You think you are helping the economic system by your well meaning laws and interference. You are not. Let be. The oil of self interest will keep the gears working in almost miraculous fashion. No one need plan. No sovereign need rule. The market will answer all things.
— Adam Smith, Wealth of Nations
Ah, the "magic of the marketplace"! No need to worry or plan, the "invisible hand" will guide us to "the best of all possible worlds" -- such are the terms used to describe the wonders of the unconscious cooperation of a whole nation of self-interested people. Can all this really be true?
Whenever there is nothing stopping them from doing so, human beings tend to create efficient markets. This is because people have a huge variety of desires, and a great deal of ingenuity. Each person evaluates the available alternatives and chooses an economic activity which will most improve his or her own life. Producers and consumers alike are human beings who want to satisfy their desires with the least exertion. The tug-of-war between producers trying to maximize income and consumers looking for a bargain helps to create the best possible product at the right price.
Self interest works most wonderfully when there is plenty of competition. A "perfectly competitive" market would be one in which there were many producers, none of whom had received any privilege that the others didn't get, and all of whom were equally free to sell their goods. Consumers would be free to choose between many substitute items. Pure competition, motivated by self interest, would insure the best services and products at the best prices. Perfect competition is a theoretical ideal -- but some markets, such as those for farm commodities, come quite close to it.
In a perfectly competitive market, there is a very large number of sellers, and little or no variation in the product being sold. The seller, therefore, has no control over the price of the goods. This is, probably, not the easiest way for sellers to become rich. Where they can, people will seek to sell goods in other kinds of markets where the competitive pressures are not quite as strong. A very common kind of market today is one in which there is a large number of suppliers, but the goods are strongly differentiated to the buyers -- by having popular brand names, well-known advertising campaigns, special features or "fad appeal". Such markets, in which sellers do have some level of control over the prices of their goods, are termed "monopolistic competition". Examples abound; the markets for personal computers, magazines, restaurants and soft drinks are all examples of monopolistic competition.
Another kind of market that has great influence is "Oligopoly", in which a small number of suppliers cooperate to reduce competition among themselves. Their products might be virtually identical, like steel, or similar, like automobiles. Oligopolies usually develop in industries that create a complex product that demands a lot of capital and technology. By working together to keep prices high, oligopolists take advantage of the fact that it is quite difficult for competitors to enter the market. However, oligopolistic industries within one nation still face foreign competition -- and a national policy of free trade can bring the benefits of competition to oligopolistic markets.
The most severe curtailment of competition is the case of Monopoly", in which there is only one supplier and competition is not possible at all. One example of an industrial monopoly was the ALCOA Company, which, because of its control over lands containing bauxite, the ore of aluminum, had a monopoly over the market for aluminum for many years. It could therefore sell aluminum for as much as buyers were willing to pay rather than go without the product. A current example is the Microsoft Corporation's monopoly over the PC operating system.
Self-interest leads people to provide for their own welfare very efficiently. Where there is plenty of competition, self-interest among consumers provides for the most benefit for everyone. But people, seeking to satisfy their desires with the least exertion, try to find ways to limit competitive pressures. The level to which free competition is maintained and encouraged is the level to which "the magic of the marketplace" will truly benefit the whole community.
Background Questions