Competitive Markets

Question 1

What is ‘competition’?

Answer 1

Competition is the rivalry that exists between firms when selling goods to the same group of customers in a particular market.

Question 2

What are ‘barriers to entry’?

Answer 2

Barriers to entry are obstacles that might discourage a firm from entering a market.

Question 3

define ‘product differentiation’.

Answer 3

Product differentiation is an attempt by a firm to distinguish its product from that of its rivals.

Question 4

What are the common features of a competitive market?

Answer 4

In a competitive market, these are common features including:

• There are a large number of buyers and sellers
• Products sold by each firm are close substitutes for each other
• There are low barriers to entry
• Each firm has almost no control over the price charged
• There is a free flow of information about products and prices.

Question 5

How does competition affect firms in terms of pricing and efficiency?

Answer 5

Competition forces firms to:

• offer products that give consumers value for money
• operate efficiently while keeping costs low
• provide good quality products and high levels of customer service
• innovate by constantly reviewing and improving the product.

Question 6

What are the advantages of healthy competition for consumers?

Answer 6

Healthy competition leads to lower prices, more choices, and better quality products for consumers.

Question 7

How does competition affect resource allocation and innovation in the economy?

Answer 7

• Competition leads to more effective resource allocation as firms have to operate efficiently to survive.
• It also promotes innovation as firms strive to gain a competitive edge over their rivals.

Question 8

What are the disadvantages of competition in terms of market uncertainty and lack of innovation?

Answer 8

• Market uncertainty may arise due to disruptions caused by unprofitable firms leaving the market.
• Additionally, a lack of innovation may occur because firms make less profit in competitive markets, leading to less investment in product development.

Question 9

Evaluate the advantages and disadvantages of competition for consumers.

Answer 9

• Competition benefits consumers by offering lower prices, more choices, and better quality products.
• However, it can also lead to market uncertainty and lack of innovation if firms struggle to make profits in competitive markets.

Question 10

Explain one possible barrier to entry a new firm might face when trying to enter
this industry.

Answer 10

One barrier to entry is economies of scale because established larger firms such as Sony and Warner may have lower average costs whereas new smaller firms may struggle to keep average costs down

Question 11

Define the term innovation.

Answer 11

An idea that leads to a new product/process

Question 12

Apart from price, describe one advantage for passengers of this competition.

Answer 12

One reason is that there are likely to be fewer
vehicles competing outside the city centre because most of the 17 million people live in the
city centre and so there is a less potential business for the drivers.