A Perfect Market Responds to Consumer Demand Changes - Essay Example

? A Perfect Market By of [Word Count] Introduction Supply and demand are the two main factors that drive the market mechanism across all types of markets. At least everyone in society has to make certain choices in their lives. For instance, people make choices about what goods to produce, how to produce these products and the target market or consumers of these products. Normally, in straight economics, these questions are answered by the market demand and supply. However, in market conditions in which no particular player has the power to influence prices, every player determines the price of goods and services. In this sense, everyone produces and consumers determine the market price of a product (Johansson, 2004). Similarly, the determined price defines and determines what is to be produced and the consumers who can afford the products. Prices provide incentive to consumers and producers, albeit in different ways. That is, whereas high prices encourage producers to create more goods and services, high prices result in reduced consumption by consumers (Johansson, 2004). On the other hand, low prices discourage production but encourage consumers to consume more of the concerned goods and services. These high and low price incentive result in a balance between demand and supply, the forces of consumption and production respectively, resulting in equilibrium (Johansson, 2004). This demand and supply mechanism results in the efficient market outcomes in which consumer satisfaction in society is maximised and minimum cost. This paper explores the concept of a perfect market with regards to how it responds to changes in consumer demands. In addition, the paper compares a perfect market and a market with which one is familiar. The paper first explores the various types of market structures within which these factors interact. Market Structures Among the conditions or factors that create and define market structure are buyers, sellers, and entry and exit barriers for sellers and buyers, size of the firm, its market share and competition (Sayantan, 2010). The table below summarises the various types of market structures that a business entity may operate in. From the tabel, it is evident that competition increases from monopoly, oligopoly, monopolistic competition and perfect competition. Structure Buyers Sellers Size of firm Product differentiation Market share Competition Perfect competition Many Many Relatively small Homogenous product Small Fierce Monopolistic competition Many Many Relatively small Substitutes with different branding Small Fierce Oligopoly Many Few Average Homogenous Average High Monopoly Many One Relatively large No substitutes Highest No competition Monopsorry One Many Relatively small Substitute good Average Imperfect competition In a monopoly, state-owned companies run the market and states bar the entry of other players whereas in oligopoly, consumers buy products of different sellers (Sayantan, 2010). On the other hand, in monopolistic competition, companies sell similar products but brand them differently. The different branding is indeed the catch for monopolistic competition. By knowing the market structure, business can measure its market share and the forces operating in the identified market not to mention the competitors and the type and range of products (Sayantan, 2010). This information is quite helpful for investment, having known the risks therein. A business can also develop its vision, values and mission after studying the target market. A perfect Market Responds to Consumer Demand Changes   In economic terms, for a market to be defined as perfect, it should have certain characteristics. These features are collectively referred to as perfect competition and they include absence of externalities, profit maximisation, equal access to production factors, absence of barriers to entry and exit, no participant with power or influence to set prices and perfect market information. The idea of a perfect market is based on the mathematical theory of general equilibrium. Assuming that a perfect competition exists, it is possible to show that a market is likely to attain equilibrium status in which every supply of goods and services such as labour is equivalent to the demand at the current price. In this equilibrium, no producer or consumer can be made better off by exchange of goods and services without hurting someone else in the process of this exchange. It is worth noting that the features of a perfect completion makes such a market to be regulated because these prerequisites for market function cannot at the same time be products of the market, yet must by some means be provided. There are numerous economic and political consequences of perfect markets. These attributes of a perfect market mainly stem from the fact that the public has been made to believe that the role of a perfect market is to allow for profit maximisation for participants. The truth is that a perfect market is intended to allow for the efficient allocation of resources and the maximisation of producers’ and consumers’ welfare (Petri, 2004). In this regard, any excess profits are indications of inefficiency and market failure. Thus, a perfect market refers to a market where buyers and sellers have complete information about a given product, making it easy for them to compare prices of similar products. Since the preconditions for a perfect market or perfect competition are rather strict, there are rarely any cases of perfectly competitive markets. However, there are certain auction markets for commodities and financial assets that have largely attempted to approximate the idea of a perfect competition (Keen, 2001). Still, this approximated perfect market and competition is a natural yardstick for contrasting various market structures. As earlier mentioned, there is no actual perfect market or competition in the real economics arena. Nonetheless, a number of approximations exist. These approximations include a large auction market in which similar goods with all potential buyers and sellers present at the same auction (Keen, 2001). An example of this is a stock exchange. However, it should be noted that this resemblance is just by design and approximation since even a stock exchange does not satisfy all the preconditions of a perfect market. In fact, in a stock exchange, huge and institutional investors make it impossible to achieve a perfect market and competition since they may solely influence the prices (Keen, 2001). This trend thus breaches the precondition that ‘no particular participant should influence the market price of a product’. The other approximation of a perfect market is horse betting in which while placing their bets, consumers merely looks for who is offering the best odds. Hence, in horse betting, no bookie has the power to offer worse odds than those offered by the larger market. Doing so will just see the consumers go to other bookies. In addition, the products offered in horse betting are homogenous except for the individual bets being the pay-off and the horse. However, there are barriers to entry, including license and the huge capital required for setting up such a venture. Street food in the developing countries has also been mentioned as an example of a perfectly competitive market. The reason for this citation is that this market has comparatively few barriers to entry and exit for vendors. Additionally, the existence of numerous sellers and buyers of a specific street food and the possession of perfect information on the products sold make this market almost perfect (Petri, 2004). This assertion is particularly true given that many street vendors serve homogenous products with little if any variations. Fish, fruit and vegetable vending are also good perfect market approximation, especially when sold at the same place. A perfectly competitive market responds to consumer demand in a perfectly elastic demand curve as shown below. Unlike in a perfect market in which not participant has the power to influence the price of a product, in a familiar market, a seller familiar with a given market may have a competitive edge over its competitors. For instance, consider two multinationals competing in a third market and with similar cost structures with one coming from a country with a taste similar to that of consumers in the third market. Thus, this favoured company produces goods and services that more closely matches the preferences of the third market’s buyers. It is this similarity in products and consumer preferences that give this company an advantage over its competitor hence can earn higher profits (Lee, 1998). Thus, in a strategic competition between the firms, the market-familiarity may be a strategic disadvantage. In addition, even the host market stands to benefit due to the entry of the market-familiar company. Brand awareness or familiarity with a brand is greatly connected with brand choice by consumers. This connection point to the fact that consumer choices increase their awareness as they tend to be more exposed to the brands they choose more often that to those they leave on the shelves. Similarly, brand awareness has been found to have a causal effect on the choice process of many consumers (Lee, 1998). To this effect, for producers to make their brand familiar to consumers, they must spend a lot of time, labour and monitory resources in processing and disseminating information about their brand. References  Johansson, D. (2004) Economics without Entrepreneurship or Institutions: A Vocabulary Analysis of Graduate Textbooks. Econ Journal Watch 1 (3): 538.  Keen, S. (2001) Debunking economics: the naked emperor of the social sciences. Pluto Press Australia. Lee, F. S. (1998) Post-Keynesian price theory. Cambridge: Cambridge University Press. Petri, F. (2004) General equilibrium, capital and macroeconomics. Cheltenham: Edward Elgar. Sayantan, S. (2010) “Market Structure: Monopoly, Oligopoly, Monopolistic and Perfect Competition.” Retrieved on August 11, 2013 from http://fintowin.com/2011/07/market-structure-monopoly-oligopoly-monopolistic-and-perfect-competition/ Read More