Economics
- Created by: ashleighclifford
- Created on: 28-03-19 16:20
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- Scarcity, Choice & Potential Conflicts
- The Economic Problem
- Basic economic problem is SCARCITY
- Refers to shortage of resources in relation to quantity of human wants
- Wants are unlimited & resources are finite
- Choices have to be made - Resources have to be used & distributed optimally
- Scarcity gives rise to opportunity cost
- Opportunity cost of a choice is the next best alternative you didn't choose
- When producing goods, the economy has to consider the following:
- What to produce: determined by what the consumer prefers. Consumers tell producers what they prefer by demanding goods & using their 'spending votes'
- How to produce it: producers seek profits & aim to minimise production costs
- For whom to produce it: whoever has the greatest purchasing power in the economy, & is therefore able to buy the good
- Basic economic problem is SCARCITY
- Business Objectives
- Profit maximisation
- Profit = important objective of most firms
- Profit is the difference between total revenue & total cost
- It's the reward that entrepreneurs yield when they take risks
- Firms break-even when TR = TC
- Firm profit maximises when they are operating at the price output which derives the greatest profit
- Happens where marginal cost = marginal revenue
- "Each extra unit produced gives no extra loss or no extra revenue
- Profits increase where MR > MC
- Profits decrease when MC > MR
- Reasons for profit maximisation
- Provides greater wages & dividends for entrepreneurs
- Retained profits are a cheap source of finance, which saves paying ^ IR on loans
- ST, interests of the owners or shareholders are most important, since aim to maximise gain from company
- some firms profit maximise in long run since consumers don't like rapid price changes in short run, so will provide stable price & output
- PLCs keen to profit maximise, because they could lose their shareholders if they don't receive high dividend
- Sales maximisation
- When the firm aims to sell as much of their goods & services as possible without making a loss
- Not-for-profit organisations may work at this output & price
- Where average costs = average revenue
- Example = Amazon kindle
- Sold as many kindles as possible to gain market share, so can earn more profits in the long run
- Helps keep out & deter competitors
- Sold as many kindles as possible to gain market share, so can earn more profits in the long run
- When the firm aims to sell as much of their goods & services as possible without making a loss
- Satisficing
- Earning just enough profits to keep its shareholders happy
- Shareholders want profits since they earn dividends from them
- Earning just enough profits to keep its shareholders happy
- Other objectives
- Survival
- Especially new firms aim to survive
- Short term view
- Market share
- Helps increase chance of surviving & achieved by maximising sales
- Cost efficiency
- More cost efficient firm is, lower its average costs
- Gives firm competitive advantage, bcos can afford to charge consumers lower prices
- In competitive markets, need to be cost efficient to ensure not competed out of market by more efficient producers
- More cost efficient firm is, lower its average costs
- Return on investment
- Entrepreneurs take risks by making investments
- Reward for taking risks is profit = return on investment
- Higher the ROI, the more attractive the investment
- Entrepreneurs take risks by making investments
- Employee welfare
- Some firms try ensure employees well-looked after
- If happy > more likely to be productive & do better job
- Also increases loyalty towards the employer, employee less likely to leave job
- Example - Google - renowned for employee perks like on-site physicians & travel insurance
- Some firms try ensure employees well-looked after
- Customer satisfaction
- Could increase competitiveness by improving quality & increasing their customer satisfaction
- Could be through innovation
- Could increase competitiveness by improving quality & increasing their customer satisfaction
- Social objectives
- Social welfare
- Corporate Social Responsibility
- Survival
- Profit maximisation
- Stakeholders (economic agents) & their objectives
- Stakeholder is anyone with an interest in how a business is run
- They can be:
- Shareholder
- Employees
- Consumers
- Managers
- Government
- Suppliers
- They can be:
- Principle-agent problem - linked to the theory of asymmetric information
- When agent makes decisions for the principles, but agent is inclined to act in own interests, rather than those of principle
- When owner of firms sells shares, lose some of the control they had over the firm
- When managers sells shares, shareholders gain more control over the decisions of the firm
- Could give rise to 'shareholder activism'
- Could be to put pressure on the management of the firm or to try get higher dividends
- Could give rise to 'shareholder activism'
- Corporate Social Responsibility
- Form of self-regulation where the firm makes sure their actions are good for society
- Goes beyond what's expected of the firm & could result in +ve effect on environment
- To be more socially responsible, firm might behave more ethically
- Could refuse cheap, exploited labour
- Form of self-regulation where the firm makes sure their actions are good for society
- Stakeholder is anyone with an interest in how a business is run
- The Economic Problem
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