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 fall and consumers get more choice.
- Prices rise because demand is shared.
- Profits of existing firms rise.