Dynamics of Competition & Competitive Market Processes

Question 1

SR & LR Benefits From Competition

Answer 1

• LR, firms more productively & allocatively efficient, because they provide G&S that consumers want, & competitive pressure forces them to lower their costs
• SR, supernormal profits can be reinvested into the firm, increasing dynamic efficiency & lower LRAC
• Consumers get wide variety of choice due to no. of firms in market
• G&S higher quality, since firms are trying to gain
  consumer loyalty

Question 2

Non Price Competition

Answer 2

• Improve Products: Improving quality of product, or innovating to keep up to date with technology, means the product remains competitive
• Reduce Costs: By reducing costs, new firms not able to compete on price w/ existing firms, so there will be less competition in the market. Also means firm is more productively efficient
• Improve Quality of Service: Important in service industry (e.g banking). Consumers likely to leave banks which do not provide good customer service. Many
  employers focus on customer service

Question 3

Process of Creative Destruction

Answer 3

Creative Destruction:
- New entrepreneurs are innovative, which challenges existing firms
- The more productive firms grow, whilst the least productive are forced out of market
- Results in an expansion of the economy’s productive
potential
- Creative destruction leads to more innovation & production of new G&S

• E.g Netflix innovated & adapted to the internet. Blockbuster forced to leave the market
• Technological change can lead to the development of new products, markets & the destruction of existing markets
• E.g DVDs, Blu-rays, then Netflix, destroyed VHS market