Business and Economics Unit 2


Nature of Markets and Resources

Dynamic market - constantly changing due to needs of buyers or incomes etc.



Land - raw materials and land itself

Labour - human input

Captial - anything that is used to produce something such as tools, equipment and buildings

Enterprise - the human spark that combines the above and creates a product


Profit Signalling Mechanism - the allocation of resources

Consumer Sovereignty - the consumer has the power to determine what is produced.

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Elasticity - how much one variable changes in response to a change in another related variable

PED = % change in quantity demanded

ggggggghh % change in price

Price elasticity of demand - measures responsiveness of quantity demanded to a change in price.

Price elastic - Beyond -1 // Unitary Price elastic = -1 // Price inelastic - between 0 and -1

If demand is price elastic - increasing price would reduce TR (P....TR..) vice versa

If deman is price inelastic - increase price would increase TR (P...TR...) vice versa

Factors that affect the degree of price elasticity SLNPT

Substitutes - more substitutes the more price elastic

Luxury or Necessity - Luxuries are more price elastic, neccessities are more price inelastic

Proportion of income spent on goods  and Time Scale - in the short term many prices would be more price inelastic than in the longterm 

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Income Elasticity YED

YED = % change in quantity demanded

..................% change in income

Income elasticity of demand - measure the responsiveness of quantity demanded to a change in income.

Income elastic-greater than 1      

unitary income elasticity=1                                  

income inelastic- between 0 and 1

Factors that affect the degree of income elasticity

Luxuries are income elastic and have high positive values

Necessities are income in elastic and have low positive values

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Marketing Mix - 4P's

Price, Product, Place, Promotion

Micromarketing - marketing products/services designed to meet the needs of a very small section of the market

Marketing ethics - applying standards of fairness and morality to marketing decisions and strategies

Advantages and Disadvantages of Marketing 

  • informs consumers about products they may want
  • markets operate effectively and increases consumer sovereignty
  • designed to manipulate consumer behaviour
  • it can encourage us to consume things that aren't good for you e.g alchohol, fast food
  • can be misleading 
  • £20 billion spent on advertising each year in the UK could be better used elsewhere
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How market structure affects the business


Technical / productive efficiency - production is taking place at the minimum average cost 

Allocative efficiency - resources are used to yield the maximum benefit to everyone, impossible to redistribute them without making someone worse off.


What prevents efficiency? Barriers to entry, government intervention, imperfect knowledge


Barriers to entry - factors that prevent firm entering a market

Collusion - business agree with eachother to avoid to compete (illegal)

Price takers - can only charge the going rate in the market

Price Makers - can choose between different pricing strategies

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Online retailing and the long tail

Online retailing

  • Greater convenience  and choice for consumers
  • Access to new products and services for consumers
  • Small businesses can potentially reach global markets
  • Online sales can be added to existing sales channels
  • Not all consumers can/will use online retailing
  • Increased risk of fraud for consumers
  • Increased competition from global online sources
  • May have to redue prices due to greater consumer knowledge

The Long Tail 

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Market Structure

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What makes firms effective?

Corporate culture - covers attitudes, customs and expectations that influence the way decisions are made within the business.

Hierarchy - layers of management in an organisation

chain of command - sequence of authority for which instructions are passed in an organisation

Long Chain......................................................................................Short Chain





Span of control - number of subordinates directly answerable to a manager.

Delayering - reducing the number of levels in an organsational hierarchy

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Tall Vs Flat

Tall organisations

  • Narrow span of control means each worker can be closely supervised
  • Clear lines of authority and control
  • Specialist managers
  • Freedom and responsibility of employees is restricted
  • Can be bureaucratic - decision making may be slow
  • Expensive as manages tend to get paid more each time they move up a layer

Flat Organisations

  • Better communication between managers and workers
  • Better motivation as workers enjoy more responsibility
  • Less bureaucratic
  • Reduced costs with fewer managers
  • Employees not strictly controlled
  • May limit growth
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Changing organisational structures

Matrix management - individuals are assigned to teams according to their specialism and work on a particular project. Encourages teamwork, empowerment and creativity.

Entrepreneurial structures- similar to a matrix system but on a smaller scale. Best for small businesses

Decentralising - moving the decision making process away from a central head office and spreading it throughout the organisation, often to branch level

  • Decision making is a form of empowerment which can increase motivation
  • Local managers can react faster to changes
  • Service may lack consistancy 
  • Employees may not want extra responsibility
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Delegation - giving more individuals responsibility for making decisions

Consultation - discussions with employees about working methods and practices 

Empowerment - employees can make independent decisions without consulting a manager

Team working - Elton Mayo

Job enrichment - giving employees more interesting / meaningful tasks 

Job enlargement - increasing range of tasks for employees

Flexible working - allows employees to have a more variable work schedule

Total Quality Management - employees are involved in quality control and take responsibility for the quality of their and their team's work. This helps reduce costly wastage

Cell production - splitting up different processes into seperate areas where teams can be responsible for one part of the process

Money - Taylorism

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Labour or Capital and capacity utilisation

Capital intensive production - uses large amounts of capital and relatively little labour

  • Tools and marchinery may become obsolete
  • Failure to upgrade may mean losing competitive advantage

Labour intensive production - uses large amounts of larbour and relatively little capital

  • Skills may not longer be needed
  • Retrainging is needed

Capacity utilisation - measure what proportion of the theoretical maximum possible output is actually produced.

Under utilisation means that caplital equipment is lying idle some of the time, and that productivity is lower than it could be

Over utilisation means that the business is trying to produce more than its capital equipment was designed for.

Avoid under utilisation by finding new markets, increase demand by proportion, exten product range and in the long run close excess capacity (sell machines and make workers redundant)

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Lean Management

Lean management - minimise costs during the production process

Just in time - stock control system that does away with the need to hold large quantities of stock 

  • Reduced costs in terms or handling
  • Less need for storage space 
  • Will not benefit from reduced unit costs for bulk purchases (economies of scale)
  • Heavy reliance on reliability of supplier

Kanban - production only takes place after a customer has placed an order - goes with JIT

Kaizen - continuous improvement. Summarises a whole company approach to quality control

Advantages and Disadvantages of lean management

  • Reduces wastage and related costs
  • Reduces costs of storage and handling
  • Improves Quality
  • Failure by one small supplier halts entire production processes
  • Workers may dislike greater responsibility
  • Does not suit all production processes
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What makes businesses expand and how?

  • Increased sales turnover & profit 
  • Increased market share / power
  • Increased monopoly/monopsony power
  • Possible advantages of economies of scale

Organic growth - firm growns from within using its own resources and expanding output and sales

Inorganic growth - firm joins with another firm by merger or takeover

Merger - joining two or more firms into a single business. Both firms retain seperate idenities

Takeover - one firm makes a bid for another and secure 50% of the shares

Merging - reduces competition, acquisition of assets, patents and brand names

Synergy - when two businesses are combined and together are able to increase efficiency and grow faster or make more profit than before.

Bring complementary strengths and diversification

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Economies of Scale

Economies of scale occur when AVERAGE costs fall due to an increase in the size of the business

Technical economies - larger the business the easier to make full use of specialised equipment

Marketing economies - larger the business, advertising/marketing costs can be reduced as the fixed costs of advertising are spread over a wider target market

Managerial economies - bigger businesses can afford to use specialist managers with particular skills

Financial economies - larger businesses can negotiate better/lower prices for inputs. e.g bulk buying so that average cost per unit can be reduced

Risk bearing economies - bigger businesses likely to have diversified (spreading risks) or to be supplying to more than one market.

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economies/diseconomies of scale diagram

Diseconomies of scale - when further increases in size begin to increase average costs and inefficiency increases

Economies of scale








Minimum efficient scale - lowest level of output at which costs are minimised

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Market power

Monopsony power - a dominant buy in the market, with power to dictate prices and terms


Effects of monopoly power

Share holder -can yeild greater profits and dividends, if X-inefficiency creeps in p & d can fall

Customer - cost savings from economies of scale can create lower prices, lace of competitions may lead to higher prices, restricted choice

Employees - High sales revenue may mean high wagers, greater security

Competitiors - X-inefficiency may harm competitiors reputation, unable to compete effectively

Suppliers - contracts to supplu big companies can be lucrative, prices can be forced down due to monopsony power.

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An uncertain future

Uncertainty- when the outcome of a particular situation is impossible to predict.


The market - dynamic and constantly changing. 

  • Marketing tactics; price reductions, promotions 
  • New firms enter the market
  • Innovation, rivals will develop new product or new versions

The economy - always changing and change in macroeconomic factors will affect trade

  • Business cycle, fluctuations in GDP and the growth of the economy affect spending
  • Unemployment affects income, confidence and spending
  • Inflation makes planning difficult
  • Exchange rates fluctuate and cause problems for exporters and importers
  • Changes in interest rate may change consumer spending
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Why a small business?

  • easy to setup and simple to run- no complex legal structure
  • profit satisficers - no attempt to maximise profits
  • niche provider - gap in the market
  • greater flexibility - react quickly to changes in the market
  • personal service - personal touch and customer service and customer loyalty
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An uncertain future 2

The government - they exert a lot of control over the economy and businesses within it

  • Direct taxation can affect income and spending
  • Indirect taxation will affect income and spending and some businesses specifically
  • Laws and regulations can restrict the freedom of a business


Geopolitical events - events in other countries such as politcal turmoil or even war can affect the UK. Natural disasters such as floods or famine have an effect on some commodities. Growth in other economies can effect UK businesses.

  • Supplies of raw material can be disrupted
  • Access to markets can be controlled or stopped
  • Raw materials can rise in price if production is reduced by war or natural disasters
  • Prices of raw materials can also be driven up by rising demand elsewhere.

Shocks - unexpected events or changes that happen suddenly without warning

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Reducing Uncertainty

Reduce uncertainty by-

Market research - gives greater understanding of the market, the better equipped the business will be to deal with changes in the market

Contingency planning - having a plan in readiness incase something happens

Research and Development - can keep a business ahead of the competition

Economic indicators - possible to predict what may happen to the economy and react accordingly

Diversifying by-

Collaboration - between competitiors to cut costs, perhaps share production facilities.

Hedging - used by importers to reduce risk of exhange rand changes. Agreeing to an exchange rate in advance.

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The economic cycle

The economic cycle - describes the fluctuations in the levels and rates of growth of GDP over a period of time. 

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The economic cycle 2


  • Sales of income elasic goods will increase, and sales of normal goods will rise
  • Unemployment is low, consumers have more income to spend and feel more confident
  • Many new businesses starting up and existing one will expand
  • Costs may also rise as some resources may become scarce, this may increase prices
  • Inflation can cause problems for a business


  • Sales of income elastic goods will fall, sales of other goods begin to slow
  • Inflation may ease
  • Increases in prices and costs begin to slow and they may begin to fall
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The economic cycle 3


  • Sales of income elastic goods will fall significantly
  • Sales of normal goods will fall
  • High unemployment, consumers have less income to spend
  • Many business will fail and existing ones will cut back output
  • Sales of inferior goods will rise
  • Prices and costs may fall as supply exceeds demand


  • Sales of income elastic goods and other goods begin to recover
  • Investment begins to increase as confidence returns
  • Output begins to rise

Inflation - sustained increase in the average price level of a country. Fall in the value of money

Skills shortages - employers want to recruit people with scarce and valuable skills

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Structural Unemployment - people have the wrong skills for the employment on offer, or are in the wrong place to take up other employment. e.g. mining, shipbuilding, engineering etc

Cyclical Unemployment - caused by a downturn in the economic cycle. fewer workers needed, recession causes high levels of unemployment

Frictional Unemployment - people who are between jobs, they seek out jobs best suited for them. E.g. graduates seeking their first jobs and people who are seeking better employment

Regional Unemployment - rate of unemployment in different areas in the UK. It can be higher in some areas than others. Often linked to declinging industries and structural change.

Seasonal Unemployment - when there is a seasonal variation demand and people are not employed all year round. E.g Tourism, catering, agriculture.

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The knowledge economy

The knowledge economy - intellectual skills, knowledge, understanding and ideas are central to economic activity and more important than physical effort.


  • More emphasis on R&D
  • A need to invest in new technology and keep updating
  • A need to adapt to rapidly changing markets
  • Employees may need training and updating
  • New ideas will need protecting

The wider economy

  • Education become more important
  • Certain skills such as IT and science need encouraging
  • Intellectual Property Rights need to be protected
  • Investment is needs in infrastructure such as broadband and transport
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