Question

In: Economics

Briefly answer while employing at least one economic term. What is the importance of competition in...

Briefly answer while employing at least one economic term.

What is the importance of competition in relation to self-interests in a market system?

Solutions

Expert Solution

Adam Smith explained the working of the market system by introducing the concept of 'the invisible hand'- People working for their own interest in a free market economy lead the economy to productivity. Smith explained that if the government left the economy alone, self interested tradesmen would compete with each other for resources. The competitiveness between the tradesmen would increase the total productivity leading to better utilization of scarce resources of the economy.

He believed that when people interact with each other for maximising their own benefits, they unknowingly create additional benefits that automatically spread across the society. Thus, the invisible hand is the market force that equals the demand and supply of goods in a free market economy, leading it to equilibruim.

Competition is a major source of motivation for businessmen. It makes them challenge their own capacity and as a result they work harder to improve productivity.This benefits the society as a while as people have wider options to choose from. If someone charged a low price for a good, consumers will be willing to buy from them, for maximising their surplus. This strategy of low pricing would make others produce something better than the competitors. But individuals can act independently only in the absence of regulations. Thus, letting the economy function on its own would benefit the society as all that is demanded will be supplied, leading to increased efficiencies.

Thus, the competitive behaviour of self interested businessmen in the economy ultimately benefits the society as a whole by producing goods and services desired by the economy.


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