Dynamics of competition

• What are the long-run benefits of competition for firms?

  Firms become more productively and allocatively efficient
• Why do firms lower their costs of production in a competitive market?

  Competitive pressure forces them to do so
• What short-run benefit can firms experience from competition?

  Supernormal profits
• How can supernormal profits benefit a firm in the short run?

  They can be reinvested back into the firm
• What is dynamic efficiency in the context of competition?

  Improvement in efficiency over time through innovation
• What does LRAC stand for?

  Long-Run Average Cost
• How does competition affect consumer choice?

  It provides a wide variety of choices
• Why are goods and services likely to be of higher quality in a competitive market?

  Firms aim to gain consumer loyalty
• What is non-price competition?

  Competition based on product differentiation
• What are the aims of firms in a competitive market?

  • Improve products to stay competitive
  • Reduce costs to maintain market position
  • Enhance service quality, especially in services
• Why is improving product quality important for firms?


  To remain competitive in the market
• How does reducing costs affect competition?

  It limits new firms' ability to compete
• Why is service quality crucial in the service industry?

  Consumers may leave for better service
• What can monopoly power lead to for consumers?

  Exploitation through high prices
• What happens to consumer surplus when monopoly power exists?

  Consumer surplus falls
• What is the process of creative destruction?

  New firms innovate to challenge existing firms
• How is creative destruction linked to technological change?

  It drives innovation and market evolution
• Who proposed the idea of 'creative destruction'?

  Schumpeter
• What does creative destruction result in for the economy?

  Expansion of productive potential
• How does creative destruction affect innovation?

  It leads to more innovation and new products
• How did Netflix exemplify creative destruction?

  By innovating their DVD service for the internet
• What impact did technological change have on VHS tapes?

  It led to their market destruction
• What happened to Blockbuster due to changing consumer tastes?

  It was driven out of business
• What is the relationship between technological change and market development?

  It creates new products and markets