Public Administration Paper on Market structure
The term ‘market’ is defined as a place where forces of demand and supply operate, and where buyers and sellers interact directly or indirectly to trade in goods, services, or contracts or instruments, for money or barter. here , price of traded item is determined and communicated facilitating deals and transcations and effecting distribution (Cooter 1). The market for a particular item is made up of existing and potential customers who need it and have the ability and willingness to pay for it.The concept of free market implies a structure whereby the production, distribution and pricing of the goods and services are coordinated by the market forces of supply and demand, unhindered by regulation. A free market economy is an economy that is composedentirely of free markets also known as laissez-faire. A free market is unregulated market but the extent of the “unregulation” posts a problem to define or describe. Other marketeers maintain that a free market is not compromised by government action to enforce contracts and property rights.
The concept of competitive market implies a structure where there are many buyers and sellers in the market and that no one buyer or seller can exercise any significant impact on the dynamics of the market. The goods offered by the numerous sellers are largely the same, identical, homogenous or perfect substitutes for one another. Consumers have perfect information and there is constant or decreasing return to scale since all firms have equal access to the resources and technology. Firms have no restrictions, be it artificial or natural to enter or leave the market thus the firms can freely enter and exit the market. Every firm and consumer is a price taker. This is also known as a perfect market or perfect competition.
From the above assumptions it becomes quite evident, that we will hardly ever find perfect competition in reality. There is rarely an industry where all these assumptions exist. This is a significant feature, because it is the only market structure that can (theoretically) result in a socially optimal level of output. Stock market is one of the best example of a market with almost perfect competition.Forex Market is one of the best closest example of a Perfect Competition. here, prices are determined by the many buyers and sellers who meet openly without restrictions. The market demand and supply determines the currency values as the buyers and sellers are well upto date with the access to real-time market information due to technological progress and related research analysis on the factors driving the prices of each individual currency. The goods traded in the foreign exchange markets are virtually the same since each currency e.g. euro or US dollar is the same regardless of whether someone is trading in Washingtone DC, Paris or London.
Pareto-efficient is the allocation of resources without any government intervention in such a manner where the only way to make one person better off is to make another person worse off. Pareto efficient acts on two major notions where all buyers and sellers act as perfect competitors and where a market exist for each and every commodity (Cooter 32). Though an allocation of resources can be pareto-efficient, it may not be on a social basis desirable. A society may be willing to trade some efficiency in return for a rational distribution of resources amongst its member. Thus even if the economy is pareto-efficient, government intervention may be essential to achieve a rational distribution of real revenue.This is where the private sector solution comes in the market. The term “the invisible hand ” give emphasis to the idea that the market is a self-regulating magical mechanism (Cooter 32). The other term “marvel of the market”is a short-hand argument against government intervention and/or government coercion (Cooter 10). According the argument, the invisible hand is capable of efficiently allocating resources in society through competition and self interest.The self-interested behaviors of these economic actors lead to designs of consumption and production that are efficient (Bailey 63). The term “efficiency” has a special meaning in economics in that the idealized competitive market is constantly moving toward a “Pareto efficient” allocation of goods (Bailey 50). This strict measure of efficiency is met when a system allocates resources in such a way that no further reallocation of goods can increase any individual’s utility without diminishing the utility of others. A given policy is Pareto efficient if it increases the well-being of at least one individual without diminishing that of others (Cooter 33). Even if the market is Pareto efficient, the question arises on whether this outcome is essential and reliable.
Each individual has a utility (one’s perception about what’s needed for his/her own well-being) and more utility implies more well-being.People maximize their welfare by using their incomes to purchase goods and services they believe give them the greatest utility. This is on the assumption that the more of any good or service you get, the more utility you get –up to a point. (Utility declines once an additional unit does not provide more value).People also sell labor and land- these are inputs for producers.There are also assumptions about producers and production.
Firms attempt to maximize profits by buying inputs to produce goods for sale and use technology to convert inputs to outputs.They make decisions based on the cost to produce and behave competitively in the sense that they cannot change the price of factor inputs by their individual actions. Resources or inputs are needed to produce each unit of output. At a point, an additional unit of output requires at least as many inputs to produce as the previous unit. In a simple world, a set of prices arises that distributes dynamic inputs to firms and goods to persons in a way that it is not possible for anyone to find a reallocation that would make at least one person better off without making at least another person worse off. This is a Pareto efficient allocation. A Pareto efficient allocation of goods and services always maximizes social (consumer and producer) surplus (Bailey 26). It can be simply put that the net profit to both consumers and producers is highest when the market is working.
Admittedly, pareto efficiency may not be achieved by the real world economies. This is because the first assumption is violated when firms have market influence and raise their prices above competitive levels e.g. in the field of industrial organizations (Cooter 84). The second assumption is violated when the market for certain commodities does not emerge and hence the market cannot even allocate it efficiently.
Bailey, Roy E. The Economics of Financial Markets. Cambridge [u.a.:Cambridge Univ. Press, 2008, Print.
Cooter, Robert D. The Strategic Constitution. Priceton, n.j: Priceton University Press, 2002. Print.