What Does Competition Mean in Economics?
In economics, competition refers to the process where different sellers each attempt to offer better products, lower prices, and various other advantages to choosing their wares over a competitor’s.
The economic competition allows the so-called “invisible hand” of the market to reward the most successful retailer, as opposed to depending on a central committee or monopoly to decide the economy. In less technical jargon, this means whoever provides the best product at the lowest cost is likely to receive the highest rewards, at least in theory.
In macroeconomics, competition refers to the process where countries compete with each other for resources. In microeconomics, it refers to the process where individual companies compete with each other to appeal to consumers.
3 Advantages to Economic Competition
Most conventional economists believe increased competition results in greater advantages for all economic participants. Below are three core advantages to consider:
1. Greater innovation: Economic evaluation indicates more competitive markets lead to both increased innovation as well as greater overall economic growth as a result. If entrepreneurs feel the need to compete with other businesses, they have an incentive to offer more unique and far less homogenous products for their customers. The competition also leads many brands to develop new products frequently to stay relevant to customers.
2. Lower prices: When a lot of companies compete with each other, one of the best ways for one to gain a competitive edge over the others is to provide lower prices. Therefore, greater market competition leads to greater price competition, resulting in retailers passing on lower prices to their customers.
3. More consumer choice: Product differentiation due to competition among sellers typically gives customers increased decision-making power. In a competitive economic environment, customers can pick between different products from a wide range of brands rather than getting the same identical products one week to the next from a handful of companies or even a single firm.
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