Competitive Analysis and Business Cycles
Based from the idea of Adam Smith with the division of labor, he believes that individuals in our economy tends to constantly seek for the possible products that they could supply to the consumers in order to generate profit out of their production. If each producer will specialize in producing one needed good of the consumers as well as the others, then, the producer group will divide the labor of producing all the needed goods of the society which on the other hand increases the societal gain.
At the end of the day, both parties will benefit from the trading of goods since the consumers will now have the goods that they need while the producers will now be able to fulfill their primary reason of producing the goods which is to generate more revenue and become rich. In this market set up, Smith assumed that producers and consumers are being guided by God towards the maximization of their happiness.
This makes the idea of Smith less acceptable today since we all agree now that we are all guided by our own choice and ‘will’ in deciding on how to maximize our happiness. But there are still ideas of Smith that is applicable today like the idea of producers provide the market with goods in order to generate profits and become rich to maximize our happiness. But this time it is not God who created our nature of maximizing our happiness but it’s already our own decision and will.
As for the self-interest, Smith believes that consumers choose sellers that offer cheapest products while the producers are always after for the business venture that would give them with the highest profit rate. This mind sets of consumers and producers, according to Smith, leads the market towards the point wherein both parties will agree to trade into certain price and product that both of them will gain benefits, the producers will generate profit out of the transaction while the consumer will be able to buy his/her needed good in the cheapest price.
By exercising the self interest of both parties, unknowingly, they tend to help one other in fulfilling the interest of each party. The only problem with the idea of Smith with the self interest of producers and consumer which makes it less acceptable today is that it failed to account other factors that affect the demand and supply of one commodity. Like for instance; tastes, preferences, seasonality, brand substitute goods are also factors that affects demand aside from the price of the commodity; rate of return and sustainability of demand are also factors that affects the level of supply in the economy and not only the rate of profit out of producing the said commodity.
As for the invisible hand, Smith believes that market system has its own way of ‘healing’ its inefficiencies with the aid of the forces of demand and supply. He stresses that eventually, after the existence of certain market inefficiencies, the economy will move back again towards its equilibrium condition through the forces of the trading between consumers and producers wherein both parties will now agree on certain level of price and quantity that both of them will still receive benefits. Smith believes that through the aid of invisible hand, the society will be able to attain their maximum level of happiness.
The latter statement of Smith pertaining to invisible hand made it less applicable to our system nowadays since we all know the invisible hand do not necessary lead us towards the attainment of our maximum level of happiness or utility. Like, there are some goods that need some intervention on the side of the government in order to protect the welfare of the consumers and to provide them with cheaper goods as compared to the one being offered by the producers (Taylor, 2007). Public goods are the best examples of this scenario and goods that are being monopolized by abusing producers. In short, government intervention also gives maximum satisfaction.
Supply is defined as the amount of goods or services that producers provide into the market at a specific point in time. On the other hand, demand is defined as the amount of goods that consumers wanted to purchase at a specific point in time (Baker, 2003). Now, we are going to relate the demand and supply forces into the idea of Smith regarding the self interest of producers and consumers.
Consumers are always after for the cheapest products in the market, cet. par. With this, the consumer would search for a producers or seller who are willing to provide the good that he/she want given the price that he/she can only pay for that specific good. The amount of people searching for a producer for a specific product would be the demand for the said product. On the other hand, the producers are always after for business ventures that are profitable to them.
Usually, their basis of producing goods is the level of profit that they will go to generate out of it. If they found out that there are a lot of consumers are searching for specific goods in the market, they will right away produce it and sell it to the consumers in order to generate funds. Trading is very hard to conduct since both parties would have to search for the person that has the product and the person that wants the product.
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A real life example of ‘invisible hand’ would be the case of Microsoft. It is said that invisible hand works in such a way that consumers tend to search for products that would give them the maximum satisfaction that they want while producers will provide the goods that are profitable for the business. Microsoft is the best example for this case for they provide innovative personal computers which give their consumers with the maximum happiness that they could have.
Consumers today are always after for innovative feature of computers rather than any other factors. This means that with the innovation of Microsoft to their computers, they bring their consumers towards the attainment of maximum utility. Microsoft on the other hand, continues to gain more profits out of their operation since they are currently the major supplier of computer units in the market (Ritchell, 2007). With their innovative products, they were successful in attracting more customers to buy their products which give them more profit as they continue with their operation.
Baker, S.L. (2003). Supply and Demand. Retrieved October 25, 2007, from http://hspm.sph.sc.edu/COURSES/ECON/SD/SD.html
Tailor, S. (2007). The Two Sides of the Invisible Hand. Retrieved October 25, 2007, from http://aplawrence.com/Misc/stailorinvisiblehand.html
Ritchell, M. (2007). Demand Outpaced Supply for New Game Consoles. Retrieved October 25, 2007, from http://www.nytimes.com/2007/01/12/technology/12games.html?_r=1&oref=slogin