Competitive Markets

• Competitive markets


  Markets with many buyers and sellers, where no single buyer or seller can influence the market price
• Pros of competitive markets


  • Static efficiencies including allocated efficiency where firms charge a price equal to marginal cost
  • Consumers pay what it costs to produce, leading to lower prices and higher consumer surplus
  • Resources follow consumer demand, leading to higher quantity, higher quality, and better choice
• Diagram showing deadweight loss of monopoly

  Can be reversed to show the allocated efficiency gains of a competitive market
• Prices are lower in competitive markets


  Quantities are higher in competitive markets compared to concentrated markets
• Productive efficiency

  Firms in competitive markets must minimize their average costs and exploit economies of scale, passing on lower costs to consumers
• Dynamic efficiency

  Lack of profit for reinvestment in competitive markets can lead to less progress over time with technology, innovation, and capital development
• Monopolies have greater potential for economies of scale

  They can charge lower prices and produce more than an allocatively efficient competitive firm
• Cost-cutting in competitive markets may happen in areas that are not in society's interests, such as health and safety, product safety, environmental standards, and wages
• Creative destruction


  The dynamics of competitive markets, with a lot of entry and exit, can lead to unemployment and living standards problems as new firms displace existing ones
• Even with creative destruction in competitive markets

  Workers can try to find jobs at the new firms that have entered the market
• Competitive markets can still have dynamic efficiency, as firms may reinvest even a small amount of profit, and reinvestment may be part of the competition
• The level of economies of scale in a market is important in determining whether competition or regulation is more desirable
• Regulation may be needed in competitive markets to ensure that cost-cutting does not occur in areas that are not in society's interests
• Static efficiency vs. dynamic efficiency

  In necessity markets, static efficiency (lower prices, higher quantity) is more desirable, while in some markets, consumers may be willing to pay a slightly higher price for differentiation, variety, and innovation (dynamic efficiency)