2.5 Competition Flashcards
• explain competition between producers in a market economy, including the reasons why producers compete • analyse how competition affects price • evaluate the economic impact of competition on producers and consumers • explain the meaning of monopoly and oligopoly and how they differ from competitive markets
What does the term ‘competition’ mean?
Where different firms are trying to sell a similar product to a consumer.
What does the term ‘price competition’ mean?
Firms lower their prices to gain customers and thus market share. Any firm that cannot achieve this will find itself losing customers and potentially going out of business as their price falls below the cost of production. Price competition is limited.
Why are the 3 reasons producers compete?
- to enter a market
- to survive in a market
- to make a profit
What does the term ‘non-price competition’ and examples mean?
Smaller producers can offer a more specialist product, or more personalised consumer service often leading to consumer loyalty.
Examples include marketing (advertising) and improving quality.
How does price competition affect price?
It will cause the price to fall and so the supply curve to shift outwards (to the right), increasing the quantity bought and sold. If demand is price elastic, typically products that are necessities, price falls sharply with little effect on the quantity. If demand is price inelastic , typically non-essential products, price only falls by a relatively small amount but there is a significant effect on quantity.
How does non-price competition affect price?
Marketing costs such as advertising is passed on to price of goods and services, charging the consumer more. Inventions and innovations can also lead to higher prices because goods and services are high quality of unique so high prices can be set.
What are the advantages of competition for producers?
- improves efficiency
- increases productivity
- encourages technical innovation and application of computerisation
- encourages growth in economy
- attract new investment
What are the disadvantages of competition for producers?
- business closing down
- forcing businesses out of the market
- customers switching to rivals
- unemployment of workers to cut costs
What are the advantages of competition for consumers?
- lower prices
- higher quality products
- increase variety of goods and services due to innovation
- consumer sovereignty
- better standard of living
What are the disadvantages of competition for consumers?
- consumption of harmful products
- buy unneeded products
- potentially high prices if small number of firms competing
- shoe leather costs
What does the term ‘monopoly’ mean and how do they exist?
The sole producer or seller of a good or service (legally 25% of the market). They exist because of the high barriers of entry, e.g.
- legal ones
- greater efficiency
- location
- copyrights and patents
What does the term ‘oligopoly’ mean and how do they exist?
Where a small number of firms control the large majority of market share (legally 50%) and despite some barriers of entry, it isn’t sufficient enough to prevent other firms entering the market and increasing competition.
What does the term ‘collusion’ mean?
When firms typically in an oligopoly get together and agree to set the price to avoid price-competition. It is illegal in the UK.
What does the term ‘competitive market’ mean?
A large number of producers compete with each other to satisfy the needs and wants of a large number of consumers and there are no barriers of entry.
How economically efficient are monopolies, oligopolies and competitive markets?
Monopoly - In theory not efficient but by achieving large economies of scale they can be efficient
Oligopoly - Usually seen as not being economically efficient
Competitive - Normally leads to economic efficiency
How much control do monopolies have over prices and therefore level of price and quantity?
Is able to set the price, but cannot then control quantity and so in theory high prices will be charged and small quantity will be produced
How much control do oligopolies have over prices and therefore level of price and quantity?
Can influence price but is restrained by the reaction of rivals and so price and quantity will depend on how strong the competitors are unless collusion is attempted.
How much control do competitive markets have over prices and therefore level of price and quantity?
The price is set by the market forces of supply and demand and so in theory the price will be lower and the quantity greater.
