2.5 Competition

• Competition in a market economy is defined as ''Where different firms are trying to sell a similar product to a consumer''
• There are two different types of competition:

  • 'Price' competition -> firms compete against each other to gain demand and market share by offering goods at the lowest possible price.
  • 'Non-price factors' -> firms use methods like advertising, after sales care, product quality and customer service to gain sales.
• Reasons why producers compete:

  • To gain market entry -> If a producer wants to enter a new market, they must devise ways of persuading consumers to buy the product. E.g. by advertising at a lower price.
  • To survive in a market -> Existing customers need to be persuaded to return while new customers should be enticed to try the product. Firms may expand the range of products to do so.
• More reasons why producers compete:

  • To make a profit -> This is needed to survive + grow. Profits provide the means for investment, in order to expand. Producers that can innovate successfully are able to compete strongly. Introducing a new product allows gains into a market for more profit.
• Analysis of how competition affects price:

  • If there is a rise in competition within a market, there will be more firms competing to sell products to consumers. This can be seen by a rightwards shift of the supply curve.
  • With more firms joining the industry to compete, there is an increase in supply (S1 to S2). This, in turn, leads to a lower equilibrium price (P1 to P2). At this lower price, there is an extension of demand (Q1 to Q2). Overall, we have a new equilibrium at a lower price/ high quantity.
• A benefit of competition for consumers is that it can lead to lower prices. As firms compete, there will be an increase in supply of a certain good or service (S1 to S2). This, in turn, will lead to a decrease in price (P1 to P2) and ultimately an increase in consumer demand (Q1 to Q2). Additionally, lower prices will be available if firms use this in order to compete with the price of other firms.
• A negative of competition for consumers is that in order to compete via price, firms may sell goods which are harmful/dangerous (but can be manufactured at a lower cost of production) in order to still make sufficient profit whilst lowering prices.
• In conclusion, the impact of increased competition on consumers will depend upon exactly what form the competition takes. If it is non-price related, then it may not have such a significant impact.
• A benefit of increased competition for producers is that competition gives firms greater incentive to innovate... to create high tech products and stay ahead of their competitors. New innovation means the firm will have new products, creating a greater demand from consumers. This means investors will see the business expanding and offer to invest. *draw diagram to show how new innovation increases supply, and therefore demand*
• A disadvantage of increased competition for producers is that firms which cannot innovate as fast will lose sales. In order to stay in business, they may fire workers or reduce wages in order to cut production costs and make more profit. This leads to a rise in unemployment, leading to worse standards of living for the former workers.
• To conclude, the impact of increased competition on producers will depend upon the ability of the firm to innovate.
• Different markets in an economy:

  • Competitive markets -> ''where a large number of producers compete with each other to satisfy the wants and needs of a large number of consumers''.
  • Monopoly -> ''A sole producer or seller of a good or service''
  • Oligopoly -> ''Where a small number of firms control the large majority of market share''.
• How monopoly/oligopoly differs from comp. markets:

  • Size of firms -> In a very competitive market, firms are much smaller, whilst in oligopoly/monopoly, firms are larger.
  • Equilibrium price + quantity -> It is assumed that monopoly firms will charge a higher price and produce a lower quality of goods. (Unless they have large EofS)
  • 'Economies of scale' -> Larger firms in monopoly and oligopoly markets have larger economies of scale compared to competitive markets. As firms in competitive markets are much smaller they are likely to have much less scope to gain economies of scale.