The market in operation

Our overview of supply and demand in action has set the stage for addressing how efficiently and equitably market mechanisms answer the basic questions of "What?" "How?" and "For Whom?"

* What? Our exploration of the price system has relied on two critical assumptions:

1. Individuals are self-interested and try to max­imize their personal satisfaction through the goods they consume. If goods add less to your satisfaction (valued in terms of money) than they cost, you will not buy them. Consumer willingness to payunder­pins the demands for goods.

2. Finns try to maximize profits when they sell goods to consumers willing to pay for them. The drive for profitunderpins the supply side of the market.

Thus, the market system answers THE WHAT? QUESTION by producing the things people de­mand.

* How? A firm’s ability to exploit consumers is limited. First, competition keeps prices from straying much above costs for long; high profits attract new firms, increasing supply, so prices and prof­its fall. Second, suppliers try to be efficient; firms that cut costs or innovate a successful technol­ogy temporarily reap higher profits. Before long, any firm not using a superior technology is left trying to sell outdated products, or its costs will exceed its competitors’ prices and it will fail. Competition ensures that price is approxi­mately equal to the opportunity cost (sacrifice to society) incurred in production. International competition exerts pressurefor specialized out­put and exchange according to comparative ad­vantage. Thus, competitive markets answer THE HOW? QUESTION byshifting resources into goods where production costs are relatively the lowest. This normally means thatcountries with abun­dant labor and scarce capitalgain most by con­centrating on labor-intensive goods (e.g., apparel), while countries with ample capital rela­tive to labor gain by producing capital-intensive goods (e.g., aircraft or scientific instruments).

* For Whom? How markets answer this FOR WHOM? QUESTION is relatively simple. Consumers who hold dollar votes and are willing to pay market prices pur­chase and consume goods. Those who do not own many resources cannot buy very much. It is this distributional side that seems to cause the most problems for critics of the market system.

Many people perceive the price system as impersonal and inequitable. However, the mar­ket offers some major compensating advan­tages. Decisions are decentralized: no gov­ernment agency dictates what everyone must (or cannot) buy or produce. Moreover, markets tend to be efficient. Consumers usually pay prices for goods that roughly reflect the mini­mal costs of producing these goods. Finally, al­though markets may not provide perfect stability, the forces that drive markets toward equilibriumtend to yield more stability than most other mechanisms.

Although markets seem to excel in the pro­duction and distribution of a wide array of goods, there are circumstances where the market system may fail. This opens the door for an economic role for government in a market economy.

Дата добавления: 2015-11-14