ECONOMICS

Economics

Economics

Introduction

Economy is the social science that studies the economic behavior of agents such as production, exchange, distribution, consumption of goods and services, as a means of satisfying needs of human and individual or collective result of the society (Harford 2007: pp.145-321). In this paper, we have studied the perfect markets and market failures that how they occur and what can be its possible examples. In addition, we have also analyzed the two significant examples of market failures that are traffic jams and credit crunch. It analyzes the concept of market failure with the examples provided in the paper.

Perfect Markets

Market is a place where any set of transactions or business arrangements between buyers and sellers are conducted. In contrast to a simple sale, the market involves formal and regulated trade, where there is some competition among the participants.

The market is also the social environment (or virtual) that fosters the conditions for exchange. In other words, be construed as a social institution or organization through which the bidders (manufacturers and sellers) and purchasers (consumers or buyers) of a given type of good or service enter into close business relationship in order to perform abundant commercial transactions (Malmendier et al. 2007: pp. 457-489).

The perfect market is an idealized representation of the markets for goods and services in which the interplay of supply and demand determines the price. A perfectly competitive market is one in which there are many buyers and many sellers so that no individual buyer or seller exerts decisive influence on the price. For this to occur, these seven elements must be met (Varian 2003: pp. 1-5):

Existence of a large number of supply and demand.

Product homogeneity: No differences between the products sold by suppliers.

Market transparency: All participants are fully aware of the general conditions under which the market operates.

Free entry and exit of firms: All companies, if desired, may enter and exit the market.

Free access to information.

Free access to resources.

Zero profit in the long term.

The essence of perfect market does not refer to both the rivalry and the dispersion of the ability to control economic agents that may have on the brand on the market.

Market Failures

In economics, market failure is the term used to describe the situation that occurs when the supply that makes a market a good or market can produce the failure because the market equilibrium provides less of a given good than it would be efficient.

For economists, the term applies when the inefficiency is particularly dramatic, or when it is suggested that an institution outside the market (such as government, a public institution or a group of associated persons) may be more efficient and produce better results than private market (Smith 2008: pp. 25-96).

The "market failure" should not be confused with a situation of "economic collapse" or dysfunction in the market rules. We should only use the term "market failure" to refer to a situation where the market fails to achieve efficiency in the economic ...