The Importance of Competition to a Market Economy

GabeEconomics(ML), Mini Lessons

Common Sense Economics: What Everyone Needs to Know about Wealth and Prosperity

What keeps McDonald’s, Walmart, Amazon, General Motors, or any other business firm from raising prices, selling shoddy products, and providing lousy service? Competition provides the answer. If McDonald’s fails to provide a tasty sandwich at an attractive price delivered with a smile, people will turn to Burger King, Wendy’s, Subway, Taco Bell, and other rivals. Even the largest firms will lose business to small upstarts that find ways to provide consumers with better products at lower prices. For example, when Walmart was nothing more than a few small stores in Arkansas, Sears was a retailing giant. Now, Walmart is the world’s largest retailer with sales that dwarf those of Sears. Firms as large as Toyota, General Motors, and Ford will lose customers to Honda, Hyundai, Volkswagen, and other automobile manufacturers if they fall even a step behind in providing the type of vehicle people want at competitive prices.

Competition gives firms a strong incentive to develop better products and discover lower-cost methods of production. Because technology and prices change constantly, no one knows precisely what products consumers will want next or which production techniques will minimize costs per unit. Competition helps discover the answer. Is marketing through social media the greatest retail idea since the shopping mall? Or is it simply another dream that will eventually turn to vapor? Competition will provide the answer, which will differ across markets and change over time.

  1. The opposite of competition is to reward without merit. Today, most students grew up in a world of “participation” trophies. In your experience, did you “compete” anyway?
  2. Part of competing is learning how to lose, and developing good “sportsmanship”. How important is “good sportsmanship” in your interactions with others? When you think, for instance, of the accusations of cheating by the New England Patriots, does that diminish them in your eyes?
  3. How do you think competition in markets keeps producers “honest”? Do you get better food in a part of town with many restaurants? Or in a cafeteria where you have only one choice?

This reading is an excerpt from Certell’s Common Sense Economics eBook.  Certell offers curriculum materials and eBooks free of charge for students and teachers.  Click here to download the Common Sense Economics

Image Citation:

Diaz, Camilo. Submerged field. Digital Image. The Atlantic.  February 12, 2019.