Business competition Flashcards

Question

What are the disadvantages of being a small firm

Answer 1

Higher costs: Small firms have a smaller output, preventing them from exploiting economies of scale. Thus their average costs tend to be higher than those of their larger rivals Lack of finance: Small firms struggle to raise finance. This is because they cannot issue shares and it's harder to get loans from financial institutions when you are not a large, established firm Difficulty attracting quality staff: Small firms lack resources. Thus they cannot afford the wages of qualified staff, since they ask for a lot of money due to skills

Answer 2

Market structures refer to the degree of competition in a market

Answer 3

Competition Oligopoly Monopoly

Answer 4

Competition is a market with a large number of small buyers and sellers, with free entry and exit out of the market

Answer 5

Choice: Consumers have a wider choice of goods to choose from Quality: Consumer receive better quality goods because if producers supply poor quality goods, they will lose costumer to competitors Lower prices: In order to attract more customers, suppliers tend to charge lower prices

Answer 6

Lack of research and development: Firms in this type of market don't make huge profits and they thus can't invest a lot into research and development to come up with new innovative products. Further, even if they have the funds to do so, they are not motivated to because as soon as they come up with a new product, their competitors will find out and copy it High advertising expenditure: Small firms might not be able to afford the high marketing expenditure involved in strong branding

Answer 7

Lower entry and exit cost Less pressure to be innovative Easy to find out about rival products and copy them Little need for advertisement

Answer 8

Firms are price takers, because their products are very similar or identical to their rivals

Answer 9

Low prices High quality Increased choice

Answer 10

Due to the large number of firms, some of them don't survive and close down, so customers have to find new suppliers Firm are not motivated to innovate because rivals are going to copy them, so product development is slow

Answer 11

Increased employment Increased efficiency due to competition

Answer 12

Resources may be wasted because if small firms close down, their workers may find it difficult to get a new job. This is a waste of labour

Answer 13

A monopoly is a firm that is the only supplier of a particular good or service

Answer 14

No competition: In monopolies there is only one supplier, so there is no competition from other firms High profits: Due to lack of competition, firms get high profits as everyone buys from them Price makers: Monopolies can dictate the prices of their goods by methods like supplying less Non-homogeneous products: Monopolies produce different varieties of their product, making it difficult for other firms to copy them Barriers to entry: Monopolies can prevent other firms from entering the market and taking advantage of their abnormal profits

Answer 15

Control of sources of raw materials: Monopolies often own most of the supply of raw material, making it difficult for new firms to enter Economies of scale: Monopolies that produce a lot of goods are able to benefit from economies of scale by reducing their average costs. This allows them to charge lower prices, preventing other firms form entering the market High start up costs: Some industries need expensive equipment and thus not every firm can afford to start up in such industries Legal barriers: Certain laws can be passed to make it illegal for firms to enter a market

Answer 16

Restrictions on supply: Monopoly firms can threaten their suppliers that they will stop buying from them if they supply any new firms Predatory pricing: Large firms can cut their prices in the short-run to force existing firms out of the market Limit pricing: Large firms can cut the price below the costs of the new entrants to prevent them from entering Exclusive dealing: Monopolies can refuse to sell to shops that stock other firm's brands of a similar product

Answer 17

Economies of scale: Monopolies are able to grow in size and output, thus reducing their average costs and allowing them to make more profits and charge lower prices (firms, consumers) Natural monopolies: The cost of having one firm supply the whole market is lower than having many individual firms supply it, as less electricity is transmitted and less water is wasted (economy) Research and development: Large monopolies have a lot of profits that they can use on research and development. This allows them to come up with new innovative products that benefit the consumers and help them make abnormal profits (firms, consumers) Lower prices: Monopolies can reduce their average costs with economies of scale, allowing them to charge lower prices and still get high profits (consumers, firms) Ability to compete in global markets: Monopolies are big enough to compete with huge overseas firms and expand further (firms)

Answer 18

Poor levels of service: Due to lack of competition, monopolies are not motivated to provide high quality services, as there are no alternatives and people will keep buying their product anyway. Thus, they do not develop new ideas and produce the bare minimum Low output and high prices: Monopolies may limit their supply on purpose in order to force the market price of their products up. This is because consumers don't have alternatives and will keep on buying the good anyway Limited choice: In a monopoly, there is only one supplier. Therefore, consumers don't have a lot of choices Producer sovereignty: In monopolies, producers have the most power and can do whatever they want in the market

Answer 19

An oligopoly is a market structure where there is a small number of firms that dominate the industry and where each firm is interdependent with other firms

Answer 20

Few large firms dominate the market Firms must be interdependent: The action of one large firm will directly affect another large firm. This is because one firm can only sell more by taking away sales from another Barriers to entry exist: Barriers to entry are those that prevent other firms from entering the industry Cartels exist: The few large firms might illegally agree to restrict output leading to a rise in price so they an make more profit Non-price competition: Competition occurs through creating a want for a product, such as by advertising or by research and development to come up with new ideas Price rigidity: Prices hardly vary as firms are too scared of entering a price war

Answer 21

Price competition is competition through reducing prices below those of competitors

Answer 22

Competition by creating a want for a product through methods like advertisement

Answer 23

The commercial exploitation of a new invention

Answer 24

A cartel is an organization of producers which exists to further the interests of its members, often by restricting output through the imposition of quotas leading to a rise in price

Answer 25

Non-price competition: Because of non-price competition, producers need to compete in other ways such as through advertising or by developing new products. This consequently leads to a greater choice for consumers as they learn about existing products, while many more new ones are coming into the market Economies of scale: Large firms are able to use economies of scale in order to reduce their average costs due to the fact that they are big in size. This allows them to maximize profits Collusion: Oligopolistic firms might make agreements to restrict competition and maximize their benefit. This can be done by sharing the market geographically, agreeing to charge the same price or even by restricting output Price rigidity: Prices don't change a lot as large firms want to avoid price wars. This makes it easier for consumers to plan their spending

Answer 26

Collusion: Oligopolistic firms collude to restrict competition, limit supply or even share a market geographically. This will force prices up, acting against the benefit of the consumers Barriers to entry: Large firms prevent other firms from entering the industry. This limits choice and competition in a market, resulting in higher prices Less choice for consumers: The number of firms in the market is small and consumer thus do not have a lot of choices

Answer 27

Competitive markets: Fruit and vegetable market, Stock market Oligopoly: Motor vehicles, banks Monopoly: Royal Mail, CYTA

Answer 28

Competition policy aims: To protect consumer interests against restrictive trade practices such as collusion, price fixing and predatory pricing. To limit monopoly power. This happens by preventing them to engage in restrictive trade practices or even forcing them to sell some of their business to break down monopoly power To control mergers and takeovers To promote competition by encouraging the creation of a thriving small business sector. This can be done through loans, advice or subsidies

Answer 29

The role of the CMA is to investigate any firm suspected of engaging in restrictive trade practices which prevent competition. They also investigate mergers to establish whether they go against public interest

Answer 30

The BIS is responsible for providing support to small businesses and start-ups. They do that through giving advice, loans, grants and tax breaks

Business competition Flashcards

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