5.8 Dynamics Of Competition And Competitive Market Processes

Question 1

What are the long run benefits likely to result from competition?

Answer 1

• In the long run, firms are likely to be more productively and allocatively efficient.
• This is because they provide the goods and services that consumers want, and
  competitive pressure forces them to lower their costs of production.

Question 2

What are the short run benefits likely to result from competition?

Answer 2

• In the short run, firms might make supernormal profits, which can be reinvested back into the firm.
• This can increase dynamic efficiency and lower LRAC.

Question 3

What are the benefits of competition for consumers?

Answer 3

• Consumers get a wide variety of choice due to the number of firms in the market.
• Goods and services are likely to be of a higher quality, since firms are trying to gain consumer loyalty.

Question 4

Firms and competition…

Answer 4

• Firms do not just compete on price.
• Firms can try and differentiate their products and gain market share using non-price competition.

Question 5

What might firms aim to do to stay competitive in the market?

Answer 5

• Improve products: improving the quality of the product, or innovating to keep it up to date with the latest technologies, will mean the product remains competitive in the market.
• Reduce costs: by reducing costs, new firms will not be able to compete on price terms with existing firms, so there will be less competition in the market.
  -This also means the firm is being more productively efficient.
• Improve the quality of the service provided: this is particularly important in the service industry, such as with banking.
  -Consumers are likely to leave banks which do not provide them with good customer service.
  -Now, many employers have customer service as one of their areas of focus.

Question 6

What is the impact of monopoly power on consumers?

Answer 6

• could lead to consumers being exploited
• could be charged high prices, because consumers have little choice where to purchase their goods and services, since there are so few firms in the market.
• consumer surplus falls.

Question 7

What is the process of creative destruction?

Answer 7

• If firms have monopoly power and they are making large profits, new firms have an incentive to enter the market and innovate, to overcome barriers to entry.
• This process of creative destruction is a fundamental feature of the way competition operates in a market economy.

Question 8

Which economist proposed the idea of creative destruction?

Answer 8

• Schumpeter
• This is the idea that new entrepreneurs are innovative, which challenges existing firms in the market.
• The more productive firms then grow, whilst the least productive are forced
  to leave the market.
• This results in an expansion of the economy’s productive potential.

Question 9

What is the impact of creative destruction?

APPLICATION

Answer 9

• The process of creative destruction is linked to technological change.
• Creative destruction leads to more innovation and the production of new goods and services.
• Netflix and Blockbuster provide a good example of creative destruction.
• Netflix innovated and adapted their DVD subscription service to the advancing technology of the internet-this has resulted in them becoming one of the biggest video distribution networks.

Question 10

What is the impact of technological change?

Answer 10

• it can lead to the development of new products, the development of new markets and the destruction of existing markets.
• For example, the development of DVDs, then Blu-rays, and now the rise of Netflix, has essentially destroyed the market for VHS video tapes.
• Blockbuster was driven out of business by changing consumer tastes towards Netflix, and similar services, as well as the technological advancement of internet services.