Fisheries Economics

5.1.1. Profit Maximization

5.1.1. Profit maximisation

Producers are considered to be rational and profit maximisers. For that they need to minimise their cost of production and maximize the output. To minimise the input cost, producers tend to use those inputs which cost least. So the least – cost combination of inputs helps the firm to minimise its cost of production based on the principle of equi-marginal returns. For example, if a rupee spent on factor A enhances output more than that obtained from a rupee spent on factor B, then a producer would substitute factor A for factor B. It will continue until equilibrium when marginal returns of the two factors are equal over the unit of money spent.

The principle of least cost combination has certain limitations : (i) the factors may not be perfectly divisible and effective substitution may not be possible; (ii) there are difficulties in calculating the marginal product of each factor and (iii) the producer has to decide not only the best production of factors, but also the best scale of production. Thus, there are limitations in the use of the principle of least cost combination.

Alternative market structures

The basis market structures that we'll be examining over the next several weeks include: perfect competition, monopoly, monopolistic competition, and oligopoly. Let's examine the defining characteristics of each market structure. Perfect competition is characterized by:

• a very large number of buyers and sellers,

• easy entry,

• a standardized product, and

• each buyer and seller has no control over the market price (this means that each firm is a price taker that faces a horizontal demand curve for its product).

A monopoly market is characterized by:

• a single seller producing a product with no close substitutes,

• effective barriers to entry into the market, and

• the firm is a price maker, also called a price searcher because it faces a downward sloping demand curve for its product (in fact, note that this demand curve is the market demand curve).

One special type of monopoly is a natural monopoly, a monopoly that arises because of the existence of economies of scale over the entire relevant range of output. In this case, a larger firm will always be able to produce output at a lower cost than could a smaller firm. The pressure of competition in such an industry would result in a long-run equilibrium in which only a single firm can survive (since the largest firm can produce at a lower cost and can charge a price that is less than the ATC of smaller firms).

Under a monopolistically competitive market:

• there is a large number of firms,

• the product is differentiated (i.e., each firm produces a similar, but not identical, product),

• entry is relatively easy, and

• the firm is a price maker that faces a downward sloping demand curve.

In an oligopoly market:

• a small number of firms produce most output,

• the product may be either standardized or differentiated,

• there are significant barriers to entry, and

• recognized interdependence exists (i.e., each firm realizes that its profitability depends on the actions and reactions of rival firms).

Most output is produced and sold in oligopoly and monopolistically competitive industries.