Microeconomics Across the World Comparing the Economies Term Paper

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Microeconomics Across the World

Comparing the Economies of Two Countries with Regard to Pricing Structures

With notable exceptions, such as Cuba and North Korea, most of the major global economic powers have within their national microeconomic or internal frameworks, some forms or a semblance of a competitive, capitalist economies. In other words, individual economic actors such as firms compete for the monetary confidence of consumers within particular industries, rather than having such behavior regulated by the government. As such, the pricing of capitalist-style micro economies are also competitively structured. Pricing within a capitalist system is based upon consumer demand and the desire of suppliers to meet that demand at a state of equilibrium determined by the market. But although this may be the ideal Adam Smith formulation of capitalism in terms of pricing, no nation and no series of markets operates according to such principles in a pure fashion.

The U.S. financial system is often viewed as the most developed in the world and a model for other countries to follow. The U.S. model of competitive, capitalist pricing structures and self-regulated (as opposed to federally regulated) corporate governance places a strong emphasis on gaining funds for corporate shareholders. It also places a strong emphasis utilizing an active and competitive market to de-emphasize singular corporate control and to create more perfect and pluralist economic markets of competition, with certain exceptions such as the market for utilities. (Scott & Mondschean, 2002) This active and competitive pricing structure is thought to keep prices low and to ensure that consumer demand is responded to very quickly.

In contrast, European nations such as Germany, although capitalist, have traditionally tolerated much more government intervention within their internal pricing structure. This does not mean that many European nations have not prospered under more directive government pricing control. "Germany wears its riches well," says one guide to the area. ("Country Information: Germany," Lonely Planet, 2004) Germany has one of the wealthiest economies in the world, in fact. ("History: Germany," Lonely Planet, 2004)

But traditional economic wisdom holds that government micromanagement of pricing structures tends to decrease productivity and overall economic efforts on the part of workers. (Scott & Mondschean, 2002) Also according to conventional economic wisdom, regarding overall productivity in regulated sectors, market capitalization relative to replacement costs of structures for production, and the rates of return on assets and on equity decreases when the government attempts to limit and control production, except during times of completely maximized economic production, such as during World War II. (Scott & Mondschean, 2002)

The performance of U.S. firms showed significantly improved after-tax returns on shareholder investments compared to European firms. Again, this is thought because the U.S. financial system has been driven largely by market rather than political policy forces, like most European in comparison. Germany has a strong leftist, Green, and socialist wing that has often attempted to limit or curb competition so that staple goods such as foods are affordable, with the U.S. federal government prefers to allow the states to take care of such aid to the indigent with monetary supplements, rather than regulating the industry as a whole.

Without ceiling prices upon staple goods and relatively lower government taxes, U.S. business' pricing can respond more effectively to elasticity of consumer demand. Consumer behavior, however, in a less regulated capitalist economy is also more volatile in its response to substitution effects, income effects, and impressions, real or imagined between goods.

Another important difference between the U.S. And the more traditional European financial system found in Germany is the greater breadth of markets in the former nation. In other words, the pricing structure of the United States builds on a wider range of financial instruments because of its encouragement of more competitive pricing. Also, U.S. firms have traditionally, free of government monetary stringencies, traded in more liquid markets. Of course the growing 'EU' economic emerging in Europe has spurred on economic development in powerful nations such as Germany, but Germany has also been stymied by the increased levels of economic regulation upon pricing demanded by less competitive members of the EU such as Portugal and Greece. (EU financial System, 2004)

Thus, Germany's pricing structures have not entirely benefited from the development of the European union. But given the importance of the availability of a wide range of funding and investment possibilities for innovations and risk taking that lead to increased growth and welfare, keeping the pricing of goods and services of new markets relatively free from government control is currently receiving a very high priority in Germany. Still, such a European perspective from one of the wealthier members of the European Union does not necessarily mean a more price driven and competitive market overall within the union. All nations may not have an equal voice, but nations demanding expanding the union to include poorer nations that have traditionally embraced more regulation regarding pricing from the government, and are likely to demand, in the spirit of European unity, more price control within the union of which Germany is part, a freer pricing structure within Germany is not likely in the near future. (EU financial system, 2004)

According to classic microeconomic theory, the concept of pricing is one of the key strategic tools any business uses to effectively market its products against its competitors in a competitive capitalistic market. Depriving businesses of such a key competitive marketing tool in an otherwise healthy and large economy can prove dangerous, except in the case of certain industries, such as those involving natural resources, when environmental concerns may come into 'play' or when resources are finite.

Pricing in a competitive market structure, in either the United States or in Germany, always involves supply and demand leading to equilibrium pricing. Competition is the process of consumers bidding prices upwards or producers cutting prices in order to allow those agents to be involved in a market trade. Microeconomics itself, quite simply, if often defined as a branch of economic theory as the study of the behavior of individual economic agents, as opposed to individual economic agents in response to larger governmental structures. (Ruby, 2003)

But in analyzing the effects of the EU and the homogenization of the German economy into a larger economic block, governmental analysis and the impact of the government upon competition is difficult to ignore. (Ruby, 2003) It remains to be seen if the calls for checks upon the production of particular durable goods from other EU nations, such as cars, and the call for pricing controls of foodstuffs from nations such as France that regards such products as having cultural as well as economic or sustenance significance will prevail.

Political concerns in the European Community thus tend to have a more dominant effect as pricing agents than in the United States, and now affect the German economy. Economics in classical microeconomic theory tend to parcel up pricing agents as being divided up into business firms and households or buyers, who react to relative changes in prices. "In any market economy," relative prices should act like signals to highlight to the consumer the potential for surpluses or shortages within in individual markets. (Ruby, 2003)

Even within the United States, however, certain sectors such as the agricultural sector, receives subsidies to cushion the effects of the market. Also, even within the classically perfect market of competition, there is a "competitive spectrum that is a continuum from the competitive ideal with many firms in a given industry and a high degree of competition to monopoly behavior where a single firm dominates an industry and competitive behavior does not exist. This spectrum is defined based on three primary market characteristics: At one end of the spectrum, we have a competitive ideal" representing "a standard by which we evaluate all other types of competitive behavior. At the…[continue]

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