Competition

What is competition?

Competition is when more than one firm is trying to sell similar goods to the same group of consumers

What is price competition?

-Where firms lower their prices to try and gain customers and market share.Any firm that cannot compete will lose customers and will go out of business.

-Fimes cannot sell at less than cost price for anytime as will cause them to go out is business.

-This happens when’s there’s a large number of firms

-Discounts,2 for 1 offers, giveaways are ways firms try to compete with price

-Some firms use loss leader by attracting people on goods that they don’t make money on. But once they’re in the store they buy other things.

What is non price competition?

-Offering a specialised product or service

-Focusing on quality of products

-Marketing and adverting

-Better customer service

Name the three reasons why Producers compete

1)Market Entry-When a business enters a new market,it’s unknown. So to gain market share they may offer low prices and promotion deals

2)Survival-60% of new businesses fail to make ten years. In order to survive producers must find sustainable ways of competing with rivals. This done by offering unique or specialised goods.

3)Profit-To survive and thrive, firms must profit. As profits can be used to re-invest in newer technology. For producers to maximise profit, they must keep costs down and increase sales

What does an increase in competition cause?

A right shift in demand. This lead to a lower equilibrium price and higher equilibrium quantity. As firms lower prices they want to attract more customers or retain the ones they got.

What happens if there’s an increases in number of firms entering a market?

There’s a right shift in supply. This leads to lower equilibrium price and higher equilibrium quantity.

What factors may cause firms to increase their prices in a competitive market?

-Advertising- if firm spent a lot of money on advertising they’ll need to recoup their money by increasing prices

-Innovations-This is costly so firms has to increases prices

Evaluate the impact of competition on firms and HOWEVER, points?

1)Encourages Efficiency-We seen a big increase in mechanisation and computerisation which has lead to big increases in productivity. Also firms are forced to lower their average cost which incentives them to cut down on waste which in turn increases profit margins

HOWEVER, in order to improve efficiency firms have to invest large sums of money on improving capital and training workers.

2)Innovation-Those that come up with innovative new products that consumers design are able to charge high prices before competitors catch up and offer the same price.

HOWEVER, innovation can be very costly which can increases cost of production and reduce profit margins.

3)Survival-Firms in competitive markets that fail to adapt to changes in consumers preferences will ultimately fail.

4)Prices-Firms in competitive markets could be forced to lower their prices which could reduce their profit margins.

HOWEVER, if demand is price elastic, reducing profits could actually lead to increased revenue.

Evaluate the impact of competition on Consumers

1)Lower prices-There are many firms competing so they must keep prices low to attract consumers.This means consumers will keep more of their money and have more disposable income to buy more of the things they need and want.This will improve standards of living.

HOWEVER, firms might lower the quality of their raw materials in order to compete with prices.

2)Higher quality goods-Firms are forced to innovate to stay ahead of competitors. This means consumers will have better quality goods and services which improves our quality of life.

HOWEVER, innovation can be very costly for firms which leads to higher prices for Consumers.

3)Consumer sovereignty-Competition means consumers have a choice and ability to ‘vote’ for certain goods and services by buying them. This helps improve customer service levels as well as quality and innovation

HOWEVER, firms spend millions of pounds on advertising which can influence us to buy goods we do not need. This is called Aggressive adverting which can manipulate consumers which reduces consumer sovereignty.

4)Firms may compete with opening hours and location,increasing convenience for consumers.

HOWEVER, consumers are usually charged a premium for benefit of convenience.

5)Wide choice of products-More firms in market means wider choices of products in market. Which means it’s more likely for consumers to find products that meets their needs. This improves their standard of living.

HOWEVR, there could be harmful products added to the goods you buy to make them last long.This may cause negative effects which may strain your living standards and life span.

What’s the role of the CMA

-They investigate mergers between organisations to make sure they don’t reduce competition

-Take action against business and individuals that take part in cartels or anti-competitive behaviour.

-Protect consumers from unfair trading practices

What is a monopoly and its features?

A sole producer or seller at a good or service

Features-High barriers of entry, Large firms, firms have control of output and prices to they keep them high. High profits. Seen as inefficient because lack of competition.

What is Monopoly power?

When a firm has more than 25% market share

What are barriers to entry?

Factors that stop a firm from entering a market. High barrier to entry’s means it’s hard to enter a market. Includes:

-Legal-Only Royal Mail can deliver letters

-Start up cost

-Location-Depending on where you are could be a issue

What’s the benefits of Monopoly for consumers?

-Less time wasted on deciding which good to buy.

-High profits may be spent on innovation/investment, improving quality for consumers.

What’s the Drawback of Monopoly for consumers?

-Less choice available to consumers

-No consumer sovereignty so they can be exploited through firms restricting output and increasing prices-and consumers have no alternative.

-No competition so little incentive for firms to innovate and bring out new products

-Poor level of customer service

What’s the benefit of Monopoly to Producers?

-Ability to change to higher prices so more profit

-Can control supply

-Less needs to be spent on advertising

What’s the drawbacks of Monopoly for producers?

-Potential for scarce resources to run out

-Lack of innovation may mean consumers find alternatives where possible

-Positive diseconomies of scale

What’s a oligopoly and what’s its features?

Is where a few firms dominate a market

-When a small number of firms control large majority of market share(5 largest firms control 50% of market)

Features:

-Relative high barriers to entry

-Firms are interdependent- have to monitor each others prices and output.

-Homogenous products(Same products)

-A few large firms but there can be smaller ones too

-Less efficient than a competitive market

What’s a competitive market and their features?

Have a large number of sellers supplying goods and buyers demanding goods.

Features:

-Low barriers to entry

-Firms have little control of prices and output as they’re set by market forces

-Efficient

-Low profits

What’s Diseconomies of scale?

When a firm grows too big and average cost rise again. This is caused by a lack of control,coordinations and co-operation

What is tacit callusion?

When firms in a oligopolie co-ordinate with their actions without explicit communication for higher profits.