Competitive Market

12 Key excerpts on "Competitive Market"

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  Economic Freedom and the American Dream

  • J. Shaanan(Author)
  • 2010(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  In this chapter, actual markets are examined, and the ques- tion posed is whether they can be properly described as competitive free markets. 124 ● Markets 10.1 Competitive Markets A perfectly Competitive Market structure is said to provide the best alloca- tion of resources. Such markets have many producers and many consumers, none of whom can affect price by their own individual actions. Instead, prices are set through the impersonal interaction of numerous buyers and sellers. Existing firms cannot bar entry into the industry or exit from it, thereby ensuring mobility of resources. In addition, products are standard- ized (no brands based on real or perceived differences), and buyers and sellers are assumed to possess perfect information. Such markets are clearly more in the nature of an ideal or a theoretical construct than a realistic depiction of an economy. Yet the theoretical basis for the well-known assertion that market economies are superior to alternative systems is based on the model of perfect competition. Critics complain that there is an excessive emphasis on price competi- tion and the ensuing (static) allocative efficiency while the benefits of other forms of business competition are downplayed. An obsession with price competition is said to reflect a misunderstanding of the way business func- tions and competes for survival. A serious challenge to price competition and its allocative efficiency as an economic priority is the claim that it may result in fewer technological innovations and therefore require a sacrifice in the form of slower rates of economic growth. Economic studies suggest that technological progress is a primary contributor to long-term growth. 3 Schumpeter proposes that monopolies and oligopolies, as well as large firms, are more likely to engage in innovative activity leading to technological pro- gress than firms in more competitive (price) markets.

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  Managerial Economics

  The Analysis of Business Decisions

  • Stephen Hill(Author)
  • 2016(Publication Date)
  • Red Globe Press

    (Publisher)

  190 Managerial Economics Finally, the perfectly competitive situation as described can have no real-life counterpart. The restrictive nature of the assumptions ensures that perfect competition has not, will not, and cannot exist. The role of perfect competition lies in setting a standard, so that real competitive situations can be described in terms of their departure from perfect competition. A closely related form of competition is pure competition, which retains the major assumptions of many small suppliers , freedom of entry and product homogeneity without the informational perfec-tion demanded by perfect competition. Some commodity and financial markets have been described as purely competitive, but even in these groups of producers have been known to act in concert to restrict supply and hence influence price. Monopolistic competition Monopolistic competition relaxes the conditions for perfect com-petition by allowing for imperfections in knowledge and some product differentiation. Because of product differentiation the demand curve faced by each firm is now downward sloping, allowing the firm some discretion over price. In the short run (Figure 8. 3}, the firm can make economic profits, but in the long run the absence of entry barriers implies that these profits are competed away (Figure 8.4). The effect of new entry, attracted by economic profits, is to force the demand curve downwards until those profits no longer exist. AC D=AR MR 0 Output Figure 8.3 Short-run equilibrium The competitive environment 191 £ AC D=AR MR 0 Output Figure 8.4 Long-run equilibrium Note that since the demand curve slopes down, marginal revenue lies below the demand curve. In the long run, equilibrium occurs when the demand curve is tangential to the long-run average cost curve. Because output is not at the minimum point on the average cost curve, each firm is left with excess capacity.

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  The Driving Force of the Market

  Essays in Austrian Economics

  • Israel M Kirzner(Author)
  • 2000(Publication Date)
  • Taylor & Francis

    (Publisher)

  For this approach, competition is the essential defining characteristic of the market process itself. No matter what the institutional contours of the market may be, no matter what the economic power possessed by market participants may be, the market process (if such a process does exist and occur) is itself necessarily competitive. It is a process during which entrepreneurial, competitive-minded market participants, whether incumbent participants or merely potential participants, discover the true shape of market possibilities and constraints. The only situation in which competition can be said to be absent is one in which markets do not operate. Such a situation presumes, as in the centrally planned economy, the existence of institutional prohibitions on market exchanges. In any market situation, however, no matter what the degree of monopoly may be (and regardless of how monopoly is to be defined), the market process itself must be a competitive one. There simply is no market process other than that consisting of competitively inspired discoveries of opportunities for gain through exchange. If, for example, a firm is the monopolist in an industry (whether as the result of unique control over some essential input or as the result of governmental grant of exclusive privilege), the manner in which the monopolist’s price and quantity of sales is determined in the market is one that emerges from the competitive interplay of the decisions of potential buyers (of the monopolized commodity) as well as of those of participants in related markets. There is no other procedure governing the sequence of prices and quantities as determined in a world of open-ended uncertainty. Textbooks present, of course, the monopolized market as one in which the monopolist is confronted by a given and known demand curve, from which he at once selects his profit-maximizing price—quantity combination. But in fact no monopolist knows his demand curve in advance

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  Microeconomic Theory

  Basic Principles and Extensions

  • Walter Nicholson, Christopher Snyder(Authors)
  • 2016(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  399 Competitive Markets Chapter 12 The Partial Equilibrium Competitive Model Chapter 13 General Equilibrium and Welfare In Parts 2 and 4 we developed models to explain the demand for goods by utility-maximizing individ-uals and the supply of goods by profit-maximizing firms. In the next two parts we will bring together these strands of analysis to discuss how prices are determined in the marketplace. The discussion in this part concerns Competitive Markets. The principal characteristic of such markets is that firms (as well as individual demanders) behave as price-takers. That is, firms are assumed to respond to market prices, but they believe they have no control over these prices. The primary reason for such a belief is that Competitive Markets are characterized by many suppliers; therefore, the decisions of any one of them indeed has little effect on prices. In Part 6 we will relax this assumption by looking at markets with only a few suppliers (perhaps only one). For these cases, the assumption of pricetak-ing behavior is untenable; thus, the likelihood that firms’ actions can affect prices must be taken into account. Chapter 12 develops the familiar partial equilibrium model of price determination in competi-tive markets. The principal result is the Marshallian ‘‘cross’’ diagram of supply and demand that we first discussed in Chapter 1. This model illustrates a ‘‘partial’’ equilibrium view of price determination because it focuses on only a single market. We look at the comparative statics analysis of this model in considerable detail because it is one of the key building blocks of microeconomics. In the concluding sections of the chapter we show some of the ways in which these models are applied. A specific focus is on illustrating how the competitive model can be used to judge the wel-fare consequences for market participants of changes in market equilibria brought about by taxes.

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  Intermediate Microeconomics and Its Application

  • Walter Nicholson, Christopher Snyder(Authors)
  • 2021(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  281 “As every individual endeavours ... to direct industry so that its produce may be of greatest value ... he is led by an invisible hand to promote an end which was no part of his intention. By pursuing his own interest he frequently promotes that of society more effectively than when he really intends to promote it.” —Adam Smith, The Wealth of Nations, 1776 Perfect Competition I n this part, we look at price determination in markets with large numbers of demand-ers and suppliers. In such Competitive Markets, price-taking behavior is followed by all parties. Prices therefore convey important information about the relative scarcity of various goods and, under certain circumstances, help to achieve the sort of efficient over-all allocation of resources that Adam Smith had in mind in his famous “invisible hand” analogy. Chapter 10 develops the theory of perfectly competitive price determination in a sin-gle market. By focusing on the role of the entry and exit of firms in response to profitability in a market, the chapter shows that the supply-demand mechanism is considerably more flexible than is often assumed in simpler models. It also permits a more complete study of the relationship between goods’ markets and the markets for the inputs that are employed in making these goods. A few applications of these models are also provided. In Chapter 11, we examine how a complete set of Competitive Markets operates as a whole. That is, we develop an entire “general equilibrium” model of how a competitive economy operates. Such a model provides a more detailed picture of all of the effects that occur when something in the economy changes. P A R T 5 281 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).

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  The Market Mechanism and Economic Reforms in China

  • William Byrd(Author)
  • 2019(Publication Date)
  • Routledge

    (Publisher)

  9 Whenever there is more than one potential opposite number, agents also have a choice regarding with whom to conclude a market transaction. This leads in a natural way to activities on the part of market participants to influence choices made by those on the other side of the market, which is the essence of competition.

  Competition is a dynamic process (Clark 1961). Depending on its nature and strength and the kinds of activities it stimulates, competition may play a crucial role in promoting efficiency, growth, and technological progress. Two main questions arise in this context: (1) the optimal type, degree, and arena of competition; and (2) the prerequisites for unfettered competition.

  Types of Competition

  Competition can be classified by several different criteria: (1) the number of transactors on each side of the market and the impact each has on the market; (2) actual versus potential competition; (3) the arena in which competition occurs (price versus nonprice competition, business competition versus competition for rents); and (4) general market conditions (buyers’ market versus sellers’ market). The last of these is discussed in the following section.

  At one extreme, monopoly in theory results in restriction of output and higher prices. At the opposite extreme, perfect competition has strong static efficiency implications. The combination of the two is monopolistic competition (Chamberlin 1956), where each producer has a unique product for which he is a monopolist facing a downward-sloping demand curve, but there are many sellers of similar goods, each too small to affect market conditions for the “product group” as a whole. In between the two extremes are various forms of imperfect competition, with relatively few transactors, at least some of them of a size large enough that they individually can have an impact on prices, market conditions, and each others’ activities.

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  Competition, Monopoly, and Differential Profit Rates

  On the Relevance of the Classical and Marxian Theories of Production Prices for Modern Industrial and Corporate Pricing

  • Willi Semmler(Author)
  • 2019(Publication Date)
  • Columbia University Press

    (Publisher)

  The market is the place where individuals and their interests are coordi-nated and disturbances are eliminated. The fundamental mecha-nism which would produce these results is the supply and demand mechanism. Moreover, the market mechanism is considered to operate in a political milieu of perfect liberty. To a great extent this is the neoclassical interpretation of Smith's theory of free compe-tition, and in that respect Smith was seen as the most important forerunner for the neoclassical theory of competition (see Stigler 1957; Arrow and Hahn 1971). The neoclassical theory formulated several conditions for a perfectly competitive economy, for which a welfare maximum would be realized. These conditions, generally regarded as the necessary and sufficient conditions for a perfectly competitive economy, are as follows (see Arrow and Hahn 1971, chs. 1-3): The participants in the economic activities (the producers and con-sumers) show a maximizing behavior: the producers, transforming inputs into outputs, maximize profits under production constraints, and the consumers maximize their utilities under income constraints. The decisions of the agents in the markets are independent of each other. There are no coalitions or collusions and no external effects of production or consumption decisions. A large number of buyers and sellers is assumed so that no firms or consumers have a significant influence on the quantity sold or bought in the market. All firms produce under constant or decreasing returns to scale. The production possibility set of producers is convex, as is the set of preferences for consumers. For firms as well as for con-sumers, both of which are price takers, prices are given by the aggre- 12 Theories and Empirical Predictions gate demand and supply on each market through a tatonnement process. Resources are perfectly mobile between the production possibilities, so that differential profit rates can be eliminated.

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  Environmental and Natural Resources Economics

  Theory, Policy, and the Sustainable Society

  • Steven Hackett, Sahan T. M. Dissanayake(Authors)
  • 2014(Publication Date)
  • Routledge

    (Publisher)
• A well-functioning Competitive Market is the primary benchmark for evaluating market failures and the need for public policy intervention. For a market to be well functioning and competitive, there must be many individual buyers and sellers, each of whom is small relative to the overall market. Market entry and exit costs must be inconsequential. Current and potential market participants must be fully informed of prices, qualities, and location; transaction costs must be low. There must be no collusion among the market participants. There can be no consequential positive or negative externalities.
• When any of the above conditions is substantially absent, a market failure has occurred, meaning that the market no longer meets the conditions for being well functioning and competitive.
• Economists argue that market failures are a central justification for public policy intervention in market capitalist systems if these interventions are designed to correct for the market imperfections and the interventions do not create a larger distortion than the market failure itself.
• Consumer demand can be derived from the level of the buyers’ utility over various alternative products, their budget constraints, and product prices. Horizontally summing the quantity demanded by all consumers at a given market price results in the market demand curve.
• In a well-functioning Competitive Market, a firm’s short-run supply curve is equal to its marginal cost curve. Horizontally summing the quantity supplied by all sellers at a given market price results in the market supply curve.
• We discussed the theoretical requirements for efficient markets to be in equilibrium, namely that the quantity supplied by sellers equals the quantity demanded by buyers at the prevailing price, so there is neither excess demand nor excess supply.
• Total surplus is the total gain from voluntary market exchange. Market price divides total surplus into consumer surplus (the gains from trade for consumers) and producer surplus (the gains from trade for sellers).