Trade - offs
Choice - a decision between two or more alternatives.
Scarcity - resources are limited in supply, e.g. raw materials,time.
Trade-off - where the selection of one choice results in the loss of another.
Oppurtunity cost - the loss of the next most desired alternative when choosing a particular course of action.
- The basic economic problem is one of trying to meet unlimited needs with limited resources.
- Businesses make decisions everyday, with every decision comes a trade- off and an opportunity cost.
Demand and price
Price - the amount of money required to purchase a good or service.
Revenue - the value of sales in a time period, calculated by price x quantity sold.
demand - the quantity of a good or service a consumer would like to buy at a given price in a time period.
Price insensitivity - where changing the price of a product by a certain amount leads to a smaller change in demand.
price sensitivity - where changing the price by a certain amount results in a bigger change in demand.
Necessity - a good or service that a consumer views as essential.
substitute - a good or service which is a possible alternative to another good service.
- lowering price increases demand
- lack of available substitutes makes demand price insensitive
- if consumers view a product or service as a necessity then the demand for the product will be price insensitive.
e.g. people who drive cars need petrol, and if the price of petrol increases as there isn't any other available substitute for petrol, people are forced to still use it as it is seen as a necessity, therefore the demand for petrol will not change much. So it is price insensitive.
Or if people go into a shop to buy their favourite chocolate bar and they find it has gone up from 30p to £1, they might not be prepared to pay that price so as there are loads of other chocolate bars (available substitutes) they will just choose a different chocolate, this makes the chocolate that rose in price, price sensitive as by changing the price there was a big change in demand as people were not prepared to pay that price, they will just happily choose something else.
Stakeholders - groups which are interested in the performance of a business they can be internal or external.
Shareholders - The owners of a limited company. They buy shares which represent part ownership of a company.
Competition Commission - the body which investigates cases where firms merge or are taken over to decide wether such activity is in the publics interest. It has the power to prevent mergers or take-overs where these are seen to reduce the level of competition.
Dividends - the payments made to shareholders from the profits of a company.
- e.g. stakeholders - workers, customers,government, local community,shareholders
- conflicts of interest arise when different stakeholder groups want different things.
- The stakeholder model is widely used by businesses; this involves taking into consideration the views of all interested groups, when making decisions.
- Stakeholders do not have equal power or influence, some influence decision making more directly than others.
Third Party - a group or an individual that is not directly involved in a decision/ action.
Externalities - the effects of an economic decision on individuals and groups outside who are not directly involved in the decision.
Negative externalities - those costs arising from business activity which are paid by people or organisations outside the firm.
Positive externalities - those benefits arising from business activity which are experienced by people or organisations outside the firm. The firm receives no payment for the benefits received.
Example of negative externality - increased car ownership leads to greater emissions of greenhouse gases which speeds up the process of global warming.
Example of positive externality -a display of christmas lights and decorations in a town centre generates lots of extra trade for local businesses as local consumers are attracted to visit the display.
How success can be measured
Profits - The rewards for risk taking.profit is the difference between the amount of revenue earned by a firm and the total costs of producing the goods & services the business sells.
Market share - the quantity sold by a business as a percentage of total salesin a market.
Competitiveness - the strength of a businesses position in a market measured by market share & profitability. it reflects wether people are prepared to use the business over its rivals.
competitive advantage - advantages that a business has over its rivals. These advantages help to win it customers. To be really effective the advantages must be difficult to copy and unique.
Social success - The performance of a business which takes account of social environmental and ethical factors. ( corporate social responsibility)
Marketing mix - the combination of product, place, promotion and price that is designed by a business to achieve its aims. This is also known as the '4 P's'.
Cash flow - the money coming into and going out of a business over a period of time. This refers to the inflows and outfllows of money.
Productivity - the measure of the output per worker or machine per period of time.
Average cost - the cost of producing each unit of output. This is calculated by dividing total cost by the amount produced (output).
- Businesses fail when the revenue they earn from sales can't cover the costs of production. if this happens over a long period of time then the business will become insolvent, where it doesn't have sufficient funds to pay expenses and therefore cant trade.
Causes of business failure
Changes in demand
- Falling income levels - fall in demands for goods.
- Changing tastes and preferences - the demand for white bread has declined as consumers turn to a healthier brown option.
- Fashions - when a product becomes less desirable demand falls dramatically.
- Advertising - a successful ad campaign by a rival firm can damage sales.
- Competition - if competitors develop better products, then demand for the firms product falls.
The marketing mix
- It's crucial for a business to get the right combination of the marketing mix, a business may have an excellent product, but if the price is too high or if it is distributed in the wrong locations then failure lies ahead.
Managing cash flow
cash flow refers to money coming in and out of a business over a period of time.Businesses do not always receive money at the same time that sales are made. Where customers pay later - using credit - the business may not receive payment for 30 days or even longer. In the meantime the business has had to pay out for costs of materials and wages. Basically if the business has more money going out than coming in, then it will potentially have a cash flow problem.
- productivity is closely linked to the efficiency of a business.
- If productivity is high then average cost per unit will be lower.
- low average cost means businesses can charge lower prices
- Or it can increase profit margins
The economy faces changes in demand which can be a
- The level of economic activity
- Interest rates- high interest rates, cost of borrowing increases, this may put off people interested in taking out loans, high interest rates also means peoples mortgages become more expensive so they have less disposable income.
- if unemployment is rising consumer confidence may fall as people feel their own jobs may be under threat.
- In times when the economy is doing well,people may be prepared to spend more money on holidays,new cars, house extensions - items that would be considered luxuries.
- Demand by foreign consumers
Inflation can be caused by a number of factors suc
A rise in the cost of production for businesses may be passed on to the customer as high prices. The rise might be caused by:
- rising prices for key raw materials - oil, copper, wheat, rice
- higher wage costs
- increases in the process paid for imported goods
A rise in the level of demand in the economy, especially when supply is not able to keep up. This might be caused by:
- rising wage levels
- increased consumer confidence
Inflation increased from 2%in 2005 to over 5% by 2008 - this sort of dramatic change is known as a shock
Problems the economy faces
Consumer confidence - a measure of the extent to which customers are prepared to spend money.
Inflation - an increase in the general price level. This is measured mb the Consumer Price Index (CPI).
Cost of living - a measure of the average cost of basic necessities, such as food, housing, clothing.
External shock - an unanticipated change in demand or inflation caused by factors beyond the control of the country, for example a rise in oil prices or a fall in the exchange rate.
Internal shock - an unanticipated change in demand or inflation caused by factors within the country. for example a successful harvest for wheat will force the price of wheat down.
Tax revenue - money received by the government from the people and businesses paying their taxes.
The problem of unemployment
Costs to an individual of unemployment
*A lower level of income than if they were employed, this will often affect the individual's and family's standard of living.
* Loss of self esteem - individuals may feel depressed and worthless during periods of unemployment.
* Losing skills - being out of work for a period of time may result in loss of skills, makes it difficult to find work in the future, they may become part of unemployment cycle.
*Family break - up - during periods of unemployment divorce rates increase.
Costs to society of unemployment
* Taxes - during periods of unemployment the Govt. receives less tax revenue. this may effect spending plans in other areas.
* Benefits - when people are made unemployed they generally qualify for state benefits. The main support in this area is jobseekers allowance, but there are also housing benefits, income supports and so on.These benefits represent a significant cost to the Govt. If the Govt. income is falling, but spending is rising, it may have to borrow more to cover its spending.
* Crime - tends to rise in a recession. when incomes fall some people are tempted to turn to crime.
Exports - goods and services which are sold to other countries and which lead to payments to the UK.
Imports - goods and services bought from other countries which lead to money going out of the UK.
Exchange rate - The value of one currency in terms of another.
The exchange rate of any currency is determined by the buying and selling of foreign currencies on world currency markets.
If the pound increases in value it is said to strengthen this means that the pound will buy ( be exchanged for) more of a foreign currency. whereas the reverse is when the pound falls in value it is said to weaken.
How the Government solves economic and social prob
Interest rate - The cost of borrowing money, or the returns recieved on savings.
Economic activity - the total amount of buying and selling in an economy over a period of time.
Monetary policy - the use of changes in interest rates to control inflation.
Fiscal policy - the use of taxation and government spending to achieve government objectives.
- Changes in interest have a significant effect on the level of economic activity
- The bank of England set the Base Rate ( this is the rate they lend to commercial banks such as HSBC.)
- The Base Rate determines the level of interest rates charged by banks and other financial institutions.
- High interest rates slow down the level of spending in an economy
- low interest rates speed up the level of spending in an economy
- This is an example of The Bank of England using Monetary policy.
The effects of high and low interest rates
High interest rates
* lower spending by individuals - mortgages increase, households have less disposable income.
* fewer loans - people put off by high interest rates, delayed spending on big ticket items e.g. new cars, holidays.
* less business investment - business investments funded by bank loans, high interest rates means businesses put off investment decisions, reduction in economic activity.
* Individuals & businesses more likely to save - attracted by high interest rates, reduced spending.
Low interest rates
* More spending by individuals - mortgage payments fall, households have more disposable income
* Increase in loans - loans become cheaper, individuals are tempted to take out loans, leads to higher levels of spending in the economy.
* Increased business investment - loans become cheaper, businesses more tempted to fund expansions.
* Savings - money saved will earn lower returns, individuals encouraged to spend rather than save.
- The Govt. raises money - tax revenue - from the taxes people and businesses pay.
- Businesses pay Corporation tax on any profits they make and VAT on many goods and services.
- Without taxes we wouldn't have the NHS, Benefits,Free education or pensions.
- The Government usually spends more than it saves so it needs to raise money from taxes to cover the cost of borrowing.
- The Govt tries to solve social problems e.g. -child poverty, crime, binge drinking, anti - social behaviour. It uses the money it raises from tax to try an solve these problems.
- Taxes can be used to help change behaviour e.g. Alcohol imposes massive costs to the NHS - so by putting a tax on Alcohol it becomes more expensive so people with limited incomes can't buy it.
How businesses grow
Internal growth - occurs when a business increases in size by selling more of its goods/ services without taking over or merging with other businesses.
External growth - where a business grows in size due to merger or takeover.
innovation - the process of transforming an invention into product that customers will buy. It is is the commercial exploitation of an invention.
Research and Development (R&D) - the process of creating and designing new products and new methods of reduction.
Merger - Where two or more firms agree to join together. This is a voluntary agreement and results in the new business retaining the identity of both businesses.
Takeover - Where one business buys another business.
Conglomerate merger - occurs when two business join which have no common business interests.
- A business grows to sell more goods and services in one time period than a previous time period. also...
- To increase market share - more control in a market, leads to rivals being forced out of business.
- To take advantage of economies of scale - large businesses can achieve lower average costs , which leads to higher profits.
Internal growth/ organic growth
* profits can be ploughed back into the business to fund expansion
* Changing the marketing mix e.g. greater use of promotion should increase awareness of the product and encourage more sales.
New product development - identifying new products or services that will lead to increased sales for a business.
External growth can happen either through a merger or a takeover
both merger and takeover can take place at different stages of the production process.
Horizontal integration - between two businesses at the same stage of the production process. e.g a pub merges/ takes-over a pub.
Backward vertical integration - two businesses at different stages of the production process. e.g. a pub merges/ takes-over a brewery.
Forward vertical integration - two businesses at different stages of the production process join together e.g. a pub merges/takes-over a night club, ( a business which is further forward in the chain of production.
Example of a conglomerate merger - a pub merging with a clothes shop, these two businesses have no common business interest.
Why businesses grow
Economies of scale - the factors which cause the average cost of producing something to fall as output rises.
Bulk - buying (commercial) economies - occur when business can gain discounts on large orders from suppliers.
Technical economies of scale - reductions in average costs of production due to the use of more advanced machinery.
Market power - a measure of the influence of a business over consumers and suppliers.
Diseconomies of scale - the factors which cause average costs of production to increase as outputs increases.
Businesses grow for so they can achieve...
* survival - larger businesses have a greater chance of survival, greater revenue,money that can be re-invested into the business.
*larger returns for owners- larger businesses have greater owners, leads to higher profits.
* economies of scale - average costs of production reduced, leads to higher profits.
*spreading the risk - where a business grows by developing new products or by branching into new markets risk can be spread and therefore reduced.
* greater market power
Drawbacks of business growth ( diseconomies of scale)
* co-ordination of the business becomes more difficult, communication becomes more problematic.
Monopoly - a business which has a market share of 25% or more and can therefore influence the market. in a pure sense a monopoly exists when there is only one seller.
Patent - a legal protection for business's new ideas. This prevents other businesses stealing ideas from other companies.
Natural monopoly - where one large business can supply the market with products at lower costs than if the market was supplied by many producers.
Market power -