Spectrum Of Competition

Question 1

Competition : definition

Answer 1

It occurs when people can choose from a range of similar goods. It can apply to labour, capital markets and the actual market for the goods and services. It can also be the rivalry between two or more businesses. Competitiveness refers to the firm’s ability to offer better value to customers than its rivals. Vital for survival and growth.

Question 2

Positives of competition :

Answer 2

Motivates company to do better
More option for customers
Lower prices ie price matching
Firms pushed to produce better quality
Encourages company to develop a unique selling point

Question 3

Negatives of competition :

Answer 3

Results in poaching of staff
Smaller markets can struggle
Less profitable for higher quality products
Harder for smaller firms to compete

Question 4

Market size : definition

Answer 4

Refers to the sales of all firms added together - value or volume. Calculating market size allows for identification of ‘trends’ ie can detect if market is declining or growing. It’s needed to allow firms to calculate market share.

Question 5

Market share : definition and equation

Answer 5

Refers to the proportion of a market held by one company or product - volume or volume.
(Sales of product or company / total sales in market) x100

Question 6

Why do firms want to increase market share ? :

Answer 6

Improves brand image
Makes firm less likely to fail
If market share ins creases, firm knows market strategies are working
Profits may increase and this keeps shareholders happy

Question 7

Why are firms interested in market share ? :

Answer 7

Let’s them know their position relative to competition
Increases potential profit
Ensures their policies are working

Question 8

Market growth : definition and equation

Answer 8

Refers to the % change in sales within a market over time

(Diff between size of old mkt and size of new mkt / size of old mkt) x100

Question 9

Factors that affect the competitiveness of a firm :

Answer 9

The price they charge
Quality of product/service
Additional features of product valued by customers
Number of other firms
Location of any outlet

Question 10

Scale of market competition;

Answer 10

Great competition Less competition
Perfect compition - monopolistic comp- oligopoly - monopoly

Question 11

Characteristic that determine the structure of the market :

Answer 11

Number of firms in industry and their size
Extent to which product produced by each firm are similar
The ease or difficulty with which new firms enter/leave market
Ability to earn abnormal/supernormal profits

Question 12

Barriers to entry : definition

Answer 12

If it is difficult to enter and industry, then we would say that ‘barriers to entry’ exist. This means that the characteristics of an industry have the ability to earn abnormal/subnormal profit.

Question 13

Government restrictions : definition

Answer 13

Such as a licence or patent

Question 14

Advertising : definition

Answer 14

Some firms spend huge amounts on advertising which means any new competitor would have to spend similar amounts and this is often beyond the means of any new entrant to the industry.

Question 15

Sunk costs : definition

Answer 15

These are unrecoverable costs associated with leaving and industry. The fact that they are a possibility puts many firms off entering and industry eg capital investment.

Question 16

Abnormal or supernormal profits :

Answer 16

These are profits that exceed what an entrepreneur would normally be expected to earn through the employment of a similar combination of factors of production elsewhere.

Question 17

Perfect compition : definition

Answer 17

A large number of small firms which produce goods which are identical. There are no barriers to entry and supernormal profits can only be made in the short run. Eg fruit and veg markets, stock markets.

Question 18

Effects of perfect competition on a business :

Answer 18

Firms are price takers ie must accept market price
Cost efficiency needed for survival
No real scope for marketing
Very low profit margins ie only normal profits are possible

Question 19

Monopolistic market : definition

Answer 19

A relatively large number of small firms which produce similar products. There are no barriers to entry and supernormal profits can only be made in the short run. Eg hair dressers, plumbers, insurance company.

Question 20

Effects of monopolistic markets on a business :

Answer 20

Some control over price as products are slightly different
Cost efficiency is important
Firms benefit from marketing
Low profit margins

Question 21

Oligopoly market : definition

Answer 21

In oligopoly there are several large firms who sell similar products. There are some barriers to entry and supernormal profits can be made in the long run. Eg supermarkets and banks

Question 22

Effect of oligopoly markets on business :

Answer 22

Firms aren’t price takers as they have differentiated products and compete on no price methods eg brand, product placement.
High overheads as larger firms
Higher profits and USP through branding
High cost of promotion
Price wars
Barriers to entry are high

Question 23

Monopoly market : definition

Answer 23

One large firm which produces all the output in the industry. Barriers to entry exist, which prevent other firms entering the industry. Supernormal profits can be made on long run. Eg Royal Mail

Question 24

Effects of monopoly market on business :

Answer 24

One firm sets prices
Can be complacent as no competition
High profit margins
Supernormal profits in long run