As requested an essay with no diagram. Here I have attached my essay answer for this question; it is graded an A. Remember a good essay needs a balance of knowledge, application, analysis, and evaluation. My essay isn't perfect but I hope you can benefit from it nevertheless. As you'll see I have not included a diagram but you can still get a good grade. Obviously a diagram will help a lot in answer a question (and I recommend you always include a diagram where possible) but it is possible without. *please do not repost without credit, thanks!
'While some economic theories become outdated, the
theory of perfect competition has become more realistic overtime.' Discuss
whether technological developments, such as the internet, are making markets
more competitive and making competition theory more realistic. (25 marks)
Perfect competitive
markets are based on several assumptions such as; perfect information, no trade
barriers, homogeneous products etc. these can be considered unrealistic as it
is impossible for all assumptions to exist simultaneously. Through
technological advances, however, markets are indeed becoming more competitive therefore
bringing the perfectly competitive market theory to become more realistic than
before. However technological development can also contribute to making perfect
competitive theory more unrealistic and due to greater emergence of
monopolistic firms from merging of small firms enables firms to influence
market prices.
Assumptions of a perfectly
competitive market includes; large number of buyers and sellers, perfect
information thus buyers and sellers are aware about all products and prices, there
are no barriers to entry thus any firm can enter or leave the industry. However
in reality perfect information is almost impossible to achieve as there will
always be imperfect or insufficient information available for example due to
time lags; additionally it is difficult to not have barriers to entry to a
market as most firms in reality often rely on the use of patents and brands,
consumer loyalty, etc. thus creating barriers to entry. However through
technological developments such as the internet it can be argued that some of these
assumptions have become more realistic. The internet, for example, has enabled
consumers to find a greater amount of information about goods and services e.g.
through search engines such as Google thus improving information flows
therefore closing the gap between imperfect and perfect information. This has
resulted in more uniform prices. Furthermore the internet has allowed the
removal of trade barriers to a certain degree especially through the use of sites
like eBay or Amazon which enabled the creation of many small firms to be established
for example through removing the barrier of high set-up costs as it is fairly
cheap or free to start up a business on given sites and thus improves the
assumption of no barriers to entry to be more realistic. And also therefore improves
the assumption of large number of buyers and sellers due to the creation of new
firms through the internet which acts as a platform for many businesses to be
established and developed. Furthermore as the internet has no geographical barriers/location
buyers and sellers from all over the world are able access online businesses
and trade together thus are increasing the number of buyers and sellers therefore
making the large number of buyers and sellers assumption more applicable in
reality thus increasing market competitiveness. Therefore technological developments
such as the internet can improve the realism of several assumptions in the
perfect competition theory.
Additionally developments
in technology will allow factors of production to become more mobile to
changing market conditions. For example, improving capital machinery; firms are
able to use one machine (e.g. for making plastic cutlery) however with several
different functions (e.g. ability to make plastic stationary) through technological
advances to perhaps follow necessary market trends or to accommodate consumers’
taste in order to survive in the competitive market which therefore makes the
perfectly mobile factors of production assumption more realistic.
Conversely some technological
developments have also made the theory of perfectly competitive markets more
unrealistic, for example; the assumption that all firms produces homogenous
products whereby all products are exactly the same thus there are not
differentiating trademarks, brand names etc. which allow similar products to
command different prices. With
technological improvements on tools and machinery businesses are able to
establish products but with different features and styles suited to consumers
tastes; for example Currys’ in the previous decades sold fridges which was
almost homogenous to other firms – however with technological advancement they
are able to sell several type of fridges differentiated between brands, colour,
design etc. thus making the assumption of homogenous products more unrealistic.
Furthermore in reality following technological advancements firms have begun to
merge thus adopting monopolistic powers therefore firms may become big enough
to affect the market price. For example, when new technology is introduced and
is fundamental to competition some firms do not have the required capital to
invest in such technology due to lack of profits thus merging together gives
firms the opportunity to be able to combine capital and afford better
technology therefore giving such firms monopolistic strengths like economies of
scale; additionally having greater power in the market thus enabling them to
perhaps influence the market price. Thus it can be argued that technology
advances have made the competition theory less realistic. Although it is not
entirely clear to what extent technological advancements have promoted mergers
and acquisitions.
Overall it can be
concluded that indeed technological development has furthered realism of the
theory of perfect competition. The internet alone has improved several
assumptions of perfect competition; large number of buyer and sellers, no trade
barriers and perfect information to become more realistic. Moreover development
in technology has also helped the assumption perfectly mobile factors of
production to be put into practice more thus improving the assumption to be
more realistic. Although such developments have contributed in making the
theory less realistic; due to products becoming less homogenous and small firms
are wielding more market powers through merging. Overall as more than half of
the assumptions for a perfectly competitive market can be proven to be more
realistic thus markets are becoming more competitive and therefore more
realistic. However it must be emphasised that though assumptions are becoming
more realistic, the perfectly competitive theory is still far from reality as the
assumptions are still impossible to completely achieve in reality; for example,
even with the internet there will not be complete access to perfect information
on a global scale given the level of poverty. In addition, very similar but non
homogenous goods leads to confusion for consumers on prices which is
exacerbated by potential price fixing between an ever increasingly
oligopolistic market. There will always be a constant battle between producers,
aiming to maximise profits rendering perfect competition weak on the one hand
and consumers minimising their spend in order to maximise their welfare
rendering the model of perfect competition alive and well.
No comments:
Post a Comment