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Maximizing Profits in Market Structures: Theory & Overview

Instructor: Ashley Johns

Ashley has taught college business courses and has a master's degree in management.

Most businesses open with the intention of achieving high profits. The process of getting there is the difficult part. This lesson is a review of profit maximization in various competition structures. You can follow-up with a quiz.

Time to Make a Profit!

You own a small clothing boutique downtown. You used to run constant promotions. The goal was to get new customers through the door. The business has been open for three years and has an established customer base. Now you've decided to adjust the strategy to profit maximization.

What is Profit Maximization?

Profit is the difference between a company's revenue (money brought in) and costs (money going out). Profit Maximization is when the goal of the company is to have the highest profit possible. It seems like this should be the goal of every business, but it is only one theory in pricing.

Price Elasticity

To determine the highest possible price it can charge, the company needs to go through a trial and error process. This determines price elasticity. Price elasticity is the demand for a product at a certain price. For example, if you put women's jeans for sale at $30 each you might sell ten pairs per week. Will that change if you bump the price to $35? What about $40? The company can slowly increase the price to determine at what point the demand for the product goes down.

Achieving Profit Maximization in Various Competition Structures

The amount of sales for a company is determined by competition. A company has to take into account how much competition exists in the industry and the competition's actions. This will determine how to react and achieve the highest profit possible. Let's discuss the types of competition.

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