2.5 Competition Flashcards
What is meant by competition?
Where different firms are trying to sell a similar product to a consumer
Why does competition take place between producers?
Because they try to achieve objectives such as profit maximation or increased market share
What does competition between different firms lead to ?
Leads to increased efficiency, as they do whatever is necessary to lower their costs of production, which in turn can lead to lower prices
What are the 2 form of competition?
Price and non-price competition
What is one of the aims of advertising?
To ensure consumer loyalty to a certain brand
What are the 3 basic reasons consumers compete?
- to enter a market
- to survive in a market
- to make profit
What is the economic impact of competition on producers?
- 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
What is the economic impact of competition on consumers?
- 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.
What are the 3 different competitive market structures?
Monopoly, Oligopoly, and competitive markets
What is meant by the term monopoly?
a sole producer or seller of a good or product
Why do monopolies exist?
because they have high barriers to entry
What may the barriers to entry monopolies have be?
- 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
When does a monopoly legally exist?
when one provider has at least 25% of the market
What is meant by an oligopoly?
a market where a small number of firms control the large majority of market share
What is the size of firms in competitive markets?
normally relatively small
What is the size of monoploys?
usually very large
What is the size of firms in an oligopoly?
can be very large but many also have smaller firms
What control over prices do monopoly’s have?
they are able to set the price, but cannot then control the quantity sold or demanded
What control do oligopolies have over price?
can influence the price but is restrained by the reaction of rivals. They may try to collude
What control do competitive markets have over price?
the price is set by the market forces of supply and demand
How efficient are monoploies?
by achieving economies of scale they can be seen as efficient
How efficient are oligopolies?
usually seen as not being economically efficient
How efficient are competitive markets?
competitive markets usually lead to economic efficiency
How can firms compete if they cant compete on price
they can:
- have good marketing, particularly advertising
- offer a better consumer experience
- offer a more specialised service
- offer better quality products
- sometimes they collude
Why do producers compete?
- to enter a market
- to survive in a market
- to make a profit
How does an increase in competition affect price? (analyse a diagram)
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
what would exceptions to the rule that competition leads to a fall in price occur due to?
due to:
- marketing costs pushing prices up
- introducing a new product which allows the firm to charge higher prices at first
What are the positive effects of competition to producers?
- 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
What are the negative costs of competition to producers?
- 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
what are the positive effects of competition on consumers? (4)
- 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
What are the negative effects of competition on consumers?(3)
- 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
