The dynamics of competition and competitive market processes

Question 1

What are the short-run benefits of competition?

Answer 1

1) Lower Prices: Firms compete by offering lower prices to attract customers, benefiting consumers who can purchase goods and services at more affordable rates
2) Increased Output: Firms may increase production to meet the higher demand resulting from lower prices, leading to greater availability of goods and services
3) Consumer Choice: A variety of products and services becomes available, allowing consumers to select options that best meet their preferences

Question 2

What are the long-run benefits of competition?

Answer 2

1) Innovation and Product Improvement: Firms invest in research and development to create new and improved products and services, enhancing consumer satisfaction
2) Economic Efficiency: Competition encourages firms to minimize costs and operate efficiently, contributing to overall economic productivity
3) Consumer Welfare: The combination of lower prices, improved products, and increased variety enhances consumer satisfaction and welfare

Question 3

What is non-price competition?

Answer 3

1) Product Differentiation: Firms strive to distinguish their products through quality, features, branding, and customer service, rather than solely competing on price
2) Advertising and Marketing: Companies invest in advertising campaigns to build brand loyalty and attract consumers, emphasizing aspects other than price
3) Customer Service: Providing exceptional customer service can be a key differentiator, encouraging repeat business and customer loyalty

Question 4

What is creative destruction?

Answer 4

Definition: Creative destruction refers to the process by which new innovations replace outdated technologies or products, leading to economic transformation

Impact on Industries: This process can lead to the decline of established firms and industries that fail to innovate, while fostering the growth of new sectors and opportunities

Economic Growth: While it may cause short-term disruptions, creative destruction is considered a driving force of capitalism, leading to long-term economic growth and increased productivity.

Question 5

What is productive efficiency?

Answer 5

When a firm produces at the lowest possible average costs (mc=ac), productive efficiency is achieved generally in the long run as competition drives them to minimise cost and eliminate waste. This applies for given level of output and available technology.

Question 6

What is allocative efficiency?

Answer 6

Achieved when resources are allocated at the socially optimal output (mc=ar).