Market demand shows us the behavior of buyers looking to purchase products at the lowest price possible, while market supply illustrates the behavior of sellers trying to maximize profitability in competitive markets. The equilibrium price in competitive markets can be thought of as a compromise point where the quantity demanded equals the quantity supplied. Here, sellers would like to charge more and buyers to pay less, but both sets of parties benefit enough to give them incentives for participating in the market. Equilibrium is not a static point. It changes as the determinants of supply and demand change and is often in the process of change when events cause it to begin changing in other ways. The behavior of markets provides valuable lessons, and paying attention and acting on these successfully help firms succeed in challenging environments.
In the short run, firms in competitive industries can experience profits or losses but tend to earn average rates of return over the long term. These returns are enough to cover their opportunity cost but low enough to keep them competitive with profit-seeking competitors. In the long run, assets are mobile and employed where the returns to them reflect the risks and opportunity costs involved. Firms may seek to establish monopolies in order to generate profits above what would be seen in free markets, but the tendency over time is for competing firms to figure out new ways to compete and drive down prices. The best sources of high returns are uniquely appealing products that are innovative and new that the competition does not have alternatives to – yet.
The overarching goal of strategy is to cut costs, increase price, and maximize performance and profitability. Though it is a simple goal in the reading, firms are doing this function in competitive environments with other firms looking to outperform them in the same quest. Because of this, a firm’s structure and strategies are of crucial importance. In this chapter, we learn about the Five Forces Model. It gives us the tools to assess the attractiveness of different industries and helps us to identify opportunities and strategies in different industries that can be entered or where current performance can be improved.