How Theoretical Perspectives Can Help Us In Essay Example
How Theoretical Perspectives Can Help Us In Essay Example

How Theoretical Perspectives Can Help Us In Essay Example

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  • Pages: 6 (1539 words)
  • Published: January 5, 2018
  • Type: Essay
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The objective of this essay is to address both parts of the given question. The first part will examine various models of markets and their descriptions of market functioning. The second part will explore the limitations and occurrences of market failures. To illustrate this, the impact of SARS on the airline and tourism markets will be used as a case study. The utilization of different theoretical perspectives can aid in comprehending market functioning. Markets operate as a trading mechanism based on the principles of Supply and Demand.

Markets operate under various models or structures, all within the concept of competition. In economic terms, competition refers to a market situation where there is limited or no monopoly power and no entity influences product price or quality. Hence, a competitive market occurs when none of the participants have market power. A competitive market achieves efficiency in alloca

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ting scarce resources as long as there are no other market failures.

There exist four renowned competitive market models: Dynamic Competition proposed by J. Schumpeter, Perfect Competition proposed by Neo-classical followers, Competition as a process of adjustment to change proposed by F. Hayek, and Competition as a power struggle proposed by Sen.

The characteristics that define a market model include the number of firms present in the market, ease of entry and exit, and the type and differentiation of products.

Schumpeter's perspective on the Dynamic Competition model is centered around competition driven by innovation in products and processes rather than price-based competition. Consequently, firms that fail to keep up with their competitors' advancements will fall behind and eventually go out of business. Schumpeter calls this process "creative destruction," which continually reshapes the economy and improve

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living standards over time. According to him, an excessive focus on static efficiency in perfect competition hinders technological progress.

Instead, we need to acknowledge that some degree of monopoly power is necessary for the progress of infrastructure growth and development. This model has several key features:
- Short-term monopolies are beneficial for firms to gather the necessary resources.
- Large firms play a crucial role in the evolutionary process of the economy.
- Markets operating under this model achieve cost reduction and quality improvement from technological advances and economies of scale.
Some argue against this model, citing the potential for monopoly problems that require government regulation to prevent abuse of power.
On the other hand, the neo-classical model of perfect competition depends on the absence of powerful innovative organizations, unlike the dynamic competition model which recognizes their presence. The neo-classical model relies on easy market entry and a large number of small firms. Key features of this "perfect competition model" are:
- The central player is the market itself, not the individual firms, guided by the concept of the "invisible hand."
- All firms are price takers.
- Perfect competition is achieved when market supply and demand reach equilibrium.
- There is a large number of firms with no corporate power.The text discusses the concept of competition in an industry, which involves a standardized product, perfect market knowledge, and immediate resource movement. However, a criticism of this model is that it fails to address how equilibrium is reached. The model assumes rational behavior in markets and individuals, which may not align with actual human behavior.

According to Hayek, the perfect competition model fails to take into account

information as a crucial factor. Hayek argues that individuals always have incomplete information when they react to economic changes. Consequently, price adjustments act as signals and transmit information among market participants. Unlike the neo-classical model, the Hayekian perspective emphasizes the competition process rather than its final outcome. Nevertheless, both Hayek and the neo-classical model support free markets and individual autonomy in making economic choices.

He also supported the concept of the invisible hand in coordinating markets. The model includes several key elements:

  • Market equilibrium is never reached.
  • Markets act as coordinators.
  • Changes in price provide information about consumer preferences and production conditions for suppliers.
  • Outcomes in market events are a result of human action rather than deliberate design, making justice and injustice irrelevant.

Despite its strengths, this model has weaknesses. For instance, price signaling can sometimes have costs and convey incorrect or incomplete information. Furthermore, externalities reveal the limitations of relying solely on prices for perfect information because they fail to capture the social costs and benefits of economic activities.

Sen's monopolistic competition model opposes the neo-classical balance between supply and demand. He sees competition as a power struggle characterized by conflict instead of harmony or shared interests.

  • This model highlights the unequal distribution of gains and losses in efficiency.
  • The model also emphasizes firms and organizations participating in the struggle for economic power.
  • An additional claim made by this model is that markets do not guarantee positive freedom.

Overall, Sen argues that economic power is unevenly distributed within competitive market relations. Despite all four market models following the principles of liberalism and capitalism, they have different perspectives on market competition. It is

important to note that these models are not clearly distinct, and a market can encompass multiple models without clear differentiation. However, understanding the characteristics of each model is crucial for comprehending how markets function regarding price, cost, supply and demand, as well as the presence of monopolies. Market competition plays a role in enhancing efficiency and productivity in the economy. To fully understand why markets may fail to produce favorable outcomes, it is essential to first define what constitutes market failure.

Market failure refers to the inefficient outcomes or unequal distribution of costs and benefits in a market. In significant cases, government intervention is justified. Market forces may fail to achieve economic efficiency due to various reasons, resulting in what economists term as "market failure". For instance, common property represents resources accessible to all but owned by none, creating a lack of control over its utilization and leading to excessive exploitation. To tackle this issue, policies and restrictions are required despite the challenges associated with enforcing them for common property.

An alternative approach is to privatize the property while ensuring that pricing and efficiency are regulated by law, thereby allowing private sectors to participate in the exploitation of public goods. Public goods possess two main characteristics: being non-excludable and non-rivalrous. These goods are not typically supplied by the free market. Once a public good is provided to an individual, there is no additional cost associated with others enjoying it. Additionally, it is impossible to prevent others from benefiting once the public good has been provided to one person. The market does not supply public goods because their benefits always outweigh their production costs.

Examples of common goods

include public parks, roads, and public education. The absence of competition leads to the emergence of monopolies, which cause market failure. Monopolies restrict production and increase prices above the natural market level. However, in some cases, monopolies are allowed or facilitated by government when a single supplier efficiently meets market needs.

Externalities:

In certain situations, individuals or firms do not bear all the costs for the benefits they receive, and someone else bears the costs of precaution. This is known as externalities, and it results in inefficient distribution of costs and benefits in the market. Environmental issues and pollution caused by manufacturers are clear examples of externalities.

(Negative externalities) Some externalities are not negative, but in certain situations, the benefits of an activity are not fully received by the individual or entity involved, like in the case of inventions. Information Failures (Asymmetric information) contribute to market failures caused by inadequate provision of information. Not everyone has equal access to information, and there are cases where consumers do not have enough market information to make informed choices. Missing/Incomplete markets pertain to goods and services that may not strictly be classified as public goods but still face inadequate supply in the market.

Insufficient availability of goods and services can lead to incomplete markets and market failure, affecting both individuals' economic fortunes and society as a whole. One specific example illustrating this occurrence is the outbreak of Mad Cow disease, which had consequences for the livestock market and people's preferences, highlighting issues related to externalities.

The emergence of Mad Cow disease resulted from farmers choosing organic materials as cattle feed to reduce expenses and waste. This led to new

regulations being implemented by government bodies, albeit with associated costs. The economic implications included a significant negative impact on the performance of the livestock market due to the increased number of Mad Cow disease cases.

A disease outbreak resulted in a ban on livestock imports and significant losses in most European countries and the USA. Measures taken to control the disease included slaughtering cattle and recalling meat from markets. As a result, cattle prices decreased and there was a shift in demand for meat from European and American countries to Asian countries. Despite this, overall beef consumption declined. The impact of the outbreak extended beyond farms, livestock markets, and beef retailers to also affect the fast food industry. For instance, McDonald's responded by promoting non-beef options like Chicken Nuggets and Veggie Sandwiches as public fear grew and taste preferences shifted towards alternative meats.

A social impact that persisted to some extent even after the danger has nearly vanished.

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