Visula Literacy

Maximizing Profits in Market Structures Paper

There are many factors that determine the structure of a market. Some of these major factors are the amount of firms, the barriers to new firms existence, and the interrelationship between the firms in order to set the prices for the products and at the same time maximize the firms’ earnings. With that, this paper will explore the role of the principle of supply and demand in the market including advantages and limitations, the exact barriers to the entry of new firms, and how all the existing firms in the market interact to increase their profits. In a capitalist economy, the performance of the markets is highly important, and the competition among these markets will also determine the market structure, as well as its impact in the market place.

Basically, a firm exists to earn as much profit as possible. In a perfect competition market, firms achieve the maximization of the profits through the following equation: Marginal revenue (MR) is equivalent to the marginal cost (MC). This could be interpreted such as that the cost of the additional revenue used for the production of an additional quantity of the product should be the same with the amount gained when producing that additional quantity. Once the MR exceeds the MC, this would allow the firm to increase their profits by increasing their quantity of goods. Therefore, the stable situation wherein the MR=MC means the maximization-profit of a certain firm. Also, in a perfect competition market the price for a certain product is equivalent to its marginal revenue – P=MR. The fixed price for every unit is simply the additional revenue the firm will earn by producing and selling additional products. With this, the pricing equation becomes P=MR=MC. Realistically speaking though, the costs will all become variable in time. Firms would eventually end up with zero economic profit. If firms were really earning good profits, then more firms would have willingly...