Competition Flashcards
Define competition
Where different firms are trying to sell a similar product to a consumer
Define a monopoly
A sole producer or seller of a good or service
Define oligopoly
Where a small number of firms control the majority of the market
Define a competitive market
A market with a number of firms
4 key facts about a competitive market:
- Large number of sellers/ producers
- These sellers compete with each other to satisfy the needs and wants of consumers
- Prices are set by the interaction of demand and supply
- Sellers and buyers cannot set either price or quantity in the market
Example of price competition:
Cutting prices leads to more consumers and greater market share:
- Those who cannot cut prices may go out of business
- Selling at a price less than the cost of supplying may lead to disaster (such as going out of business)
- Price competition is easier for large firms with many products to sell
Examples of non-price competition:
- Marketing/ advertising
- Offering a specialist service
- Offering a better consumer service
- Offering a better quality product
Why do producers compete?
- To enter a new market
- To survive in a market
- To make a profit (needed to survive and grow)
How does increased competition affect price?
More competition = prices decrease
If competition = decrease in price, what does introducing new products allow firms to do?
Charge more for new products at first
Positive effects of competition for producers
Increased efficiency because:
- Cutting costs to maintain profits.
- Innovating to keep supplying consumers with new products
- Improving productivity
Negative effects of competition for producers
- Lose consumers and potentially go out of business
- May have to replace workers with technology (to cut wages etc)
Positive impacts of competition for consumers
- Cheaper prices means that consumers can buy more, leading to an rise in living standards
- Improved quality of goods and services
- Innovation gives consumers more choice
- Increased consumer sovereignty
Negative impacts of competition for consumers
- Innovations may be harmful (use of pesticides on food crops)
- Quality may decrease
- Marketing may persuade consumers to buy what they do not want
What is the typical size of a monopoly?
Very large
What is the typical size of a oligopoly?
Can be very large but may also have smaller firms
What is the typical size of competitive markets?
Relatively small
How many firms are in a monopoly?
1
How many firms are in a oligopoly?
A few
How many firms are in a competitive market?
Many
How are prices controlled in a monopoly?
Able to set the price, but cannot then control the quantity
How are prices controlled in a oligopoly?
Can influence the price but is restrained by the reaction of rival firms.
How are prices controlled in a competitive market?
The price is set by the market forces of supply and demand.
How are the levels of price and output set in a monopoly?
Charge a higher price and produce a smaller quantity.
