Economics Discuss the Alternative Theories to Profit Term Paper

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Economics

Discuss the alternative theories to profit maximization ranging from perfect competition to strict monopolies and discuss how these two special conditions are theoretical limits

In economics, profit maximization is the process by which a firm determines the price and output level that returns the greatest profit. There are several approaches to this problem. The total revenue -- total cost method relies on the fact that profit equals revenue minus cost, and the marginal revenue -- marginal cost method is based on the fact that total profit in a perfect market reaches its maximum point where marginal revenue equals marginal cost. Economists identify four basic types of markets based on the number of firms relative to the size of the market (The size of the market is determined by what the buyers believe to be good substitutes for a firm's product. For example, the market for long-distance calls is national: people consider any U.S. long-distance supplier to be a good substitute. However, the market for funerals is very local: you are unlikely to consider a funeral parlor even in another neighborhood to be a good substitute.), the ease of entry (are there barriers such as economies of scale or government regulation?) and the degree of competition (do firms ignore each other's choices or compete actively?) And product differentiation (Do consumers consider the product to be the same regardless of who produces it, or not?) Perfect competition: This is a market in which there are large numbers of buyers and sellers of a homogeneous product (e.g., wheat is wheat), none of which can influence price; easy entry (small economies of scale and no other barriers); and essentially no competition (they ignore or even help each other).

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E.g. include most basic commodities: agricultural products, minerals (oil, etc.), etc. The alleged unique attribute of a perfectly competitive industry is that the market price equals the marginal cost of production, as a consequence of the competitive profit maximizing behavior of myriad non-collusive small firms. Individual self-interest and social welfare are reconciled, because the profit-maximizing behavior of individual firms leads to the socially optimum outcome: that the marginal benefit of output to society equals the marginal cost of production. Perfect competition is a purely theoretical construction. Some compare perfect competition to frictionless state in physics; it is the beginning point. Provides basis for much of the decision theory that has been applied in finance, management, and marketing. It is remarkably useful in predicting economic behavior in actual markets

Monopoly: This is the case where there is essentially only one big firm in the market for the product (there may be many tiny ones but they have no effect on the big one's choices), there are significant barriers to entry, and, of course, no competition. An example is Microsoft with respect to the PC operating system. Its monopoly power….....

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