Perfect Markets and Supply and Demand

According to Tim Harford’s book The Undercover Economist, a perfect market is a market where competition and efficiency are perfect.  List prices mirror manufacturing prices, so generally competition is very even, as any change from one company directly causes change in another.  The key to this is that everyone tells everyone else everything.  Products aren’t sold for insane prices simply based on brand-name, as all prices are directly based on manufacturing costs.  Conversely, buyers are unable to exploit sellers as they were in our class’ Buying and Selling Chips activity.  Profits are public, so they would end up evening themselves out between the various entities or people involved with the transactions.  Ultimately, this would result in a relatively equal economic distribution, the similar goal of socialism.  While this would be perfect for lower class citizens, the upper class despises it, as it would mean a decrease in their high economic standing and luxurious lifestyles.  Thus, a capitalist society like ours rejects it, and societies that attempt to use methods such as socialism to create more perfect markets and civilizations end up being corrupted by human tendencies to misuse power and wealth.

The ideas of supply and demand are that there is a certain scale on which both consumers buy products and suppliers create products.  The two axes of the scale are price and number of goods.  These are directly interconnected, though not linearly.  A higher price results in fewer consumer purchases and higher production rates.  That’s a bit of a problem.  The result of more production than there is demand for a product results in a surplus.  Suppliers need to get rid of this surplus, so they obviously cut back on production.  They also lower the price on the surplus.  An example of this is that as a car dealership begins to receive cars for the next model year, they put the cars of the previous model year on sale.  That’s how Luis’ dad got his Maserati Gran Turismo for $80,000 rather than $120,000 (though that was also because the dealer couldn’t find anyone else who wanted a burgundy colored Maserati).  Unfortunately, that’s also why my dad chose to buy an Audi A6 rather than a BMW 5 series.  The first completely redesigned model of the BMW 5 was supposed to be released in the summer of 2010 (after my dad’s lease on his Lexus RX 350 ended), so the residual value of the current generation was fairly low.  Thus, the lease would have been a really bad deal, while buying the car itself would be.  By lowering the price of a product, the supplier sparks greater consumer demand for it, so sometimes these suppliers result in a shortage of a product.  Eventually, this rounds out to a number where production rates match demand.  Of course, in the real world, this is also affected by the media, which sponsors and rebukes certain brands, and by the quick advancement of technology.  For example, the Motorola Razr was still in demand when the Original iPhone was released, but the wild popularity of the iPhone over the next five years (yes, this coming June is the 5th anniversary of the release of the iPhone) caused the demand for Razrs to drop drastically.  On the other hand, while the introduction of electric cars and hybrid vehicles that require less or no fuel compared to conventional vehicles has been greatly covered by the media, it hasn’t significantly affected the oil industry, which is still thriving (though gas prices are going up again).  Nevertheless, alternative fuel is still in its earliest stages for mass-produced vehicles, so the real effect will have to be measured over the next decade or two.

 

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