2.5 Competition Flashcards
1
Q
Competiton Definiton
A
Different firms trying to sell same or similar good and services to consumers
1
Q
Why do firms compete?
A
- TO MAKE A PROFIT (profits can be used to further innvoate and invest)
- TO SURVIVE AND STAY IN THE MARKET (if firms do not gain market share they will probabaly go bust)
- TO ENTER A MARKET (if firms want to gain market share in a new market then they must compete on price and non price factors to convince consumers to buy their product)
2
Q
Features of a competitive market?
A
- Few barriers to entry
- Large amounts of buyers + sellers
- Goods/Services are close substitues of on another
- No one seller controls the market
3
Q
Competition’s effect on price
A
- an increase in competition will to a supply curve shift to the right
- leads to a drop in price (more sellers)
- depends on the elasticity of the good, more inelastic, the higher the price drop
HOWEVER competition may not lead to higher prices if:
- Producers pay extra costs (like advertising) for market share and these costs are passed down
- There may be diseconomies of scale, so COP rises
- Producers innovate and produce better products which they charge more for
4
Q
Effect of Competition on Producers
A
- encourages producers to increase efficiency (this will increase profit margin or make them look more appealing by lowering prices )
- encourages producers to innovate and produce a better product ( as more people will buy it and they will gain more market share)
5
Q
Effect of Competition on Consumers
A
- increased product choice as more producers are in the market
- decreased prices as more sellers are competing
- better non-price factors e.g customer service
- Better quality of goods as sellers compete
- Increased consumer sovereignty as sellers try and keep up with tastes and preferences
- misleading advertising could also occur
6
Q
What is a monopoly
A
Where a single firm controls the market for a good setting the price
7
Q
Characteristics of a Monopoly
A
- not efficient
- one seller
- high barriers to entry
- no close substitutes
- seller sets price
8
Q
Causes of Monopolies
A
- Location ( small town could have only 1 shop
- economies of scale ( so they can out price competitors )
- patents and copyrights
- Legal Barriers to Entry
9
Q
Consequences of a Monopoly
A
- No push to innovate, products do not improve
- no consumer sovereignty
- inflated prices
10
Q
What is an Oligopoly:
A
- An oligopoly is where a small number of firms control the market for a product and where the barriers to entry are still high but other firms can enter
- competition is relatively small
- not efficient
11
Q
Summary Table Competition
A
LOOK AT NOTION
