⚙ Efficiency
A firm that wastes resources has higher costs than its rivals. It will lose customers. So firms in competition work hard to cut waste and keep costs low. This makes better use of scarce resources across the whole economy.
Business Competition » Competition: Good or Bad?
What you'll learn this session
Study time: 30 minutes
Edexcel spec: 1.2.4 (a)
- What competition is and why firms compete
- The advantages of competition for firms, consumers and the economy
- The disadvantages of competition for firms, consumers and the economy
- How competition affects efficiency, choice, quality, innovation and price
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Unlock This CourseWhat is competition?
Coffee shops side by side compete on price, quality and choice to win your custom
Think of two bakeries on the same street. Each wants you to buy your bread from them. So each one tries to offer something better than the other. That is competition. It is examined on Paper 1 (Microeconomics and Business Economics).
Key terms:
- Competition: when firms compete with each other to win customers and sales.
- Efficiency: making the best use of resources, so that output is made at the lowest possible cost with little waste.
- Innovation: introducing new products or new ways of making them.
The more rival firms there are, the stronger competition is. In this lesson you will see that competition has good and bad sides. The spec asks you to look at five things: efficiency, choice, quality, innovation and price. You must be able to say how each one affects firms, consumers and the economy.
The advantages of competition
🛍 Choice
Where there are many firms, there are many different products. A consumer who wants a phone, a pair of shoes or a meal out can pick from lots of options. Firms also try to offer something different from their rivals.
🏆 Quality
If your goods are poor, customers can walk away to a rival. So firms try to make better goods and give better service to keep their customers.
💡 Innovation
A firm with a new idea can win customers from its rivals. This pushes firms to invent new products and cheaper ways of making them. New ideas can help the economy grow.
💲 Price
If one firm charges too much, customers buy from a rival that charges less. So firms in competition keep prices low. Consumers gain because they pay less.
🏢 The economy
Efficient firms, new ideas and lower prices help the economy as a whole. Resources are used well, living standards can rise, and firms that sell well may grow and create jobs.
The disadvantages of competition
Fierce competition can force weaker firms to close, a downside for owners and their workers
Competition is not always good news. Strong competition can cause problems too.
📉 Lower profits for firms
To keep customers, firms cut prices and spend more on quality and new ideas. Their profit gets squeezed. Some firms do not survive.
🚫 Firms close and jobs are lost
Weaker firms may be forced out of business. Workers lose their jobs. If many firms in one area close, the local economy can suffer.
⚠ Cutting corners
A firm under pressure to keep prices low may use cheaper materials or pay low wages. Quality or safety may fall. Consumers could end up with poorer goods.
🔄 Waste and too much choice
Many firms making almost the same product can mean some waste, for example in advertising and packaging. Too many options can also leave consumers confused.
💰 Costly innovation
New ideas can cost a lot of money to develop. If profits are low, smaller firms may not be able to afford to innovate at all.
🌍 Pressure on the economy
Job losses and closed firms can mean less spending and lower tax revenue. Competition can also pass costs on to society, for example if firms cut corners on safety or the environment.
Putting it together
Here is a quick table to help you revise. Remember that each effect depends on how strong the competition is and how firms respond.
| Feature | Advantage | Disadvantage |
|---|---|---|
| Efficiency | Less waste, lower costs | Weak firms may cut corners or close |
| Choice | More products to pick from | Some waste and confusion |
| Quality | Firms improve goods to keep customers | Quality may fall if firms cut costs |
| Innovation | New products and methods | Costly, and small firms may not afford it |
| Price | Prices kept low | Profits squeezed, firms may fail |
Worked example
Two ferry companies, BlueWave and SeaStar, run the same route. BlueWave cuts its fare from £30 to £25. SeaStar must match it or lose passengers. Consumers gain: fares are lower. Firms lose: profit per passenger falls. If SeaStar cannot cover its costs, it may close, and its staff lose their jobs. That hurts the economy locally. Notice how one event has good and bad effects on different groups.
Common mistakes
- Writing that competition is always good for everybody. Firms often lose out.
- Only writing about consumers. The question may ask about firms or the economy.
- Writing "low prices" and stopping. Explain why: a rival would take the customers.
- Mixing up competition with the types of market covered later, such as monopoly. Here, just think about rival firms competing.
Exam-style question
Read the information, then answer the questions.
In the town of Ashby there were five pizza takeaways. Last year a new takeaway, Dough Boys, opened and lowered its prices by 15%. The other firms lowered their prices too. One firm, Pizza Palace, also launched a new gluten-free range. Another takeaway, Crust Corner, could not cover its costs and closed.
(a) Identify one way in which consumers in Ashby may have gained from competition. [1 mark]
(b) Explain one disadvantage of competition for firms in Ashby. [3 marks]
(c) Analyse how competition may have affected choice and the local economy in Ashby. [4 marks]
Model answer
(a) Lower prices, or a wider choice with the gluten-free range (1).
(b) Lower profits (1). The firms cut prices to match Dough Boys (1). Each pizza now earns less, and if costs stay the same the firm may make a loss or close, as Crust Corner did (1).
(c) Choice: Pizza Palace launched a gluten-free range to win customers, so consumers can pick from more types of pizza (1) because competition pushes firms to offer something different (1). Economy: Crust Corner closed, so its workers may have lost their jobs (1). This could reduce spending in the town, although the other firms may need to hire more staff if they win its customers (1).
Exam tip
For "analyse", link each point to the information given in the question, then follow it through with "which means" or "because". One developed point scores better than a list of single words.
Recap
- Competition is when firms compete to win customers.
- Advantages: efficiency, more choice, better quality, innovation and lower prices, which help consumers and the economy.
- Disadvantages: lower profits, closures and job losses, cutting corners, some waste, and costly innovation.
- Always say who is affected: firms, consumers or the economy.