Economics

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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
    • 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
      • Satisficing
        • Earning just enough profits to keep its shareholders happy
          • Shareholders want profits since they earn dividends from them
      • 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
        • 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
        • 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
        • Customer satisfaction
          • Could increase competitiveness by improving quality & increasing their customer satisfaction
            • Could be through innovation
        • Social objectives
          • Social welfare
          • Corporate Social Responsibility
    • 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
      • 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
      • 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

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