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Differentiating Between Market Structures Simulation Essay

1144 words - 5 pages

Market Structures Simulation PAGE \* MERGEFORMAT 1
Differentiating Between Market Structures SimulationUniversity of PhoenixECO/365: Principles of MicroeconomicsNovember 9, 2009Differentiating Between Market Structures SimulationIn the University of Phoenix simulation (2003), Differentiating Between Market Structures, a situation is presented concerning cost and revenue curves in the different market structures by a freight transportation company. Throughout the simulation scenarios are presented and decisions must be made to maximize profits or to minimize losses (University of Phoenix, 2003). This paper will summarize and address the advantages and limitations of supply and demand the simulation, analyzing how market structures maximize profits, identify the market structure of a selected organization, and include a table that compares and contrasts the various characteristics of the four market structures.Advantages and Limitations of Supply and DemandAll firms strive to obtain their objective of maximizing profits, "to get as much for itself as possible" (Colander, 2008, p. 242). All firms regardless of the market structure in which they operate will maximize profits when marginal cost (MC) equals marginal revenue (MR).Scenario OneIn the first scenario, East-West's Consumer Goods Division operated in a perfectly competitive market structure. A perfectly competitive market is "a market in which economic forces operate unimpeded' (Colander, 2008, p. 238). The division had been recording losses for the past few years and was considering exiting that line of business. A decision was made to continue operations and limit output to 6.75 million hundred weight shipments at $55 per hundred weight shipment to minimize losses at $150.03 million.In a perfect competition, many sellers exist and all sellers take the market price (P) because no seller can control the market price. "Profit is maximized for each seller at the output where marginal revenue (MR) equals marginal cost (MC)" (University of Phoenix, 2003). In a perfect competition price equals marginal revenue for the sellers because the price is the revenue the seller expects to earn for each additional unit; P=MR=MC. When price is between average total cost (ATC) and average variable cost (AVC), producing at this level will minimize losses and cover variable costs but not fixed costs. If price decreases below average variable cost, neither ATC nor AVC can be recovered and operations should cease. In the long run, firms make zero economic profits because all costs are variables.Scenario TwoIn the second scenario, Fast Forward Transport exited the business resulting in East-West's Coal Division to operate in a monopoly market structure. A monopoly is "a market structure in which one firm makes up the entire market" (Colander, 2008, p. 261). As a regional monopoly East-West could set the price for their services, but would also need to increase their services to meet the entire market demand. A...

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