Economics Section B Part 2

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What is competition?
Rivalry between firms trying to sell goods in a market.
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What happens in a competitive market?
There are lots of sellers, prices are similar and goods can be easily substituted for each other.
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How do firms survive in a competitive market?
Minimise costs and operate efficiently; provide good quality products; charge fair prices; innovate (review and improve products)
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What are the advantages of competition for the firm?
Firms will be efficient and more able to compete overseas.
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What are the disadvantages of competition for the firm?
Profit is limited- total profit in an industry must be shared.
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What are the advantages of competition for the consumer?
Lower prices (can switch easily to other goods); More choice (lots of firms, pressed to innovate and make different products); better quality (poor quality goods will not be bought-consumer will switch).
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What are the disadvantages of competition for the consumer?
Uncertainty (frequent entry and exit of firms, disrupted market, confusion); less innovation (as profit limited fewer resources for R&D)
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What are the advantages of competition for the economy?
Resources are allocated more efficiently (firms must be efficient to survive- pressure to minimise costs); more innovation (due to competitive pressure, benefits economy as living standards higher)
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What are the disadvantages of competition for the economy?
Resources may be wasted (some production factors immobile- when firms close it takes time for resources to transfer to other uses)
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How can you measure a firm's size?
Turnover (the revenue a firm makes from selling output); number of employees; capital employed (the amount of money invested in a business)
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What are the advantages of small firms?
Flexible (can adapt quickly); personal service (more accessible owners); lower wages (employees less likely to be in a trade union); better comms (fewer employees, owner more in touch); innovation (under pressure so can survive).
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What are the disadvantages of small firms?
Higher costs (cannot exploit EoS, unit costs higher than larger rivals); lack of finance (considered too risky, choice of source limited); recruitment probs & vulnerable (lack resources to attract best staff/ survive if market conditions deteriorate)
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What are the advantages of large firms?
Costs- can exploit EoS and reduce unit cost; dominate market- higher profile, more recognition, can charge more; bigger contracts- can take on profitable large scale projects that small firms can't.
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What are the disadvantages of large firms?
Too bureaucratic- to maintain control, may be overwhelmed by admin; loss of control- lots of staff and factories make control difficult; poor motivation- workers feel alienated/demoralised, lack of personal contact.
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Why do firms want to grow?
Survival- can better deal with competition & poor trading conditions; EoS- lower average costs, improved efficiency and profitability; increased profits and market share; reduce risk (branch out to new markets and products).
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How can firms grow internally?
Increase output, sell more.
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How can firms grow externally? Why might they think this is better?
Takeover/merge with another firm (lateral- similar production techniques, forward V- next stage of P, horizontal- same business line, backward V- previous stage of P, diversifying/conglomerate- different business line); it's faster.
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What are the limitations to growth?
Limited markets; lack of finance (considered risky); aims of entrepreneur (wants to remain small- less responsibility/avoid tax); low entry barriers (fierce competition); DoS (if costs rise a firm will not grow any more- loses its competitiveness)
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What is a monopoly?
When a single firm dominates a market. Pure- only one producer (not common but do exist e.g. water/rail). Legal- one firm has 25% or more of a market.
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What are the features of a monopoly?
Barriers to entry (legal, marketing, EoS, discourage competition,cost); unique product; control over price (force price rises by restricting supply).
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What are the advantages of a monopoly?
More R&D (high profits- able to invest in R&D and generate new products); lower costs (exploit EoS, might lower price for consumers); natural monopolies (more efficient to have one supplier); internationally competitive (create jobs & exports)
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What are the disadvantages of a monopoly?
Higher prices, inefficiency (less pressure to minimise costs), less choice, less innovation (little incentive)
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What is an oligopoly?
Where there are lots of large suppliers that dominate a market.
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What are the features of an oligopoly?
Barriers to entry (high set up costs, marketing investment); price rigidity (fear price wars); collusion (restrict comp); EoS; non-price comp (invest in advertising & promotion to avoid price wars); interdependence (one firm's actions affects others)
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Why is collusion often illegal?
Price agreements exploit customers.
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What are the advantages of an oligopoly?
EoS (perhaps lower prices for consumers); price stability; choice (non-price competition- may launch new brands etc); price wars may result in lower prices
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What are the disadvantages of an oligopoly?
Price wars may not last for long, one firm may leave the marker- less comp, prices rise even more; firms may collude-pay more, less choice; a cartel may form- acting as a monopoly; spend lots of advertising- consumers may prefer lower prices
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Other cards in this set

Card 2

Front

What happens in a competitive market?

Back

There are lots of sellers, prices are similar and goods can be easily substituted for each other.

Card 3

Front

How do firms survive in a competitive market?

Back

Preview of the front of card 3

Card 4

Front

What are the advantages of competition for the firm?

Back

Preview of the front of card 4

Card 5

Front

What are the disadvantages of competition for the firm?

Back

Preview of the front of card 5
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