Dealing with Innovation Push and Market Need - Essay Example

? Economics Assignment Module Semester 1350 Words The free-market economy is an economic system which works and operates automatically. The mechanism used in this is called price-mechanism. The movement in prices under this system leads to efficient allocation of resources and also helps the producers decide which goods these should produce. On the buyer side, it is an efficient system as well. Price signals what good is wanted by the consumers, and hence resource movement to that industry leads to the efficient product of that good or services. This is how consumer well being is ensured and they get what they want through their price signals. Free Market Economy is also characterized by the rights of individuals to buy and hold private property (Lipsey & Chrystal 2003). This characteristic is an incentive for both buyers and producers. It allows both buyers and producers to make bold and brave decisions. Since producer knows that he can own land, capital and other factors of production, he invests money into the system. Buyers also know that they can acquire goods, property or other thing of value now and can either consume it or store it for future consumptions. This moves the wheels of the economy and leads to equilibrium quantity demand and quantity supplied in the market. It also leads to price adjustments in the economy at a point where the motives of the buyers meets the motives of the sellers or producers. This is also called market creation or market searching. Market searching is the process when the market is trying to adopt or settle at the equilibrium price. Eventually market settles down at equilibrium because in over priced market supply is greater than demand which eventually leads to price going down. If the market is under priced demand is going to be higher than supply and this will result in price hike and eventually equilibrium will be reached. Free Market Economies encourage the process of market searching through market forces working without any intervention from government or other control factors. (Brue & McConnell 2006) Adam Smith also pointed out an interesting phenomenon in the system. He laid the foundations for the concept of “Invisible Hand” in the free market economy. He was referring to the fact that everything changes in response to the movement in prices. In essence, he was telling the world that in order to achieve their own motives, buyers and producers end up doing good for the system. This interesting fact can be explained in the following example. When a person earns income in this system, he spends it on his necessities, needs and wants. The money spent in the economy changes hand and transfers from the hand of the person spending the money to the producers of goods and services wanted by that person. This encourages producers of these goods and services to employ more resources and produce more goods and services. This leads to employment generation in the economy and when people are employed they tend to invest and save more. This leads to further employment generation and the cycle continues. The focus in this example is on the trickledown effect in the Free Market Economy. Many countries where the socialism dominated previously have realized the importance of Free Market Economic System and are opening up themselves for more private investment and encouraging the development of private entrepreneurs that will provide the impetus for high economic growth rates. The debate here is not about how good or bad the free market system, but it is more about why aren’t countries adopting the model of free market economy in its perfect sense. Even USA is not a totally Free Market Economy. Government controls and regulates the economy in the United States of America as well. The reason for this is simple. Extremism in any system is bad. If a system is totally dominated by private sector without any government regulation of the economy, then there are chances that private businesses might exploit the resources, consumers and the environment. This would lead to more problems and despite the efficient functioning of the system, there might will a very bad impact on the exogenous environment. It is for this reason that many economies have chosen to adopt a system that maintains some sort of a balance between the Free Market and the government control and regulations. This helps the smooth functioning of the system and tells businesses that if they try to harm the environment or exploit the resources, the government will be there to regulate them and would not allow them to operate in the country. This leads to further improvement in the system and the system becomes more efficient without any loopholes or chances of errors. It is for this reason mixed economy is always preferred to a system dominated wholly by market forces. 2) 2.1) The results of this technology are evident on the curve above. The car manufacturers are moving towards using cheaper metals and this has resulted in a fall in demand of precious metals. The demand for Palladium has come down from D1 to D2. This is shown by a leftward movement in the curve. The result in reduction of demand has resulted in a new equilibrium being formed and Q1. At this equilibrium, the price of Palladium has come down to P2 from P1 signifying the impact of change in technology for precious metals. The main reason for the fall in demand is because many firms have shifted from using Palladium to other cheaper alternatives. Hence, the demand for the product at every price has come down which is shown by a leftward shift in the demand curve from D1 to D2. In economic theory, we can refer this phenomenon as “availability of cheaper alternatives” (Sloman 2003). In case mining firms do not decrease their prices, they will lose out significant market share to cheaper alternatives because they have significantly reduced the production costs for the firms and has helped firms translate the reduced costs to their profitablity. 2.2) The result of reduction in costs due to the advancement in technology will help reduce the total cost of production of Nissan and Mazda. This would help them elevate their supply. This is shown in the above diagram by a movement of supply curve leftward. The supply curve has shifted from S to S2. This is has resulted in lower price of Nissan and Mazda cars for consumers. The price of cars has come down from P1 to P2. At this point, the company is being able to make more sales. This is reflected at a new equilibrium point at Q2. Previously the company was selling Q1 cars, but after the reduction in costs and prices, it is selling Q2 cars. The technology advances has helped Japanese car makers Nissan and Mazda. It has made them more competitive against the Indian car manufacturers such as Tata Motor Company. This means that the price of Japanese cars imported into the USA has decreased and this has made them more competitive against Indian car makers who are already marketing their product at very low prices. (Volti 1991) 3) If the new technology is not adopted, it can be hazardous for the Japanese Car industry. Japanese Car Industry faces competition from car manufacturers all over the world. Indian car makers pose the highest threat to Japanese Car Industry. Indian Car Makers are selling their cars at a very low price. If the new technology is not adopted by the Japanese car makers, they are going to lose their market share. Indian car makers are going to gain more market share if Japanese Car Industry does not come up with cheaper and more efficient cars. This can be dangerous for the entire Japanese economy. This would stop the flow of foreign exchange coming into Japan and may deplete the foreign exchange reserves of Japan. This can lead to currency depreciation and other bad macroeconomic effects. All in all, the entire economy will suffer and face serious macroeconomic problems like inflation, unemployment and Balance of Payment deficit. (Sloman 2003) In the end, it can be concluded from the paper that technology advancement and adoption is a continuous process. Firms who try to act complacently lose their market shares fast as they are unable to remain competitive. Winner firms are innovators and they constantly upgrade the technology just like Indian firms are doing to attract higher market shares. They are winning the battle of market share from Japanese firms who are acting complacently. (Ottosson 2004) Works Cited Brue, S & McConnell, C 2006, Economics, McGraw-Hills, New York. Lipsey, A & Chrystal, M 2003, Economics, Oxford University Press, Oxford. Ottosson, S 2004, 'Dealing with innovation push and market need', Elsevier, vol 4, no. 1, pp. 279-285. Sloman, J 2003, Economics, Prentice, New York. Volti, R 1991, 'A History of First 50 Years of Toyota Motor Corporation', Technology and Culture, vol 32, no. 2, pp. 423-424. Read More