The Perfect Market

I have been meaning to do this for a while, respond to the blog posts the students write with one of my own. So here we go.

The Questions:

What would a perfect market look like?Why doesn’t it exist?
A free market would be one free of government or controlling influences. All drivers of the market would be naturally allowed to move and exist as determined by market forces. Supply and Demand would set the correct prices and determine the failure and success of the companies who enter into it. A few examples are as follows:

1. Oil Prices: Oil and thus gas prices are tied together based on the overall demand of oil worldwide. The reason this is not a good example of a perfect market is because outside forces(stock and futures traders) trade oil on the price based on events that might occur. Demand for oil is up worldwide right now. China is growing and us Americans don’t seem to be slowing down in our usage of this black gold. The shocker comes when you learn that we also have the perfect amount of supply on the market right now. Prices are driven up based on fears of what might happen in Iran, The Straight of Hormuz and other political oil producing hotspots around the world. So in a perfect market we have prices set on current conditions not what might happen.

2. Bank Bailouts 2008:We spent beyond our means chasing houses we couldn’t afford 2 years down the road. The banks sold us these mortgages and made money off our defaults when we couldn’t pay our loans. So when the banks realized they had spent all this money on these mortgage that they would not get a profit on they were overextended and bankrupt.  In a perfect market when a company makes a poor business decision the market will react and those businesses will fail. In our world the US government intervenes and decides that if these banks fail then it will have catastrophic effect on the overall economy.

So you can see that this perfect market doesn’t exist because these outside forces act on and effect our economic cycles. It’s not quite the Lazziez Faire system Adam Smith predicted.

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