11. Production, Costs & Revenue - Dynamics of Competitive Market Processes

Question 1

What are the likely benefits to come of competition?

Answer 1

1. Increased Quality2. Decreased Prices3. Increased ChoicesThe above also improve the international competitiveness of products, raise living standards, reduce cost-push inflation and benefit the BoP

Question 2

What is the process of creative destruction?

Answer 2

Definition of creative destruction This refers to the process of how capitalism leads to a constantly changing structure of the economy. Old industries and firms, which are no longer profitable, close down enabling the resources (capital and labour) to move into more productive processes.Creative destruction means that the company closures and job losses are good for the long-term well-being of the economy.

Question 3

What are the justifications for allowing industries to fail and adopting a creative destruction position?

Answer 3

If a firm becomes unprofitable, then it should close down so that resources, (labour and capital) can move into more productive and profitable firms and industries. The threat of going out of business is an incentive for firms to move with the changing market and keep costs low. Although short-term job losses are bad for those involved, people often forget the less visible new jobs created during the economic change. In the long-term, periods of labour market change have enabled rising real wages.

Question 4

What are the arguments against creative destruction?

Answer 4

Structural unemployment - no guarantee the unemployed workers will be sufficiently skilled to shift employment prospects. External benefits which impact on social efficiency - e.g. Train systems destructed cars invested in - now we have pollution problemsRegional unemployment - In a shifting economy, regional immobilities can make the ‘destruction phrase’ last for a long time and be focused to one area, new jobs created elsewhere. Hysteresis - short-term unemployment may increase the NAIRU.Unprofitability doesn’t mean the firm always should close down. A firm may become unprofitable from short-term factors, such asHigh tariffs hitting exportsShort-term recession hits outputShort-term labour market problems, such as strikesA temporary glut in supply from overseas.See bailout of US car industry