3.5.9 - The Dynamics of Competition and Competitive Market Processes Flashcards
Traditionally, how have economists thought of competition?
Price competition, leading to consumers benefitting from lower prices and more choice.
Why does the economy benefit from the competition?
It weeds out high cost and inefficient firms.
How do firms compete in imperfectly competitive real-world markets?
Not only on the basis of price, but also on the basis that firms will strive to improve products, reduce costs and improve the quality of the service provided.
How else can firms compete (outside of price) in imperfectly competitive markets?
Marketing
Branding
Packaging
Fashion
etc.
Why do firms employ non-price competition?
To make themselves more dynamically efficient.
What is creative destruction?
New technologies completely changing markets.
What status is the firm in at P1, and what should they do?
Supernormal profit.
Produce at Q1 to make supernormal profit.
What status is the firm in at P2, and what should they do?
Break-even price.
Produce at Q2 to make normal profit.
How / Why did the firm move from P1 to P2?
The supernormal profits made at P1 caused new firms to enter the market and compete away the supernormal profits.
What status is the firm in at P3, and what should they do?
Loss-making.
Continue producing goods, as their losses are smaller than if they didn’t produce anything at all.
If the firm produces where MC = MR (=price=demand=AR), they earn enough revenue to cover variable costs of production, while still having money left over to pay off some of their fixed costs.
What status is the firm in at P4, and what should they do?
Shut-down price.
Sell their capital assets and shut down to reduce their loss to 0.
Who benefits from price competition?
Both consumers and firms benefit from price competition.
Who benefits from non-price competition?
Firms.
Particularly those that are dominant to increase their market power.
