Advantages of competitive markets: Low prices for consumers as a result of increased competition. This is good for buyers as long as quality is also good. Improved choice and customer service as firms compete to win customers. They compete by constantly looking for ways to improve their products, lower their prices, find more convenient distribution channels or come up with better advertising and promotional strategies. Improved efficiency as businesses make economic decisions that allocate their resources as efficiently as possible. This reduces wastage of resources and keeps costs low.
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Disadvantages of competitive markets: There may be limited economies of scale and if there are too many competitors in a market this may reduce innovation. Economies of scale are the reductions in costs that result from producing goods in large quantities. For example, negotiating bigger discounts from suppliers, employing more specialised and skilled staff or investing in high tech manufacturing facilities. This allows large businesses to reduce product costs and prices.
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3. How are prices determined in a competitive market? In a market the equilibrium price is where demand and supply are equal. At this point the quantity demanded by customers exactly matches the quantity supplied by sellers.
In all markets this equilibrium price and quantity are not rigidly fixed and can change over time. They can be influenced by many things such as changes in the costs of production, new competitors entering the market and changes in consumer demand. However, in theory, the market will always move to equilibrium where demand and supply are equal. This is also known as the market mechanism. Scenarios 1-4 on pages 359-361 show how markets adjust to changes.
