2.5 Competition

Question 1

What are 3 features of a competitive market?

Answer 1

1. There are a large number of sellers.
2. These sellers compete with each other to satisfy customer’s needs.
3. Sellers and buyers cannot set price or quantity - only market forces can.

Question 2

What is meant by competition?

Answer 2

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

Question 3

What is price competition?

Answer 3

This is when (usually larger) firms lower their prices to gain customers and market share. Those who cannot cut prices may go out of business.

Question 4

What are 5 types of non-price competition?

Answer 4

1. Marketing
2. Convenience
3. Better customer experience
4. Offering a specialist service
5. Better quality products

Question 5

Why do producers compete?

Answer 5

• To enter a new market
• To survive in a market
• To make a profit

Question 6

How can competition affect price?

Answer 6

Prices fall as supply shifts to the right, however this depends on the PES. If a product is more elastic, the fall in price is small and the rise in quantity is larger.

There are some exceptions to this because marketing and innovation of new products can push prices up.

Question 7

What are the positive effects of competition on producers?

Answer 7

• Cutting costs (economies of scale)
• Increased innovation
• Improved productivity and efficiency

Question 8

What are the negative effects of competition on producers?

Answer 8

• Machinery could replace workers if costs need to be reduced
• Firms may be forced out of the market

Question 9

What are the positive effects of competition on consumers?

Answer 9

• Higher quality goods.
• Innovation gives customers more choice.
• Cheaper prices mean consumers can buy more, raising living standards.

Question 10

What are the negative effects of competition on consumers?

Answer 10

• Innovations could be harmful (for example use of pesticides).
• Marketing may persuade consumers to buy goods they don’t need.

Question 11

What is a monopoly?

Answer 11

A solo producer or seller of a good or service.

Question 12

What requirement does a firm need to be legally classified as a monopoly?

Answer 12

It has to have 25% or more of the market share.

Question 13

What is an oligopoly?

Answer 13

When a small number of firms control a large majority of the market share.

Question 14

How much market share should oligopolies technically control?

Answer 14

Oligopolies only exist if the 5 largest firms control at least 50% of the market share.

Question 15

How do monopolies, oligopolies and competitive markets differ in size?

Answer 15

Monopolies are usually very large whereas competitive markets (CMs) are quite small. Oligopolies can be large or have smaller firms.

Question 16

How do CMs, monopolies and oligopolies control of price vary?

Answer 16

Prices in CMs are set by market forces of supply and demand. Monopolies can set the price, but not the quantity and oligopolies can influence prices by colluding.

Question 17

How is efficiency different within oligopolies, CMs and monopolies?

Answer 17

Oligopolies are usually not seen as economically efficient. This is the same case with monopolies, although they can gain economies of scale due to their size and become efficient. CMs normally lead to efficiency.

Question 18

How does level of price and output differ within CMs, oligopolies and monopolies?

Answer 18

CMs prices are set by market forces. In theory, they will have lower prices and higher quantities. In oligopolies, price and quantity depends on competitors strength and ability to collude. Monopolies can charge high prices while producing less.