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Week Four Assignment: Market Structures and Maximizing Profits Shayne Paul Jedlicka XECO 212 October 30, 2011 Walter Schaefer Week Four Assignment: Market Structures and Maximizing Profits Three market structures involving monopolies, oligopolies, and competitive markets make up the economy in the United States. Each market has different characteristics making each an important part of the economy.
Maximum profits are received in a monopoly market because of its control over the market, an oligopoly market also has a large amount of control but profits are reduced because some competition is present, and a competitive market realizes the least profit potential for any company though it is the largest market structure. Each market has its own method of determining how much of a product or service to produce, how much money the product or service is worth, and the level of difficulty for another company to enter that particular market structure.
Monopoly Market A monopoly is when one company has control over a resource needed to produce a product or service because of ownership of the resource, the government giving one company the rights to a resource, or the demand for the product or service is not large enough to support more than one company (Mankiw, 2007). To maximize the profit in a monopoly the company sets the price above the marginal cost of production while only producing enough of the product to meet the demand (AmosWEB LLC, 2011).
If the company sets the price to high the demand for its product will decrease causing a negative profit, to avoid this, companies set the price low enough to keep the demand high while still pricing the product or service above the marginal cost of production. Most monopolies exist because the demand for the product is not large enough to support two or more companies, one company owns the rights to a product such as Microsoft’s Windows programs (Mankiw, 2007), or the government controls or assigns a resource to a company or locality because the resource is limited.
Where a monopoly controls a market, sets the price of the product or service, and is hard or impossible for another company to enter, the opposite is true for companies in the competitive market. Competitive Market A competitive market exists when multiple companies produce the same or like product and the demand from buyers equals the output of these companies (Mankiw, 2007). The price of the product or service in a competitive market is not controlled by any company but rather is set by what the consumer is willing to pay.
In a competitive market if one company raised the price of their product, the consumer would purchase the same from another company that did not raise the price. This results in most companies keeping the price of their product equal to or below other competitors to maximize profit potential by selling large quantities of the product. Market equilibrium is reached because the companies only manufacture enough products to meet the demand, making a competitive market the most efficient market structure (AmosWEB LLC, 2011).
Another advantage in a competitive market is a company’s ability to enter or leave the market at any time. Unlike a monopoly, no one company or government has control of a necessary resource; the result is a market that can support multiple companies producing the same product (Mankiw, 2007). The economy benefits from this competitive market because prices for a product or service remain stable at a level the consumer is willing to pay. Whereas a competitive market and a monopoly market are opposite in most respects, an oligopoly market connects the two in the middle. Oligopoly Market
An oligopoly market shares traits with both monopoly and competitive markets in that several companies form a kind of monopoly but are still competitive with one another. Oligopoly markets are formed when small number of large companies controls a resource or has the patents of a product or service. These companies sometimes work together in establishing a price for the product and compete for business with differing methods. Some will concentrate on advertising their product or service as the best, while others will make the product more easily accessible to the consumer.
The ability for companies in an oligopoly market to control the pricing is much like a monopoly, but the competition between them likens to a competitive market. To gain a competitive edge over other large companies in this type of market, companies continue developing new ideas and advances in technology, which promotes economic growth throughout the economy (AmosWEB LLC, 2011). While it is not impossible to enter an oligopoly market, it is hard because of the costs involved with starting a small company that can compete with the large established firms involved in the market.
To maximize profits in this market companies focus on producing the product at a lower cost than other companies while still selling the product at the same price, rely on franchise name, or develop features in the product that the other like products do not have (AmosWEB LLC, 2011). A stable economy depends on each market operating efficiently by pricing the products or service equal to the demand of the product, and ability or willingness of the consumer to pay for the product or service. Market Structure Summary
As different as each market structure is, the economy depends on a balance of monopoly, oligopoly, and competitive markets to maintain strength. While a competitive market may appear the fairest to both producer and consumer, there is no motivation within these companies to produce a better product as seen with an oligopoly because greater profits would not be realized. For this reason oligopoly markets, even though the pricing in this market parallels a monopoly, the motivation for these companies to produce better products exists over a competitive market.
Monopolies are a strong market stabilizer because without them, some companies would attempt to gain access and the neither the existing company or the new one would be able to receive a profit because the operating cost would exceed the revenue generated; not enough demand to support more than one company producing the product or service. Each company within each market type is important in maintaining a stable economy, if one market structure operates ineffectively by producing more of a product than is in demand, not producing enough, pricing the product or service to high, or pricing it to low can result in an economic breakdown.
References AmosWEB LLC. (2011, October). Competitive Market. Retrieved from http://www. AmosWEB. com AmosWEB LLC. (2011, October). Monoploly. Retrieved from http://www. AmosWEB. com AmosWEB LLC. (2011, October). Oligopoly. Retrieved from http://www. AmosWEB. com Mankiw, N. G. (2007). Principles of Economics (4th ed. ). Mason, OH: South-Western Cengage Learning.