High returns - Essay Example

High Returns A starting firm would contemplate a few aspects regarding market structures before venturing into business. Those reflections involve the subject of high returns. The elementary aspect for any economy is competitions. Firms outdo each other in terms of competition in order to increase their various returns. The intensity of competition among firms is not a matter of fortune. Not all industries possess equal potential. They vary fundamentally in their ultimate earnings potential as the combined forces of competition differ.

The forces range from deep in industries where no firm earns returns spectacularly to those with spectacular returns (Smith 46). This paper will provide an opinion about the market structure that can provide high returns for a starting company. There are a number of market structures a business may exist. Perfect competition: the market experiences no other forces other than the economic forces. The sellers are price takers in the market. No restrictions for companies to enter and leave the market.

There are large numbers of competing firms with many buyers. There is product homogeneity. Everyone has instantaneous and perfect information about all companies (Nevin 67). Monopoly: includes a single company which is the main industry with many buyers. Oligopoly: there are a few interdependent companies within the industry i.e. a small number of firms are competing. Monopolistic competition: many companies in the industry operate independent of one another. The number of the companies is not too large to approach infinity like in the perfect competition (Mankiw 48).

Through a strict analysis of various market structures I believe that monopoly would provide the highest returns for a novel company. This is in accordance with a number of reasons. In economics, a firm qualifies to be a monopoly when it lacks viable competition (Campbell and Brue 26). In this case, it has the capacity to become the sole producer of the product in the industry. Under normal competitive circumstances, the price of the firm’s product is equal to the marginal cost of the produced product.

A monopoly company does not have worries of losing customers to competitors. It can put prices which may be extensively higher than the Marginal cost involved in producing the product (Von Mises 9). The situation of monopolists allows the company to set a monopoly price. This price is normally higher than one in the competitive market. The commodities for monopolists do not have close substitutes unlike in the other forms of market structures (Langbein 17). Monopolists are price deciders rather than price takers as depicted under perfect competition market situation.

The power of the monopoly gives the firm the mandate to set prices at maximizing profit levels (Schumpeter 33). These are levels where Marginal Revenue is equal to Marginal cost. In normal market situations for monopolists, the price at an optimum output level is higher than the Marginal costs. Therefore, a monopoly company is able to make supernormal profits (Weasels 29). All firms within an industry, producing similar products, in broad sense are competing. Substitutes limit the potential for profits of an industry by introducing a ceiling on the firms’ prices the industry can charge.

The lid on the profits of the industry becomes tight when the pace of performance in tradeoff provided by substitutes is attractive (Baumol and Blinder 78). Substitutes not only reduce profits in normal periods, but also limit the bonanza an industry may reap in boom times. A monopolist does not experience such challenges thus, can maximize returns at any given time of a business cycle. Work Cited: Baumol, William, and Blinder Alan. Economics: Principles and Policy. New York: Blackwell Press, 1999. Print. Campbell, McConnell, and Brue Stanley.

Microeconomics: Principles, problems, and Policies. New York: McGraw Hill Press, 1999. Print. Langbein, Laura. “Grounded Beefs: Monopoly Prices, Minority Business, and the Price of Hamburgers at U.S. Airports.” Public Administration Review 15.1 (1994): 15-18. Print. Mankiw, Gregory. Principles of Microeconomics. New Jersey: Prentice Hall Press, 2002. Print. Nevin, Edward. An Introduction to Micro Economics. New York: McGraw Hill Press, 2004. Print. Schumpeter, Joseph. History of Economic Analysis.

New York: Oxford University Press, 1994. Print. Smith, Adam. An Inquiry into Nature and Causes of the Wealth of Nations. New York: Oxford University Press, 1994. Print. Von Mises, Ludwig. “ Monopoly Prices.” Journal Quarterly Journal of Austrian Economics 1.2 (1998): 3-12. Print. Weasels, Walter. Economics. New Jersey: Prentice Hall Press, 2001. Print.