The dynamics of competition and competitive market processes

Question 1

State 3 non price factors firms may use to compete in the market with

Answer 1

• Improve products: Improving the quality of the product, or innovating to
  keep it up to date with the latest technologies, = product remains competitive in the market.
• Reduce costs: by reducing costs, new firms will not be able to compete on price terms with existing firms, so there will be less competition in the market + the firm is being more productively efficient.
• Improve the quality of the service provided:(particularly important in the service industry, such as with banking). Consumers are likely to leave if do not provide them with good customer service.

Question 2

What type of efficiency is most likely to happen in the long run and why

Answer 2

long run, firms are likely to be more productively and allocatively efficient. This is because they provide the goods and services that consumers want, and competitive pressure forces them to lower their costs of production.

Question 3

What type of efficiency is most likely to happen in the short run and why

Answer 3

short run, firms might make supernormal profits, which can be reinvested back into the firm. This can increase dynamic efficiency and lower LRAC.