This sample essay on Equilibrium Output provides important aspects of the issue and arguments for and against as well as the needed facts. Read on this essay’s introduction, body paragraphs, and conclusion.
The equilibrium is the point where economic forces are balanced and there are no external influences. The equilibrium is the condition where a market price is established through competition such that the amount of goods or services sought by buyers is equal to the amount of goods or services produced by sellers.
Perfect competition describes a market in which no buyer or seller has market power. Such markets are usually allocatively and productively efficient. In general a perfectly competitive market is characterized by the fact that no single firm has influence on the price of the product it sells.
A perfectly competitive market has many distinguishing factors. A market in perfect competition has many people who are willing and able to buy a product as well as a many buyers who are willing and able to produce the products.
The products the firms supply are exactly the same. Another distinguishing characteristic in a perfectly competitive market is that there are low entry and exit barriers to the market, and it is relatively easy for a firm to enter or exit the market. There is also perfect information for the consumers and producers.
Most importantly, in a perfectly competitive market, the firms aim to maximize profits, firms aim to sell where marginal costs meet marginal revenue, where they generate the most profit.
Following on from above, an important idea from which equilibrium output is determined in perfect competition is that the firms main aims are to maximize profits. So, price taking from the firms guarantees, that when the firms maximize profits, by choosing the quantity they wish to produce and the combination of factors of production to produce it with, the market price will be equal to marginal cost.
The price = marginal revenue = average revenue – The demand curve is horizontal. So as the firms they have the choice of how much they supply, but no firm has more influence on the equilibrium than any other firm. In the short run the equilibrium market price is determined by the interaction between market demand and market supply. The long run equilibrium for a perfectly competitive market occurs when the marginal firm makes normal profit only in the long term. In the long run equilibrium, the business will be operating at the minimum point on both long – run and short – run average cost curves obtaining full economy of scale.
As firms grows larger it is possible for them to reduce their cost of production and it is shown as the declining pert of LRAC . Firms in a perfectly competitive market are able to make abnormal profits, however not for a sustained or great deal of time as there are no, or limited barriers to entry in a perfectly completive market thus other firms see that there are abnormal profits to be made and enter the market producing exactly the same product. This eventually puts an end to abnormal profits being made
Perfect competition describes a market structure whose assumptions are extremely strong and highly unlikely to exist in most real-time and real-world markets. The reality is that most markets are imperfectly competitive. Discuss the view that developments in information technology such as the internet made markets more competitive? Developments in information technology have without doubt made markets more competitive (although not in all sectors). The arrival of the internet has removed many barriers to entry. As, vitally, there are very little start up costs in starting an online business.
There is no need to purchase, rent or lease premises, employ several members of staff, pay electricity, gas, water etc bills. In some cases, there is not even a need for the online firms to purchase and store or keep stock, which eliminates a great deal of risk – this leads into another concept in which the developments in information technology and the internet have made easier, which is arbitrage. Arbitrage is the making of a gain through trading without committing any money and without taking a risk of losing money.
Arbitrage is not simply the act of buying a product in one market and selling it in another for a higher price at some later time. The transactions must occur simultaneously to avoid exposure to market risk. So to look at it in the perspective of a potential online business, there is no need to spend money on land utilities and labour and there is a possible chance of the business not even having to risk buying stock before it’s sold. It actually attracts businesses to the market. This could mean that online firms are able to make more profits and sell the product cheaper than those in actual shops.
Developments in information technology have moved markets closer towards perfect information. Perfect information of prices of goods (such as price comparison websites) , technology, products and consumer feedback. The introduction of price comparison websites has made the market hugely more competitive. It is now exceptionally simple to obtain the cheapest and highest prices of any good or service you want. This now means businesses have no choice but to compete and lower prices if they are to stay in business. The internet has also brought about consumer feedback which is very easy to find for pretty much any product.
Before the internet it wasn’t easy to find reviews and feedback on products, so there was a lack of information which also gave scope and benefitted businesses as if there was a disadvantage in there product and, or another product was better it was difficult to find out. The internet has made feedback extremely easy to find on most products which means any mistakes in products and services are highlighted and alternatives are recommended. This means the firms have to keep upto date and constantly maintain there product to keep themselves in business.
The online market has significantly reduced or even removed transaction costs. For instance if you were buying a banana from a store; to purchase the banana, your costs will be not only the price of the banana itself, but also the energy and effort it requires to find out which of the various banana products you prefer, where to get them and at what price, the cost of traveling from your house to the store and back, the time waiting in line, and the effort of the paying itself; the costs above and beyond the cost of the banana are the transaction costs. An online business has no or significantly less transaction costs.
This had made markets alot more competitive as online firms are able to provide there products cheaper than they are in shops. Developments have also introduced new kinds of retailers, like Amazon who have different business structures. However, the internet has also put great strain and eroded some markets. Businesses such as Antique shops have been put out of business due to the internet and internet auction sites such as eBay. People are able to sell there antiques from the comfort of there own and homes and perhaps even make more money selling online as opposed to taking it to there antiques dealers (this leads in with transaction costs).
The most notable change in an industry is the music industry. The music industry has seen a huge slump with the development of the internet and the introduction of music downloads which has had a severe affect on shops and the artists themselves, as a lot of downloading is done illegally, which is free. So the internet has effectively allowed us obtain (although illegally) a product which a consumer would pay i? 10-i? 15, for free, very easily. However music listening has increased globally due to the internet.