What this lesson teaches
I can describe competitive markets and explain how many firms affect price, quality, choice and profit.
Syllabus K343, 3.7.1. Competitive markets: characteristics, advantages and disadvantages of competitive markets; effect of having a high number of firms on price, quality, choice, profit
Make a guess
A hawker centre has twenty chicken rice stalls. One stall doubles its price. What happens?
- Other stalls double their prices too.
- It loses most of its customers to nearby stalls.
- It earns twice as much, because prices doubled.
Show the answer
It loses most of its customers to nearby stalls.
In a competitive market buyers can easily switch to rivals selling a similar product, so a firm cannot charge much more than others.
Many firms competing keeps prices down and pushes quality and choice up, though profits are limited.
A competitive market has many firms, each with a small share. Firms sell similar products. It is easy for new firms to enter and for firms to leave. Buyers can easily compare prices.
Effects of many firms. Price: firms cannot charge much more than rivals, so prices stay low. Quality: firms improve quality to attract customers. Choice: consumers have many products and sellers to choose from.
Profit: competition keeps profits low. If profits are high, new firms enter and take customers, pushing profits down.
Disadvantages: small firms cannot gain large economies of scale, so costs per unit may be higher. Low profits leave less money for research. Some firms fail, and workers may lose jobs. Diagrams of competition are not required in this syllabus.
- Competitive market
- Many firms, similar products, easy entry and exit.
- Effects
- Lower prices, better quality, more choice, lower profits.
- Drawbacks
- Fewer economies of scale, less money for research.
Worked example: Hawker food as a competitive market
A hawker centre has dozens of stalls.
- Many sellers: each stall is a small part of the market.
- Easy comparison: customers see prices and queues before choosing.
- Price: a stall that charges far above others loses customers.
- Quality and choice: stalls compete on taste and variety, so customers benefit.
Watch out for this
In a competitive market firms make large profits because they sell a lot.
Competition keeps profits low. If profits are high, new firms enter, increasing supply and pulling prices and profits down.
Check your understanding
What is likely to happen when many new firms enter a market?
- Prices rise, because demand is now shared among more firms.
- Prices fall and consumers get more choice.
- Profits of existing firms rise as the market grows.
Show the answer
Prices fall and consumers get more choice.
Right. More competition puts pressure on prices and widens choice.
Check your understanding
Which is a feature of a highly competitive market?
- One firm that sets the price for all
- High barriers that keep new firms out
- Products that have no close substitutes
- Many firms selling similar products
Show the answer
Many firms selling similar products
Right. With many close rivals, no single firm can raise its price far.