Competition Theories Essay Example | Topics and Well Written Essays - 1000 words

Competition Theories - Essay ExampleThe primary role of government then is to ensure the flexibility of the market through allow-side policies. There were three main theories used to justify this - Free Market Theory, Says Law, and the Quantity Theory of M unrivaledy.In the Free Market Theory, it is assumed that if they prudence were left to fend for itself, then it would tend to full employment equilibrium. For instance, in a classical scenario a surplus of labor equates into unemployment, which results in falling wages. one time wages fall, there would be an increased demand in labor, and hence equilibrium is achieved. Says Law (named after 19th century economist Jean Baptiste Say) argues that supply creates its own demand, and gives credence to the traditional belief that the economy will make provisions for full employment. It states that an increase in supply will eer have a resulting increase in demand, and since there will be no shortage in demand jobs will always be avai lable. Unemployment would thus be temporary as the pattern of demand adjusts itself. Lastly, the traditional view of inflation is based on the Quantity Theory of Money. Quite simply, this outlines that an increase in the money supply would lead to inflation. Thus, if the money supply could be controlled, inflation would be at a low.The Neoclassic approach to perfect(a) competition essentially defines a competitive market as one in which there are a large number of small firms, all selling a homogenous good and possessing perfect knowledge. Using this analysis, it is the structure of the market which determines the inherent competitiveness of the market. The Austrian school of thought firmly rejects this. Hunt (2000) states that the Austrian schools possibleness of competition is noted for its insistence that competition is a process, and is not a thing, place, or collective entity. (p. 26) To the Austrian economist, competition is defined by rivalrous behavior, intend competiti on is simply offering better deals than the prevailing competition. Competition arises from one firm establishing a pronounced differentiator that is parlayed into a sustainable competitive improvement against other firms. Now, because firms in the real world do not have access to perfect information, the viability of a competitive strategy would not be known. Ergo, if one is to assume perfect knowledge, then in essence you are placing by the wayside the pressing quagmire that competition is supposed to solve. Consumer preferences are not pass on a silver platter, by taking part in the competition process firms discover them. Likewise, the cost-effectiveness of a firms technology is never freely provided, this is something that is well-read as well. This makes the basic tenet of the Austrian theory of competition as knowledge-discovery - the challenge of working ones way through coitionly incomplete information. In relative comparison, the Post- Keynesian theory of competition re volves around the premise of each plant being built on a scale lower than the optimum one. briefly after, the long-term average cost is prone to decrease and may lead to significantly increasing returns. Straffa (1926) put it succinctly in stating that firms operating under perfect competition must be subject to decreasing returns of scale, and that increasing returns would only exist in the presence of a monopoly. (p. 535) The foundation of the Keynesian theory