The objective of every business entity regardless of their size to maximize profits and minimize costs. This is achieved by either maximizing their revenue and cutting down on expenses hence; the gap between costs and revenue increases. Businesses can achieve profitability by ensuring that they are economical on how they spend their resources and maximize the capacity of their productive apparatus. For example, they maximize the productivity rate of a machine by producing at the level where it is functioning optimally. The costs are cut down by ensuring that the unnecessary resources are preserved until the time they are needed most.
Profits are the difference between the total revenue gained from the sale of a product and the total cost incurred in the production of that product. Revenue is the amount collected from the proceeds of selling the product in question. Revenue includes the profit and the production costs. Production costs are the resources incurred in the production of resources right from the start of the production to the sale of the same.
Barriers of entry are the hurdles that a company creates intentionally in order to prevent any rival firm from entering the market or from obtaining the optimal production level. The objective of barriers of entry is to prevent the entry of other firms into a certain sector. The company can use different types of barriers of entry as a way of ensuring it remains the dominant if not the only firm in the productivity of that product. The tougher the barriers of entry, the tougher it is for a potential rival firm to join the market. Even though it sounds unethical, barriers of entry are not illegal in an economy hence; most organizations usually develop them to remain relevant and maximize their profits.
There are several kinds of barriers. A technological barrier of entry is one where the firm creates a barrier by ensuring that other companies do not have access to the necessary technology in order to produce a particular product. This can be achieved by producing a new technology and then keeping it secret so that other firms do not know how to develop it on their own. Alternatively, an organization can decide to develop a new technology and then patent it. Patents ensure that no other company has the right to use that technology apart from it.
Cost barriers are ones where the firm ensures that the cost of production for a new entry firm is so high that it becomes not viable for another company to enter that market. This ensures that it remains the dominant company. An example of this is when a beer producing company reserves the right to buy all the barley in the country. This would mean rival companies will have to import barley in order to make their beer. This would be too expensive for a starting company hence; new firms will not join the industry.
Demand barriers are developed in an effort to ensure that rival companies do not have clients even if they start. This is achieved by starting customer loyalty programs. Such programs include loyalty presents and cards. This is a way of ensuring that new entrants will have few if any clients. The loyalty program is designed to maintain a huge market share that would ensure the company remains the dominant firm.
In order to become a rich monopolist, one has to fulfil certain things. One has to be the only firm in the industry hence; there are no competitors. This can be achieved by acquiring rival firms or merging to form one strong monopoly. The monopolist must then ensure that he creates more demand than supply. Higher demand than supply means consumers are willing to buy the products at a higher price than normal. The next thing is to ensure that the costs of production are kept at the minimum while the revenues are maximized to ensure high level profits. A rich monopolist will always maximize profits where the marginal revenue equals the price.
A monopolistic competition market has the characteristics of a competitive market and those of a monopoly. It has several firms in one market, each of which has its own market share. There is are barriers of entry in this market and the firms have their own market shares. The goods produced are similar but are highly differentiated in order to suit their market share. These firms operate like monopolies by setting their own prices.
The bread industry is a monopolistic market because there are several firms producing one product. However, these companies set their prices for the bread and have their own market shares. There is full flow of information in this market. The bread is highly differentiated into fibre bread, brown bread and white bread among others. The seller compete by designing their products to suit their market share’s desires.
Controlling and reducing the profitability levels of monopolies is not always in the best interest of society or consumers. Monopolies have so many ways of ensuring that they get the maximum gain out of their productivity. The level of profitability does not reflect the amount of exploitation a monopoly does to its clients. Reducing the profitability levels means that the firm can continue charging its clients high charge but by producing lower quantity products. When the profits are low, the monopoly decides to produce less products because of the regulation. However, the shortage in productivity creates increased demand for the same products. This will drive up the prices of the products hence; the consumers will still pay higher prices for the products. Furthermore, the consumers will have to suffer a shortage in the supply of goods and services produced by the monopoly because of the intentional reduction in production levels. Therefore, the monopoly’s profits will be regulated but the welfare of consumers will become worse due to shortage in supply and increased prices. The increased prices for reduced production will mean that the monopoly breaks even after producing a smaller amount of products and selling it at higher prices.
Perfect competition often results in low profits and prices regardless of the cost of production. In perfect competition, there is free glow of information and there are no barriers of entry. The firms are price takers and the number of firms is very high. When an industry is profitable, new firms will join the market hence; creating stiff competition. The high supply of goods will cause a reduction in prices since firms are trying to sell their over-supply to a limited number of buyers. The buyers know that the goods are homogeneous hence they can buy from any seller with the least price levels. Therefore, regardless of the production costs, profits in this market remain low. On the other hand, high demand creates high prices because the consumers will want to buy the goods in less supply. Suppliers will realize this and increase their prices knowing that the consumers will still be willing to buy these products.
Boyes, William J and Michael Melvin. Microeconomics. 9. London: Cengage Learning, 2012.