The Concept Of Competitive Market

Before we look at these forces, we should sketch out how exchange rate movements affect a nation 's trading relationships with other nations. A higher currency makes a country 's exports more expensive and imports cheaper in foreign markets; a lower currency makes a country 's exports cheaper and its imports more expensive in foreign markets. A higher exchange rate can be expected to lower the country 's balance of trade, while a lower exchange rate would increase it.

Currency exchange rates can be categorised as floating, in which case they constantly change based on a number of factors, or they can subsequently be fixed to another currency, where they still float, but they additionally move in conjunction with the currency to which they are pegged. Floating rates are a reflection of market movement, demonstrating the principles of both demand and supply, as well as limit imbalances in the international financial system. Fixed exchange rates are predominantly used by developing countries as they are preferred for their greater stability. They grant further control to central banks to set currency values, and are often used to evade market abuse. (MacEachern, A. 2008; Simmons, P.

Changes in exchange rates are the result of changes in demand and supply factors for goods and services, such as changes in tastes, relative incomes, and relative prices. Under a flexible-rate policy, all domestic prices are linked with foreign prices. Any change in the exchange rate automatically alters the prices of all foreign goods to domestic goods. The price change alters the relative attractiveness of imports and exports and maintains equilibrium in each trading partner's balance of

If a good in itself is available and on the pricey side the consumer in today’s society will look for a substitute that complements the budget, therefore creating a competitive market. A competitive market begins when the substitute for the good is marketed at a lower price and the sale of this product begins to increase. When the supply and demand for the substitutions become larger the manufacturer will adjust the costs of the original good to increase sales of the product. If the consumer notices that there was a particular reduction of the good or it can be purchased in a larger quantity of a more reasonable price, then the consumer will change back to the original product at hand. Therefore lending a hand in creating today’s society of price elasticity.

In the short run the perfect competition equilibrium can be found by graphing the marginal cost (MC), average total cost (ATC) and marginal revenue (MR) curves. In perfect competition the price is equal to the average revenue, which is equal to the marginal revenue and these are all constant, giving an infinitely elastic demand curve for the firm. The demand curve is “perfectly price elastic” due to the homogeneity of the products supplied, where each supplier, as a price taker, must focus on a single price. Given this, the only choice a supplier has in the short run is how much to produce. For profit maximisation to occur marginal costs (supply curve) must equal marginal revenue (demand curve). Profit maximisation is assumed to mean the maximisation of normal economic profit (i.e. revenue that covers the

Since there are so many producers in a perfect competition market, consumers are able to be price makers and there is ample opportunity for firms to compete for their business. Consider the below graph depicting the natural efficient price equilibrium and the firm’s optimal output in the short run. The market may demand a quantity of a product where the usual efficient market would consume at the marginal revenue= marginal cost (MR=MC)

Thus the rationale behind changing the nominal exchange rate under a fixed or pegged exchange rate system is easy to follow provided that the set rate is found to be far away from the optimal or equilibrium rate. However, why does the central bank need to manage exchange rates which are determined by market forces in case of independent floating? This remains a contentious issue. Essentially, the central bank is believed to determine the appropriate level (or path) of the nominal exchange rate and then intervene in foreign exchange markets to bring the actual exchange rate close to the appropriate level. In practical sense, the appropriate level of the exchange rate may represent the rate which, when translated into a real exchange rate, is consistent with the long-run equilibrium real exchange rate. Many economists of neoclassical persuasion believe that the market determined exchange rates broadly represent the long-run equilibrium exchange rates and there is no need for managing exchange rates or intervention in foreign exchange markets.

Trends are also perpetuated by market participants who were wrong in their analysis; being forced to exit their losing trades pushes prices further in the current

Monopolistic competition is another market structure that business will adopt in order to produce product. In a monopolistic industry model, you will notice that it is made up of a large number of sellers and each seller will offer a differentiated product. In a monopolistic firm industries like to put a name with a product, make packaging prettier or just have better credit terms than another product. A good example is how Nike sells Nike, but they also associate different products or shoes made by them with a number of different athletes. Like perfect competition, monopolistic completion is also a relatively easy

Purchasing power Parity (PPP), is a theory stating that the unit of one currency should have the same purchasing power as the foreign currency. Following the theory, where the normal exchange rate between two currencies should be the same as the ratio of aggregate price level between them. It can be also called “inflation theory of exchange rates” as it stands for the theory of a change of price level where as the overriding determinant of exchange rate movements. It is the same status as Quantity theory of money(QT). To make things clear, the dogma of PPP or its alternative Law of one Price (LOOP), states that when goods in the basket expressed in a single currency meaning that they cost the same in all countries. This can be achieved only if the rate or nominal exchange rate is equal to the differences between growth rate. The dental of LOP context is to find the most disaggregate product and price can be readily material-provides as strong presumption that it is impossible to assemble available date into aggregate price index which can be expected to obey the LOP.

Like stated previously, each factor has its own respected relationship to the exchange rate within the global market. But a large influence is in part to how much a currency is worth is correlated to how much value that currency is backed by the local government. Physical cash has to be supported by goods and/or gold for the currency to be worth anything. This value comes from a balance with in accounts and controlled government spending. The current account is the balance of trade between a country and the trading market, based off of all payments between other countries for goods and services. Any deficit in the current account shows if there is more being spent on imports products than being earned by exporting its own goods. These deficits in turn force countries to borrow capital from foreign sources to make up for this difference to keep the balance. “This excess demand for foreign currency lowers the country 's exchange rate until domestic goods and services are cheap enough for foreigners, and foreign assets are too expensive to generate sales for domestic interests.” (Van Bergen)

If a country’s economy (GDP) is on a steady track, the currency is valued at a high rate.

theory suggests that the changes in exchange rate would of a country is proportional to the

The use of money has become most prevalent in terms of purchasing goods and services instead of the old way of bartering. Most nations have different types and rates of money, so countries have to figure out the proper exchange rate that reflects a consistent balance when dealing with the rest of the world. An important observation made by Weaver is that there needs to be a balance of trade. More specifically, there needs to be a balance between a nation’s exports

a) In a perfect competitive market, the sole determinant of pricing is the market demand and the supply curves. A demand curve refers to the total amount that consumers will pay for their products. The supply curve is the total amount that the producers can actually make to supply to the company at the price they can afford or are willing to pay. Another factor in a perfect competitive market structure is the equilibrium price which is basically when the supply of the market meets the market demand of the consumers. Anther unique feature of a perfect competition market is that it is a price taker. In essence, this means that the company doesn’t have any influence on the price. Again, this can only be caused through a market that has a large number of firms with identical products. (Samuelson and Marks, 2010).