How a Competitive Market Operates and How it Moves towards Equilibrium - Example

Competition Course Name and Code Institution Name Instructor’s Name Date How a competitive market operates and how it moves towards equilibrium Competition is a term that has a wide range of meanings depending on the field to which it is being referred. In the field of economics, competition is expressed in terms entrepreneurial rivalry and that is why the perfect type of competition is never considered competitive behaviour. This is because of the fact that the state of perfect competition leaves the situation of decreased average cost and increased returns. This means that increasing the demand of the products in the market will put some strain in the industries to increase production as far as the out is concerned. This kind of situation is what led to the researchers to conclude that perfect competition will never be a theory to analyze the increase in scale of returns. Competition refers to the process of dis-equilibrating the processes in the market for the firms to be able to take advantage of the resources in terms of market share and segmentation for the purposes of financial performances (Burns, 1961). The theory of perfect form of competition is said to assume that there is an aspect of full usage of resources meaning that there is no excess hence there is a market force that does not interferer with the market as far a the sellers and the buyers are concerned. This is unlike the imperfect competition, which is known to interfere greatly with the mechanisms of market by causing destabilization. This kind of competition is found in the monopolies and the oligopolies form of businesses, which generate excessive capacities. The theory of perfect competition is actually based on the symmetry or balance existing between the forces of supply and demand. This is whereby the prices in the market are smoothly driven together to an extent of being grouped together (Finlay, 2000). The presentation of the demand and the supply curve in the perfect competition will be a curve that is made up of some intersecting curves. The perfect competition was also by a researcher called Harrod having homogeneity or rather some organized exchange as far as the products in the market are concerned. The demand too is very elastic in an infinite manner due to the great organization in the market of the products hence the production cost marginal looks exactly like the prices. The other aspect that was discovered was the issue of pure competition. This is characterized by perfect elastic demand of the output. The perfect competition and the pure competition slightly differ in the sense that the perfect form of competition is much deeper in that it has more conditions like the factors of mobility; there is no uncertainty and finally fluidity. In the aspects of economics, the perfect form of competition is associated with rational behaviours of the sellers and the buyers, full knowledge, absence of friction, perfect mobility, static conditions and the production factors are perfectly divisible (Mintzberg, 1979). The above characteristic therefore expresses perfect competition as being the kind of a situation that puts a demand on the outputs of a seller in a perfect elasticity. Price Supply P3 P1 equilibrium point (demand =supply) P2 Demand Q1 quantity P1 represent the price at the equilibrium level while Q1 represent the quantity at the level of equilibrium. When the price is at P2, then it means the demand will be more while the supply will be less. It is very obvious that many people will tend to purchase at large quantities when the prices are lower. On the other hand, when the prices is at P3, then the demand will be very less while the supply will increase. The prices of the market are usually set by the interaction of the demand and the supply curve. This means that when there is an equilibrium struck in the market the quantity of the goods demanded by the customers is equal to the quantity of the good that is supplied by the suppliers. Demand can increase in the market for a number of reasons like a rise in the prices of a particular substance or even the decline on the price of the complement. In addition, the increase of the customers income as well as their wealth, changes in the customer taste or preferences in terms of the flavour, fall in the rate of interest and finally the rise of the customers’ optimism and confidence (Hannagan, 2005). On the other hand, there can be changes in the supply curve in the market due to a number of reasons. These reasons may include fall in the costs of production, subsidy by the government to the producers hence reduction on the cost of the suppliers, and production in terms of unit cost. Moreover, a fall in the substances substitutes, when the climatic conditions are very favourable cause a higher production more than it was expected, improvement in the technological means of production hence a higher production and also effectiveness and efficiency in the process of production and finally new market entry by the suppliers hence increasing the quantity of products supplied. The methods governments use to influence market outcomes and discuss the possible effects of these policies. The market outcome differs depending on a number of factors. The government is one of the key solutions as far as the improvement of the market outcomes is concerned. This is because there is usually a role that is played by the government when the activities in the market place do not seem favourable to the people or when the social outcomes there are not very favourable. A very good example is the fact that in the united states of America, the population is less as compared to how it was some few years ago. The reason for that is due to the laws that were put across by the government to control the population in the states, which led to the process of altering the market activities (David, 2002). The government is also very much involved in the provision of the national defence, which cannot be provided by the private market. So many people especially the economist are at disagreement as far as the issue of the issue of market correction of the failures is concerned. This is because of the fact that some of the methods the government uses are likely to affect greatly the activities in the market as well as the operations of the people who are involved in the production of the goods in the market. One of the policies that are used by the government to influence the market economy is fiscal policy, which represents the government means of expenditure and the revenue collection. This kind of policy is very often contrasted with some of the policies existing like the monetary policy and microeconomic policy because they are aimed at the process of controlling the economy by stabilizing it through the control of interest rates as well as the supply of money. The main tools that are involved in the fiscal policy are the taxation and expenditure (Hill & Jones, 2007). It should be noted that if there were changes in the level of taxation by the government as well as its level of spending would have the following impacts in the country’s economy. These impacts include the aggregate demand as well as the economic activity level will change, the patters that will be used in the allocation of the national resources will also change and finally the distribution of the income will also change greatly. These activities will change because the government will be using the budget to make the changes. The fiscal policy can be neutral meaning a very well balanced economy, an expansionary fiscal policy meaning that it will lead to the government using much tax revenue or it can also be fiscal policy that is contractionary. This occurs whereby the government will be spending much les than the tax revenue collected, all of them will affect the economy in different ways (Peter, 2007). Innovation is another method that the government can use to bring about influence in the market outcomes. According to the Australia theory, the following are the five environmental factors, which influence competition: public decisions on policies, consumer behaviours, competitor and supplier’s actions, the societal resources from where the firm draws and institutions in the society. The entrepreneur is said to exploit opportunities in the market, which brings about the aspect of competition (Finlay, 2000). In such a situation, if the competing firms discovers they are at an inferior level as far as competition is concerned which leads to their disadvantages in competition then they are motivated through the government laws and policies by the need for superiority to neutralize the superior firm through the process of innovation and resource acquisition. They do that through resource imitation or investing in some more superior resources. The meaning of superior resources is the investment of the resources, which are far much better than superior firms in existence in terms of value and technology to increase its competitiveness. According to the theory, the following are the main four factors that lead to the perfect competition with reference to the command economies and market base. The fact that competition can be caused by shifting equilibrium, productivity or efficiency problems may be defined by equations. The fact that both the innovations in productivity enhancement and knowledge discovery may be believed to be the exogenous competition process and the fact that the societal institutions are believed to be superfluous to having efficient producing characteristics as far as the competition is concerned. It is the aspect of competition that motivates different firms to be involved in innovation to increase the productivity according to the neoclassical theory (Chandler, 1962). The governmental firms that are disadvantaged as far as competition is concerned are forced to use their little existing resources efficiently and effectively to yield maximum profits or rather increase their resources. Reference Burns, T. (1961). The Management of Innovation. London: Tavistock. Chandler , A. (1962). Strategy and structure: Chapters in the history of the American industrial enterprise. Cambridge, MA: MIT Press. David, F. (2002). Strategic management: concepts (9th Ed.). New Jersey: Prentice Hall. Finlay, P. (2000). Strategic management: an introduction to business and corporate strategy. New York: Pearson Education. Hannagan, M. (2005). Management concepts and practice. England: Prentice hall. Hill, C. & Jones, G. (2007). Strategic Management: An Integrated Approach (8th Ed.). California: Cengage Learning. Peter, F. (2007). The practice of management. New York: John Wiley & sons. Mintzberg, H. (1979). The Structuring of Organizations. 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