Business Competition

What is business competition, and what determines it level?

Firms competing for customers.

It depends on the number of firms and how easily new firms can enter

What is perfect competition?

Many small firms sell identical goods, with easy entry and exit. Firms are price takers

What are the effects of perfect competition?

Low prices, high efficiency, and little supernormal profit in the long run

Example: agricultural markets (approximately)

What is a monopoly?

A market dominated by one firm with high significant price-setting power and high barriers to entry

What are the advantages and disadvantages of monopolies?

Advantages: economies of scale and lower average costs

Disadvantages: higher prices and less consumer choice

What is an oligopoly?

A market dominated by a few large firms, often with high entry barriers

Examples: airlines, car manufacturers

How do firms in an oligopoly compete or collude?

They compete through advertising and product design, or collude to fix prices or restrict output

What is monopolistic competition?

Many firms sell similar but differentiated products, with relatively easy market entry

How do firms compete under monopolistic competition?

Through branding, advertising, quality, and product differences

Examples: cafes, clothing shops, hair salons

What are barriers to entry? Give 4 examples

Obstacles to entering a market: high start-up costs, legal restrictions, brand loyalty, control of resources

What are the effects of strong competition?

Lower prices, better quality, greater innovation and efficiency, but lower profit margins

What are the effects of weak competition?

Higher prices, fewer choices, possible inefficiency, and slower innovation (due to reduced competitive pressure)

How do competition laws and regulation protect consumers?

Competition laws restrict anti-competitive behaviour, such as price fixing

Regulation can limit monopoly prices

What are privatisation and deregulation?

Privatisation: selling state-owned firms

Deregulation: removing rules or barriers to encourage market entry

What is the difference between a price taker and price maker?

Price taker: accepts the market price

Price maker: has power to influence the price changed