IGCSE O Level Economics Chapter 4.4 Competition
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Questions and Answers

Why do firms compete?

To increase their customer base, increase their sales, expand their market share, achieve product superiority, enhance their image and the image of their products, and ultimately to increase profits.

Which of the following is an example of non-price competition?

  • Cutting prices below average cost
  • Competing on all other product features other than price (correct)
  • Competing with rival suppliers on product price
  • Selling each unit at a loss

    • In perfect competition, firms have control over market prices.

    False

    A _ monopoly controls the total supply of a product to a market.

    <p>pure</p> Signup and view all the answers

    Match the characteristics of market structure with their descriptions:

    <p>Perfect Competition = Many suppliers with identical products Monopoly = Single large supplier with control over market price Oligopoly = A few large firms dominating the market Monopolistic Competition = Many firms with slightly differentiated products</p> Signup and view all the answers

    What are the two factors that determine the demand for and supply of labor in an economy?

    <p>Derived demand for workers and government policies</p> Signup and view all the answers

    Define value added in production.

    <p>Value added is the difference between the market price paid for a product by a consumer and the cost of the resources used to make it.</p> Signup and view all the answers

    Production adds value to resources by turning them into goods and services consumers ____.

    <p>want and are able to buy</p> Signup and view all the answers

    Which sector involves the extraction and production of natural resources?

    <p>Primary sector</p> Signup and view all the answers

    Labour productivity can be measured by the average amount of output each employee produces per period of time.

    <p>True</p> Signup and view all the answers

    Match the following with their descriptions:

    <p>Fixed costs = Do not vary with output Variable costs = Vary directly with output Total cost = Total fixed cost + total variable cost</p> Signup and view all the answers

    Sole trader is the oldest and most popular form of business organization.

    <p>True</p> Signup and view all the answers

    What is the main difference between unlimited liability and limited liability in business?

    <p>Unlimited liability requires business owners to repay all business debts even with personal possessions, while limited liability limits the financial obligation to the amount invested in the business.</p> Signup and view all the answers

    A __________ is a legal agreement between two or more people to own, finance, and run a business.

    <p>partnership</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>Joint-stock company = Sells shares in ownership to raise capital Public corporation = Business-like public sector organization operating under governmental control Cooperative = Owned by members for mutual benefit</p> Signup and view all the answers

    What is internal growth or organic growth?

    <p>Internal growth or organic growth is when a firm expands its scale of production through the purchase of additional equipment and increasing the size of its premises.</p> Signup and view all the answers

    What is external growth in business?

    <p>When two or more firms join together to form a larger enterprise</p> Signup and view all the answers

    Firms can grow too large and experience diseconomies of scale. Is this statement true or false?

    <p>True</p> Signup and view all the answers

    Economies of scale are cost savings from increasing the scale of production in a firm or industry. These can be categorized as __________ and external economies of scale.

    <p>internal</p> Signup and view all the answers

    Why might some firms choose to remain small?

    <p>Some firms might choose to remain small due to operating in a small, local, or specialized niche market, the inability to raise sufficient capital to expand, or the preference of the owner to keep the business small.</p> Signup and view all the answers

    Study Notes

    Why Firms Compete

    • Firms compete to increase their customer base, sales, and market share, achieve product superiority, enhance their image, and ultimately increase profits.

    Benefits of Competition

    • Encourages profit-seeking firms to use their resources efficiently to compete on prices and products, benefiting consumers.

    Types of Competition

    • Price competition: competing with rival suppliers on product price.
    • Non-price competition: competing on all other product features, such as new product development, after-sales care, promotions, advertising, in-store displays, and competitions.

    Market Structure

    • Characterized by the number of firms competing to supply, the degree of competition, product differentiation, and ease of entry for new firms.

    Perfect Competition

    • Based on 4 assumptions: many buyers and sellers, perfect knowledge, no barriers of entry/exit, and homogenous output.
    • Firms are price takers, and individual firms have no control over market price.

    Monopoly

    • A single firm or group of firms with sufficient market power to restrict competition and set the market price.
    • May restrict supply to force up the market price and earn abnormal/supernormal profits.
    • Can abuse its market power to restrict market supply, restrict competition and consumer choice, and cut product quality to save costs.
    • May lead to x-inefficiency and require regulation.

    Problems with Monopolies

    • Abuse of market power, x-inefficiency, and need for regulation.

    Regulating Competition

    • Competition policy measures: regulating prices of monopolies, imposing fines, and breaking up monopolies into smaller firms.
    • Consumer protection laws protect consumers from exploitation and harmful business activities.

    Not all Monopolies are Bad

    • A monopoly can still act competitively and be good for consumers if it is a more efficient producer or invests profits in new product developments.
    • Abnormal profits can be a reward for significant investment risks, leading to revolutionary products.

    Exam Questions

    • Discuss whether the advantages of a monopoly are greater than its disadvantages.
    • Explain how firms can grow in size, and discuss whether some large firms might benefit from reducing their size.
    • Explain how firms may have benefited from horizontal and vertical integration.
    • Discuss whether firms always benefit from growing larger.

    Organization of Production

    • Sole Trader: A business owned and run by one person, with unlimited liability.
      • Pros: easy to set up, full control, and all profits belong to the owner.
      • Cons: unlimited liability, all losses are borne by the owner, and lack of continuity.

    Labour Market

    • Demand for Labour: The demand for labour is a derived demand, meaning it depends on the demand for the product or service produced.
      • Factors that determine demand for labour:
        • Government policy in relation to the public sector
        • Regional policy to encourage firms to locate in particular areas
        • Tax relief to firms to encourage production and employment
    • Supply of Labour: The supply of labour is affected by factors such as:
      • Effective training and retraining schemes
      • Good education system
      • Minimum wage legislation

    Production

    • Production Process: The process of transforming inputs (land, labour, and capital) into outputs (goods and services).
      • Value added: the difference between the market price paid for a product and the cost of the natural and man-made materials used to make it.
      • Value added = profit + wages
    • Industrial Sectors:
      • Primary sector: extraction and production of natural resources
      • Secondary sector: construction and manufacturing
      • Tertiary sector: personal and business services

    Aims of Production

    • Aims of Private Sector Firms: Maximize profit, which is a surplus of revenue over costs.
    • Aims of Other Organizations:
      • Charities: help people or animals in need, or protect the natural environment
      • Not-for-profit organizations: run for the benefit of their members, with any surplus reinvested in the organization or used to lower prices
      • Public sector organizations: provide public services, such as healthcare and education

    Productivity

    • Productivity: Measures the amount of output (goods and services) produced from a given amount of input (land, labour, and capital resources).
    • Improving Productivity: Strategies to increase productivity include:
      • Training employees to improve skills
      • Rewarding increased productivity with performance-related pay
      • Increasing job satisfaction
      • Introducing new production processes and technologies
      • The division of labour and factor substitution

    Costs of Production

    • Fixed Costs: Do not vary with output, e.g., rent, insurance premiums, and loan repayments.
    • Variable Costs: Vary directly with output, e.g., cost of materials, labour, and other inputs.
    • Total Cost: Total fixed cost + total variable cost
    • Average Cost: Total cost ÷ number of units produced
    • Break-even Level of Output: Where total revenue equals total cost.

    Starting a Business

    • An entrepreneur combines and organizes resources in a firm for the purpose of carrying out productive activity or business.
    • Firms can take different legal forms depending on how they are owned, controlled, and financed.

    Types of Business Organization

    Sole Trader

    • A sole trader or sole proprietorship is a business owned and controlled by one person.
    • It is the oldest and most popular form of business organization.
    • Financial liability is unlimited, meaning the business owner's personal possessions can be sold to repay business debts.

    Partnership

    • A partnership is a legal agreement between two or more people to own, finance, and run a business.
    • It is popular among professionals such as solicitors, accountants, and veterinary surgeons.
    • Financial liability is unlimited.

    Joint-Stock Company

    • These companies sell shares in their ownership to raise permanent capital.
    • Shareholders are the owners of joint-stock companies.
    • Shareholders elect directors to run the company from day to day.
    • The company has a separate legal identity from its owners.
    • Shareholders have limited liability.

    Private Limited Company

    • A private limited company is a type of joint-stock company.

    Public Limited Company

    • A public limited company is a type of joint-stock company.

    Multinational

    • A multinational is a firm that operates in more than one country but has its headquarters based in its country of origin.
    • Multinationals have a huge global customer base and revenue potential.
    • They can minimize transport costs, wage costs, and average production costs.
    • They can raise significant capital for business expansion, R&D, and to employ highly skilled labor.

    Cooperatives

    • A cooperative is owned by its members for mutual benefit.
    • There is a one member, one vote policy.
    • Principles: mutual aid, mutual responsibility, and mutual respect.
    • Values: self-help, self-responsibility, democracy, equality, equity, and solidarity.
    • A cooperative is different from other types of business because it is owned and controlled by its members.

    Public Corporation

    • A public corporation is a business-like public sector organization created to carry out a particular public sector function or operate under governmental control.
    • Examples include municipal water companies, public health services, and central banks.
    • Some public corporations may be run for profit.
    • They are responsible for the day-to-day running of nationalized industries.

    Measuring the Size of Firms

    • The size of firms can be measured in various ways, including:
    • Size of workforce
    • Capital employed (amount of money invested in productive assets)
    • Market share (dominance in sales in a particular market)
    • Internal organization (division of labor into different departments)

    Types of Firm Growth

    • Internal growth (organic growth): expansion of scale of production through purchase of additional equipment and increasing premises
    • External growth: integration of two or more firms to form a larger enterprise
    • This can be through merger or takeover
    • Examples of external growth:
      • Just Eat acquiring Hungry House
      • Expedia acquiring Orbitz Worldwide
      • BT acquiring EE
      • etc.

    Types of Integration

    • Horizontal integration: between firms producing the same type of good or service
    • Vertical integration: between firms at different stages of production
    • Lateral integration: between firms in different industries at the same or different stages of production

    Economies of Scale

    • Cost savings from increasing the scale of production in a firm or industry
    • Internal economies of scale:
    • Purchasing economies (e.g. discounts for bulk purchases)
    • Marketing economies (e.g. mass advertising; own distribution network)
    • Financial economies (e.g. ability to borrow more at lower interest rates)
    • Technical economies (e.g. ability to afford and employ advanced equipment)
    • Risk-bearing economies (e.g. offering a range of different products)
    • External economies of scale:
    • Access to a skilled workforce
    • Ancillary firms providing specialized equipment and business services
    • Joint marketing benefits
    • Shared infrastructure

    Disadvantages of Firm Growth

    • Firms can experience problems if they expand too much and too quickly, leading to:
    • Diseconomies of scale
    • Falling productivity and rising average costs
    • Problems with internal communication and coordination
    • Industrial disputes and uninteresting work tasks

    Why Firms Remain Small

    • Firms may remain small due to:
    • Small, local, or specialized niche markets
    • Inability to raise enough capital to expand
    • Owner preference for keeping the business small
    • Ability to provide personalized goods and services

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    Learn about the reasons why firms compete and the benefits of competition for consumers. Discover how firms use resources efficiently to compete on prices and products.

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