The Theory of Competitive Markets - Paper Example

Introduction

The theory of competitive markets is a scenario where there is a large number of producers competing against each other to satisfy the needs of a large number of consumers. In this case, a single producer or consumer cannot dictate the market (Wolff, 2012, P.56). It is essential to understand that in the competitive markets, producers compete openly and fairly for buyers without any external influence. Competitive markets are the best form of markets in any economy as they do not limit businesses because of their size. Competitive markets are formed under the following conditions:

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The Profit Motive

Firms get the incentive to enter competitive markets because of the profitability levels that the market offer. In competitive markets, companies can make substantial profits since the market is well balanced.

Rivalry

Competitive rivalry is another characteristic that triggers the formation of competitive markets. For example, in a case where there is a monopoly, it becomes impossible for the market to become competitive since new companies get a stronger barrier to entry and competition. However, in a perfectly competitive market, companies with better competitive advantage thrive thus pushing for the need for innovation and creativity.

A Large Number of Buyers and Sellers

In competitive markets, there have to be many buyers and sellers thus creating an equilibrium demand and supply. In such a case, the market forces of demand and supply will dictate the prices of goods and services unlike in other markets such as oligopoly or monopoly where companies dictate the prices (Jones, & Kierzkowski, 2018, P.67).

The Principle of Diminishability

For the formation of competitive markets, the private goods have to be able to diminish with increased purchase. Such will create a constant demand for the goods by the market. In the long run, the market will continuously remain competitive as more sellers will continue to provide the good needed by the buyers. Sellers will also feel the pressure to device new products and innovations to cater to the market needs thus improving customer satisfaction and increasing product diversity.

The housing markets can be considered to be competitive in the modern age due to the increasing number of realtors competing for the market share and the ever-rising demand for quality housing. The real estate market is thus competitive due to its distinct features that are attractive to investors.

Distinct Features of Housing Markets

In the housing markets, numerous factors are considered to affect the demand and supply. For example, the income distribution within a particular economy. In case there is a sizeable middle-income population which is likely to grow over the years, it is advisable to keep tapping into it and avoiding the other extreme markets. Some of the distinct features of a real estate market are as stated below;

Source of Income

Income is as a result of direct rent received from tenants or cost of sale of property less the cost of operation and mortgage payment. In the property market, property developers focus on obtaining their revenues from the sale of property or renting out their houses. Also, revenues obtained are most likely to be used to service bank loans used to build the property (Stiglitz & Greenwald, 2014, P. 122). It means that, at any particular point, the main focus is to make sure that the property is fully let or sold to avoid loses. Only such moves can help in the settling all the expenses such as bank loans and servicing of the houses.

Pricing in the Market is Demand Dependent

In areas where individuals earn a higher income, the demand for the property might be higher compared to cities with low average income per person. Apart from the income, the population too dictates the demand and supply in the real estate market. For example, a property in New York will not be priced the same as a property in Kigali, Rwanda even though the costs involved in developing the property might be slightly similar. Also, property in areas that are tourist attractions is likely to be costlier even with little costs involved in developing and maintaining the property.

Demand Depends on Quality of Housing

The demand for property in the housing market also depends on the quality which can be brought about by factors such as technology, security, and location. Quality can be brought about by factors such as modern technology used in the property for automation and security. Modern technology incorporated in housing can be an added advantage in giving companies a competitive advantage (Hinterhuber & Liozu, 2017, P.15). Individuals would prefer to have a smart house where most of the things are automated in comparison to the traditional houses not fitted with alarm systems and automatic door knobs among many others. The housing market is also subject to possible cases of distortions due to the high cost involved in setting up apartments and estates. As such, the possibilities of market failure due to extreme cases economic inefficiency such as inflation is likely to happen.

Cases of market failure in the real estate industry trigger the government to introduce subsidies to allow for market adjustment. The supply and demand subsidies can be initiated depending on the present market situation.

Supply and Demand Subsidies

The state can introduce demand and supply subsidies to make the cost of housing affordable to the people.

Supply Side Subsidy

Supply subsidies cause a shift in the supply curve to the right as the demand curve remains the same (Wolff, 2012, P. 120). It means that consumers can buy the product at a lower price than before due to the subsidy provided by the government. On the other hand, the suppliers are encouraged to produce more houses to meet the market demand.

The supply side subsidy is thus meant to encourage the producers to produce more goods and sell them at a lower price (Ruttan, & Thirtle, 2014, P.90). The government ensures that the costs involved remain the same and thus the businesses involved remain profitable. Reducing the price encourages the buyers thus creating an increased demand in a good that was not initially highly dema...