Economics IGCSE Edexcel - Competitive markets

Advantages of competitive markets:

1. Efficiency - companies increase efficiency so as to be able to compete by lowering prices.
2. Choice - a greater variety of products as many different suppliers.
3. Quality - higher quality products survive while others fail as they are less popular.
4. Innovation - faster pace of innovation and invention as firms try to gain an advantage.

Disadvantages of competitive markets:

1. Market uncertainty - unprofitable firms will leave the markets so customers will have to constantly switch suppliers.
2. Profits - profits falls as the price of products are lower. This means less money can be invested in research and development and also means slower growth.

Monopoly: a situation where one firm dominates the market. In the UK, a company with over 25% market share is said to be a monopoly.

Features:

1. Barriers to entry prevent other firms from entering the market through. These barriers include cost barriers; legal barriers through patents; and marketing barrier.
2. Contains unique products which has no other real competition.
3. Able to control the price of the product through restricting supply.

Advantages:

1. Monopolies often invest their profits into research and development and so can produce new products and technologies that benefit customers.
2. Able to exploit economies of scale.
3. Some situations call for a monopoly. For example, street lighting should be provided by one firm as to not do so would lead to duplication in resources and greater cost. This is called a natural monopoly.
4. Ability to compete internationally.

Disadvantages:

1. Higher prices as they are able to control the price of products.
2. Restricted choice.
3. Lack of innovation as there is no need to develop new products.
4. Inefficiency as firms have no incentive to keep costs down.
5. May suffer from diseconomies of scale.

Oligopoly: a situation where a market is dominated by a few very large firms/

Features:

1. Interdependence - if one company's sales rises, another will fall.
2. Barriers to entry.
3. Price rigidity as price wars are feared, meaning most just follow the market leader.
4. Non price competition becomes more important. This means a higher dependence on advertising, service, internet etc...
5. Economies of scale are prevalent.
6. Collusion, where firms agree on a high price, restrict output or reduce competition may occur.

Advantages:

1. Economies of scale means the costs are lower and therefore the price of the product should be lower.
2. Price stability - this promotes certainty in the market.
3. Choice - non price competition encourages new brands and products.

Disadvantages:

1. Lack of competition means prices don't really fall.
2. Chances of collusion means consumers can be exploited. In fact, cartels may from where a group of firms join together to agree on a price or output level in the market.