Competition In Economics

Competition In Economics

Competition, in economics, market situations, forms of activity or a social process.

(1) Competition is used in a technical sense to classify market conditions according to the degree of control over prices exercised by producers or consumers. The situations depend on the numbers of suppliers and customers, the uniformity of the goods and the freedom of entry for potential suppliers. They range from (a) pure and perfect competition, in which there are many producers so that none is able to influence the price and newcomers are free to produce on the same terms as existing producers; through (b) imperfectly competitive markets in which individual producers can influence prices to an extent depending upon numbers of producers in relation to total demand, the degree to which products are differentiated in quality, design, style and location, and the degree of freedom of newcomers to produce close substitutes; to (c) pure monopoly, in which a single seller of a single product with no dose substitute has complete control over price. These market forms can also be applied to buyers: e.g. monopsony is a market situation in which there is a single buyer.

This technical language may cause confusion because the adjectives 'perfect' and 'imperfect' seem to imply a moral or ethical judgment of desirability. But economists use them in the same sense as physicists who refer to perfect and imperfect vacuums. Some of the technical market imperfections are physical facts of life, such as space and consequent variety in locations (e.g. in retail trade); others would be generally considered desirable, such as product improvements or variations in response to differing requirements of customers; yet others, such as sales promotion and advertising, represent in part efforts to inform consumers, or to persuade them to try new commodities or services so that they can inform themselves, which may or may not be economically wasteful or ethically objectionable.

The analysis of real-life market situations in tern's of varying degrees of competitiveness helps to explain the pattern of prices and outputs and to suggest reasons for differences in producers' responses to changes in the conditions of demand or cost. The simple situation of perfect competition in the production and sale of one commodity may be generalized to cover an entire economy in order to demonstrate the interdependence of all kinds of economic activity. It can be argued that the properties of such a perfectly competitive economy provide a set of standards for Government policies designed to secure an efficient allocation of resources. Although formally valid, the significance of such an approach is debated by economists. Since government s are concerned with developing events it would seem that study of the ways in which adjustment takes place in a changing competitive economy is likely to have more importance for the optimum allocation of resources.

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