What is Competitive Equilibrium? Meaning and Examples

Definition

The concept of Competitive Equilibrium can be defined as an equilibrium condition where the objective of profit maximization of the firm and the aim of utility maximization of the consumers in the competitive market is to arrive at an equilibrium price owing to the freely determined prices.

As per the theory of Competitive Equilibrium, the quantity supplied of the product by the firm is equal to the product quantity demanded by the consumers in the market.

It is an economic situation of a relative balance wherein, neither the buyer nor the seller can improve its bargain position of the products offered.

Meaning of Competitive Equilibrium

Unlike the basic supply and demand model that is underlined on the individual behaviors of the firm and the consumers in the market, the model of Competitive Equilibrium is based on the behavioral statistics of the collective set of consumers and firm in the market that is high on competition.

The Competitive Equilibrium is quite useful for the market researchers and the management of the firm to forecast and calculate the equilibrium price and the total quantity of the specific products in the market.

The model of Competitive Equilibrium is also quite helpful in figuring on the levels of consumption quantity of the said product and its output per firm in the operational market.

In hindsight, the theory of Competitive Equilibrium is the condition of the market that is defined by the allocation of products and the set of prices amidst the tough and ever growing competition.

At equilibrium prices of the product in the market, each of the agents involved tries to maximize his business aim and objective but is confined by his limitations of technical know-how and the availability of the resources.

The market clears the collective supply and demand of the said products.

The concept and theory of Competitive Equilibrium are highly applicable for making and arriving at the strategic decisions of the larger markets. It is considered a cousin of the concept of game theory that also works on similar fundamentals.

The theory of Competitive Equilibrium exhaustively and comprehensively analyzes the details of economic activities such as fiscal policies, tax policies, interest rates, exchange rates, and the detailed know-how of the stock and commodity markets as a whole.

It works as a standard or a yardstick for the efficient analysis of the economic condition of the market.

The concept of Competitive Equilibrium also works on the supposition that in the competitive markets, each of the traders has a free hand to decide the quantity that is quite smaller in comparison to the demand of total quantity of the products traded in the market.

To analyze and evaluate the structures and the overall working of the other markets, the markets that are high on the aspect of the competition work as an ideal case scenario.

In the market that is capitalist in nature and its overall operations, its significant regulatory functions such as market competency, fairness in the dealings, and overall stability are decided as per the mechanisms of the pricing of the product.

Hence, the theory of Competitive Equilibrium has carved a niche for itself in the stream and subjects of mathematical economics.

Comparative Study: Competitive Equilibrium and General Equilibrium

1. One of the main and vital features of the Competitive Equilibrium is that it is highly competitive in nature. And the vital feature of the general equilibrium is that is it focused on more than one market. It is quite indifferent from the partial equilibrium wherein, there is a liberty to hold on to at least one fixed price and analyze the response of other markets and prices as a whole.
2. The major difference between both the equilibriums is their methodologies and emphasis.
3. It is to be noted that any general equilibrium can be a Competitive Equilibrium but no Competitive Equilibrium can be a general equilibrium.

Assumptions of Competitive Equilibrium

1. Competitive Equilibrium is also known as Walrasian Equilibrium and is based on the assumption that the quantity of the products decided by each manufacturer is quite small in comparison to the quantity of the products by the overall manufacturers in the market.
2. And even the individual transactions of the manufacturers have no impact on the structuring of the overall commodity present at the marketplace.

Factors that define Competitive Equilibrium

1) Price:

The theory of Competitive Equilibrium is defined by the price of each commodity in the market.

2) Allocation:

The theory is also based on the quantity of each product or commodity allocated to each of the sellers in the market.

Vital conditions required for the Competitive Equilibrium:

1. As per the feasibility condition of the market, the total demand of each of the goods in the market should equate to its total supply by the manufacturers.
2. As per the condition of the rationality, within the given budget, each of the seller or manufacturer in the market should get the best combination of the goods.
3. Last but not least, the goods that have a positive price point should be fully allocated in the market.

Example of Competitive Equilibrium

In the example discussed over here, the product we will take as a notebook and it is indivisible in nature. For instance, the utility value of the book for the seller is 150 and the utility value of the book that buyer perceives is 100.

And the buyer is not ready to pay 150 for the book and seller is not ready to sell the book at 100 or less than it. Hence, both the parties involved that is the buyer and the seller have to come at a middle ground to attain the Competitive Equilibrium.

If the buyer is ready to pay 120, then the seller may or may not agree to the same as the factor of utility is increasing from both sides.

It is to be noted that Competitive Equilibrium is not possible in all the cases and scenarios especially wherein the utility is getting decreased by both the parties involved.

Uses of Competitive Equilibrium

1. It helps the market researches and economists to understand the various determinants of the patterns of the economy. The customers look for the maximum utility of the product at the best possible price and the seller looks for the maximum profit utilization from the sale of the product. There have to be no wastages and the optimal utilization of the resources available.
2. The concept and theory of Competitive Equilibrium help to check and understand if the economic system is working in an efficient and effective manner. Plus are there are factors that make the entire process and working less smooth and not coordinated in nature.
3. The market is always high on factors of dynamics such as increased competition, evolving tastes, and preferences of the customers, duplication of the products, and high price range by certain sellers in the market. The theory of Competitive Equilibrium helps to understand the complex problems and bottlenecks that are affecting the buyers and sellers in the market.