Maximizing Profits

Maximizing Profits in Market Structures

The definition of market structure is how the market is organized, based largely on the number of firms in the industry. There are four basic models which are: monopoly, oligopoly, monopolistic competition, and perfect competition.

A firm’s goal is to maximize their profits, and to acquire as much as they can. In the perfect world, each of the firm’s will maximize their profits where marginal revenue equals marginal cost. This is when the additional revenue from producing additional quantity equals the additional cost incurred in producing that quantity. When you have an output where the marginal revenue is greater than the marginal cost, increasing production increases profits. If the marginal revenue is less than the marginal cost, decreasing production increases profits. So when the marginal revenue equals the marginal cost it is the prime profit-maximization condition.

The type of products sold in the market is also a key characteristic. The difference between the firm’s products is also a characteristic that is used in classifying market structures. When all firms sell the same products, this is perfect competition. In monopolistic competition firms make products that vary slightly, while firms with an oligopolistic market structure produce products that are the same. Finally, with a monopoly the difference between products is not an issue due to the fact that there is only one firm that is in control of all of the products.

A monopoly can be considered to be the opposite of perfect competition. In a monopoly there are no price takers. The price is set by a monopolist so the profit is maximized for a product. The profit-maximizing price and output is at the point where marginal cost equals the marginal revenue. It is possible for a monopolist to earn some economic profits if the entry of a new firm exists. The monopoly concept comes up when one of the firms becomes the only producer and the only...