Competitive Markets and Costs

Competitive Markets and Costs

There exist several types of markets operating in the business environment that includes competitive markets, oligopoly, duopoly, and monopoly markets. As such, in each market, there are certain factors that influence the ease of entry or exit in the market (Avgeropoulos, & McGee, 2015). In a competitive market, the ease of entry and exit will be influenced by the size of the market, the nature of the product or services to be offered in the target market, the initial capital outlay to operate in the market, and government regulation. Therefore, if the government puts a lot of requirements to enter or exit the market, few operators will be willing to join. Also, if the market is capital intensive, smaller firms will find it challenging to enter the market. If the market is small or saturated with firms offering the same products or services, few firms will seek to enter and those operating will seek to exit. If the product is essential to life, many firms will enter the market to offer it (Mankiw, 2021). This is well explained in the simulation results below that has many drivers operating in the market with the option to decide whether to operate or not as profits vary on different days and levels of competition.

Marginal costs refer to incremental costs in the production of an extra unit of the good. As a business owner, I will seek to operate where the earned revenue from extra units produced will be more than or equal to marginal cost, thus operate at the point where marginal revenue equals marginal cost (Turvey, 2000). Fixed costs are the costs that do not change with the level of production. Total costs are a summation of fixed costs and variable costs where variable costs are the costs that vary with the level of production. As the firm increases its production in long run the fixed costs reduce while in the short run they are high. This is because the total cost gets distributed to a large volume of production in long run giving average total costs which are lower than in the short run where the total costs are distributed on small volume produced.




Avgeropoulos, S., & McGee, J. (2015). Barriers to entry and exit. Wiley Encyclopedia of Management, 1-3.

Mankiw NG, (2021). Principles of Economics (9th Edition), Cengage Mind Tap. Retrieved from:

Turvey, R. (2000). What are marginal costs and how to estimate them? (Vol. 13). Ralph Turvey.

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