Market Failures, Economic Systems, and Competition

Posted on Nov 29, 2024 in Economy

Market Failures

  1. Imperfect Competition: Markets where participants influence prices (monopoly, oligopoly, monopsony).
  2. External Factors: Issues like pollution are not addressed by the market.
  3. Public Goods: Consumption by one doesn’t reduce availability for others (national defense, public safety).
  4. Common Property Resources: Resources not owned by individuals tend to deplete (fisheries, pastures).
  5. Consumer Manipulation: Public can manipulate consumer desires and create artificial needs.
  6. Market Instability: Market economies suffer internal and external crises (subprime crisis in Asia).

Economic Systems

Centralized System

Central planning avoids unemployment and crises. The state owns production means, and a central authority makes key decisions. The government allocates resources, and companies fulfill the plan, not maximize profit. This can lead to inefficiencies and debt.

Mixed Economy

Countries like Sweden, France, UK, and Spain use planning mechanisms, nationalize key industries, and redistribute income.

The Company

Profit and Benefits

The main objective is to maximize profit, the difference between revenue and costs.

Technology

Technology is the state of the art used in production. The production function shows the maximum product obtainable with given inputs.

Production Timeframes

  • Short Term: Some factors are fixed; companies can adjust variable factors.
  • Long Term: Companies can alter all production factors.

Goods Classification

  • Basic Necessities: Demand increases with income but at a lesser extent.
  • Luxury Goods: Demand increases proportionally more than income increases.

Competition

Perfect Competition

Equilibrium occurs with many buyers and sellers, product homogeneity, market transparency, and free entry/exit.

Imperfect Competition

Equilibrium occurs when bidders affect prices. Imperfect competition arises when:

  • One bidder controls prices (monopoly).
  • Exclusive control of a productive factor or raw materials.
  • Patents granting temporary monopolies (pharmaceuticals).
  • State control of services (water, energy).
  • Market size and cost structure create natural monopolies.

Natural Monopoly

A single company provides production due to high average costs across the production range (telephone, water, electricity).