Maximizing Profits of a Competitive Market
“A firm in a competitive market, like most other firms in the economy, tries to maximize profit, which equals total revenue minus total cost” (Mankiw, 2011). So for instance say a farm makes certain quantity of milk m, and sells each at the market price y, their revenue would be m x y. If the each milk sells for three dollars a gallon and they sell 500 of them their total revenue would be $1500. The farm is small compared to the market field, so it takes the price that the market has given to them by its conditions. That means that the price of milk is not determined by how much the farmer produces. If they were to double their production of milk then their revenue would ...view middle of the document...
The dairy famer can apply this principal by seeing if their “marginal revenue is greater then their marginal cost” (Mankiw, 2011). So if the farmer sees that it is revenue is greater when it sells, a number of gallons of milk, then they should increase their production of milk because it will put more money (revenue) in their pockets then it would take out (cost), but if they make too much and the revenue is less then the cost than they need to decrease the production of it. So if the dairy farmer thinks at the margin at makes gradual adjustments to the production level, this will lead to them gaining the “profit maximizing quantity” (Mankiw, 2011).
Characteristics of a Monopoly
A monopoly occurs when a firm is the sole seller of the product it makes and there are no close substitutes for it. They provide 100% of the items to the market. A mononpoly also happens when a firm can supply items to the entire market at a lower cost then other firms together. Since the firm is the only one that can make the product it can set its price for the item. Monopolies are, however, rare in this world, but there are some. “One kind of monopoly is when a firm owns all of a specific resource” (Mankiw, 2011). An example of this is the restaurant space in an airport. Governments can also grant permission for a company to have specific rights to an item. A patent is also an example of that. The four characteristics of a monopoly are; they have a unique product, they sell all of their output as a one firm, there are restrictions for firms to enter in and out of the industry and they have special information on products or techniques not available to other firms or producers of the product.