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I suspect what you're thinking is a "perfect market", i.e., an optimally competitive market with several (implausible) characteristics, such as no barriers to e

I suspect what you're thinking is a "perfect market", i.e., an optimally competitive market with several (implausible) characteristics, such as no barriers to entry, all participants being fully informed, A good rule of thumb to keep in mind is that, from a "competition is the ideal" perspective, profit margins represent market inefficiency. In a maximally efficient market, no one can make more money than the absolute minimum required to make participating worth their time, because otherwise someone else will come in and undercut them. A simple, relatively free market is sometimes a passable approximation of a perfect market, but not always.

randallsquared 17y ago
In a maximally efficient market, no one can make more money than the absolute minimum required to make participating worth their time, because otherwise someone else will come in and undercut them. While that's true, it's also the case that the "absolute minimum" rises as people in a society get wealthier, and markets are the fastest method known for generating wealthy societies. The minimum amount for which most people are willing to work is absurdly high by the standards of all but our own very recent past.
cperciva 17y ago
In a maximally efficient market, no one can make more money than the absolute minimum required to make participating worth their time No. In a maximally efficient market, no one can make more money than the absolute minimum required to make participating worth someone else's time. If I can make widgets twice as fast as everyone else, I can make lots of money.
- inerte 17y ago
  If the widgets were the same.
deleted 17y ago
[deleted]
smokinn 17y ago
I don't believe that profit margins represent market efficiencies. In a perfect market, profit margins represent value perceived. If your product will save me 10$ but costs you 2$ to produce, charging 5$ is beneficial to both of us. The problem we have now is that the current large companies believe that they're entitled to receiving the same profits they've had in the past without innovating or even adapting to the future. If your value proposition is only worth 2$ to me in the future, why should the government come in and tax all companies in my industry because I don't think you're worth paying anymore? I suppose that's a simplistic view but then again I've always abhorred working at large companies because of the huge number of people I'd see around me contributing very little. I think small companies will very often beat big ones on both quality AND cost because of the lack of bureaucratic overhead. The overhead though is exactly how the incumbents protect themselves from the newer entrants, entrapping government to create barriers to protect themselves.
- camccann 17y ago
  I don't believe that profit margins represent market efficiencies. In a perfect market, profit margins represent value perceived. If your product will save me 10$ but costs you 2$ to produce, charging 5$ is beneficial to both of us. Except that in a maximally competitive market, someone else would quickly come along and offer to sell you an equivalent product for $4, and then someone else comes along, etc. Competition always pushes prices towards the cost of production. Of course, cost of production varies as well. In an idealized sense, the cost to produce a product is proportional to the amount produced (due to scarcity), whereas everyone in the market has some price limit below which they would want to buy the product. At a given price point, if the cost of producing an additional unit is below the highest price limit among people who wouldn't buy the product otherwise, it's a net gain for me to make the product and sell it to the person with that limit. Of course, at any price point, there's some people who want the product but not enough to pay that price, and some people who would happily pay more; but that's just the system working as intended. The end result (in theory) is that every product eventually settles at a price point reflecting optimal resource allocation to production, plus some small profit margin to make the time spent on the transaction worthwhile. In practice, it's... a bit more complicated.

randallsquared 17y ago

In a maximally efficient market, no one can make more money than the absolute minimum required to make participating worth their time, because otherwise someone else will come in and undercut them. While that's true, it's also the case that the "absolute minimum" rises as people in a society get wealthier, and markets are the fastest method known for generating wealthy societies. The minimum amount for which most people are willing to work is absurdly high by the standards of all but our own very recent past.

cperciva 17y ago

In a maximally efficient market, no one can make more money than the absolute minimum required to make participating worth their time No. In a maximally efficient market, no one can make more money than the absolute minimum required to make participating worth someone else's time. If I can make widgets twice as fast as everyone else, I can make lots of money.

inerte 17y ago
If the widgets were the same.

deleted 17y ago

[deleted]

smokinn 17y ago

I don't believe that profit margins represent market efficiencies. In a perfect market, profit margins represent value perceived. If your product will save me 10$ but costs you 2$ to produce, charging 5$ is beneficial to both of us. The problem we have now is that the current large companies believe that they're entitled to receiving the same profits they've had in the past without innovating or even adapting to the future. If your value proposition is only worth 2$ to me in the future, why should the government come in and tax all companies in my industry because I don't think you're worth paying anymore? I suppose that's a simplistic view but then again I've always abhorred working at large companies because of the huge number of people I'd see around me contributing very little. I think small companies will very often beat big ones on both quality AND cost because of the lack of bureaucratic overhead. The overhead though is exactly how the incumbents protect themselves from the newer entrants, entrapping government to create barriers to protect themselves.

camccann 17y ago
I don't believe that profit margins represent market efficiencies. In a perfect market, profit margins represent value perceived. If your product will save me 10$ but costs you 2$ to produce, charging 5$ is beneficial to both of us. Except that in a maximally competitive market, someone else would quickly come along and offer to sell you an equivalent product for $4, and then someone else comes along, etc. Competition always pushes prices towards the cost of production. Of course, cost of production varies as well. In an idealized sense, the cost to produce a product is proportional to the amount produced (due to scarcity), whereas everyone in the market has some price limit below which they would want to buy the product. At a given price point, if the cost of producing an additional unit is below the highest price limit among people who wouldn't buy the product otherwise, it's a net gain for me to make the product and sell it to the person with that limit. Of course, at any price point, there's some people who want the product but not enough to pay that price, and some people who would happily pay more; but that's just the system working as intended. The end result (in theory) is that every product eventually settles at a price point reflecting optimal resource allocation to production, plus some small profit margin to make the time spent on the transaction worthwhile. In practice, it's... a bit more complicated.