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August 20, 2019, 01:54:23 pm

Author Topic: Competitive markets  (Read 276 times)  Share 

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Chelsea f.c.

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Competitive markets
« on: October 27, 2018, 10:09:34 pm »
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Free and competitive markets should lead to an allocation of resources that maximises society’s wellbeing.’ a. With reference to the statement above, evaluate the role of markets in achieving an efficient allocation of resources.

Don't pm me post in forum for everyone's benefit... but here's some notes to the question =)

As per individual utility maximisation:

The competitive equilibrium is efficient as it is where the market clears I.e. Demand equals supply and the price is set so the welfare of sellers and buyers is at its highest.

If there are abnormal profits in the market (undersupply) new entrants (no barriers to entry and perfect information) will enter the market until profits evaporate and buyers pay sellers just enough for goods such that they will continue to supply... oversupply is similar...

But this assumes all benefits of transaction accrue to buyers and sellers and there are no spillovers I.e. Externalities where if the socially optimal is greater/less than that of the market than the government can intervene to subsidise/tax until the welfare of society is maximised...

A tax would increase price for buyer who hence would buy less however the seller would receive no benefit... and a quota is a reduction in quantity which would artificially increase prices reducing benefit of buyer who would buy less thus reducing welfare of buyer and most likely seller as they sell less though they may get increase in price... as per free bit
« Last Edit: October 27, 2018, 10:24:47 pm by Chelsea f.c. »
Bachelor of Commerce (Honours) Finance - UoM - 2019
Bachelor of Commerce - Economics and Finance - UoM - 2015 - 2018
Diploma in Mathematical Sciences - Statistics and Stochastic Processes - UoM - 2015 - 2018

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Re: Competitive markets
« Reply #1 on: October 27, 2018, 10:32:00 pm »
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I'd argue the counter-intuitive way...

If there wasn't complete allocative efficiency, the market mustn't be a free and competitive one.
Now, given that the market is free and competitive, society's wellbeing can be maximized because consumer sovereignty exists, enabling them to have the best material living standards they can with their disposable income.
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Chelsea f.c.

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Re: Competitive markets
« Reply #2 on: October 27, 2018, 10:47:11 pm »
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I find it really hard to follow your argument... competitive markets do exist without allocative efficiency I.e. energy market just pollution isn't priced
Bachelor of Commerce (Honours) Finance - UoM - 2019
Bachelor of Commerce - Economics and Finance - UoM - 2015 - 2018
Diploma in Mathematical Sciences - Statistics and Stochastic Processes - UoM - 2015 - 2018

Chelsea f.c.

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Re: Competitive markets
« Reply #3 on: October 27, 2018, 11:19:30 pm »
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Sorry hope I didn't come across as rude... but don't over think your response the examiner just wants to test understanding this is true for all levels... I don't know what's in the course as I've only studied econ at uni so maybe don't mention taxes or quotas but put something else
Bachelor of Commerce (Honours) Finance - UoM - 2019
Bachelor of Commerce - Economics and Finance - UoM - 2015 - 2018
Diploma in Mathematical Sciences - Statistics and Stochastic Processes - UoM - 2015 - 2018