Supply & Demand of Companies & Competition

In a modern economy, individuals and companies produce and consume everything that is made. As a consequence, the study of microeconomy starts by studying how the supply and demand determines the prices and levels of production in competitive markets. This would be a logical place to start learning from since the producers determine the supply and the consumers determine the demand, and their interaction in the markets determines what is produced and how much it will cost. 

Something that is interesting is to look into how individuals make economic decisions in order to gain as much contentment as possible with their limited income. These decisions generate demand curves that affect the prices and quantities produced in the market. In the same way, the decisions of the companies that are looking to maximize their benefits generate the supply curves that affect the market. We will be explaining how this happens and how such companies behave in order to maximize their benefits.

It is possible you do not feel comfortable with companies that look to increase their benefits, but economists and investors are all for this, as long as these companies are in competitive industries. The reason for this is that the companies that are forced to compete end up satisfying two great conditions which are:

• They are efficient in the assignation of resources, which means they produce goods and services that the consumers want more of.

• They are efficient in production, which means they produce these goods and services at the lowest price possible.

These are fundaments that constitute the ideas of Adam Smith, which involves the idea that when the companies are restricted by competition, the greed of each one of them makes them behave in an optimal way for our society, as if they were guided towards what is correct.

Unfortunately there are companies in the world that do not have any competition and when this occurs these companies behave in a way that is not appropriate for their society. The extreme situation occurs when there is a monopoly, which is a situation when there is only one company in the industry, meaning that it does not have any competition. We will explain this later on, but basically monopolies behave in an incorrect way because they restrict the production in order to raise prices and inflate the benefits. These actions that end up hurting the consumer continue on indefinitely unless the government takes certain measures to regulate this ill behavior. Another less extreme case of lack of competition is oligopoly, which is when there are only a few companies in the industry. In these situations, there are companies that frequently do things to compete between each other, with the end purpose of keeping the prices high and obtaining more gains.