2.5 Competition Flashcards
(10 cards)
competition
Where different firms are trying to
sell a similar product to a
consumer.
why do firms compete
how can competition lower price
A great advantage of competition is that it has the potential to drive the price down so that firms produce at the point where total revenue = total cost. The effect of competition is shown in Figure 2.5.1. The increase in competition has caused the supply curve to shift to the right (S to S1). This has resulted in an increase in quantity bought and sold, from Q to Q1, and a fall in price, from P to P1. This is the result that we would expect. The extent of the fall in price will depend on the PED (see Chapter 2.2) of the product. In Figure 2.5.2, if the demand is price inelastic (D1), then price falls sharply from P to P1, with little effect on the quantity (Q to Q1). This would be typical of products that are necessities. The increase in competition means that the sellers are fighting to take each other’s customers. On the other hand, if demand is price elastic (D2), then price only falls by a relatively small amount, from P to P2, but there is a significant effect on the quantity (Q to Q2). This would be typical of non-essential goods. Here the fall in price is creating new quantity demanded. In both cases, this is what we would expect.
if a firms goal is profit maximisation, then even with inelastic DD they will lower P just so Q rises
how can competition raise price
It is possible, however, for competition to lead to higher prices. Marketing costs, such as advertising, have to be paid by someone, so producers will try to pass these costs on to consumers by charging more. This is one of the reasons why branded and heavily advertised goods often cost more than those that are not heavily advertised, for example Kellogg’s breakfast cereals as against Sainsbury’s own-brand cereals. Inventions and innovations can also lead to higher prices. Producers driven by the need to be in front of their competitors look for new products. If you are the first, you can charge a high price because some consumers want to be ahead of their friends. As competitors produce similar products and producers are able to gain economies of scale (see Chapter 2.6), the price may fall.
economic impact of competition on producers
**1. Competition Drives Efficiency
Producers must cut costs to remain competitive → Lower Total Cost (TC) reduces Average Cost (AC).
Firms invest in technical innovation & computerization → Increases productive efficiency by reducing waste & improving output per unit of input.
Example: Automation in car production reduces Labour Costs (LC) → Lowers Marginal Cost (MC).
Example: Real-time data improves decision-making → Reduces inefficiencies → Lower AC.
Higher productivity of factors of production → More output per input → Increases Aggregate Supply (AS).
Economic growth follows → Higher national output (GDP rises) → Greater consumer demand (Derived Demand for labour and capital goods).
2. Growth & Profitability
Efficient producers gain higher Total Revenue (TR) → Due to lower AC, they achieve higher Profit Margins (π = TR - TC).
Higher profitability allows firms to expand output → Growth in Market Share (MS) leads to Economies of Scale (EOS).
EOS reduces AC further → Price competitiveness improves → Greater Consumer Surplus.
Incentive for innovation to maintain competitive edge → New products & processes create Non-Price Competition → Attracts demand.
Investment increases as firms seek profit opportunities → More Foreign Direct Investment (FDI) and capital inflows into growing industries.
3. Downsides of Competition
Firms failing to innovate face falling TR → Higher AC relative to competitors → Loss of Market Share (MS).
Example: IBM led in PCs but failed to innovate → Competitors offered better value → IBM exited market.
Example: BHS couldn’t match changing consumer preferences → Falling sales → Loss-making firm shut down.
Workers face structural unemployment → If technology replaces labor, demand for certain skills declines (Occupational Immobility).
Example: Factory workers replaced by automation → Real Wages (RW) fall → Higher Unemployment Rate (UR).
Long-run market equilibrium sees inefficient firms exit → Only firms with Lowest Cost Curves (LAC) and highest Productive Efficiency survive.
economic impact of competition on consumers
There is an assumption that competition must be wholly good for consumers. This is based on the idea that competition leads to a fall in price, as shown in Figures 2.5.1 and 2.5.2. This idea often extends to the quality of the goods and services in that competition will force firms to improve the quality of the product they offer. In addition, innovation and inventions will increase the choice and the variety of goods and services available to the consumer. Overall, competition will lead to consumer sovereignty (see Chapter 2.4) and thus to more products that consumers want at a price they are prepared to pay. This will lead to a rise in consumers’ standard of living (see Chapter 2.1). The falling price of food in recent years, for example, has meant that households spend a significantly lower proportion of their income on food and have more money for other goods and services. In addition, competition often means that goods and services that are not wanted, and are of poor quality or too high a price, are likely to be forced out of the market. It is possible, however, for competition to potentially disadvantage the consumer. Producers may introduce goods, for example pesticides, that are dangerous or harmful either directly or indirectly to consumers. Consumption of these may cause negative effects (see Chapter 3.8). Advertising can be a method of persuasion. Consumers may be encouraged to buy products they do not need, for example a new type of toothpaste. In some circumstances producers may tempt consumers to buy a product, for example cigarettes, by offering a low price, but then increase it once they are ‘hooked’ on it. Low-cost airlines have competed against the major airlines by offering very low fares, but customers often find that they then have to pay a range of extra charges before or during the flight.
monopoly
oligopoly
monopoly vs oligopoly vs competitive markets (size, no. firms, control of prices, level of price and output, efficiency)
non price competion
