Economics
A competitive market is that type of market that has sufficient number of both the buyers and the sellers and that no single buyer or seller has the capacity to influence the price or have power over any market aspect of each other. A perfect competition can only be achieved in a perfect world. The perfect competition outlines the hypothetical form of market where the buyer and the seller has no ability to manipulate the prices of commodities.
In a competitive market, the concept of the theory of demand and supply is built and it follows the belief that there has to be some competition to keep the economy at motion. In most cases, a competitive market requires a middleman who intervenes in brokering the relationship between a buyer and a seller. The brokering is known as the market equilibrium. The involvement of a middleman who sets the standard of market equilibrium is the mechanism through which competitive market operates.
In order to achieve a perfect competition, there are five prerequisites that have to be met. The first condition is that there has to be a vast number of consumers and producers who have no impact on each other. The second condition requires that the goods and services to be easily interchangeable. There is also a need for all the firms to know the exact pricing that exist in other firms. Fourth, all the firms must have similar access to resources and the enabling technology and the fifth conditions require that any firm may choose to enter or exit the market at own will.
It is often difficult for firms to meet all the five requirements of competitive market. In some firms, meeting even a single requirement becomes a heavy task and becomes almost impossible. In the contemporary market condition, the marketplace nears the perfect competition when considering the agricultural market. For instance, a lot of farmers may be found to grow peaches where their local consumers are entirely the grocery stores in the area that may pay a set price per each bushel. Here, all the farmers are fully aware of the price. These peaches are then sold under a common banner as local and not by individual farm.
The element that keeps agricultural sector not to be a perfect competition is the regulations from the government that distorts the market theory. In another observation, even without government regulations, it is clear that not every farm will have equal access to the enabling resources and technology. In fact, all the market shops and stalls that are seen around the tourist areas in cities are same in both merchandise and prices. This does not encourage competitive market. In areas where the factors are not permitting the competitive market, an imperfect competition may exist instead (James, 2003). This scenario happens if a perfect competitive market is never achieved and a majority of markets work under this stand. The imperfect competition is common in situations where there is no available information about the items that are traded or sold. Similarly, it may also happen when there is a lag time in the marketplace particularly when there is a necessity for a supply or service but the availability of people to provide the goods and services is lacking.
Discuss How The Market Moves Towards Equilibrium.
A typical competitive market achieves equilibrium when the competition among the buyers forces the market price to increase up to the maximum demand price as it may appear in a demand curve. On the other hand, competition among the sellers makes the market price to be thrust down to the least price or minimum price of supply as it may be seen in the supply curve. With this competition being maintained among both the buyers and the sellers, the price in the market simultaneously changes in both the demand and the supply curves (Britton, 2002). The market equilibrium can well be reached when the price and the quantity in the market reach at equilibrium.
The competitive force that exits in the demand and supply of the commodities generate the market equilibrium in an automatic manner. In situations where the going price in the market is either lower or higher than the equilibrium price, a condition which creates a surplus or shortage of the quantity supplied in the market, the competitive forces will then eliminate the imbalances and re-establish the equilibrium. A competitive market is perfect when the equilibrium is achieved at a point where the quantity demanded and the quantities supplied are equivalent to the price.
Describe the Methods Government Can Use To Influence Market Outcome.
Market outcome has been studied from different approaches. These approaches have mainly been based on the industrial organizational perspective of market characterization as per the level of the competitive pressure. Another approach has been the consequent firm behavior modeling by the use of sophisticated tools of game theory at the same time permitting the mathematical modeling (Britton, 2002). The visual framework that was coined by earlier economists that gave much importance on the correlation between the demand and supply in the market and the price and the quantity measures undoubtedly provides a guideline to a number of mathematical models which have proved to be helpful to policy makers particularly the government.
The government, through the utilization of the demand and supply concept can take up decisions that may be either damaging or building the market outcome. Therefore, the government can greatly influence the market income through policies that may either encourage or discourage the place. The government may set some taxes on commodities which are consumed by a minority of populations. Some tax impositions can be taken in order to discourage the consumption of the goods or services. For instance, the government may decide to increase the tax charged on all alcoholic drinks which will eventually reduce the market outcomes of those product that have alcoholic content (Snowdown, Vane, 1997). In the US, policy makers have influenced alcohol consumption as well as reduced adverse social consequences that could otherwise increase problems in the society.
The Effects of Government Policies on Market Outcomes
Tax is one important factor that affected the market outcome particularly the labor market outcomes. However, research has shown that there is a weak correlation that exists between the Government policies such as subsidies can also make a great change to market outcomes. One good or service will be favored as compared to another. The buyers or the sellers will prefer more subsidized goods that will cost less and that are produced by accredited companies that are known by the government.
The government may deliberately determine the prices of goods and service. When this occurs, the market outcome has to be affected either negatively or positively. For instance, the price of natural gas may be hiked and also the cost per barrel will be increased. This situation may witness the increase in market competitiveness between the individuals or firms selling different types of commodities. It then means a lot when taking an aerial view of such a problem caused by the governments in its suggestion to improve the market competitiveness (James, 2003). While not all like machines, humans always change their perceptions and end up making some other decisions to buy goods or services from the sellers of their choice.
Competitive market plays an important role in the recognition of a scenario when the buyer and the seller do not have any mandate over each other. The neoclassical theory is considered in to be an important lead which has been identified to be determining the government failure in it process of making policies and warn the buyers and sellers on the availability of the goods and services. While in another perspective, government policy may bring about innovations (Snowdown, Vane, 1997). For instance, the exemption of tax for some other traders or companies or even the state organs result to enormous changes in terms of development. The subsidies and tax exemption mainly act to encourage development.
In general, there are some factors which may encourage a competitive market. In situations where the government does not encourage competitiveness, an imperfect competitive market result. However, when all conditions that favor competitiveness are provided, a perfect competitive market ensues.