Cambridge International as and a level Economics Ebook

SELF-ASSESSMENT TASK 
7.11
For your own economy, analyse the extent to which 
the four typical examples given above are contestable 
markets.
Equilibrium and eff iciency: 
The underpinning rationale 
for contestability in markets is that of eff iciency. By 
opening up markets to competition, and having a situation 
where market entry is easy for new entrants, this puts 
continual pressure on incumbent firms to be more 
eff icient. Any hint of abnormal profits being made should 
be a signal for the entry of new firms.
KEY CONCEPT LINK
Growth and survival of firms
Small vs. large firms
At least 90% of business units in the UK are small fi rms 
employing fewer than ten people. Th
is is typical of 
most economies, although in developing economies the 
percentage will be even higher. Th
ese small fi rms are to 
be particularly found in the service sector, in retail, food 
production, automotive, personal and business services. 
A recent trend in many developed economies is for small 
knowledge- and research-orientated fi rms to provide 
services for much larger manufacturing companies oft en 
in developing economies. Th
e reasons why so many small 
fi rms exist in a world where the economic power lies with 
large MNCs are as follows:
■ 
There are economic activities where the size of the market is 
too small to support large firms.
■ 
The business may involve specialist skills possessed by very 
few people.
■ 
Where the product is a service – e.g., solicitors, accountants, 
hairdressers, dentists and small shops – the firm will be 
small in order to off er the customers personal attention for 
which they will pay a higher price.
173
Chapter 7: The price system and the microeconomy 

---