Competitive Markets (Edexcel IGCSE Economics)

What is Competition?

Spec point — 1.2.4a

• Competitiequationon refers to the number of firms that sell similar products in the same industry
• The more competitive an industry is, the harder firms must work to keep their customers and to attempt to attract customers away from competitors
• Highly competitive markets can generate advantages for customers
• Competition between firms can be useful to generate improvements in the standard of living in an economy Advantages and Disadvantages of Competitive Markets for Firms | Advantages | Disadvantages | | - Efficiency: increased competition incentivises firms to lower cost of production
  - Less waste: firms are likely to minimise waste in order to keep costs low
  - Better quality: firms continuously seek to improve the quality of their goods/services in order to become recognised in a crowded market
  - Innovation: firms will research and develop new products to attract new customers | - Poor quality: in a bid to lower prices, product quality may deteriorate over time as firms cut costs or use cheaper raw materials
  - Worker welfare: low profit margins may result in low wages and poor working environments for workers | Advantages and Disadvantages of Competitive Markets for Consumers | Advantages | Disadvantages | |---|---| | - More choice: more sellers means more choice for consumers
  - Better quality products: consumers will benefit from firms striving to improve their quality
  - Innovation: consumers can enjoy improved versions and brand new products
  - Lower prices: competition causes firms to lower prices for consumers in an attempt to gain market share | - Poor quality output: consumers may find products deteriorate in quality with repeat purchases
  - Too much choice: consumers may be overwhelmed and not explore the full range of market offerings, instead sticking to what they know
  - Low wages: consumers may find many jobs offer only low wages to workers | Advantages and Disadvantages of Competitive Markets for the Economy | Advantages | Disadvantages | | - Efficiency: increased efficiency by firms reduces the use of scarce resources and reduces waste
  - Innovation: over time, the improved goods and services offered in markets will increase the standard of living | - Low levels of innovation: too much competition reduces profit levels and stifles innovation and economic progress
  - Low profit levels: small profit margins may lead to poor quality jobs and low welfare standards for labour |