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January 17, 2018 

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AGGREGATE EXPENDITURE EQUATION: An equation indicating that aggregate expenditures (AE) are the sum of consumption expenditures (C), investment expenditures (I), government purchases (G), and net exports (X-M), stated as: AE = C + I + G + (X-M). This equation surfaces in the Keynesian economic income-expenditure model in the form of the aggregate expenditures line. However, it's also central throughout the study of macroeconomics, including aggregate demand and the measurement of gross domestic product.

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COMPETITION:

In general, the actions of two or more rivals in pursuit of the same objective. In an economic context, the specific objective pursued is usually either selling goods to buyers or buying goods from sellers.
Competition, as noted by the fourth rule of competition, brings out the best among buyers and sellers, that is, it results in an efficient use of resources.
  • Competition among sellers drives the equilibrium price in a market down to the supply price and forces sellers to supply the most wanted products at the lowest resource cost.

  • Competition among buyers drives the equilibrium price in a market up to the demand price and forces buyers to spend their incomes on the most satisfying goods.

  • Competition on both the demand-side and supply-side of the market results in equality between the demand price and the supply price, which is essential for efficiency.
Without competition, sellers can charge more than the supply price or buyers can pay less than the demand price, neither of which results in efficiency.

Competition by the Numbers

The degree of competition in a market is determined by the number of participants. All things being equal, larger numbers lead to greater competition. A market with 10,000 buyers and 10,000 sellers is likely to have greater competition than a market with 10 buyers and 10 sellers.

The Few and The Many

Playing this numbers game results in two varieties of competition:
  • Competition Among The Few: This form of competition occurs if there are only a handful of participants. Each participant usually knows the other competitors quite well. Many markets operate with competition among the few. In such markets, one seller can gain a competitive advantage by offering a product that is just a little better than the others--not the best product, only a little better product. Such competition seldom leads to an efficient use of resources.

    Competition among the few is like a race between Edgar Millbottom and his buddy Chip Merthington. To win, Edgar only needs to run a little faster than Chip. Edgar does not need to set a world record. Edgar does not need to run his absolute fastest race ever. Edgar only needs to run a little faster than Chip. In fact, if Chip trips and falls, then Edgar wins easily.


  • Competition Among The Many: This form of competition occurs if there are hundreds or even thousands of participants. Each participant is lost among the masses. Competition among the many brings out the best, that is, the most efficient use of resources. In this case, the only way for a seller to gain a competitive advantage is to produce the best possible product.

    Competition among the many is like a race among Edgar Millbottom, Chip Merthington, and ten thousand other runners. To win, Edgar needs to do a lot more than run faster than Chip. Edgar needs to run faster than everyone; to be his absolute best. Setting a world record might be needed. Moreover, Edgar cannot count on every other participant in the race to trip and fall.

Market Structures

Differing numbers of participants result in a continuum of market structures.
  • Monopoly/Monopsony: One end of the continuum are markets with only one participant, meaning there is no competition. If there is one participant on the selling side of the market, the result is monopoly. If there is one participant on the buying side, the result is monopsony. These two market structures are the antithesis of competition. There is no competition.

  • Perfect Competition: At the other end of the continuum are markets with large numbers of participants, both buyers and sellers. The numbers are so large that no one participant can influence the market price in any way. Perfect competition achieves efficiency as the theoretical, ideological benchmark market structure for competition among the many.

  • Monopolistic/Monopsonistic Competition: Residing close to perfect competition on the continuum are markets with large numbers of participants, but fall short of the theoretical perfection. If competition is on the selling side of the market, the result is monopolistic competition. If competition is on the buying side, the result is monopsonistic competition. These market structures are the best real world examples of competition among the many. While they do not achieve efficiency, they often come close.

  • Oligopoly/Oligopsony: Residing near monopoly/monopsony on the continuum are markets with small numbers of participants, but more than one. If competition is on the selling side of the market, the result is oligopoly. If competition is on the buying side, the result is oligopsony. These market structures are the ones most likely to practice competition among the few. They also tend to have numerous efficiency problems.

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Recommended Citation:

COMPETITION, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: January 17, 2018].


Check Out These Related Terms...

     | market | market demand | market supply | competitive market | voluntary exchange |


Or For A Little Background...

     | efficiency | allocation | fourth rule of competition | economic goals | three questions of allocation | scarcity | competition among the few | competition among the many |


And For Further Study...

     | distribution standards | invisible hand | specialization | market equilibrium | monopoly | monopsony | perfect competition | monopolistic competition | monopsonistic competition | oligopoly | oligopsony | market structures |


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