Theme 1: Markets, Consumers and Firms

• Infinite wants
• Finite needs
• Choices have to be made

OPPORTUNITY COST: The benefits of the next best alternative which is forgone when a choice is made.

TRADE OFFS: The situation where two outcomes cannot be fully achieved simulataneously.

OBJECTIVE: Something to follow by and complete in order to get to your goal.

Why do businesses exist?

• to benefit people, creates employment
• self satisfaction, profit
• innovate another idea

ENTREPRENEURS: Individuals who set up in business, accepting the risk involved, taking the decisions about what to produce and how, and working out how to market the product.

SALES MAXIMISATION: An alternative objective, for either the short or long term.

SATISFICING: Researching a good enough profit level, without maximising. 

Examples of business objectives: Survival, market share, customer satisfaction, cost efficiency, ethical business (technology/ competition/ human resources affect choice of objectives).

MARKET SHARE: Proportion of a specific market that is supplied by one business 

SOCIAL OBJECTIVES: Employee welfare, sustainability, ethical business 

STAKEHOLDERS: Anyone who has an interest in a business E.G. consumers, employers, owners, suppliers and pressure groups 

SHAREHOLDERS: Legal owners of a business

Corporate Social Responsibility: The environmentalists, suppliers, local communities,employers, partners

TAX EVASION: Illegally failing to pay taxes that are due

TAX AVOIDANCE: Finding legal ways to reduce tax liability. 

ZERO HOUR CONTRACTS: Employees work only when they are needed, often at short notice

• Advantages to employer: flexibility to respond to fluctuating demand for their product. Less costly employment rights for workers
• Advantages to employee: Some employees value the flexibility 
• Disadvantages to employer: Workers possibly less committed and motivated
• Disadvantages to employee: Less income leads to less financial stability and security.

What do they think about?

• what type of product to offer 
• where to produce it 
• how to produce the product 
• how many units and where to sell them
• when to expand and develop the business
• what price to charge customers

CREATIVE DESTRUCTION: Highlights the way in which creativity leads to new ideas, inventions and products.

ADDED VALUE: Represents the difference between the cost of material inputs and the eventual value of the product in terms of the price that can be charged for it. 

COST OF PRODUCTION: Payments that have to be made in order to get a product into the market place.

Sales revenue= price x quantity sold

Profit= sales revenue - cost of production 

INCENTIVES: Financial and other rewards that can induce people to behave in a certain way.

FACTORS OF PRODUCTION: LABOUR, LAND, CAPITAL/ FINANICAL CAPITAL

LABOUR: Human capital: Human input into the production. Different skills and qualities 

LAND: Natural resources on the planet 

CAPITAL: Goods used to produce other goods. Increased capital= investment 

FINANICAL CAPITAL: Funds used to purchase physical capital.

When a business or individual focuses on the production of a limited scope of products. It gaines productive efficiency or businesses or areas.

DIVISION OF LABOUR: Is when co-operating individuals perform specialised tasks.

ADVANTAGES OF DOL TO FIRMS: Reduces waste, reduces cost. Workers become more productive. Increased productivity means average cost falls.

ADVANTAGES OF DOL TO WORKERS: Job satisfaction, specific skills improve, specialised workers tend to get paid more.

DISADVANTAGES OF DOL TO FIRMS: High staff turnover, expensive. Costs more to train the workers. Quality may suffer if workers become bored. More expensive workers.

DISADVANTAGES OF DOL TO WORKERS: Becomes boring, less satisfaction. Other skills may suffer. May be replaced by machines. 

INTEREST RATES: The price of money (cost of borrowing/ the reward for lending)

Implications for business of changes in business rates:

DIRECT- Increased cost of exisiting loans. New investment projects will be more expensive to finance. Any surplus funds on short term deposit will earn more. Harder to hold stock.

INDIRECT- Consumer demand will generally weaken- households have less discretionary income- more attractive to keep funds. 

ZOMBIE COMPANY: A company which generates enough cash to service its debt. 

EXCHANGE RATE: The price of one currency expressed in  another. 

THE FOREIGN EXCHANGE MARKET (FX) MARKET DIAGRAM:

IMPLICATIONS FOR BUSINESS OF CHANGES IN EXCHANGE RATE: If the pound exchange rate increases...

SPICED (Stronger pounds import cheaper exports dearer)

...becoming more expensive, imports of raw materials and goods become cheaper, imports of finished goods from overseas competitors become more price competitve. UK firms' exports become less price competitive. 

OR WPIDEC( Weaker pound imports dearer exports cheaper)

Impacts depend on: Scale of change in the exchange rate, duration of the change in currency, the response of firms and consumers to the exchange rate fluctuation. 

TAXATION: The charge a government makes on the activities earnings and income of businesses and households.

The impact on businesses:

• impacts on their customrs/ potential customers' disposable income and resultant spending
• impacts upon the firm's costs, revenue, retained profits
• influences the firm's ability to raise finance
• impacts upon their employee motivation and wage claims 

UMEMPLOYMENT: the number of people willing and able to work at current wage rates but are unsuccessful in finding a job, in a given time period. 

Cyclical type: slumping of the recession 

Structural type: long term changes in the economy where economic activity shifts between sectors.

Frictional type: Hopeful of finding a new job

Seasonal type: Changes in the annual employment, temporary work. 

Concequences for businesses due to unemployment: 

• Some worker's income will fall- lower demand for many products- low profit
• Short time working for employees
• makes the employed feel less secured- they want to secure their jobs, less likely to make wage claims, easier to hold price at current level, firms become more efficient. 

Job insecurity: 

• lower morale and demotivation. lower output. increasing costs per unit. 

Alternatively workers seek more secure jobs elsewhere: 

• firms lose skilled and experienced workers
• firms less ready for any upturn in activity 

Increased supply of workers:

• recruitment becomes easier
• firms become more efficient 
• profit margins increase 

INFLATION: A sustained increase in the general price level in a given time period. 

Price index= value of basket in current time period/ value of the basket in base year x 100

Inflation rate= later date CPI value - earlier date CPI value/ earlier date CPI value x 100

Problems caused by inflation: 

• uncertainity in individual businesses
• many workers react by trying to gain wage increases
• alters pattern of consumer spending 

Concequences of inflation:

• need to update price list
• problems in financial market 
• problems with pay negotiations
• uncertainity about investment plans 
• potential loss of international competitveness 

EFFECTIVE DEMAND: the combination of desire for a product or service with the abiliy and readiness to pay. 

DEMAND CURVE:  a graphical representation of the relationship between quantity demanded and price, for a product in a market. 

Non-price factors affecting demand- 

• income, price of other goods, population, fashion, legislation, advertising, expectations, 

Movements along the demand curve-

• If the PRICE OF A GOOD/ SERVICE changes theres a movements along the EXISTING CURVE 
• A shift to the RIGHT indicates an increase in demand- consumers are willing and able to buy more at each and every price.
• A shift to the LEFT indicates a decrease in demand- consumers are willing and able to buy less at each and every price. 

DEMAND CURVE  AND MOVEMENTS GRAPH: 

NOTIONAL SUPPLY: What firms would like to provide 

EFFECTIVE SUPPLY: The quantity of a good or service firms are willing and able to sell, in a given time period. 

Non-price factors affecting supply:

• Changes in cost of production 
• state of technology
• indirect taxes or subsidies
• entry and exit of firms 
• external shocks e.g. weather
• changes in legislation
• changes in supplier expectations of future events 

Movements and shifts along the supply curve- new supply curve only exists if there's a change in relevant non price factors. Shift to the right= increase in supply, firms are willing and ble to sell more at each and every price. Shift to the left= decrease in supply, firms are willing and able to sell less at each and every price.

SUPPLY CURVE GRAPH 

MARKET- Place where buyers and sellers meet to transact business

EQUILIBRIUM- A position of test or balance, where there is no tendency to change. 

MARKET EQUILIBRIUM- A position in the market where both buyers and sellers simultaneously fulfil their respective plans. 

EQUILIBRIUM PRICE- Price at which quantity supplied and quantity demanded are equal in a market, leaving neither excess supply nor excess demand. 

MARKET CLEARING- Obtaining a balance between quantity supplied and quantity demanded, normally by arriving at the equilibrium price. 

Assessment of the demand and supply model-

• a model simplifies complex situations to help understanding 
• normally only one variable is examined at a time
• analysis is usually done under conditions of CETRIS PARIBUS (Assuming other variables remain constant)
• It is a representation of one particular point in time and markets are very likely to change 

PRICE MECHANISM: An economic model that helps to explain the allocation of resources between different possible uses. 

ALLOCATION OF RESOURCES: Reflects the way in which economic agents take decisions about what to buy, what to produce and how best to use the available land, labour and capital.

Strengths of the price mechanism- works automatically, following decisions taken by a multitude of economic agents. It can direct resources to the best possible use.  

HOMOGENEOUS- Products are uniform, identical whatever their origin. 

DIFFERENTIATED- Products are distinctive, with different design features or branding. 

MASS MARKETS- Products are supplied in significant quantities to all or most types of customers. 

NICHE MARKET- Small segment of a market with distinctive, specialised requirements. 

Rising prices give a signal to- 

• existing consumers to reduce demand or withdraw from a market completely.
• potential consumers may not enter the market
• existing producers stay in the market
• potential producers enter a market 

Falling prices give a signal to-

• Potential consumers enter the market
• existing consumers increase demand
• potential producers do not enter the market
• existing producers reduce supply or leave market completely

The rationing function of the price of mechanism-

• resources are scarce.
• The greater the scarcity, the higher the price and the more the resource is rationed.
• the effect of a price rise is to discourage demand and conserve resources 
• the effect of a price fall is to encourage demand and deplete resources 

The incentive function-

• these motivate producers and consumers to follow a course of action or to change their behaviour
• higher prices provide and incentive to existing producers to supply more because they provide the possibility or more revenue and increased profits
• higher prices provide and incentive to existing consumers to demand less because they no longer provide the same value for money (satisfaction/ benefits) and to seek out substitutes.
  • lower prices do the opposite 

MARKETING: the basic function of marketing is to attract and retain customer's at a profit.

MARKET RESEARCH: process of gathering data in order to understand current and future customer needs and the nature of the marketplace. 

How market research can reduce risk when developing a new business idea:

• Quantify potential demand- the results used can help entrepreneurs forecast future sales.
• Understand how much customers are willing to pay- an entrepreneur can assess whether the price that people will pay covers costs of production.
• Understand customer behaviour- Finding out who the product appeals to helps sell in the right places and promote products effectively. Can identify demand for something currently unavailable.
• Study competitors and unique selling points (UPS)- Checking that a business idea is able to survive the competition and ideally stand out from rivals.
• Identify key features of the business environment- Study whether social, legal, ecnomic, political and technological factors are favourable to the new business idea. 
• PRICE PLACE PRODUCT PROMOTION PACKAGING PEOPLE PROCESS 

PRIMARY MARKET RESEARCH/ FIELD RESEARCH- Obtained first hand by the business that is interested in the results. It involves fieldwork and can be directly related to the needs of the individual business.

SECONDARY MARKET RESEARCH-/ DESK RESEARCH- Uses data that has been gathered previously by another organisation. It is often freely available. 

Ways of conduction primary market research: Questionnaire/ survey, focus group, observation, test marketing 

Ways of conducting secondary research: Market reports, government data, economic historic and forecast data, internet and trade publications 

Advantages of primary research- Up to date, more reliable, much more specific, you do it when you need it, aimed at the target audience. Disadvantages- Expensive, time consuming, requires specialist skills.

Advantages of secondary research- Save time, quick, multiple sources of the same research, cheap, accessible. Disadvantages- Out of date, difficult to guarantee accuracy, expensive to purchase, rivals can access this data too. 

Aspects of market orientation- market research, market testing, customer focus

Aspects of product orientation- product research, product testing, product focus

POTENTIAL BIAS- Occurs when information collcted from a sample does not accurately reflect variations in the total population. 

• Random sample could be more representative
• An alternative is quota sample , researcher ensures the responses are from different groups 
• Stratfied sampling (select participants within the target groups on a random basis, to gain greater accuracy) 

Limitations of market research:

• Particularly tricky in foreign markets, businesses need well trained local people to help them
• Some markets change very rapidly, they are so dynamic that it may be impossible for market research to keep up with current trends.
• Production decisions may be take by managers who are unfamiliar with their markets and have not fully understood the need for or the implications of market research. 

Aspects of market orientation- market research, market testing, customer focus

Aspects of product orientation- product research, product testing, product focus

POTENTIAL BIAS- Occurs when information collcted from a sample does not accurately reflect variations in the total population. 

• Random sample could be more representative
• An alternative is quota sample , researcher ensures the responses are from different groups 
• Stratfied sampling (select participants within the target groups on a random basis, to gain greater accuracy) 

Limitations of market research:

• Particularly tricky in foreign markets, businesses need well trained local people to help them
• Some markets change very rapidly, they are so dynamic that it may be impossible for market research to keep up with current trends.
• Production decisions may be take by managers who are unfamiliar with their markets and have not fully understood the need for or the implications of market research. 

MARKET SEGMENTATION: Means identifying different groups of consumers in a market where each group has distinctive preferences. 

Some products aim at a mass market (making a product or providing a service aimed at a large number of customers). 

Niche Market- A small market for a specialised product. 

Types of market segmentation- 

• Geographically- seasonal products, certain foods 
• Demographically- rings, dresses 
• Pysychologically- environmentally friendly people 
• Behaviourally- vouchers, discounts given 

Benefits of market segmentation- 

• helps to analyse the demands of each customer group 
• allows them to concentrate on productive and profitable market segment. 
• increases the profit, focus of a firm and customer retention 

MARKET POSITIONING- refers to the way a product is seen in comparison with rival products. Market research helps to position products so that businesses can match customer preferences or appeal to different market segments

MARKET MAP- tool that plots brands in the market according to how they meet customers' needs. It allows a business to position individual products effectively. 

COMPETITIVE ADVANTAGE- Having an edge over rival products. There are many ways of making the perception of a product positive, depending on the nature of the market and its consumers. 

• feature that makes a business successful 
• it has to make other business hard to copy them
• may result from innovation, reputation or the relationship with customers/ suppliers. 

PRODUCT DIFFERENTIATION- Entails unique features which distinguish a product from its rivals. 

ADDING VALUE- occurs when factors of production are used to make material inputs more valuable to potential customers. 

COMPETITIVE PRICING- Takes account of prices charged for similar products competing in the same market. Prices will usually be the same or a little below that of the closest rival. 

PORTER'S GENERIC COMPETITIVE STRATEGIES-

• Cost leadership- A firm sets out to become the low cost producer in its industry. (May include the pursuit of economies of scale, proprietary technology, preferential access to raw materials and other factors).
  • Good relationship with suppliers
  • low employment
  • low quality
• Differentiation- A firm seeks to be unique in its industry. It is rewarded with a premium price. 
• Focus- The generic strategy of focus rests on the choice of a narrow competitive scope within an industry. 
  • Focus selects a segment or groups of segments in the industry and tailors its strategy to serving them to the exclusion of others. 

PORTER'S 5 FORCES- Competitive rivarly within an industry

• Bargaining power of customers
• Threat of new entrants
• Bargaining power of suppliers
• Threat of substitute products 

STABLE MARKET- 

• Competition not aggressive 
• no need to change anything 

DYNAMIC MARKET-

• trends are changing all the time
• businesses have to be flexible all the time 

BOSTON MATRIX GRAPH 

Banking system is founded on 2 key factors:

• banks must act wisely so that they are able to cover the risks they take on when they lend to investors.
• banks must be trustworthy so that depositors (savers) are confident that their money is safe. 

BANKS- take deposits from people and businesses that wish to save and lend to people, businesses and governments that wish to borrow. 

WORKING CAPITAL-  refers to the finance needed to keep the company's day-to-day business going. There must be enough working capital to cover short-term debts. 

COLLATERAL- on a loan means that there is no risk to the lender. If they cannot be repaid, the collateral assets can be sold to pay off the debt. 

Why do banks matter?

• keeps the economy running 
• bank lends money to a lot of people and companies
• banks make transactions possible without huge risks
• 'term transformation'- borrow short term but leng long term

RISK- something where the outcome is unknown (uncertain).

• you can look out possible outcomes and see how to minimise it
• identify actions that will reduce the risk (mitigate)
• you can do a risk assessment 
• you need a business plan
• terms and conditions 

FINANCIAL INTERMEDIARIES- include retail and investment banks, building societies, pension funds and insurance companies. They all offer a link between investors and savers. 

LIMITED LIABILITY (incorporated business)- protects shareholders in that as individuals they are legally separate from the business. The most that shareholders have to contribute towards business debts is the amount of capital orginially invested in buying shares. e.g. public limited companies-

Business and the owner have a separate legal identity. 

So if there are debts that the business cannot pay the owner does not have to find the money. 

UNLIMITED LIABILITY (unincorporated)- An individual has no legal separation from their business and is therefore personally responsible for the debts of the business. Their personal assets could be used to pay business debts if the business is not able to cover them. 

INCORPORATED BUSINESS- Separate legal entity, it exists separate from the owners.

CORPORATED BUSINESS- Legal, binding contract between a franchisor and franchise. Lays out the obligations for both parties.

Franchisee: they would like to open the business. Franchisor: main company, they own the idea. It costs a lot of money and you spend a certain % of the revenue. The money you send every year is the royalty fee- good way to grow the business- a larger number of outlet. 

Sole traders: Ads: full control of the business. Owner receives all profit.

                       Disads: Unlimited liability for all debts. Can be hard to raise finance. 

Private limited companies: Ads: Limited liability for business debts. Easier to get bank loans 

                       Disads: More regulation, sharing the profits. Shareholder involvement.

Internal vs external finance: 

Internal finance: personal savings, retained profit, working capital, asset sales.

External finance: overdrafts, bank loans, share capital, venture capital, peer to peer lending, trade credit, leasing. 

INTERNAL SOURCES OF FINANCE: Comes from within the business. It can be retained profit or cash raies from the sales of assets. 

Personal savings: An important source of finance for new or small businesses. Before getting started, the entrepreneur will save in order to fund the early expenses associated with the productioon process. It may also contribute to the purchase of capital equipment. 

Retained profits: Is profit that is being reinvested in the business rather than being given to the owner(s) of the business in the form of dividend payments. It does not incur interest payments or dilute ownership of the business. It is a long-term source of finance.

Sales of assets: Refer to physical assets such as machinery or property, or to intangible assets such as the patent to a particular product. It is a long term source of finance.

Working capital: Refers to cash that the business can access immediately. It is available to cover immediate costs that must be paid for ahead of the time when sales revenue flows in. 

EXTERNAL FINANCE: Comes from banks or investors that have no direct connectio with the company.  

The investors may offer finance in exchage for equity. Equity (another name for shares) finance gives the business money in return for a share of the business, the money does not have to be paid back. 

SHARE CAPITAL: A long term finance raised by selling shares in a business. Share capital does not have to be repaid, investors recieve part-ownership of the business and a share of the profits in the form of dividends. 

For- Share capital does not have to be paid back and does not incur interest. Shares in PLCs can be sold on the Stock Exchange- this may encourage investors. 

Against- The original owner of the business gives up some control over it as shareholders must be consulted. In time, new shareholders will expect to recieve dividends as a reward for investing, so the original owner will recieve less profit in the future. 

STOCK EXHANGE: Market where shares in PLCs can be bought and sold. Investors can sell if for some reason they need the money they invested.

VENTURE CAPITAL: Money invested in a new business by one or more individuals who believe the business will succeed and therefore increase in value but are willing to accept the risk that the business idea may fail. 

Bank finance: The rate of interest will depend on a number of factors including:

• the current Bank of England interest rate
• The size of the loand 
• the repayment period 
• whether the lender percieves a significant risk of the business defaulting on the loan. 

LOAN- Amount of money borrowed for a fixed period at a fixed interest rate. The loan is paid back in regular instalments until the total amount plus interest is repaid. Loans are medium- to long term sources of finance.

OVERDRAFT- Short term flexible loan where a bank allows a business to operate with a negative bank balance. Interest is paid on the amount overdrawn, usually at a higher rate than is charged for a fixed sum loan. 

Bank finance: The rate of interest will depend on a number of factors including:

• the current Bank of England interest rate
• The size of the loand 
• the repayment period 
• whether the lender percieves a significant risk of the business defaulting on the loan. 

LOAN- Amount of money borrowed for a fixed period at a fixed interest rate. The loan is paid back in regular instalments until the total amount plus interest is repaid. Loans are medium- to long term sources of finance.

OVERDRAFT- Short term flexible loan where a bank allows a business to operate with a negative bank balance. Interest is paid on the amount overdrawn, usually at a higher rate than is charged for a fixed sum loan. 

Loans- ADS... High street banks may see well established businesses as low risk and give low interest loans. For business start ups, family or friends of the business owners may provide finance, which is helpful if banks are unwilling to lend to an entrepreneur with no security and no trading history.  

DISADS..The higher the percieved risk, the higher the interest rate. New businesses may find it hard to get a loan from a bank at a low rate. Lenders may require collateral. If the business cannot repay the loan, the lender can sell the asset to recover their money. The most commonly secured assets are buildings, they reduce the risks on long term loans. 

LEASING: Used by businesses that need land, buildings or equipment which they are unable or unwilling to buy outright. 

ADS... leasing is a more flexible way to acquire an asset than outright purchase. Leasing can be used for long-term or short term finance. 

DISADS...the business never takes ownership of the item. The business will pay more than the market value of the leased items in the long term. 

Loans- ADS... High street banks may see well established businesses as low risk and give low interest loans. For business start ups, family or friends of the business owners may provide finance, which is helpful if banks are unwilling to lend to an entrepreneur with no security and no trading history.  

DISADS..The higher the percieved risk, the higher the interest rate. New businesses may find it hard to get a loan from a bank at a low rate. Lenders may require collateral. If the business cannot repay the loan, the lender can sell the asset to recover their money. The most commonly secured assets are buildings, they reduce the risks on long term loans. 

LEASING: Used by businesses that need land, buildings or equipment which they are unable or unwilling to buy outright. 

ADS... leasing is a more flexible way to acquire an asset than outright purchase. Leasing can be used for long-term or short term finance. 

DISADS...the business never takes ownership of the item. The business will pay more than the market value of the leased items in the long term. 

Loans- ADS... High street banks may see well established businesses as low risk and give low interest loans. For business start ups, family or friends of the business owners may provide finance, which is helpful if banks are unwilling to lend to an entrepreneur with no security and no trading history.  

DISADS..The higher the percieved risk, the higher the interest rate. New businesses may find it hard to get a loan from a bank at a low rate. Lenders may require collateral. If the business cannot repay the loan, the lender can sell the asset to recover their money. The most commonly secured assets are buildings, they reduce the risks on long term loans. 

LEASING: Used by businesses that need land, buildings or equipment which they are unable or unwilling to buy outright. 

ADS... leasing is a more flexible way to acquire an asset than outright purchase. Leasing can be used for long-term or short term finance. 

DISADS...the business never takes ownership of the item. The business will pay more than the market value of the leased items in the long term. 

TRADE CREDIT: Short term source of finance offered when suppliers allow a time period before payment for supplies must be made. The credit period will vary between suppliers and may be changed by the supplier at any time. 

FACTORING: When the bank takes control of the invoices under the confirmation of a company 

DEBENTURES: A long term secured loan, you can buy and sell them but they are not as simple as getting a loan from the bank. 

CROWD FUNDING: It's online and small scale investors are involved. The website allows the small scale companies to gain money which is then paid back to the investor. 

DIVIDEND- End share profit for the shareholders 

Market failure oocrs when the competitive outcome of markets is not efficient from the point of view of the economy as a whole. 

EXTERNALITIES- Costs or benefits that affect anyone other than the buyer or seller e.g. all third parties.

EXTERNALITIES GRAPH: 

CAUSES: abuse of power, market dominance. Factors of production not easy to respond. Equity issues. 

SOCIAL COST = PRIVATE COST + EXTERNAL COST

SOCIAL BENEFIT = PRIVATE BENEFIT + EXTERNAL BENEFIT 

EXTERNAL COSTS- Are costs which impact on third parties

EXTERNAL BENEFITS- Are gains which impact on third parties

PRIVATE BENEFITS- Are a buyer's gains from consumption of goods and services

PRIVATE COSTS- Are the costs paid by a supplier of a good or service 

SOCIAL COSTS- Are the total of private costs and any external costs

SOCIAL BENEFITS- Are the total of private benefits and any external benefits

OVERPRODUCTION/ OVERCONSUMPTION- Occur when prices reflect only the private costs of production, ignoring the external costs. 

NEGATIVE EXTERNALITIES: Social costs are greater than the private costs as external cost exist. Third parties not part of the decision making are negatively affected.

NEGATIVE EXTERNALTIIES GRAPH 

• negative externalities caused market failure because the market does not take into account the effects of the external costs.
• market equilibrium of P and Q shows people over consuming and businesses over producing. 
• As a result of this, misallocation of the resources, the market fails to give us an efficient outcome. 

POSITIVE EXTERNALITIES: The social benefits are greater than the private benefits as external benefits exist. The third parties are benefitted by the decision made. 

PRIVATE BENEFITS + EXTERNAL BENEFITS= SOCIAL BENEFITS

• positive externalities caused market failure as the market under consumes and businesses under produces.
• misallocation of resources, the market fails to give us an efficient outcome. 

POSITIVE EXTERNALITIES GRAPH 

GOVERNMENT FAILURE: occurs when a public sector activity or government intervention, intended to correct a market failure, makes the situation worse rather than better. 

SOLUTIONS TO NEGATIVE EXTERNALITIES:

1) TAXATION GRAPH:

• Ads... solves the problem, tax can be used for other important stuff 
• Disads..businesses and consumers not happy. Less spending power. Depends on how much they tax, elasticity of demand 

2) LEGISLATION GRAPH:

• Ads...reduces consumption, law abiding citizens would want to stick to the law. More people aware of the law.
• Disads...people might start breaking the law. Illegal, forgery products made. Loopholes in the law.

3) ADVERTISING AND COMMUNICATION GRAPH:

• Ads... reduces consumption. Young age introduction means less harm in the future
• Disads...people ignoring advertisements. Costs of making them are high

4) POLLUTION PERMITS; Legal right to produce a certain amount of CO2 a year

GRAPH

• Ads.. reduces pollution. Government gaining revenue 
• Disads..government does not know how much to charge. Rich businesses can keep buying it. 

SOLUTIONS TO POSITIVE EXTERNALITIES

1) TAXATION GRAPH 

• Ads...customers don't pay full price. Makes it cheaper 
• Disads...not everyone takes advantage of this. Opportunity costs. It can increase other tax paid to afford the subsidy. 

2) LEGISLATION 

• Ads... increases consumption. Effective immediately.
• Disads..takes a long time to be agreed on. 

3) ADVERTISING GRAPH:

GOVERNMENT INTERVENTION- 

E.g. when tax is too much: graph 

Reasons why Governments trying to introduce policies correcting market failures can create further inefficiencies:

• problems of information
• problems of incentives 
• problems of distribution 

1) PROBLEMS OF INFORMATION:

Information needed is: What is the right level of tax to set when correcting a negative externality?, What level of subsidy is required?, How much of a public good should the government provide?

• Issues: The government may get the calculation wrong 
• gathering the information incurs a cost

2) PROBLEMS OF INCENTIVES:

• the distortion of incentives due to the introduction of taxes and benefits
• the motivation of politicians 
• the incentives of those running government services 

3) PROBLEMS OF DISTRIBUTION:

• has an impact upon the distribution of wealth and income 

SALES REVENUE (price x quantity sold)- total of incoming payments for products sold 

SALES VOLUME- Total physical quantity of products sold 

START UP COSTS- Financial input e.g. grants from government, loans from banks 

• resources, initial materials, advertisement, machinery, business licence

RUNNING COSTS/ OPERATING COSTS - Costs that you have to keep paying e.g. salary for the staff, rent/ mortgage, repaying loans 

FIXED COSTS- Do not vary with output e.g. salaries, royalty fee, rent, mortgage, loans

VARIABLE COSTS- They do vary with output e.g. wages/ commision, raw materials 

SEMI-VARIABLE COSTS- Utility bills (they change but somethings like office use are fixed)

TOTAL COSTS: Add all of them up

AVERAGE COSTS= total costs/ no. of products sold 

MARGINAL COSTS- Cost of the next unit of output 

PROFIT- The money remaining from sales revenue after all costs have been paid. 

SALES REVENUE- Money earned by selling good and services. It is calculated by multiplying the sales volume by the unit selling price.

SALES VOLUME- Refers to the number of goods or services sold by a business in a period of time.

SELLING PRICE- The amount charged to a customer for the purchase of a good or service. 

profit= sales revenue - cost

sales revenue = (sales volume x selling price) 

Point at which costs = to revenue is called the break even point 

total fixed costs + total variable costs = total sales revenue 

Identifying the break even revenue-

FIXED COSTS/ CONTRIBUTION 

BREAK EVEN POINT- The volume of sales at which a business breaks even, so total revenue matches total costs exactly.

BREAK EVEN ANAYLSIS- The calculation and interpretation of information about the break even sales level. 

MARGIN OF SAFETY- The volume by which sales are above the break even point. 

margin of safety= calculated as expected sales- break even sales level

PURPOSE OF BREAK EVEN ANALYSIS-

• To inform pricing decisions
• To predict profit
• To seek finance 
• To conduct 'what if' analysis 

contribution= selling price per unit - variable cost per unit 

Identifying the break even revenue-

FIXED COSTS/ CONTRIBUTION 

BREAK EVEN POINT- The volume of sales at which a business breaks even, so total revenue matches total costs exactly.

BREAK EVEN ANAYLSIS- The calculation and interpretation of information about the break even sales level. 

MARGIN OF SAFETY- The volume by which sales are above the break even point. 

margin of safety= calculated as expected sales- break even sales level

PURPOSE OF BREAK EVEN ANALYSIS-

• To inform pricing decisions
• To predict profit
• To seek finance 
• To conduct 'what if' analysis 

Limitations of break even analysis-

• If the assumptions are not solid, then it affects the break even output 
• If the fixed costs change, the break even forecast becomes inaccurate
• unexpected expenses 
• variable costs can change- out of your control
• management and accounting time- only focusing on this rather than other stuff 

BARRIERS TO ENTRY- obstacles to new entrants which affect some industries, particularly where competing businesses are very large. 

GROSS PROFIT- Means sales revenue less the immediate variable costs of producing the goods sold

NET PROFIT- What remains from sales revenue after the deduction of all operating costs including fixed costs, tax and interest. 

gross profit margin= gross profit/ sales revenue x 100

operating profit margin= operating profit/ sales revenue x100

net profit margin= net profit / sales revenue x 100

• HOW TO IMPROVE PROFITS: reducing fixed costs, increasing sales revenue by raising prices, increasing marketing expenditure, cutting prices 

INSOLVENCY- Occurs when a business fails because a lack of working capital means that debts cannot be paid

CASH FLOW FORECAST- A month by month prediction of the timing of expected cash inflows and outflows for a business

CASH INFLOWS- Money recieved by a business

CASH OUTFLOWS- Money leaving a business

LIQUIDITY- Having sufficient cash available, sometimes also having assets which can quickly be converted to cash. 

• Why should business calculate their cash flow? So they have a rough idea of when they are going to fall back on money, evidence to show how much they need to borrow from the bank, visualise expenditure, helps you realise where you can save money (negotiate with suppliers/ cut any costs)
• Downsides to cash flow: time consuming, if the assumptions are not solid and you make key decisions based on this then you will mess up.