Market Structure, Financial Stability, and Development - Assignment Example

Market struscture, Financial Stability and Development Market struscture, Financial Stability and Development The relationship between market structure and financial development In classical economics, the level of production within an economy generates income that is enough to enhance the purchase of produced goods. In this context, the classical fish store has price tags posted on the fish types. In classical economics, free markets are in a position to regulate themselves regarding the level of output and the purchases or consumption. Companies produce goods that can be purchased by the consumers. However, it does not imply that all goods produced in the economy are consumed as some cases of excess production could result in a surplus. The classical system has no mechanism to ensure that the public consumes all products. Market prices are flexible and are based on the quantity of output produced in the economy. Similarly, the equilibrium prices are determined based on Say’s law where the demand of commodities in the market is determined by the supply with the aggregate production generating income that is enough to purchase the produced output According to Smith (1776), capitalism is an economic system that enables humans to gain the value for their money through the exchange of goods and services based on demand and supply. The system is driven by self-interests as rational consumers seek the satisfaction of their needs while producers provide goods that satisfy particular consumer needs (Shaikh, 2004). Capitalism values profits as was identified by classical economists such as Adam Smith. His argument was that an increase in the price of commodities is related to the rise in the wages, which act as a simple interest in the profits realized by producers acting as compound interest. Classical economists argued that the increase in wages affects the profits realized by producers. However, the producers are silent on their pernicious gains although they complain about the gains of other people in the economy (Hunt, 2002). Classical economists argue that it is abnormal for companies to realize abnormal profits in a competitive market. They distinguish between economic and abnormal profits with economic profits reflecting the total opportunity costs for investment ventures. On the contrary, normal profit realized by an organization indicates a situation in which a company registers no economic profit. Adam Smith believed that normal profit realized by firms is good as it encourages production, although the society considered it a nuisance (Hunt, 2002). Marx who attributed the economic profit to exploitation of employees provides further details. This means that the economic profit should be part of the wages compensated to employees as indicated in the labor and value theory. Despite all these arguments, the perfectly competitive market structure is characterized by economic profits (Marx & Engels, 2004). 2) How Marginalists Treat Profit and Why they do so The Marginalists came after the classical economists, and they argue that the economic profit is not relevant in the market. For them, perfect competition is significant and there is no profit generated in the market. Consumers can be purely subjective despite not realizing profits. The Marginalists define profit as the existing difference between the price that consumers pay for goods and goal attained. Also described as psychical phenomenon, it increases the happiness of individuals. There is no specific figure of the surplus profits to be realized as the figure keeps on varying. The Marginalists argue that the existence of the economic profit is a distortion of the market that should be solved by the market (Henry, 2012). Question 2: The Relationship Between Market Structure and Financial Stability Together with my friends Jose and Diego, we decided to go shopping for fish, and we walked into a classical fish store run by Brad, the fishmonger. In the store, each fish item is easily visible although they do not have any price tags. As I inquired about the fish prices, we found out that the cod was more expensive than the tuna and the reason given by the vendor was that cod is caught from the deep sea and is rare while the tuna can be easily obtained while some is bread locally. This argument is in line with the initial argument put forward by Adam Smith that the trouble associated with acquiring a product ends up being the costs incurred in acquiring it. The vendor argued that fishermen undertook deep sea fishing that takes a number of days or even weeks in order to catch the cod as compared to the tuna that could be obtained easily. After some haggling, the fishmonger agrees to reduce the price of tuna because it could be obtained easily from other fish stores around. After purchasing the tuna, we decided to take a walk to the other section of the store. In this section, we realized that the Salmon was priced at $36/lb, which was 10% higher than it could cost the previous week. The vendor explained that the Salmon his week and had to be imported from the neighboring state. This means that the scarcity of the salmon led to a price increase of 10%. Despite my ability haggle for a reduced price, the vendor could not agree as it could not be found locally. However, he pointed out that after two months, the price will increase because the government has introduced property taxes. On their part, property owners have passed it onto tenants. Despite the tax, it is clear that fish prices are determined by other factors one of the being labor, availability, and taxation. However, long run fish prices will be stable because vendors will be able to need the demand of fish in the market. The classical view is not only exemplified within this section of the fish store but also in other scenarios such as a car exhibition. In the exhibition store, the the vendor has many makes of cars with each car having a price tag besides it. The prices of cars differ from one make to another based on the technology used and the level of innovation. Cars that were locally manufactured and assembled were cheaper than vehicles manufactured by foreign firms. Similalry, the price of the cars was determined by the technology and quality of the car with high quality vehicles having higher prices. Part 3: The Marginalist/Neoclassical Fish Store Under the Walrasian Auctioneer and perfect competition, the fishmonger in this market calculates the demand of fish at every price and submits to the auctioneer with the price being set based on the total demand of fish supplied in the market. The level of fish supplied in the market and the level of demand of fish in the market determine the equilibrium price of fish in the market. The market equilibrium price is taken up by the fish store and begins selling the fish based on this equilibrium price. The items sold in the shop are digitized with the vendor giving any new customer a tag and ushering them into another room where other customers are (Heilbroner, 1966). The room has many screens with each screen displaying different varieties of fish available at the shop. I found myself concentrating on one screen together with other customers with related tastes for snow crabs. After a successful display of the items, the vendor proceeded to call for everyone’s attention and he began to announce the initial prices for every item displayed on the screens. He thereafter gives the desired equilibrium price for the items. After the Walrasian auctioneer had given his offer for the different items (tuna, salmon, cod, snow crabs), each customer was given a chance to give his/her price for the item in order to purchase the fish. The initial prices offered by the auctioneer were not accompanied by any activity (Nell, Argyrous, Forstarter & Mongiovi, 2004). Commodities that had excess supply had their prices reduced while those whose supply was scarce remained the same. After consumers offered their prices within a short span of time, each consumer would be offered what they want after the ringing of the bell, and the shop would be closed (Bhattacharyea, 1987). The use of large screens that gave different details of each item sold, the consumers were informed of the details of the items and later their prices. With the final price being given, the demand of all items equates the supplied items in the shop. The success of the auction depends on the availability of information regarding changes in the price throughout the entire process. The aggregate demand and supply determine the price at equilibrium thereby making the prices unique as the utility of each consumer is met (Hunt, 1979). Although every consumer, including myself aim at maximizing our utility, though we end up with equilibrium in the market. Given the final prices, I managed to purchase the snow crabs in order to maximize its utility. This market is led by the tastes and preferences of fish consumers (Heilbroner, 1996). The neoclassical view is also exemplified in the motor vehicle exhibition room whereby the car vendor acts as the Walrasian auctioneer the exhibition room does not have cars on display, but large screens with iPads that are given to consumers. In a common room, the vendor takes his time to explain each car model and gives the initial price for the model to all customers. This is followed by the final price with consumers giving their offers based on their needs. There is no time for haggling. Lack of a walrasian auctioneer means that fishmongers would determine the prices of fish based on the level of demand, supply, transaction costs (such as transportation costs) and the individual mark up. The price is determined by the marginal utility that consumers derive by consuming the fish. The utility on its part yields the value for the consumers’ money. Conclusion After asking the factors affecting the prices of fish, the vendor pointed at seasonality of the market especially bad weather during winter that could hit common fishing areas thereby affecting the supply of fish in the market. On the contrary, the summer season is characterized by high demand for fish and the weather is good, which means that the prices of fish increase. Apart from supply and demand, the pricing of fish is determined by labor, storage and transportation costs among other factors. Haggling was only permitted for some products and not others, especially fish products readily available in the market. We learned that Marginalist approaches are applicable in real life. However, it is difficult for them to be applied in the fish market because it is difficult to explain the actual price of fish in the market based on the marginalist theory. References Bhattacharyea, A. (1987). “Keynes and the Long-Period Theory of Employment: A Note.” Cambridge Journal of Economics, 11(3), 275-284. Heilbroner, R. L. (1966). The worldly philosophers (Large type ed.). New York: F. Watts. Heilbroner, R. L. (1996). Teachings from the worldly philosophy. New York: W.W. Norton. Henry, J. (2012). The Making of Neoclassical Economics (Routledge Revivals). London: Routledge. Hunt, E. K. (1979). History of economic thought: a critical perspective. Belmont, Calif.: Wadsworth Pub. Co.. Hunt, E. K. (2002). History of Economic Thought: A Critical Perspective. 2 ed., updated. Armonk, N.Y.: M. E. Sharpe. Marx, K., & Engels, F. (2004). Karl Marx, Frederick Engels: collected works. New York: International Publishers. Nell, E., Argyrous, G., Forstarter, M., & Mongiovi, G (2004). Growth, Distribution, and Effective Demand: Alternatives to Economic Orthodoxy: Essays in Honor of Edward J. Nell. New York, NY: M.E. Sharpe. Shaikh, A. (2004). The power of profits. Social Research, 71(2), 1-6. Smith, A. (1776). Wealth of nations. Hoboken, N.J.: BiblioBytes. Read More