Maximizing Profits in Market Structures

Maximizing Profits in Market Structures

Jennifer Meyer

XECO/212

April, 29, 2012

Peter D. Brothers, MAOM

A competitive market is a market with many buyers and sellers trading identical products so that each buyer and seller is a price taker. A competitive market is comprised of two characteristics; there are many buyers and many sellers in the market and the goods offered by the various sellers are largely the same. There is a third characteristic thought to characterize perfectly competitive markets: firms can freely enter or exit the market. With consideration to the sizeable amount of buyers, sellers, and product in a competitive market one single action by a buyer or seller hardly has any impact on the price. Buyers and sellers alike take the market price as given. In a competitive market and in terms of maximizing profits, the price of the product is already determined. The market dictates what the prices of certain products are going to be. A competitive firm is a price taker, so the profit-maximizing quantity is determined when its marginal revenue equals the market price. Output in terms of maximizing profits is different though. In a competitive market a firm will have to find out what their output needs to be to effectively maximize their profits. When a firm maximizes profit, the marginal cost will equal marginal revenue. In a competitive market, there could be barriers when a firm attempts entry, but a competitive market allows free entry and exit. “If price is less than average total cost, profit is negative, which encourages some firms to exit.” (Mankiw, 2007). Competitive markets play a significant role in the economy. This market structure sets a “check and balance” system where firms will enter and exit the market freely depending on different variables. Supply and demand are a driving force with this market structure. They determine the prices, and the prices tell businesses what to produce. When demand rises, opportunities arise for...