Maximizing Profits in Market Structures
The three important market structures in economics are competitive markets, monopolies, and oligopolies. Each market plays a different role in the economy. Competitive markets are when no firm has the power to affect the market price of a good and “many buyers and sellers trading identical products so that each buyer and seller is a price taker” (Mankiw, 290). A monopolistic market is when a specific person or enterprise is the only supplier of a certain good. An oligopoly is a market in which a good has only a few “similar or identical” (Mankiw, 346) products ...view middle of the document...
Also, “The fundamental cause of monopoly is barriers to entry: A monopoly remains the only seller in its market because other firms cannot enter the market and compete with it” (Mankiw, 312). The barriers to entry are: “A key resource is owned by a single firm; the government gives a single firm the exclusive right to produce some good or service, and the costs of production make a single producer more efficient than a large number of producers” (Mankiw, 312). In a monopoly, output is determined by analyzing the demand curve. “The market demand curve describes the combinations of price and quantity that are available to a monopoly firm. By adjusting the quantity produced (or equivalently, the price charged), the monopolist can choose any point on the demand curve, but it cannot choose a point off the demand curve” (Mankiw, 317). Because of this, “the monopolist reduces the quantity of output it sells, the price of its output increases” (Mankiw, 316). The price is determined in a monopoly in two ways. First, “when marginal cost is less than marginal revenue, the firm can increase profit by producing more units” (Mankiw, 320). Second, “if marginal cost is greater than marginal revenue, the firm can raise profit by reducing production” (Mankiw, 320). The role that a monopoly plays in the economy is usually negative. A lot of times monopolies will restrict free trade which allows the market to set its own prices.
The characteristics of an oligopoly are that there are only a few sellers, and they...