Chapter 18: Competitive
Markets
pages 132-138
EC2 Economics
Key Terms
KEY TERM: MATCHING
1. Competition
A. attempt by a firm to distinguish its product from
2. Deregulation
B. to remove or reduce the number of government
3. Barriers to entry
that of a rival
controls on a particular business activity - done to
make companies work more effectively and to
increase competition
C. obstacles that might discourage a firm from
4. Innovative
entering a market
D. commercial exploitation of a new invention
5. Product
differentiation
E. rivalry that exists between firms when trying to
sell goods to the same group of customers
KEY TERMS: ANSWERS
1. Competition
E. rivalry that exists between firms when trying to
sell goods to the same group of customers
2. Deregulation
B. to remove or reduce the number of government
controls on a particular business activity - done to
make companies work more effectively and to
increase competition
3. Barriers to entry
C. obstacles that might discourage a firm from
entering a market
4. Innovative
D. commercial exploitation of a new invention
5. Product differentiation
A. attempt by a firm to distinguish its product from
that of a rival
ACTIVITY ONE
● Three companies provide equal cell phone coverage
○ Company A : 20 CHF (per month)
○ Company B: 30 CHF (per month)
○ Company C: 35 CHF (per month)
● Which company would receive your order?
● What do you think will happen to the market
price for this item over time?
What is a competitive market?
How do know you if a market is competitive? (5)
1. large number of buyers and sellers
2. products are close substitutes (elastic goods)
3. low barriers to entry
a. not too technical
b. not too much capital/money required
4. no control over price
a. because of many substitute goods
b. price takers
5. free flow of information (consumers can see how much each
company is charging)
a. prices, production and availability
Which markets are very competitive? Why?
1.
2.
3.
4.
5.
restaurants
hair salons
taxi services
dry cleaners
bars/nightclubs
•
Businesses not too
complicated (so many exist)
•
Don't need much money to
open (so many exist)
•
Easy to compare the price of
different options (consumer has
access to information – can
rationally compare)
Competition and the Firm
What are the advantages for firms from a
competitive market?
1. None
○ Firms do not welcome competition
● If you can innovate, you can set yourself apart from the
competition
What are the disadvantages for firms from a competitive
market?
1. Can't charge higher prices
○ Profit tends to be lower
What do firms have to do when faced with
competition?
1. lower production costs by increasing efficiency
2. provide good quality products and high levels of customer
service
3. charge prices acceptable to customers
4. innovate
a. product differentiation (come up with a way to set
yourself apart from the competition)
You own a restaurant. How will you innovate and
make sure that you have product differentiation?
Case Study: The Funhouse
page 135
The Funhouse
1. What evidence is there
in the case to suggest
that the accommodation
market in Queenstown
is competitive?
1.
2.
3.
2. Discuss the main
disadvantage to firms of
competition.
3. Assess how firms, such
as the Funhouse, might
benefit from
competition.
large number of providers for accommodation =
118 firms
lower profits
a. Why? lower prices and more pressure to
innovate (higher costs)
advantages vs. disadvantages
a. advantages
i. lower production costs
ii. more innovation + more consumers
drawn to production differentiation +
ability to increase price
b. disadvantages
i. lower profits + lower prices + lower
production costs + pressure to innovate
Competition and the Consumer
What are the advantages to consumers from a
competitive market? (3) ADD
1. lower prices
a. Why? substitutes mean consumers can switch
2. more choice
a. Why? product differentiation/more sellers
3. better quality
a. Why? competitors increase their quality to attract
customers
What are the disadvantages to consumers from a
competitive market? (2) ADD
1. market uncertainty
a. Why? firms entering and leaving the market
(consumer is inconvenienced)
● Example: 13,000 passengers stranded after French
airline goes bankrupt
2. lack of innovation
a. Why? low profit means less money for product
development
Competition and the Economy
What are the advantages to the economy from a
competitive market? (2) ADD
1. less waste and more efficiency = resources will be
allocated effectively
a. Why? lower production costs and lower prices
2. better standard of living
a. Why? more innovation
What are the disadvantages to the economy from a
competitive market? (1) ADD
1. resources may be wasted
a. Why? more firms leave the market
b. Why? some factors of production are immobile
i. Results: more unemployment
ii. Result: land and machinery are not used
iii. Result: takes time to reallocate resources
Exam-style response question
Read the Case Study: Competition
in the USA on page 137-138.
Question 4 on page 138: There
should be more competition
between businesses in the USA.
With reference to the case and
your knowledge of economics,
analyse this comment. (6 marks)
●
●
●
10 MINUTES
What is the key word?
How would you graph it?
How would you explain it?
○ Two explanations why there should be
(back up with facts from the article)
OR
○ Two explanations why there shouldn’t
be (back up with facts from the article)
Remember:
1. Use your knowledge of economics
2. Use facts from the extract (facts and figures to
back up your point)
3. Make sure the paper flows (A leads to B leads
to C)
4. Use connecting phrases (however, on the one
side, on the other side, in conclusion, etc.)
REVISE CHAPTER 17
NAME THE SIX INTERNAL ECONOMIES OF SCALE
1.Marketing
2.Financial
3.Purchasing
4.Managerial
5.Risk-Bearing
6.Technical
MATCHING - INTERNAL ECONOMIES OF SCALE
Internal EOS
Example
1. Marketing
C. We make a lot of deliveries so it makes sense for us to own
our own delivery truck instead of paying someone to do it for us
2. Financial
D. We put pressure on banks when negotiating the price of our
loans
3. Purchasing
A. We bulk buy so we get better discounts
4. Managerial
E. We hire specialists who can focus on a specific task, which
makes them more productive
5. Risk-Bearing
F. We not only own a factory, but we also own a retail store, and
a gas station
6. Technical
B. We have a large factory and use specialized equipment
frequently
NAME THE FOUR EXTERNAL ECONOMIES OF
SCALE
• Skilled Labour
• Similar Businesses in the Area
• Infrastructure
• Access to Suppliers
NAME THE FOUR DISECONOMIES OF SCALE
•
•
•
•
Bureauacracy
Communication Problems
Lack of Control
Distance Between Senior Staff and Shop Floor
Workers