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2.5 Competition_Notes

Competition involves multiple firms selling similar products to the same consumers, which can lead to lower prices and increased quantity supplied. While competition generally benefits consumers through lower prices and innovation, it can also result in negative effects, such as harmful additives in products or excessive marketing. The Competition and Markets Authority (CMA) in the UK regulates competition to prevent anti-competitive practices and ensure consumer protection.

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10 views

2.5 Competition_Notes

Competition involves multiple firms selling similar products to the same consumers, which can lead to lower prices and increased quantity supplied. While competition generally benefits consumers through lower prices and innovation, it can also result in negative effects, such as harmful additives in products or excessive marketing. The Competition and Markets Authority (CMA) in the UK regulates competition to prevent anti-competitive practices and ensure consumer protection.

Uploaded by

Amit Gupta
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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2.

5 – Competition

Competition is where more than one firm is trying to sell similar products to the same consumers. In a
competitive market there are a lot of buyers and a lot of sellers so that no individual can control the
market.

The key reason businesses compete is to attract customers and make a profit, but it is not always as
simple as that. In reality the reasons and manner in which firms compete changes as businesses evolve.
How competition affects price
An increase in competition means there are more firms
in the market or one or more of the firms in the market
has grown in size. This means a right shift of supply. As
you can see from the diagram on the right, this leads to
a lower equilibrium price and higher equilibrium quantity.

The elasticity of demand in the industry will make a big


difference to the effect competition is likely to have on
equilibrium price and quantity. If you look at the image
on the right you can see that when demand is elastic
and competition increases there is a small drop in
equilibrium price but a large increase in quantity
supplied. However if demand is inelastic then it will lead
to a large drop in equilibrium price and only a small
increase in equilibrium quantity.

It is also possible for competition to actually lead to an increase in costs and a left shift of supply. This
might happen if firms needed to spend a lot of money on marketing or research and development in order
to compete. If there were to be a firm go out of business, or two competitors merge causing competition
to decline then we would also see a left shift of supply.
The effect on consumers
In general competition provides a lot of benefits to consumers as it can lead to lower prices, innovation
and therefore better quality and a wider variety of products. All these things are positive for the consumer
giving them more and or better quality stuff and improving their standard of living.

There can however be negatives for consumers from competition. In an effort to compete producers may
use preservatives or chemicals that enhance production or shelf life but have harmful side effects. Some
advertising and methods of promotion may lead consumers to purchase more than they would or things
they do not need.

Advantages of Competition to the Consumers (Snapshot)

Disadvantages of Competition to the Consumers(Snapshot)


The effect on producers
You might initially think that competition is bad for business as it stands to force them out of business.
While it is true that inefficient firms may be forced out of business by competition, it is generally
considered that competition has positive effects for producers.

Competition forces firms to become more efficient. This leads them to seek out technical innovation. The
current computer age has already led to many changes but still stands to revolutionise many processes
to the same extent as the industrial revolution. Automation can greatly increase productivity and if
widespread GDP, however it may come at the cost of jobs.

Impact of Competition to the Producer (Snapshot)

Role of CMA (Competition and Market Authority)


The Competition and Markets Authority (CMA) is the UK's principal competition regulator and
consumer protection agency. The CMA is responsible for promoting competition and preventing anti-
competitive activities in the UK. It also has consumer protection responsibilities and oversees the
enforcement of competition and consumer law.

For Example: The UK Competition and Markets Authority (CMA) has indeed blocked the proposed
merger between AstraZeneca and Gilead Sciences. The CMA concluded that the merger would
significantly reduce competition in the pharmaceuticals market, particularly in the areas of oncology and
immunotherapy. This decision was made to ensure that patients and healthcare providers continue to
benefit from competitive prices and innovation.
Monopolies, oligopolies and competitive markets

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