Business economics Flashcards
What is competition?
Competition refers to the number of firms that sell similar products in the same industry
What are the advantages of competition FOR FIRMS?
- Efficiency: increased competition incentivizes firms to lower cost of production
- Less waste: firms are likely to minimize waste in order to keep costs low
- Better quality: firms continuously seek to improve the quality of their goods/services in order to become recognized in a crowded market
- Innovation: firms will research and develop new products to attract new customers
Disadvantages of competition FOR FIRMS?
- Poor quality: in a bid to lower prices, product quality may deteriorate over time as firms cut costs or use cheaper raw materials
- Worker welfare: low profit margins may result in low wages and poor working environments for workers
Advantages of comp. FOR CONSUMERS?
More choice: more sellers means more choice for consumers
Better quality products: consumers will benefit from firms striving to improve their quality
Lower prices: competition causes firms to lower prices for consumers in an attempt to gain market share
Disadvantages of comp. FOR CONSUMERS?
Poor quality output: consumers may find products deteriorate in quality with repeat purchases
Too much choice: consumers may be overwhelmed and not explore the full range of market offerings, instead sticking to what they know
Low wages: consumers may find many jobs offer only low wages to workers
Advantages of comp. FOR ECONOMY?
Efficiency: increased efficiency by firms reduces the use of scarce resources and reduces waste
Innovation: over time, the improved goods and services offered in markets will increase the standard of living
Disadvantages of comp. FOR ECONOMY?
Low levels of innovation: too much competition reduces profit levels and stifles innovation and economic progress
Low profit levels: small profit margins may lead to poor quality jobs and low welfare standards for labour
What are small firms?
A small firm is an independently owned and operated enterprise that is limited in size and in revenue depending on the industry
What are large firms?
Large firms operate on a large scale and are often characterized by their substantial market share, extensive resources, and considerable employee base.
What are the advantages of small firms?
- Small firms often provide highly customized goods and services
- They often create personal relationships with customers, which helps generate customer loyalty and word-of-mouth advertising
- They often provide unique products which are sold in small quantities at high prices which can be highly profitable
- Smaller firms can respond quickly to changing market conditions
What are the disadvantages of small firms?
- Small firms are more susceptible to changes in the wider economy, especially during recessions
- Fewer financial resources are available to them
- It is harder to recruit and retain staff as the wage and non wage benefits are less competitive than those offered by larger firms
- Owners may struggle to take a holiday/sick leave as revenue slows/stops when they stop working
- Small firms struggle to generate economies of scale as the volume of the output is lower than that of larger firms, resulting in low profit margins
What are the advantages of large firms?
- Increased economies of scale which increases profit
- Lower prices: firms may pass on their cost savings in the form of lower product prices
May earn greater profits and can use this to invest in research & development to innovative or improve the quality of goods and services
What are the disadvantages of large firms?
- When a company grows too large, it may experience diseconomies of scale –> may struggle in coordinating its various departments, managing its workforce, or maintaining quality control
- Rapid growth may result in miscommunication, resulting in delays, errors, missed opportunities and impact of employee morale
- A firm can take on more business than it can handle
Reasons why firms stay small:
- nature of the market
- size of the market
- aims of the entrepreneur
- lack of finance
- less managerial problems
- avoid rapid growth and diseconomies of scale
- avoid investigation by government
What is a monopoly?
A monopoly is a market structure in which a single seller dominates the whole market
Advantages of monopoly?
- Economies of scale can be achieved thereby lowering the AC
- Possibly lower prices if firm pass on their cost savings to consumers
Product innovation may be possible due to the firm’s large profits may result in a better quality products
Disadvantages of monopoly?
- Due to a lack of competition, there is a reduced incentive to be cost efficient
- May lead to an inefficient allocation of resources ad they limit supply in order to increase price
- Consumers will have a limited choice
- A lack of competition is likely to result in higher prices as no substitute goods are available
- There is a risk of diseconomies of scale occurring
- A lack of competition may result in no product innovation and poor product quality over time
