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Explanation of key theories

Discuss bout the Competitive Markets Use Resources Efficiently.

Strategy research focuses on the issue of firm’s performance that is based on the resources available in the market (Luo, 2012). Furthermore, it can be seen that firms differs in production in a competitive market because of its organisational needs and high level of competitive in market. Hence, the questions have been raised by Porter that why the firms differ, how they choose strategies, how they behave and how they manage in order to seek sustainable competitive advantage (Dewatripont, Hansen, & Turnovsky, 2013). Hence, it is important for any firm to make efficient utilisation of resources to seek sustainable competitive advantage in the market. In other words, it is important for any organisation to choose between available resources effectively, to get best result out of the implied strategies to survive in a competitive market (Gale, 2010).

The paper has been developed to conduct an analysis of the key theories related to efficient use of resources in a competitive market. In order to conduct the analysis, efficiency related to producer and consumer surplus has been discussed. Along with that, the study discusses the supply and demand in relation to cost and benefit. Furthermore, the efficiency of the competitive market equilibrium has been discussed to understand the role of invisible hand in controlling the use of resources in a competitive market. Finally, the study discusses the role of government intervention in increasing the efficiency of the competitive market.

In a free market economics, the concept of efficiency and equilibrium in competitive market must be identified resourcefully so that the most effective demand and supply curve can be evaluated (Shubik, 2015). For an example, in a competitive market, the relationship of marginal cost and minimum supply price must be identified through the analysis of supply curve. For competitive market operation, marketers must receive a least price or a price equal to marginal cost (Younes, 2010). By considering increase in the total costs and marginal costs, the minimum supply cost must be identified (Grodal, Schultz, & Vind, 2016).  In a free market economics, consumer surplus, producer surplus and equilibrium must be analysed in the underlying section for further discussion standpoint.

Consumer Surplus and Producer Surplus

Figure: Consumer Surplus and Producer Surplus

Source: (Alaei, Jain, & Malekian, 2011)

In market scenario of demand and supply, producers have expected that consumers in a given market can continue to consume additional products until the marginal benefits of the manufacturer’s product no longer surpass the price or increasing consumer surplus. In such condition, manufacturers will continue to supply additional units considering the price must not go beyond the minimum supply cost (Hatfield & Kominers, 2011). On the other hand, the marginal benefit for the entire social public has been identified as the marginal social benefit. Correspondingly, the marginal cost for the entire social manufacturers has been identified as the marginal social cost (Anglin, 2013). Invariably, at the point of market equilibrium, the marginal social benefit of the extra products consumed must be equal to the marginal social cost of manufacturing the supplementary units. The figure presented in the above section has included the consumer surplus and producer surplus situation (Chae, 2008). Clearly, the triangle formed by the points P1PmQm stands for producer surplus whereas the triangle created by the points P2PmQm stands for consumer surplus.

Efficiency of Competitive Market Equilibrium

Under the circumstances of perfect market competitiveness, premium product manufacturing companies have charged additional prices to the product as the demand of the products will increase in the recent times (Cass, 2016). Through the identification of respective market pricing, the marginal benefits to the consumers have been seemed to be decreased as the producer surplus situation has been identified. Clearly, the demand of additional units have not picked up according to the surplus of the product (Ruffle, 2013). Therefore, in competitive market scenario, the best market operators have managed their resources efficiently to control efficiency and equilibrium reducing other factors (Perry, 2014). Moreover, the manufacturers and marketers have identified the marginal benefits and marginal costs within a free market economics to use the resources efficiently.

It is important to note that in a competitive market presents a huge number of firms that operates in a single market. There is a freedom of exit and entry in the market with homogenous products and perfect information (McKenzie, Mitra, & Nishimura, 2009). A diagram of perfect competition has been presented below:

Competitive Market

Figure: Competitive Market

Source: (Pressacco, 2014)

It can be seen from the above figure that the resources are allocated efficiently because the price is equal to marginal cost. Along with that, the product efficiency can be evident because the firms produce at the lowest point on the Average Cost curve (Pressacco, 2014). Furthermore, the competition among the firms act as an invisible hand that enforces increase efficiency in the use of resources. On the other hand, the diagram presents a normal profit that shows equality in the price through normal profit. Hence, it can be seen that resources are effectively used in a competitive market.


Now, a market is found to be efficient only when it produces maximum output using the given amount of resources and without increasing the inputs there is no possibility of increasing the output. Hence, an efficient market ensures optimal use of resources by allowing the price to control the independent factors in the economy (Ormiston & Schlee, 2014). For example, if the consumer preference for ‘Product A’ increase compared to ‘Product B’, the price of Product A will increase. It will result in the additional production of ‘Product A’ by allocating more resources to ‘Product A’. It will decrease the production of product B. Hence, there will be an over-production of ‘product A’ and an under-production of ‘product B’ to maintain efficient allocation of resources in a competitive market (Ormiston & Schlee, 2014).

Conclusion

If a real world example is considered, it can be seen that the hike in the petroleum prices have resulted in development of the oil and gas industry by introducing innovative technologies to increase production. Furthermore, it can be seen that more investment has been done in drilling project and in the development of oil substitutes. Along with that, the wages rates of the programmers in the USA have decreased due to fall in the demand (Plessner, 2011). Hence, people working on the programming professions started developing other computer skills to continue with their professions. Hence, it can be seen that resources in the competitive market are efficiently used to seek competitive advantage and fight the battle of immense competition in the current market scenario.

When considering the government role in maintaining equilibrium price, it can be seen that many authors says that government will set the prices at market clearing prices. Hence, there is a high chance of inefficiency in the use of resources. Hence, the prices will not be there at the equilibrium level. On the other hand, no government intervention will also develop a monopoly power in the hands of certain large traders with high financial backup (Wright, 2007). Hence, the government intervention is required along with the invisible hand that will set the prices at equilibrium level where the firms can make efficient utilisation of resources. Hence, it can be seen that government intervention is required up to a mark to increase efficiency of competitive market equilibrium.

Conclusion

The comprehensive analysis of a free market economics has identified how the competitive market equilibrium has been restored within the market industries. In a competitive market scenario, manufacturers have set their own significant business perspective to deal with under production and over production of products. As defined in the review paper, efficiency and equilibrium of a competitive market have been determined through a number of factors. Therefore, identifying the most sustainable options will be evident to achieve economic sustainability. During demand surplus, the biggest manufacturers in the competitive market have adjusted the supply of production to meet market equilibrium while using the resources efficiently for superior market operations. Understandably, the allocations of resources have been distributed as per the demand and supply ratio.

Clearly, in a competitive market if more goods have been sold to the consumers, the additional marginal benefits have seemed to be reduced. Conversely, if more goods are available to the consumers the marginal cost increases. On that particular note, the fundamental of economics must be utilised in an evident way to achieve the market equilibrium scenario. Moreover, the efficiency of the business will be determined how the market equilibrium has been set to meet the requirement of the consumers as well as producers. Conclusively, based on the given argument and discussion, it is quite clear that competitive markets have utilised the best resource allocation.

References

Alaei, S., Jain, K., & Malekian, A. (2011). Competitive equilibrium in two sided matching markets with general utility functions. Sigecom Exch., 10(2), 34-36. https://dx.doi.org/10.1145/1998549.1998556

Anglin, P. (2013). A note concerning a competitive equilibrium in the market for agents. Economics Letters, 41(3), 247-252. https://dx.doi.org/10.1016/0165-1765(93)90148-6

Cass, D. (2016). Competitive equilibrium with incomplete financial markets. Journal Of Mathematical Economics, 42(4-5), 384-405. https://dx.doi.org/10.1016/j.jmateco.2006.04.008

Chae, S. (2008). Existence of competitive equilibrium with incomplete markets. Journal Of Economic Theory, 44(1), 179-188. https://dx.doi.org/10.1016/0022-0531(88)90102-0

Dewatripont, M., Hansen, L., & Turnovsky, S. (2013). Advances in economics and econometrics. Cambridge, U.K.: Cambridge University Press.

Gale, D. (2010). Strategic foundations of general equilibrium. Cambridge: Cambridge University Press.

Grodal, B., Schultz, C., & Vind, K. (2016). Institutions, equilibria and efficiency. Berlin: Springer.

Hatfield, J. & Kominers, S. (2011). Stability and competitive equilibrium in matching markets with transfers. Sigecom Exch., 10(3), 29-34. https://dx.doi.org/10.1145/2325702.2325710

Luo, G. (2012). Evolutionary foundations of equilibria in irrational markets. New York, NY: Springer.

McKenzie, L., Mitra, T., & Nishimura, K. (2009). Equilibrium, Trade, and Growth. Cambridge, Mass.: MIT Press.

Ormiston, M. & Schlee, E. (2014). Wage Uncertainty and Competitive Equilibrium in Labour Markets.Economica, 61(242), 137. https://dx.doi.org/10.2307/2554953

Perry, M. (2014). Vertical equilibrium in a competitive input market. International Journal Of Industrial Organization, 2(2), 159-170. https://dx.doi.org/10.1016/0167-7187(84)90029-8

Plessner, Y. (2011). Computing Equilibrium Solutions for Imperfectly Competitive Markets. American Journal Of Agricultural Economics, 53(2), 191. https://dx.doi.org/10.2307/1237431

Pressacco, F. (2014). Competitive equilibrium on risk exchanges: A constrained market approach.Insurance: Mathematics And Economics, 3(3), 167-172. https://dx.doi.org/10.1016/0167-6687(84)90058-1

Ruffle, B. (2013). Competitive Equilibrium and Classroom Pit Markets. The Journal Of Economic Education, 34(2), 123-137. https://dx.doi.org/10.1080/00220480309595207

Shubik, M. (2015). Competitive Equilibrium, the Core, Preferences for Risk and Insurance Markets*.Economic Record, 51(1), 73-83. https://dx.doi.org/10.1111/j.1475-4932.1975.tb00225.x

Wright, R. (2007). Market structure and competitive equilibrium in dynamic economic models. Journal Of Economic Theory, 41(1), 189-201. https://dx.doi.org/10.1016/0022-0531(87)90013-5

Younes, Y. (2010). Competitive Equilibrium for Incomplete Market Structures. International Economic Review, 31(3), 495. https://dx.doi.org/10.2307/2527158.

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