The Wider Economic Environment

Chapter 1 - Why do businesses want growth?

Chapter 2 - How best to grow?

Chapter 3 - Why innovate?

Chapter 4 - How is the digital economy affecting firms and markets?

Chapter 5 - How do small firms compete? 

Chapter 6 - Using PED

Chapter 7 - How is price decided?

Chapter 8 - Exploring marketing strategies

Chapter 9 - Income elasticity of demand

Chapter 10 - Why is productivity important?

Chapter 11 - Labour, Capital, Investment and Capacity

Chapter 12 - What difference does lean production make?

Chapter 13 - How did globalisation happen?

Chapter 14 - Developed, emerging or developing?

Chapter 15 - How does international trade develop?

Chapter 16 - How do exchange rates work?

Chapter 17 - What is the economic cycle?

Chapter 18 - The circular flow of income 

Chapter 19 - In Inflation a problem?

Chapter 20 - Employment, unemployment and underemployment

Chapter 21 - Possible macroeconomic objectives

Chapter 22 - What policies can we use? 

Chapter 23 - Can we devise an effective macroeconomic policy package? 

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Economies of scale
Ways in which long run increases in capacity and output can reduce average costs.
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Internal economies of scale
Arise when a business invests in large scale production ( technical, marketing, managerial)
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External economies of scale
Unit cost reductions that are shared by a whole industry rather than a single firm
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Minimum efficient scale
Lowest level of output at which unit costs are minimised as firms can use economies of scale
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A market with a single buyer. If suppliers insist on higher prices they may lose their contracts.
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Brand Recognition
measures % of consumers who recognise a brand and associate it with product features
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Diseconomies of scale
Increase in unit costs as a business grows. Often associated with communication issues.
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Skill Shortage
A certain service requires specific skills e.g.. Health care cant grow without sufficient amount of GP's.
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Corporate Culture
refers to shared values, attitude, standards and beliefs that characterise members of the organisation.
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Organic growth
Expansion of a business by extending its own operations. This is slower than inorganic but more secure.
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Inorganic growth
Expansion by merger/takeover leads to a sudden increase in business size.
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Horizontal integration
Firms with similar products at the same stage of production come together.
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Forwards vertical integration
Taking a business into consumer sales.
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Backwards of vertical integration
Taking over suppliers of raw materials.
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Two unrelated businesses merge.
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Research and Development (R&D)
Leads to innovative and attractive new products for the market place.
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Product Innovation
Creation of new goods/services and improvements to a previous version
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Process Innovation
Changing the ways something is produced, normally to reduce average costs.
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Product Life Cycle
Series of five stages which typical products go through between introduction and decline.
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Extension stategy
A business attempts to prolong the mature phase of a product life cycle.
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Asymmetric Information
When one party to a transaction know more than the other party
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Vital Marketing
Encourages spread of information and opinions about a product/service from person to person ; it can be particularly effective using online media
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An umbrella term for any online selling
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Specifies sales to consumers
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Customised marketing strategy in which advertising efforts are focused on a small group
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The long tail
A proliferation of choices, with increasing ability to match the precise niche market needs of individuals and small groups, reducing the dominance of standard hits
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Unique Selling Point (USP)
Distinctive features that no competing product can match precisely.
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Price elasticity of demand
Measures the response of quantity demanded to changes in price
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Price elastic
Where quantity demanded changes by a higher % than price, demand in price elastic
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Price inelastic
When quantity changes by less than the % change in price
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Brand loyalty
Arises from distinctive features that give the product some uniqueness and attract customers to make repeat purchases eg Apple
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Big Data
High voluem, high velocity and hight variety information that combines with cost effective, innovative information processing for better insight and decision making
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Income elasticity of demand
Measures the change in quantity demanded when incomes change
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Normal Goods
Have positive income elasticity of demand. A rise in income will lead to an increase in quantity demanded
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Inferior goods
Have negaive income elasticity of demand, demand rises as incomes fall.
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Two quatres of falling output in the economy as a whole. Most recessions involve a long period of slow growth after that.
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Conditions mean that incomes are rising strongly across the economy
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Using scarce resources in the most economically achievable way. Costs can then be minimised and the best possible use can be made out of capital equipment and labour
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Measures efficiency in the use of resource inputs. Labour productivity is usually calculated as outputper hour worked. Capital productivity can be measured by output per unit of capital
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Include all the publicly available services eg transport, communications, facilities, basic services eg water, drains, roads.
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Human Capital
Skills, experience and knowledge acquired by individuals. Is created through education, on the job training, apprenticeships and vocational training courses.
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Net Investment
Spending on new capital equipment over and above the level of spending on replacement on worn out equipment - this increases productive capacity
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Capital intensive
Production uses large amounts of capital equipment and little labour. Productivity will usually be high.
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Labour intensive
Production uses large amounts of labour and relatively little capital. Eg hairdressing
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Capital Utilisation
Measures the extent to which the capacity of the business is in use, taking actual output as a percentage of total capacity
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Underutilised capacity
Raises unit costs beacause the fixed costs are spread across a lower level of production
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Over - Utilised production
The business is trying to produce more than its capacity will allow = rising costs
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Quality control
Involves checking finished products for any sign of a defect or poor quality
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Quality Assurrance
Designing the production process sp as to eliminate waste and ensure that defects do not happen
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Cell Production
Small teams of employees taking responsibility for a significant part of the total production process.
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Total quality management
Places the emphasis on meeting customer requirements and continuous improvements in all aspects of the business
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Continuous improvement, finding new and better was of organising production and designing products.
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Emplyess Participation
That employees contribute ideas that lead to greater efficiency, new or better quality products and higher productivity
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Just in time
Stock control systems involve scheduling the delivery of inputs in a precisely co-ordinated way that minimising the quantity of stock required. ( producing to order only)
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Lean production
A number of strategies for minimising waste, reducing costs and saving time.
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Lead times
Time it takes to go from a decision to produce the arrival of the product, model or style of the product.
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Arises from growing world markets and increasing international trade. Associated with strong economic growth. May entail increasing independence as individual businesses make profits in foreign markets and look abroad for finance for investment.
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Open Economies
export a relatively high proportion of total production and import a relatively high proportion of G/S they use.
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Structural change
Involves reallocation of resources. Less is produced of G/S that face falling demand; output of those for which demand is increasing rises. Technological change, and international competition play a part in this.
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Foreign Direct Investment (FDI)
When business set up production or distribution facilities in other countries. FDI flows mainly into d/ing countries as business seek lower costs.
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Shifting the production process to other businesses in order to reduce input costs.
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Trade Liberalisation
Process of limiting and reducing barriers to trade so that the economies involved move closer to free trade.
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International capital flows
Large sums of money that are moved from one economy to another ( includes FDI and activities of wealthy individuals and businesses eg buying shares in foreign businesses to get higher interest rates or dividends)
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Multinational company
Businesses with active interests in 1+ economies ( also know as TNC's) some have turned into oligopolists.
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Developed economies
High per capita incomes, literacy levels and life expectancy and large service sectors.
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Developing economies
Low incomes, weak education and welfare systems, abundant cheap labour and little capital investment.
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Emerging Economies ( Eg BRICS)
Rising capital investment, inreasing productivity in secondary sectors and increase in international trade. Work with lots of TNCs.
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Absolute Advantage
Exists if the real resource cost of a product is lower in one country than another.
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Comparative Advantage
If two countries each specialise in the product with the lowest opportunity cost and then trade, real incomes will increase in both countries.
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Free Trade Areas ( trade blocs)
Groups of countries that trade freely with the members. Each member has its own trading policies in relation to the rest of the world
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Common Markets
Completely free trade internally and a single unified trade policy covering all members trade with the rest of the world. Including free movement of people and capital.
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Floating exchange rate
The level of a floating exchange rate is determined by market forces. It reflects the demand for currency, to buy its products or invest there, and the supply of currency which arises from buying imports and capital flows abroad.
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( rising value) When the exchange rate appreciates, we get more for our pounds. ( SPICED ) If house prices rise, their value appreciates.
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( falling value ) A unit of currency buys less. There will be a competitive advantage as export prices fall
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19/28 EU member countries have adopted the euro as their currency. ( monetary union ). So the European Central Bank sets monetary policy for the whole area.
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Economic Cycle
The tendency of national or global economic activity to fluctuate between boom, downturn, recession and recovery.
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A time of rapid growth, linked to rising demand, lower unemployment and rising inflation
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Soft Landing
When the economy moves to a gradual downturn in growth after a boom, rather than into a recession
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GDP is falling ( 2+ quarters) linked with unemployment and low levels of business confidence
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an unattractive combination of falling GDP with prices rising at uncomfortable rates
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Social Capital
Capital assets which are publicly owned, eg roads, schools and hospitals
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Leading Indicators
Early signals of the direction of economic activity,such as the state of confidence or capital goods order.
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Lagging Indicatiors
Measures which are slow to reflect the current state of economic activity eg unemployment levels
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Income received by the owners of businesses and shares
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Leakages (STM)
Ways in which incomes escape the circular flow between houses and firms
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Injections (IGX)
Additions to the circular flow from sources other than households.
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Aggregate demand
Measures total demand from all sources in the economy
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Capital goods
Productive assets, acquired by investment, which are expected to make a contribution to future output.
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Aggregate Demand Curve
Diagram representing the total level of demand in the economy at different price levels.
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Aggregate Supple Curve
Diagram showing total quantities of output in the economy at different price levels
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Supply Constraints
When demand for scarce resources increase forcing prices up. ( people, natural resources and financial resources)
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A rise in the general level of prices and a fall of purchasing power of money
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A fall in the general level of prices and a rise of purchasing power of money
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When rate of inflation falls
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Index Numbers
Take data for a period of time for each year, it gives the % change from the previous year.
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Allows us to adjust raw data to allow for the relative of importance of items eg those bought frequently in the case of a price index.
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Consumer Price Index (CPI) and Retail Price Index (RPI)
Main UK measures of inflation
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Real Values
Have the effect of inflation/deflation removed so they show the actual quantity changes
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Nominal Values
Current prices without modifying for inflation
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Being economically active, normally in a paid role
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Someone of working age and available for work but no job
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When people who want full time work can only find part time/ skilled people can only find unskilled work.
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Claimant count
Measure of unemployment of people claiming Job Seeker's Allowance
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Labour Force Survey (LBS)
Bases estimates on answers form people out of work and actively seeking work
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Structural Unemployment
When demand for the product is falling because of changing customer preferences/ competition from imports/ newer products
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Technological Unemployment
When labour saving equipment and other new techniques reduce the need for labour
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Geographical Mobility
Ability of workers to move from one area to another
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Occupational mobility
Their ability to move from one type of work to another.
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Seasonal Unemployment
Varies throughout the year
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Frictional Unemployment
When people have left one job and take a short time to find the next one.
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Balance of payments equilibrium on current account
A situation in which current outflows are exactly equal to current inflows. So visible and invisible exports, plus investment income paid abroad and current transfers abroad, would together be equal in value to visible and invisible imports.
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Disposable Income
personal income after tax - amount of available house hold spending
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Net injection
A positive amount bywhich total injections exceed total leakages ( leakage>injection)
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Expansionary policy
One that uses fiscal measure to increase spending within the economy, to encourage economic growth
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Contractionary policy
Aims to reduce spending in the economy in order to avoid overheating and high inflation rates.
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Direct Taxation
Paid directly by individuals and firms to government from their income/profit
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Indirect taxation
Taxes on G/S generally collected from a retailer or other intermediary
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National debt
The cumulative total of public sector debt outstanding
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Austerity Policies
Involves spending cuts and tax increases, which reduce the extent to which the governemnt needs to borrow. They are contractionary, meaning that they will tend to reduce economic activity generally.
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Base Rate
Set by the Monetary Policy Committee(MPC) , being its main tool for controlling the level of lending in the economy. Main target of the Bank of England is 2 % CPI inflation
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Reducing rules and regulations which inhibit private enterprise
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Means selling public sector bodies to private sector shareholders in the hope that competition and the profit incentive will make them more efficient
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Sustainable growth
economic growth that is growing unsustainably fast. It cannot continue indefinetly as there will be insufficient resources to maintain momentum. Skill shortages will develop and inflation will accelerate.OR (env) excessive use of finite resources
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Free Market Policies
Associated with smaller governement, minimal government intervention, incentives to work and allowing markets to function freely
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Policies are associated with measures to reduce market failure and in particular with policies that address income inequality.
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Other cards in this set

Card 2


Arise when a business invests in large scale production ( technical, marketing, managerial)


Internal economies of scale

Card 3


Unit cost reductions that are shared by a whole industry rather than a single firm


Preview of the back of card 3

Card 4


Lowest level of output at which unit costs are minimised as firms can use economies of scale


Preview of the back of card 4

Card 5


A market with a single buyer. If suppliers insist on higher prices they may lose their contracts.


Preview of the back of card 5
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