Competitive Markets Flashcards
state what is meant by a competitive market
competition is the rivalry between firms that operate in the same market.
market is the place where buyers and sellers come together to exchange goods and services for money
explain how producers operate in a competitive market.
if there are just a few large competitors in the market, competition tends to be in non-price terms and uses other elements other than price.
if there is only one business selling a good, then they would be able to charge whatever they wished, especially if the product is a need, and nobody else can provide the good - this is referred to as a monopoly
state some of the ways competition has an impact on firms.
price
market share
location decisions
strategies for growth
explain what is meant by monopolistic competition.
if there are lots of competitors in a market, this will increase the power of the consumer who will have a range of businesses that they can buy their products from
this will push down prices where goods are similar and where less brand loyalty has been established
this will have a negative impact on consumers, as price, and therefore profit will be lower
explain the economic impact of competition on producers
monopolistic competition exists where there are a large number of firms in the market selling differentiated products
this leads to a small degree of monopoly power as each firm offers something different to the others
barriers to entry are very low therefore it is easier for firms to enter the market - this creates strong competition
this mix between monopoly power and competition leads to the term monopolistic competition
explain the economic impact of competition on consumers
firms within a competitive market will try to brand their products
this may be through the building up of a reputation
consumers will benefit from lower prices and greater choice
smaller producers will find it easier to enter the market as barriers to entry are low
explain the economic impact of competition on workers
firms within a competitive market will try to be efficient : this will lead to lower unit costs and greater productivity
higher productivity will make a worker more valuable and will lead to more jobs
at the same time, it would increase wages as the workers human capital is more valuable
this will require the intervention of the government to ensure that markets remain competitive
explain why profits are likely to be lower in a competitive market than one that is dominated by a small number of producers
profits are likely to be lower in a competitive market
consumers will have greater choice and will be able to buy from different firms: they can shop based on price, choosing the cheapest supplier or look for the best quality
as there is less monopoly power in perfect competition, it becomes harder for firms to gain a USP.
therefore, profits are likely to be lower
