For a tree seedling to successfully establish in dense shrubbery, it must maintain function under heterogeneous resource availability. We evaluated leaf-level acclimation in photosynthetic capacity, seedling-level transpiration, and seedling morphology and growth to gain an understanding of the effects of above- and below-ground competition on Quercus robur seedlings. Experimental seedlings were established in a typical southern Swedish shrub community where they received 1 of 4 competition levels (above-ground, below-ground, above- and below-ground, or no competition), and leaf-level responses were examined between two growth flushes. Two years after establishment, first-flush leaves from seedlings receiving above-ground competition showed a maximum rate of photosynthesis (A_max) 40% lower than those of control seedlings. With the development of a second flush above the shrub canopy,A_max of these seedlings increased to levels equivalent to those of seedlings free of light competition. Shrubby competition reduced oak seedling transpiration such that seedlings exposed to above- and below-ground competition showed rates 43% lower than seedlings that were not exposed to competition. The impaired physiological function of oak seedlings growing amid competition ultimately led to a 60–74% reduction in leaf area, 29–36% reduction in basal diameter, and a 38–78% reduction in total biomass accumulation, but root to shoot ratio was not affected. Our findings also indicate that above-ground competition reduced A_max, transpiration and biomass accumulation more so than below-ground competition. Nevertheless, oak seedlings exhibited the ability to develop subsequent growth flushes with leaves that had an A_max acclimated to utilize increased light availability. Our findings highlight the importance of flush-level acclimation under conditions of heterogeneous resource availability, and the capacity of oak seedlings to initiate a positive response to moderate competition in a shrub community.