How small firms compete (2.1.5)

Perfect competition

1. Many buyers and sellers: No single firm can influence the price

2. All goods are completely identical

3. All buyers and sellers know price methods and production methods

4. Firms can freely join or leave the market

Price Elasticity of Supply

Measures how responsive businesses are to a change in the market selling price

Price inelasticity demand (PED)

Firms may increase their prices to increase profit, they won’t face losses because consumers would still buy it anyways, because there might not be a alternative cheaper substitute, or the product is an absolute necessity such as petrol.

Income elasticity of demand

Consumers demands increase for luxury items. As wages increase. Firms exploit this by targeting luxury markets, and making a profit margin.

6 factors on how firms survive

1. Many smaller businesses act as a supplier to much larger firms

2. Might take advantage of low price elasticity of demand and high income elasticity, (income increasing, increase in demand for luxury) for specialist niche products, sold at higher price so more profit margin earned

3. Can avoid diseconomies of scale

4. Owners seeking profit satisfaction

5. Small business are often more innovative, and flexible in responding to changes in market demands

6. Smaller firms benefit from consumers buying products online.

Product differentiation (USP)

Something that set a product apart from competitors in the eyes of customers (unique selling point)

Mass market

Higher outputs, so more potential for economies of scale

Niche market

Firms target specific consumers with specific needs and wants. To make profit margins

Dividend

When you buy shares, at end of year you get “dividend” (profit) if a company does really well.