Maximizing Profits in Market Structures

Maximizing Profits in Market Structure
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July 18, 2010
James Nzokah

Maximizing Profits in Market Structures
What is a competitive market? According to Mankiw (2007), “A competitive market has many sellers and buyers who trade products that are identical or similar. There are three characteristics of a competitive market and they are: there are many sellers and buyers in the market, the goods offered by the various sellers are largely the same, and firms can freely enter or exit the market. However, as a result of these conditions, the actions of any single buyer or seller in the market have a negligible impact on the market price. Each buyer and seller takes the market price as given (pg 290). In a competitive market both buyers and sellers must agree upon or accept the price that the market determines. This is why the buyers and sellers are referred to as price takers.
However, the goal of any competitive firm is to maximize its profit, which equals total revenue minus total costs. Wikipedia (2010) states, “Any profit-maximizing producer faces a market price equal to its marginal cost. This implies that a factor’s price equals the factor’s marginal revenue product. This allows for derivation of the supply curve” (para 2). In a competitive market the price of goods would equal marginal revenue. If a company would want to maximize their profits they would have to increase their production making sure that marginal revenue surpassed marginal cost. A company would have to cut its production if marginal cost were to be greater than marginal revenue.
According to Wikipedia (2010), “Perfectly competitive markets are not productively inefficient as output will not occur where marginal cost is equal to average cost, but efficient, as output will always occur where marginal cost equals average revenue. In long term, such markets are both allocatively and productively efficient” (para 2). Barriers of entry in this case are relatively easy. It is...