Business and Economics As

Economics n business unit 2

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Business and Economics AS - How businesses respond to their market
1. The nature of markets
a. Economic systems
i. Command Economic System
- A command system relies on planners, directed by government
to decide what and how to produce. Command economies were
characterised by low living standards and inflexibilities. Former
command economies are now mixed.
ii. Transitional Economy
- One in which the government is liberalising some sectors so
that production and marketing decisions are made by individual
organisations and people on the basis of supply and demand
conditions, rather than by state-employed planners.
iii. Mixed economy
- An economy which has both public and private sectors. For
example, the police service is normally in the public sector and
most shops are in the private sector. All economies are now
mixed to some degree, but the balance between public and
private sectors varies. In North Korea and Cuba market forces
still have very limited scope.
iv. Public sector
- The areas of economic activity which are directly controlled by
the state. This typically includes defence and the legal system,
some education and some health care, for example.
v. Free market economy
- One where activity is directed by entrepreneurs and private
organisations rather than the state. There are no totally free
market economies, but the private sector is larger than the
public sector in many economies.
b. Market forces
i. Market forces
- When the conditions of supply and/or demand change in a
market, this is likely to lead to price changes. These, in turn,
influence the decisions of businesses and consumers. For
example, if prices fall to unprofitable levels businesses are
eventually likely to cut production or leave the market
ii. Entrepreneurs
- People who take responsibility for organising business activity
and carry business risks
iii. Profit
- The gain from operating a business when sales revenue earned
is greater than costs incurred.

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Scarcity and choice
i. Scarcity
- In all economies individual needs and wants always exceed the
availability of resources to provide them. Choices must be made
ii. Choice
- Involves deciding on priorities in the light of what can be
afforded. Consumers' choices are based on what can be
afforded with the available income. Business choices involve
careful consideration of likely profitability of the product
iii. Opportunity cost
- The best alternative foregone when a particular choice is made.…read more

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Is the money amount paid by the buyer to the seller in a
transaction. This is often set by market forces but can sometimes
by regulated by governments.
b. Demand curve
i. Demand curve
- A graphical representation of the relationship between
quantity demanded and price, for a product in a market.
Non-price factors influencing demand are assumed to be fixed;
any change in them causes a shift to a new demand curve.
3. Supply
a. A small business
b. Market signals
c.…read more

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i. Equilibrium price
- The price at which quantity supplied and quantity demanded
are equal in a market, leaving neither excess supply nor excess
in demand
ii. Market clearing
- Obtaining a balance between quantity supplied and quantity
demanded, normally by arriving at the equilibrium price.
b. Changes in supply
c. Changes in demand
i. Profit signalling mechanism
- The way that the prospects of profits (e.g.…read more

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Purpose of marketing in changing markets
a. Dynamic markets
b. Why does market share matter?
i. Market share
- The share of sales in a market which one business or brand has.
Market share is normally expressed in percentage terms.
ii. Non-price competition
- Includes all possible inducements to buy the product other than
a price cut. Design, reliability, customer service, advertising,
promotions, packaging, branding and sponsorship all provide
iii.…read more

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- Can be key feature of competitive advantage. A price cut may
increase sales substantially.
iii. Brands
- identify a product or its packaging in such a way that it is clearly
differentiated from competing products
iv. Brand loyalty
- May be achieved if the distinguishing factures of the product
create a sense of uniqueness that will induce customers to make
repeat purchases and avoid competing products. This may make
demand for the brand less price elastic.
h. Product
i.…read more

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It is particularly criticised when aimed
at children or promoting unhealthy/harmful products.
7. Marketing ethics
a. Truth in advertising
b. Consumer sovereignty
i. Corporate social responsibility
- Accepting that organisations must take account of their impacts
on the community and environment, show consideration and
behave ethically. Accepting this in principle is sometimes easier
than practical implementation.…read more

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Economics and Business - How does market structure affect business?
8. How does competition affect the market
a. Competition
b. Competitive markets, prices and costs
c. Competitive markets and easy entry
i. Homogeneous products
- Identical to one another. It is impossible to distinguish one
producer's output from another's. They are closely associated
with strong competition.
ii. Normal products
- Just sufficient to keep the producer in the market.…read more

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-Occurs where there is weak control of costs and resource use
and no competition to provide the incentive to stimulate
efficiency. X-inefficiency has been found in both public and
private sector organisations. Privatisation has made
x-inefficiency much less likely to be a problem.
k. Restricting supply
9. Different market structure
a. The spectrum of competition
b. Perfect competition
i.…read more

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Are leading firms in the industry with sufficient market power
to decide between restricting output and charging high prices,
or reducing prices in order to increase sales. A brand or producer
may be in a powerful position where rivals will set their prices in
line with the price leaders.
iii. Concentration ratio
- A measure of the extent to which a market is dominated by
large firms. This is usually found by adding the market shares of
the largest three to five firms.…read more


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