Competitive Markets (Cambridge International IGCSE Economics)
Exam board Cambridge International · IGCSEUpdated 2024-06-27
An Introduction To Competitive and Monopoly Markets
Spec point — The effect of having a high number of firms on price, quality, choice, profit. Note: the theory of perfect and imperfect competition and diagrams are not required.
- Each firm operates in a specific market
- The conditions in different markets can vary significantly and are determined by the market structure in which the firm operates
- There are a range of market structures, however your syllabus only requires you to know the characteristics of two - competitive markets and monopolies
- Competitive markets are those with an extremely high degree of competition
- A monopoly is a market structure in which one firm dominates the market and has significant market power
The six characteristics which determine the type of market structure a firm operates in - competitive or monopoly
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The answers to the questions above determine the type of market structure in which a firm is operating in
- If a firm is selling a unique product (e.g. handmade car) it is likely operating in a monopoly market and setting high prices
Characteristics of Competitive Markets
Spec point — The effect of having a high number of firms on price, quality, choice, profit. Note: the theory of perfect and imperfect competition and diagrams are not required.
- The characteristics of a competitive market are as follows
- There are many buyers and sellers: due to the number of market participants sellers are price takers
- There are no barriers to entry and exit from the industry: firms can start-up or leave the industry with relative ease which increases the level of competition
- Buyers and sellers possess perfect knowledge of prices: this assumption presupposes perfect information e.g. if one seller lowers their price then all buyers will know about it
- The products are homogenous: this means firms are unable to build brand loyalty as perfect substitutes exist and any price changes will result in losing customers
Advantages and Disadvantages of Competitive Markets
| Advantages | Disadvantages |
|---|---|
| - Lower prices: competition causes firms to lower prices for consumers in an attempt to gain market share - Better quality: firms innovate and continuously seek to improve their quality of their goods/services in order to become recognised in a crowded market - More choice: more sellers equals more choice for consumers | - Worse quality: in a bid to lower prices, product quality may actually deteriorate over time - Too much choice: consumers may be overwhelmed and not explore the full range of market offerings, instead sticking to what they know - Worker welfare: the greater the competition the greater the need to cut costs, often resulting in low wages and poor working environments |
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