Nature of Competition: Accounting for the Product Market

 

We idealize the apple as to be “the product” traded in “the market” of textbooks; while the exactly same unit of Golden Delicious (GD) as the “marginal unit” selling at a price of bilateral agreement. In addition, we take “the year” as the accounting period, or equivalently the traded units of GD (“q” for quantity) are counted per annum (PA). Most students of old-fashioned economics would not fail to call the “q” a “flow variable” yet to be determined over the coming year.

 

The aggregate value added in the year. As the apple is “the final good” available at the end of the supply chain, the gross communal revenue equals the aggregate value added of apples “at the market value.” Technically, value added at each firm is “the sales revenue after all the purchases of intermediate goods from other firms”; consequently we might well assume all the firms in the chain to be a single firm by way of abstraction (cf. Figure below).

             A query: Where would the value added arrive at on closing the books? A great question, really! We’ll tell you. 

             Let us build the market framework approximately similar to the one in economics. Over the year, prices are not only individual but also seasonal. On the flipside, the number of units @ price is anywhere from so few to "so many." Nevertheless, we at the end of the year have all the information, “symmetric” of course, for the sake of finding out “the price” which might be equilibrating-the-market, market-clearing, imaginary, tautological, or else. For the sake of convenience, we go for “simple arithmetic weighted average” out of indefinitely many ways of averaging. 

              Here-----s the price! If we will, we may call it the communal “price level” covering the whole year of the apple. Of course we mean the average price for the community of the apple in the year. 

             Let us play a trick. First round, if we had known the price ex ante, we could easily put at that price the apple market in the natural state, or equilibrium, over the long year of 52 weeks. In the meanwhile, we keep all the individual differences and seasonal cyclicality at bay for the sake of abstraction, or of convenience if any will. From the beginning, equilibrium means the average price.

             Second round, if we had lined up all the marginal production costs ex ante from the lowest to highest, we could have drawn the supply curve as easily as finding the natural state of equilibrium. Blessed, we now can make a call on the “producer surplus.” Come to think of it, the surplus belongs to the natural persons who collectively own the legal person generically named as “the firm.” Aha, the surplus sits on the bottom line of income statement so as to be the “legal” incomes of the owner-households.

             Third round, the area of the triangle between and the supply curve and the abscissa would represent rental payments per annum to the households that have lent the human and physical assets to the firm.  

             That’s the way the market trade is accounted for. And, the particular way of accounting is retrospective. After all, history is irrelevant except for lessons therefrom. Likewise, the price and the price level are useful, if ever, as a guide for the following period of accounting.

             If we will, we may include interests paid to financial instruments, but then we would commit the error of “intellectual dishonesty” for worse; or falling prey to fallacy of composition for better. Money and finance balance values, but never add a value. By definition, money and financial instruments in some parties' hands are certainly other parties's debts, while all are us in aggregate. 

              My asset is from my value creation in the past, while my money or instrument at present is some party's current debt.  Watch your steps, or you  may cross over the time line: money is no asset. 

             J.S. Mill once (1848) suggested that money confuse many people, innocent or dishonest. No wonder, when in Cambridge“monetary” is always “nominal” but “money”  is everywhere preferred, unanimously or otherwise: yes, macroeconomists are serious “in real.” To borrow from Paul Samuelson (1948), what is true over there in the community named above  shall be false in here Cambridge of reality.

              See you tomorrow!