Nature of Competition: The Product Market

 

The reason for the gross disarray of  macroeconomics is the aggregate miscomprehension of the market “Adam Smith talked about” (quote from Larry Summers @.gov/blog, 2009).

             To be honest, the market is a model, a paradigm or a metaphor and that after a great abstraction. Consequently, the model is for application subject to numerous adaptations and adjustments. Furthermore, “the market” is for trade of goods and services, never for financial instruments. If anyone fuses “the market” of economics with “markets” of finance, you bet she is either an alchemist or a macroeconomist.

             While Finance is balancing, Economics creates. A CPA or not, no accountant who is no macroeconomist would combine an income statement with a balance sheet.

 

Metaphor and applications. Take the Newtonian gravity theory for example. Rocket scientists would never try empirically to test the theory as is. The idealized theory is one, technologies and engineering are another. Another example: Youngsters often say to a darling, “You are my sunshine,” without ever meaning to dry laundry in front of.  

             The market is neither a traditional marketplace nor a modern mart. Don’t get Smith wrong, the market is beyond empiricism. When anyone is unsatisfied, near-satisficed, satisficed or near-satisfied, do not bark up the wrong tree, either. In the first place, science is a matter of kind never of degree: we when in science are interested in true or false. If anyone is interested in “right or wrong,” he might take a trip to Cambridge, humanities or elsewhere.

             With so many things considered, macroeconomics is the best form of economics except for all those that have been tried.   

 

Defining a market. There are three premises in naming the market: a unique product, a community of limited number of households, and a finite accounting period. 

             First, the product, say, the apple is homogeneous and packed to a minimum sellable unit. Such a unit is called “marginal” by economists including Gregory Mankiw (Principles of Economics, 2009). The homogeneity rules out any substitutes from the beginning; heterogeneity and substitution are close cousins so as to turn any definition of product useless. Just think of how to define “the apple” in theory out of indefinite varieties in practice.  Apparently,  it's homogeneity assumption.  

             In this regard, Alfred Marshall recommends to group inter-substitutive items into a single product of a kind (Principles of Economics, 1920). On the same page as such, he refers to Sir. Robert Giffen and effectively rules out the so-called Giffen good, which incidentally appears in Mankiw’s textbook as well. For instance, “the Irish potato” and “the meat” might be grouped together as a staple product to be consumed for calories. More simply, the two might be defined to be the same product. “And, that’s the way it is.”  

             Second, before naming a market we must confine the number of potential participants representing the community. Conceptually, theoretically or empirically, indefiniteness, not to mention infinity, is beyond our reach. For instance, the mirage is eternally up for grabs. Have you  ever?

             Third, the finite period of accounting is necessary for two reasons. First of all, we consume apples periodically on one hand, and the perishable apple would be the last asset, even after “the useless money,” to invest in (quote borrowed from Samuelson and Nordhaus, Economics, 2010). It’s costly either keeping or removing the smelly perished, while money when preferred does not stink as much bad.

           Moreover, the accounting is usually public and “financial” (monetary to be precise) for the community as a whole. The period for communal accounting must be a period of a certain “temporal run”; for instance, a week for the apple, a month for the widget and a quarter for the gadget. Honey, never go for the spatial run.

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The demand curve. There are two typical reasons why the demand curve cascades down: at the household and in the market. The marginal utility of the apple declines primarily because each household has so many other products to consume in the same period.

             At a lower opportunity cost of price, more households will stand in the demand line in the market.

 

The supply curve. Ditto, except that the marginal production cost of apples increases in the defined orchard. This effect is generally called the law of diminishing returns (to the scale of creation at the given workshop).  

 

No calculus, please, until Eternity. We are not interested a quarter of the apple not to mention infinitesimal thereof. We are not interested, either, in the apple, physically or mathematically squared. After all, convenient tools such as a sword are deleterious when misused, abused or overused. The apple when differentiated or integrated turns the other edge to us, so as to become a disutility sooner than later.

             “Honey, I turned the bottom of glass up and spilt the orange juice on my silk dress. What shall I do, damn the mal-, miss- or over-produced orange or else?”

Honey, I Blew Up the Kid