Profits in Market Structures Market Structures are described as a particular relationship between the buyers and the sellers of goods and services in a specific market (Mathias, 2000). Three different types of market structures are competitive markets, monopolies, and oligopolies. Each of these market structures has a particular set of characteristics that identify it and separate it from the others. These categories are also separated by the way they each use pricing and output to calculate and maximize their profits.
Another difference between these three categories is the presence of barriers, which may be present to encourage current companies to exit, as well as new comers to enter that market. Also, each of these three structures has a different effect on the economy, some having more control on the market than others. With all these differences the specific market structures all have one thing in common, they all rely on supply and demand to determine how to maximize their profits. Competitive markets have two primary characteristics that separate it from other market structures.
The first characteristic is that, within a competitive market, there are a large number of buyers and sellers. Second is that the product being sold is the same among all companies, making the products completely interchangeable. These factors make the market competitive by insuring that no single buyer or seller can control the market price. Therefore, in order for companies within a competitive market to maximize profits, they must maintain an equilibrium between the price charged for a product and quantity that they produce.
This means that a company must take the price being charged for a product and subtract the cost of making the product to figure out where they are equal. As the price of a product in a competitive market is controlled by the market as a whole, the seller must adjust its output to maintain maximum profits.
This is important because the company’s revenue is in direct correlation with the price, so if the price goes up $1. 00 per unit then the revenue also will go up the same amount. For example, if a product has a fixed cost of $1. 0, and the variable cost of $3. 00 and the product sells for $5. 00 then the company has to adjust its output to balance that amount, so that it does not cost over $5. 00 for each product sold. One factor that can affect the output of a product, is the lack of barriers that are present for anyone wanting to begin or exit a company. If the amount of sellers change but the demand does not then current companies will need to decrease the output or risk the price dropping below the profitable levels.
The competitive markets can have a positive impact on the economy because the competition helps control the cost of products. If there was little or no competition, then companies would have the ability to raise prices as high as they wanted to, especially in the case of items that are necessities (Mankiw, 2007). The characteristics of a monopoly are first, that there is only one company selling a product and there are no substitutions. Second, there is no competition, the product is exclusive to one company.
Third, in a monopoly the company completely controls the pricing of its products and can charge as much as they believe a customer will pay (Mathias, 2000). In contrast to a competitive market, a monopoly can chose what to charge for its product. However, the price must be set according to what consumers are willing to pay, while still maintaining a profitable level of production. It is important to control the output of product so, the price must be set to where the company will still be able to sell a large amount of product while maximizing its profits .
There are substantial barriers to entering a market that has a monopoly. One barrier is the inability to compete in the market that is controlled by one company. A small business starting out in completion with a large monopoly would incur substantial costs to begin production and they would have to increase their prices to make a profit. This could also be a problem if the monopoly holds the rights to the raw materials that it takes to make a product. Therefore, entering a market that is controlled by a monopoly is very difficult.
However, it is possible for a market to be controlled by a small number of companies, similar to the way that a monopoly controls a market. The economic impact that monopolies have can be outrageous prices or limited availability of goods and services to many people (Mankiw, 2007). An Oligopoly is when a limited number of companies control a specific market, with little competition (Mathias, 2000). Some characteristics of an oligopoly are that the companies all make the same or similar items, so they are substitutable, and there are only a few companies that produce this good.
As there are a limited amount of producers these oligopolies are also able to set the price of their goods, using things like advertisements and warranties for competition between businesses. Because there are only a few companies making a product the members of an oligopoly have to control the production of their goods in order to control the pricing. If one of the companies decides to increase production then there will be an abundance of supply without the necessary increase in demand. This means that the cost of the product will have to go down to try to increase demand.
These companies have to maintain a steady level of output in order to maintain price, giving them the best profits. The companies that are in this small circle of businesses, try very hard to erect barriers in front of anyone who may think about entering their market. By stopping the emergence of new companies the oligopolies can continue to control the market. The affect that oligopolies have on the economy is the ability to control pricing and supply of products, similar to the impact that a monopoly has (Mankiw, 2007).
In conclusion, each market structure plays a role in the economy with the focus of these companies centering on profits. They monopoly can be beneficial if the lowest price for consumers comes from having only on producer but in many cases a monopoly means high prices and limited supply. An oligopoly does have less control over pricing only because they are sharing the demand and antitrust laws prevent them from gathering together as one monopoly, to maximize profit.
The competitive market is the most economically friendly market because it has to compete to get customers and this helps keep prices affordable and does not limit the availability of goods to the public.