The Dynamics of Competition and Competitive Market Processes

AQAMicroeconomics1.5.8 Updated

Written by — First-Class BSc (Hons) Economics, University of Bath · 6+ years teaching A-Level Economics · Edexcel A, Edexcel B, AQA and OCR

Specification Coverage: AQA unit 1.5.8 - The Dynamics of Competition and Competitive Market Processes. Students should understand both the short-run and long-run benefits which result from competition; that competition leads firms to improve products, reduce costs and improve the quality of services provided; and the process of creative destruction.

Short-Run and Long-Run Benefits of Competition

Short-run Benefits Long-run Benefits
Immediate Lower Prices: competition between firms in the short-run can lead to lower prices for consumers as firms compete to attract customers. Sustained Lower Prices: in the long-run, competition can lead to sustained lower prices as firms become more efficient and reduce costs.
Improved Choice: competition can lead to a wider variety of products and services being offered to consumers in the short-run. Long-term Quality Improvements: in the long-run, competition can lead to sustained quality improvements as firms invest in research and development to differentiate their products and gain a competitive advantage.
Non-price competition: competition can lead to firms using non-price competition strategies such as advertising, branding, and product differentiation to attract customers.

Creative Destruction

Creative destruction is a process in which new innovations and technologies replace older ones, leading to the destruction of existing businesses and industries.

In a competitive market, firms are incentivised to innovate and improve their products and services in order to gain a competitive advantage. This can lead to the creation of new products and services, which can disrupt existing markets and lead to the decline of older businesses.

For example, the rise of digital photography led to the decline of traditional film photography companies like Kodak.

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