Why are price signals and market competition so important to a market economy? When prices accurately signal costs and benefits and markets are competitive, the
Why are price signals and market competition so important to a market economy? When prices accurately signal costs and benefits and markets are competitive, the Invisible Hand ensures that costs are minimized and production is maximized. If these conditions aren’t met, market inefficiencies arise and the Invisible Hand cannot do its work. In this video, we show how two major processes, creative destruction and the elimination principle, work with the Invisible Hand to create a competitive marketplace that works for producers and consumers.
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If profits across ALL industries are balanced and above normal profits are only temporary, how come certain industries have historically been much more profitable than others?
Remember that we are discussing competitive industries. If some industries aren't competitive then profits will be higher in those industries and they will stay high. In such a case, we do not get a balance across industries and in fact we will get too few resources in the highly profitable industry.
Does this mean that in a perfectly competitive market, new entry needs new innovation and new technology without which the entry will be a failure? If yes does this further mean that as the world moves towards more perfect competitive market, we need to restructure the education system and invest more in teaching new generation to think differently and motivate them to try new different things even if its seems absurd?
The answer to the first question is yes. Technology" in the widest sense means "way of doing things". Imagine a competitive process in a industry where at first, the members of that industry have different ways of doing things. Some of them make more profits some less. The concept of competitive market assumes that each member of the industry sees, understands, and can copy the others' technology. The ones who make less profit will naturally imitate the ones who make more. The concept of competitive markets also means that non-members of the industry can easily enter the industry and "compete on price", which means to replicate the production process but sell cheaper. The same concept means that entrants are practically infinitely many. Thi smeans there will always some new competitor coming in to compete on price. The equilibrium outcome is thus that given a technology, entry will erode profits to zero. What can you do then do make a profit in a competitive market? Come up with a new way of doing things. And make money for as long as it takes other to imitate you.
The answer to the second question is no, as you already guessed when you said "absurd". Education is a service performed by people - teachers. If teachers knew which new technologies will make a profit, they would do business instead of teaching. What teachers can do though is to a) teach students to be open to the 'idea' of commercial innovation and teach students to recognize the kinds of non-commercial innovation that destroy wealth (various kinds of fraud, theft and political enterprises whose object is to transfer wealth from some groups to others).