Spectrum Of Competition Flashcards
Competition : definition
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.
Positives of competition :
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
Negatives of competition :
Results in poaching of staff
Smaller markets can struggle
Less profitable for higher quality products
Harder for smaller firms to compete
Market size : definition
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.
Market share : definition and equation
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
Why do firms want to increase market share ? :
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
Why are firms interested in market share ? :
Let’s them know their position relative to competition
Increases potential profit
Ensures their policies are working
Market growth : definition and equation
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
Factors that affect the competitiveness of a firm :
The price they charge Quality of product/service Additional features of product valued by customers Number of other firms Location of any outlet
Scale of market competition;
Great competition Less competition
Perfect compition - monopolistic comp- oligopoly - monopoly
Characteristic that determine the structure of the market :
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
Barriers to entry : definition
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.
Government restrictions : definition
Such as a licence or patent
Advertising : definition
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.
Sunk costs : definition
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.
Abnormal or supernormal profits :
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.
Perfect compition : definition
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.
Effects of perfect competition on a business :
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
Monopolistic market : definition
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.
Effects of monopolistic markets on a business :
Some control over price as products are slightly different
Cost efficiency is important
Firms benefit from marketing
Low profit margins
Oligopoly market : definition
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
Effect of oligopoly markets on business :
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
Monopoly market : definition
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
Effects of monopoly market on business :
One firm sets prices
Can be complacent as no competition
High profit margins
Supernormal profits in long run
