2.5 Competition

Question 1

What is meant by competition?

Answer 1

Where different firms are trying to sell a similar product to a consumer

Question 2

Why does competition take place between producers?

Answer 2

Because they try to achieve objectives such as profit maximation or increased market share

Question 3

What does competition between different firms lead to ?

Answer 3

Leads to increased efficiency, as they do whatever is necessary to lower their costs of production, which in turn can lead to lower prices

Question 4

What are the 2 form of competition?

Answer 4

Price and non-price competition

Question 5

What is one of the aims of advertising?

Answer 5

To ensure consumer loyalty to a certain brand

Question 6

What are the 3 basic reasons consumers compete?

Answer 6

• to enter a market
• to survive in a market
• to make profit

Question 7

What is the economic impact of competition on producers?

Answer 7

• it forces producers to improve their efficiency. This includes finding ways to reduce their costs
• those who are slow to adapt to changing technology or demands of consumers will either go out of business or forced out of that particular market

Question 8

What is the economic impact of competition on consumers?

Answer 8

• forces firms to produce better quality products. and innovations will increase the variety of goods and services available. Competition can lead to consumer sovereignty.
• however, producers may introduce pesticides which are harmful when consumed.

Question 9

What are the 3 different competitive market structures?

Answer 9

Monopoly, Oligopoly, and competitive markets

Question 10

What is meant by the term monopoly?

Answer 10

a sole producer or seller of a good or product

Question 11

Why do monopolies exist?

Answer 11

because they have high barriers to entry

Question 12

What may the barriers to entry monopolies have be?

Answer 12

• legal ones: e.g. only royal mail can deliver letters to your home
• greater efficiency than rivals due to very large economies of scale, which reduce the costs for larger producers
• location, so that even small firms can be monopolies: e.g. the village post office may be the only place you can buy milk until you get to a town
• copyrights and patents that prevent copying while they exist

Question 13

When does a monopoly legally exist?

Answer 13

when one provider has at least 25% of the market

Question 14

What is meant by an oligopoly?

Answer 14

a market where a small number of firms control the large majority of market share

Question 15

What is the size of firms in competitive markets?

Answer 15

normally relatively small

Question 16

What is the size of monoploys?

Answer 16

usually very large

Question 17

What is the size of firms in an oligopoly?

Answer 17

can be very large but many also have smaller firms

Question 18

What control over prices do monopoly’s have?

Answer 18

they are able to set the price, but cannot then control the quantity sold or demanded

Question 19

What control do oligopolies have over price?

Answer 19

can influence the price but is restrained by the reaction of rivals. They may try to collude

Question 20

What control do competitive markets have over price?

Answer 20

the price is set by the market forces of supply and demand

Question 21

How efficient are monoploies?

Answer 21

by achieving economies of scale they can be seen as efficient

Question 22

How efficient are oligopolies?

Answer 22

usually seen as not being economically efficient

Question 23

How efficient are competitive markets?

Answer 23

competitive markets usually lead to economic efficiency

Question 24

How can firms compete if they cant compete on price

Answer 24

they can:

• have good marketing, particularly advertising
• offer a better consumer experience
• offer a more specialised service
• offer better quality products
• sometimes they collude

Question 25

Why do producers compete?

Answer 25

• to enter a market
• to survive in a market
• to make a profit

Question 26

How does an increase in competition affect price? (analyse a diagram)

Answer 26

An increase in competition causes a shift of the supply curve to the right and price to fall. It also leads to quantity supplied and demanded increasing. However the extent of the fall in price and rise in quantity will depend on the price elasticity of demand. If the demand is elastic, then the fall in price will be small and the rise in quantity larger. If the elasticity is inelastic, then the fall in price will be larger and the rise in quantity smaller

Question 27

what would exceptions to the rule that competition leads to a fall in price occur due to?

Answer 27

due to:

• marketing costs pushing prices up
• introducing a new product which allows the firm to charge higher prices at first

Question 28

What are the positive effects of competition to producers?

Answer 28

• it improves productivity
• they become more efficient as they cut costs to maintain profits
• they become more innovative to keep supplying consumers with new products

Question 29

What are the negative costs of competition to producers?

Answer 29

• they may have to replace workers with machinery which costs money and workers are also consumers, so less people with income meaning possibly less people purchasing
• if they cant compete well they may lose consumers and possibly go out of business

Question 30

what are the positive effects of competition on consumers? (4)

Answer 30

• lower prices mean that consumers can buy more, which increases the standard of living
• innovation means that consumers have more choice
• increase in consumer sovereignty
• better quality goods and services also increases standard of living

Question 31

What are the negative effects of competition on consumers?(3)

Answer 31

• quality may fall as producers use cheaper materials and suppliers in order to “cut corners” and lower costs
• consumers may end up buying a product they didn’t want to because they were persuaded by the marketing
• innovation may lead to the use of harmful chemicals, e.g. the use of pesticides on food crops