Competition Leads to a More Efficient Use of Resources The word “efficiency”, in economists’ dictionary, is often interpreted into the degree of an economy allocates scarce resources to meet the needs and wants of consumers. As we can see that a free market economy is the one in which resources are allocated based on the principle of self-interests. Where there are profits, there are firms, and where there are firms to produce identical goods and services, inevitably, there is competition. The degree of competition determines the market structure which is the main determinant of the behaviour or conduct of firms. This in turn determines the efficiency in the use of scarce resources. It is often argued that competition leads to a more efficient use of resources. I agree with the statement, but not totally. In my opinion, competition would lead to efficiency and best use of resource by encouraging firms to improve productivity, to reduce price and to innovate, but in certain industries, particularly industries where the impact of economies of scale is distinctive, for example industries with great indivisibilities, monopoly is more favourable. Economic efficiency can be seen to maximizing total utility from a given amount of scarce resources. There are two types of economic efficiency—allocative efficiency and productive efficiency. According to their definitions, the idea of allocative efficiency is that “consumers pay firms exactly what the marginal cost is (Price=Marginal cost)…such a pricing strategy can be shown to be a key condition if achieving a ‘Pareto optimum’ resource allocation, where it is no longer possible to make anyone ‘better-off’ without making someone else ‘worse-off’.” (Griffiths and Wall, p93) When this condition is satisfied, total consumer and producer’s surplus are maximized. Alternatively, productive efficiency is about how to produce a good or service. To achieve productive efficiency, a firm must use all available methods to produce a certain level of output at the lowest possible costs. To start with, a profit-maximizing firm under perfect competition has, first of all, too small the proportion of total industry supply to make any influence on the market price of the identical product. It is therefore a price-taker. As nobody has the power to control the industry, there is complete freedom or no barrier for new firms to enter the industry competing with the existing firms. In this case, the individual firm faces a horizontal demand curve and its AR and MR coincide with the demand curve (shown in figure 1).
Efficiency is not always the answer, according to David Owen, in his novel The Conundrum, explains that society is headed in the wrong direction, believing that to be greener we need to make our everyday lives more efficient when in reality we need to change our behavior. As consumers, people want to be sustainable and preserve the Earth while greedily expanding our collection of trinkets. Efficiency can be beneficial, but to make the world a greener one, it is essential for people to change their behavior, not efficiency of the products.
In a capitalist system, businesses compete with one another to produce the most innovative merchandise at the most competitive prices; in turn, consumers freely select the most desirable products. According to Adam Smith, this competition, when left unregulated, fosters maximum wealth and the common good (Economist 2-3). Indeed, unmanaged competition may ensure prices are affordable for consumers (2). However, in a global free market that exploits cheap labour; market demand dwindles, resulting in excessive credit lending and debt crises (Li 295-6). In this way, capitalism’s efficiency and promotion of the common good is questionable.
A couple of Squares has a limited capacity for which to produce their products and smaller companies tend to have larger fixed costs than bigger companies. Therefore, A Couple of Squares must maximize profits in order to ensure that they will stay in business. A profit-oriented pricing objective is also useful because of A Couple of Squares’ increased sales goals. A Couple of Squares increased their sales goals due to recent financial troubles. Maximizing profits is the easiest way to meet these sales goals due to the fact that A Couple of Squares has limited production capacity. The last key consideration favors a profit-oriented pricing objective because A Couple of Squares offers a specialty product. A specialty product often has limited competition, therefore can be priced on customer value. Pricing at customer value will maximize profits as well as customer satisfaction. A Couple of Squares’ lack of production capacity, increased sales goals, and specialty product favor a profit-oriented pricing
...eir welfare as efficiently as they possibly can. According to Harberger (2008), “This process helps them to decide what they will supply and what they will demand,” essentially the ideology that birthed this statement translates into opportunity cost. Forgone opportunity, “or the best alternative sacrificed for a chosen alternative,” Tucker (2013), from the consumer or firms perspective, revolves solely around what they must sacrifice varying from factors of production to the establishment of mutually beneficial alliances with other consumers or firms, etc. Nevertheless, in conjunction with supply and demand, these two primordial concepts form a platonic relationship that generates countless influential possibilities with respect to the decisions made by consumers and or firms in order to truly generate what they perceive as the most efficient use of their resources.
No single firm can influence market price in a competitive industry; therefore a firm’s demand curve is perfectly elastic and price equals marginal revenue. Short-run profit maximization by a competitive firm can be analyzed by comparing total revenue and total cost or applying marginal analysis. A firm maximizes its short-run profit by producing that output at which total revenue exceeds total cost by the greatest amount.
- Heyne, P. (n.d.). Efficiency. Library of Economics and Liberty. Retrieved April 14, 2014, from http://www.econlib.org/library/Enc/Efficiency.html
The concept of perfect market allocation of resources was in W. Baumol's (1988,631), view largly theroretical. Baumol believed that economic models relied upon the concept of the invisible hand first discussed by Adam Smith. In these models, the perfectly competetive economy was able to allocate resources efficiently, without the need for market intervention by outside agents, including governments. However, there were significant weaknesses in these models particuarly in the area of ensuring equity of acess, social objectives and in the provision of public goods.
In micro-economics market failure is characterized by resource misallocation and subsequent Pareto inefficiency. Just as the invisible hand falters, so is the case that the unregulated markets are incapable of solving all economic problems. In laissez-faire economy, market models mainly monopolistic, perfect competition and oligopoly are expected to efficiently allocate resources for the “welfare benefit” of the society. However individualistic and selfish private interests divert the public benefits thereby prompting government intervention to correct the imperfection which may lead to disastrous economic impact. Although corrective intervention policies by government may not necessarily address the underlying imperfection induced by private sector inefficiency, it still becomes a necessary remedy to benefit the wider public if private entities are not allocating efficiency. Furthermore, as the largest contributor of the Gross Domestic Product, poor and untimely corrective measures could signal the failure of both the private and public interests. Effectiveness of the policies and mechanisms designed by the state in market intervention are fundamental in correcting any perceived market failure. Intervention however does not guarantee effective remedies expected by the economy and could lead to deeper market failures if the regulations “crowd out” the private sector but is the viable approach to address market failure.
Except consumer can benefit in cheaper goods, corporate access to larger markets means that firms may experience higher demand for their products, as well as benefit from economies of scale, which leads to a reduction in average production costs.
A perfectly competitive market is based on a model of perfect competition. For a market to fall under this model it must have a number of firms, homogeneous products, and easy exit and entry levels into the market (McTaggart, 1992).
Markets have four different structures which need different "attitudes" from the suppliers in order to enter, compete and effectively gain share in the market. When competing, one can be in a perfect competition, in a monopolistic competition an oligopoly or a monopoly [1]. Each of these structures ensures different situations in regards to competition from a perfect competition where firms compete all being equal in terms of threats and opportunities, in terms of the homogeneity of the products sold, ensuring that every competitor has the same chance to get a share of the market, to the other end of the scale where we have monopolies whereby one company alone dominates the whole market not allowing any other company to enter the market selling the product (or service) at its price.
Efficiency is highly prized in a culture turned toward productivity. It is therefore cultivated in contemporary business administration theories. It also tends to be prized above all other values in modern society, as society is more and more oriented toward technological advancement. Efficiency is also defined here as the most economic or the shortest or fastest or most simple way of realizing or achieving a goal with the least cost.
In a perfectly competitive market, the goods are perfect substitutes. There are a large number of buyers and sellers, and each seller has a relatively small market share. Perfect competition has no barriers to information regarding prices and goods, meaning there is no risk-taking behaviour – sellers and buyers are rational. There is also a lack of barriers for entry and exit.
Ancient China has a number of sayings about competition, such as, “seeking great honor results in no honor at all”. Theodore Isaac Rubin, a writer of both fiction and nonfiction, explains in his essay, “Competition and Happiness” competition seldom brings out the best and often brings out the worst in people. He argues that competition is a form of projection in which the development of self is abandoned to beat the next fellow. Rubin believes that, “competition is a residual of a primitive past, and it is not a genetic residual” (312). In the past, competition was necessary for people had to compete in order to survive. Even though, people were conditioned to compete in the past, it is not pertinent anymore as it became another aspect in the modern day. Rubin further states, “people brought up this way feel lost…because they exist to compete and they’ve lost their raison d’être in the new situation” (312) Learning to compete with others is taught by an individual’s family and the individual forgets why he/she is competing as they only focus on beating their fellow mates. Competition produces anxiety which can interfere with learning and disassociates with one’s own body. It is not instinctual because it is taught and it damages people and creates stress in their life. Competition teaches people to give their worst while as they only focus on what their fellow mate is doing. I agree with Rubin that “competition limit people’s ability to lead happy and satisfying lives”, for I am assured that competition is destructive to children's self-esteem, it interferes with learning, sabotages relationships, and isn't necessary to have a good time.
Social efficiency is related to the concept of the government intervening in a situation where the costs pertaining to a firm or a number of firms acting in a specific way is higher that its benefits. One might want to say for correctness purposes that one achieves social efficiency when "the marginal benefits to society - or marginal social benefits (MSB) of producing any given good or service exceed the marginal costs to society or marginal social costs (MSC)." [2]