are known as copyright

and patent laws. When comparing the competitive markets, monopolies and oligopolies the

prices of marginal cost of monopolized markets is usually greater than the original the marginal

cost. However, in most cases, the presence of monopolistic firms causes the price of the

production to be more suitable, even when dealing with multiple producers.

The last structure when dealing with maximizing profits is called oligopoly and

commonly known as the imperfectly competitive market. According to Mankiw, oligopoly is ‘a

market with only a few sellers, each offering a product similar or identical to the others’

(Mankiw, p.350). The role of the different structures such as oligopoly appears to be like the

role of the competitive market, but others feel as if that particular structure is more like the
monopolies. The main characteristic noted when dealing with the oligopoly market structure is

the number of companies that produce similar products, if not the same products in order to give

the consumers a choice of whom they want to purchase the products from. That way, the

customers have some say so in regards to the businesses that they choose to support. Although,

there are some instances that a business can come to terms with paying and charging a higher

prices for a product. This situation calls collusion, and the companies that create such union

called a cartel (Mankiw, p.350). Oligopoly markets are similar to the monopoly markets due to

their ability to change the prices of the products for the consumers of the markets. In situations

where oligopoly businesses are not willing to cooperate with the changes of the amount of a

particular product, they will more than likely manufacture more products than that of a

monopoly market but a lot less than that of the competitive market. So the primary rule for

output and price are decided when considering how to maximize profits which does not apply as

much as it does in the case of the competitive market and not as little as in the case of

monopoly structure, which equals to the marginal cost. Oligopoly is much simpler easier than a

monopoly, but far more difficult than the competitive market.

Once we have learned about the three different types of market, we now have a better

understanding of its three main structures. Every market has something that is considered to be

unique to their individual structure, which clarifies the role of each market structure.

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References

Mankiw, Gregory. Principles of Economics, 4e. Pages 290 Received January 18, 2010