Briefs: Competition

The Wikipedia entry for “competition” reads as follows. “In economics, competition is the rivalry among sellers trying to achieve such goals as increasing profits, market share, and sales volume by varying the elements of the marketing mix: price, product, distribution, and promotion.” Let’s discuss.

The primary goal in any business is the same, no matter what level of competition that exists. A business operates with the primary goal of making a profit. Some business owners may say that they started their business for a number of reasons, but their goal is to turn a profit. Profit is what is left over after the business sells a product and then pays all of the expenses that were necessary to create the product. If a business cannot make a profit, then there is no reason for the business to exist. Not only is there no reason for it to exist, it will eventually naturally not exist because it cannot continue to operate when expenses exceed income. Competitive industries exist when companies in those industries are trying to make the most profit as possible, in order to continue the business and grow.

The goal of market share is one that stems from the existence of multiple businesses in the same industry, competing for the same customers (market). The portion of the customers that buy products from a particular business is that business’ market share. Market share is important because it dictates the business’ ability to impact prices in their favor. The bigger companies (ones with more market share) influence price with their ability to manufacture more efficiently and other reasons like brand name recognition. You can see why companies in the same industry are competing to gain more and more market share, giving them the ability to have more influence on price.

Sales volume is another important factor because it is generally that way companies grow. Every business wants to attract more customers than they already have to buy their products. The more sales (revenue) the more profit the business gets to keep, assuming everything else is equal. Meaning, if you sold a product for $100 and it costs you $60 to make it, you keep $40 worth of profit. Well, for each product you sell, your total profit is the number of products you sell times $40. And as the sales volume increases, the more $40 worth of profit per product sold you can keep. However, with most industries, the more sales you can achieve (the more sales volume increases) that $40 profit actually goes up, due to a phenomenon called “economies of scale”. As production volume increases, it actually gets cheaper to make, and the profit you make becomes larger.

Economics is Life.

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