Competition

Question 1

What is competition?

Answer 1

Competition is when multiple businesses try to sell similar products to consumers.

Question 2

Causes of competition

Answer 2

Firms entering a market
Firms needing to survive in a market
Firms wanting to make profit

Question 3

How do firms compete?

Answer 3

Price Competition
Non Price Competition

Question 4

What is price competition?

Answer 4

-The most obvious, lower prices to attract customers
-Businesses will want to avoid this where possible as it reduces profits

Question 5

What is non price competition?

Answer 5

-Quality
-Advertising and Branding
-Variety
-Specialised/Personalised services - often useful for small businesses

Question 6

What do firms compete for?

Answer 6

They compete for customers who will return or attract new customers

Question 7

Effects of competition on Customers

Answer 7

Lower prices
Higher quality
Greater variety
Better customer service

Advertisement doesn’t help
Reduced quality if focus is on price
Could lead to unethical behaviour

Question 8

Effects of competition on Businesses

Answer 8

Lower profit
Higher costs
Lower revenue
Survival
Lower market share
Hard to predict demand
Job losses

Promotes efficiency

Question 9

What are the 2 types of uncompetitive markets?

Answer 9

Monopoly and Oligopoly

Question 10

What is a monopoly?

Answer 10

A monopoly is when their is a sole producer of a good or service. This can be for a whole country or just a region of the country. It is defined by an absence of competition.

Unless a government prevents it, they can either set the price or quantity of their product

Monopolies only exist because of barriers to entry

Question 11

What are the barriers of entry enabling monopolies?

Answer 11

Legal ones - E.g. only Royal Mail can deliver letters to your house

Greater efficiency than rivals due to economies of scale

Location - e.g. village post office only place available to by milk

Copyrights - Prevents others from copying you

Question 12

Legally, what makes a business a monopoly?

Answer 12

When it has at least 25% market share

Question 13

What is an oligopoly?

Answer 13

An oligopoly is where a small number of business control the market. Technically it is when the 5 larges companies have over 50% market share. E.g. “Big 4” control 70% of the market. If one cuts prices, others follow.

Oligopolies have a few barriers to entry but normally not enough to keep new firms from entering the market

Oligopolies may try to band together and control market through collusion: they agree to set the price to avoid price competition. This is illegal in the uk.

Question 14

How do different markets differ in size?

Answer 14

Monopolies are usually very large

Oligopolies can be very large but may also have smaller firms

Competitive firms are normally relatively small

Question 15

How do different markets differ in no. of firms

Answer 15

Monopolies : 1

Oligopolies: A few

Competitive firms: Many

Question 16

How do different markets differ in control if prices

Answer 16

Monopolies are able to set price but not control quantity

Oligopolies can influence price but are controlled by reactions from rivals, may collude

In competitive markets price is set by market forces: Supply and Demand

Question 17

How do different markets differ in level of price and output

Answer 17

In theory, monopolies will charge a higher price and lower quantity

In oligopolies, Both price and quantity depends on strength of competitors

In competitive markets, Price + Quantity set by market forces. In theory they lower prices and greater demand

Question 18

How do different markets differ in efficiency

Answer 18

Monopolies, In theory not seen as efficienct but can be because of EoS

In oligopolies, they are usually seen as not being efficient.

In competitive markets, it normally leads to economic efficiency

Question 19

How does firms entering a market cause competition?

Answer 19

If a business is new, or selling a new product it needs to convince people to buy from them

Question 20

How does firms needing to survive in a market cause competition?

Answer 20

To avoid a loss you need to convince customers to return and/or attract new ones

Question 21

How does firms wanting to make profit cause competition?

Answer 21

Customers are needed to make a profit which can then be reinvested into becoming more competitive with better products etc