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Profit Maximization Strategy in Different Market Structures

Question

Discuss whether profit maximisation is the best strategy in the long run for firms in different market structures.

Category:

Market Structures and Competition

[CIE A level November 2019]

Preview Answer


Step ➊ : Define ‘profit maximisation’ and ‘long run’ in the introduction.

It is argued whether profit maximisation is the best strategy in the long run for firms in different market structures. The long-run is a period of time in which all factors of production and costs are variable. In the long run, firms are able to adjust all costs, whereas, in the short run, firms are only able to influence prices through adjustments made to production levels. Profit maximisation means that the firm will aim to maximise the difference between the total revenue and total cost. The Profit Maximization Rule states that if a firm chooses to maximize its profits, it must choose that level of output where Marginal Cost (MC) is equal to marginal revenue (MR) and the marginal cost curve is rising. However, we will also see that firms in market different market structures may have different objectives.


Step ➋ : Discuss in which market structure profit maximisation would be the best strategy.


➤ 2.2 In perfect competition and monopolistic competition long-run profit maximisation would apply.

In both under perfect competition and monopolistic competition, the number of firms is large and there is high competition between firms. There are no barriers to entry and exit. In the case of firms facing strong competition from others, they are forced to act as profit maximizers. They must do everything possible to increase sales and reduce costs in order to survive in their competitive environment. Both monopolistic firms and perfectly competitive firms will be making normal profit or zero economic profit in the long run.

The figure below shows the equilibrium price and output in a perfectly competitive firm in the long run.

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