Maximizing Profits

A competitive market is it is both unable to influence the price of its product and the firm takes as given the price of its product set by supply and demand in the market. When a firm is in the competitive market the only way it is going to survive is to have market power. If a firm has market power then it can set its own price, which is called a price setter. The characteristics of a competitive market for a firm are when there a large number of small firms to compete with. Each firm sells the same product and the consumer has the ability to go in and out of each firm and they know the price of each good. A monopoly is a single seller of a good or service. They have the ability to set their own price of their good. It could be a diamond seller or a company that had sole ownership of a particular space in the airport. No other firm can come in and take over or take ownership of that good that the single firm is selling. The firm is at an advantage because this would be the only good that is available. This is in the example of the De Beer’s diamond mining. As long as a firm can add more to total revenue by it production, the firm will produce it. After the point where marginal revenue equals marginal cost of the marginal unit is greater than the revenue it brings in. Oligopolies are a market with a small number of sellers, where the sellers interact strategically with each other. Each player tries to guess which the competitor is trying to do. There are usually a small amount of large firms and they usually control the market. Competitive firms will use the firms marginal cost to produce the price. The price of the good must be lower than the cost to produce it. To maximize the profits is when the price is equal to the marginal cost of production. The competitive firm must be producing at the point where price equals marginal cost. In monopoly firms they cannot just set a high price for their good because the customers will completely avoid the firms good. If

References: Mankiw, N. G. (2007), Principles of economics (4th ed.) Mason, OH: South-Western Cengage Learning Tomilson Economics Videos http://custom.cengage.com/static_content/OLC/032483332