Notion of Competition in the Economy - Assignment Example

Running Header: Competition in the economy Student’s Name: Instructor’s Name: Course Code & Name: Date of Submission: Competition in the economy What is meant by ‘competition’ in the economy? Is it always desirable? Synopsis Competition is the contest of services or goods in the economy. Firms compete for consumers in any competitive market. Competition may as well take a different perspective as firms compete on advertising and marketing field. Several economic schools have developed different kinds of competition world. Neoclassical economic school has developed theories that emphasized on the economic freedom while promoting free competition and laissez-faire ideas. Perfect competition model that was marked by absolute trade freedom and easy access to sellers and buyers marked neoclassical economics. In Classical economic schools, competition was regarded as a natural outgrowth of supply and demand operation with an economy of free market. The magnitude of competition is determined through various economic viewpoints implemented by economists and market conditions. This essay emphasizes on different perspective of competition through various economic schools and by various economists. Introduction Competition in economics is the contest in obtaining or supplying an economic service or good. In economics, competition involves buyers competing with other buyers while sellers compete with other sellers and workers competing with other workers (Whish, 2003, pp. 56). Firms compete for the same group of customers in a competitive world. Economic competition takes place in markets where intending consumers and supplier’s grounds are met. Sellers compete to attract the buyers with favorable offers and high-quality supply of goods and services. Consumers compete to obtain goods and services from suppliers when they are in adequate supply and at equitable price. Every supplier and consumer interacts voluntarily while being motivated by self interest. Competition usually involves several tools that are used to improve goods and services in order to ensure the firm strives in the realm of competition. Innovation to lower cost is a tool for competition that allows suppliers to gain a larger share in the market. Marketing and advertising are other instruments that firms compete with others. This increases and strengthens the competitive position of the suppliers in the market. This is so especially for complicated and durable products like motor vehicles where only the good quality goods are considered mainly due to safety factor. Competition is therefore important in that it compels suppliers to remain attentive and increase the quality of their productive while taking into consideration the cost or prices. There is need for suppliers to have relevant knowledge of consumer wants in the realm of competition. Competition and economic schools Economics schools of thought started long years ago and they have undergone various stages (Barr, 2004, pp. 67). These economic schools are classical, Marxist, and Neo-Classical economics. Competition has varied significantly through those periods over time while taking different perspectives. Several economists have been involved in the development of these schools of economic thought. Classical economics is broadly considered as the economics’ thought first modern school (Emma, 2001, pp. 132). Classic economics refers to work that an economists group in the 18th and 19th century has done. Theories on how markets and market economies work were developed. Those theories emphasized on the freedom of the economy while promoting several ideas like free competition and laissez-faire ideas. Several individuals were involved in this economic thought school. They included Adam Smith, David Ricardo, John Stuart Mill, Jean-Baptiste Say and Thomas Malthus. The start of Classical economics can be marked by Adam’s Smith’s The Wealth of Nations in 1776. This school was active up to mid 19th century (Franklin, 2006, pp. 59). Economists in the Classical school of economics developed a theory of price or value to investigate the dynamics of economy (Michael, Lall & Aron, 2006, pp. 56). Competition according to the classical perspective emphasized on certain business practice and agreements that could be a restraint which is unreasonable on the liberty of the individuals. Classical economics emphasized on the freedom of the economy while they reacted against mercantilism. Economists in the neoclassical school like Alfred Marshall demonstrated clearly that supply and demand forces would ration the resources of the economy to uses that are most effective. Ricardo refined and elaborated the ideas by Smith. He formulated principle that the goods’ prices produced and sold under conditions that are competitive; tend to be proportionate to the cost of labor that is acquired in producing them. Economist theorists in the Classical economic schools regarded competition as a natural outgrowth of supply and demand operation with an economy of free market. The item’s price was seen as to be fixed by confluence of those two forces. Early capitalist economists argued that pricing by supply and demand functioned well with no regulation. Their perfect competition model was marked by absolute trade freedom, easy access to sellers and buyers, extensive knowledge or information of the conditions of the market, and non-existence of all action limiting trade by state agencies. This led to buyers or sellers not to be in a position to control or affect the items market price. The mechanism of market was self controlled with no government intervention; the marketing mechanism looked for the equilibrium on its own. Classical economics is where the Marxist economics descends from (Vatiero, 2009, pp. 222). Marxism economics derives its work from Karl Marx work. Marxist economies do not depend entirely on the widely known Marxists work but they also draw from other non-Marxist sources. Capitalism is the means of production which is private owned. It is also characterized by production of profit or accumulation of capital. According to capitalism; the profit can be acquired through investment of employment and capital. Capitalism stressed on the profit making and competition and it continued to call for social service and cooperation. According to Marxist, markets existed in Europe whereby merchants and producers bought and even sold goods. Labor itself became a commodity and this led to mode of production becoming capitalist. This led towards workers competing on delivering quality labor and the capacity to work. This kind of competition as well went to those who required the labor by providing better terms and conditions. Means of production was privately owned while exchange and distribution in a mainly market economy was predominant. There was also production with the main purpose of getting profit. The main objective of capitalist production in a competitive pressure was to accumulate capital more than others when in non-productive or productive assets. Competition was also stiff as capitalist tried to maximize the net profit as much as they could. This was through the reduction of cost of production hence increasing their sales. This characterized an immense competition in this era. This competition was important as it helped in increasing the production of more and quality goods in that time. It also helped in the improvement of the quality of labor that was provided and delivered by laborers. This kind of competition was desirable in ensuring that means of production and goods produced were of good quality. Neoclassical economics is a term that refers to or used for economics which focus on determination of outputs, prices, and distribution of income in market through demand and supply. In this era of economics, there was a shift in the economic theory that emphasized on theoretical model and precise competition. A simple neo-classical model of market that was free held that, distribution and production of services and goods in a market that was free of competition maximized social welfare (Veblen, 1986, pp. 125). This meant that new organizations can emerge and get into the market freely and compete with the existing ones. This may involve use of legal language to avoid some barriers that may block them from entering into the market. The economists in this economics time suggested that a competitive free market led to deliverance of dynamic, allocative and productive efficiency. Allocative efficiency also referred to as Pareto efficiency was named after Vilfredo Pareto who was an Italian economist (Olivier, 1987, pp. 98). This means that resources in an economy will in the long run go to those willing and capable to pay for them. Free markets meant to reward those who worked hard and produce as much as he could. Dynamic efficiency referred to the idea that must be researched as a firm competes constantly. A firm must also innovate and research in order to keep the share of customers. When one or just few firms or organizations exist in the market, there is no credible threat of a competing firm from entering the market. A vital change in neoclassical economics took place in 1933 when Edward Chamberlin and Joan Robinson published their books on the theory of Monopolistic competition of 1933 and The Economics of Imperfect Competition of 1933 respectively. They introduced imperfect competition models. Imperfect competition is the situation that is competitive in any market where necessary conditions for competition that is perfect are not satisfied. It is a structure of a market that does not meet the perfect competition conditions. In imperfect competition, it is in different forms that include monopoly competition whereby there is only one seller or supplier who is producing goods in the market place. The firm in this market is the price setter and there is no competition which makes these firms be able to maximize on their profits (Stilwell, 2005, pp. 182). Another form that is prevalent in imperfect competition is oligopoly whereby there is only small number of sellers or firms. These firms have differentiated products that are classified according to the brand name. The firms’ behavior is determined by their independence (Stilwell, 2005, pp180). Competition between firms in oligopolies occurs mainly from advertising as well as identification of brands. Monopsony competition is whereby there is only one buyer of goods in the market. Still in the imperfect competition, there is another form referred to as information asymmetry competition whereby one competitor has the advantage of better or more information than the other. Conclusion Competition has changed over periods from being dominated by sellers to buyers while taking different perspectives with time (Kizner, 1997, pp. 142). Competition is essential in any business environment because it ensures quality deliverance of services and goods all the time. Several economist and economic schools including Marxist have played a major role in trying to define competition as well as analyzing it. Market or business environment becomes successful when competition becomes the central part of that area. In Neoclassical economics, competition is more prevalent than other economy schools. There is emphasis on the imperfect competition in this school of economics where it took various forms like oligopoly, monopoly, and information asymmetry among others. Classical school of economics was characterized by perfect competition model that marked absolute freedom in trade where new organizations or business can emerge and get into the market freely and compete with the existing and established business. According to Marxist, markets existed in Europe whereby goods were bought and sold by merchants and producers in different markets with aim of making profits. There was no much emphasizes on the competition during the Marxist economies. Competition is thus of great significance in every aspect of economy from production of goods to deliverance of services. It acts as a measure of ensuring there is quality delivery of goods and services in the society. Bibliography Barr, N. (2004). Economics of the Welfare State. Oxford University Press: New York. Emma R. (2001). Economic sentiments: Adam Smith, Condorcet, and the enlightenment. Harvard University Press: London. Franklin, J. (2006). ‘Economic and schools of economic thought’. The Quarterly Journal of economics. vol. 14, no. 2, pp. 54-65. Kirzner, M. (1997). How market work. Institute of Economic Affairs: London. Michael, S, Lall, R & Aron, A. (2006). Samuelsonian economics and twenty-first century. Oxford University Press: New York. Murray, R. (1995). An Austrian Perspective on the history of Economic Thought Volume II: Classical Economics. Edward Elgar Publishing Ltd: California. Olivier, J. (1987). ‘Neoclassical synthesis’. A dictionary of Economics. vol. 3, no. 2, pp. 634-636. Stilwell, F. (2002). Political Economy; the Contest of Economic ideas. Oxford University Press: Melbourne. 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