1.1 (Scarcity, Choice & Potential Conflicts) Flashcards
1.1.1
What is scarcity?
Unlimited wants and finite resources
What is the economic problem?
How to satisfy unlimited needs and wants with finite resources
What is opportunity cost?
The cost of the next best alternative foregone
How to calculate per unit opportunity cost?
Cost/Gain
The importance of opportunity cost for consumers?
- use it to choose what to spend their income on
- used to ensure a more efficient allocation of resources
The importance of opportunity cost for producers?
- use it to look at profit foregone by not making an alternative product
-making use of scarce farmland
-investing today for consumption tomorrow
The importance of opportunity cost for governments?
- spending priorities
- use it to look at the lost value to society from policies they chose not to implement
What is a trade off?
A balance achieved between two desirable but incompatible features
What is equity?
the value of the shares issued by a company
What is efficiency?
the ability to achieve an end goal with little to no waste, effort or energy
What is choice?
The act of choosing between two or more possibilities
1.1.2
What is a business objective?
the results you are aiming to achieve in order to accomplish your longer-term company vision
What are the 3 main business objectives?
- Profit maximisation
- Sales maximisation
- Satisficing
What is profit maximisation?
+ equation
Finding the production output at which the difference between revenue and cost is the largest
+ (marginal revenue= marginal cost)
Why may a business choose the objective of profit maximisation?
+ shareholders benefit from higher dividends
+ employees may gain if profit is linked to payment (e.g bonus)
+ may lead to increased capital spending which benefits other businesses
+ profit= security and is also motivating
+ firm may wish to be efficient (minimum cost)
+ positive cash flow
+ strong growth prospects
Reasons to avoid profit maximisation
- profit seeking but not profit maximising business
- increasing market share
- may have to sacrifice short term profits for long term profit maximisation
- breaking into a new market
- just trying to survive
- may not know the point at which MC=MR
- may decrease brand reputation
- may create an inferior product (worse quality)
- inflated prices may dissatisfy customers
What is sales maximisation?
When a firm attempts to sell as much output as possible without making a loss
Why may a business choose the objective of sales maximisation?
+ to increase market share
+ they are a charity/ social enterprise
+ they want to grow and experience the benefits of economies of scale (e.g lower interest on loans)
+ they are a new business and want to get their name out there
+ strong sales figures can attract investor interest and make financing easier
Reasons to avoid sales maximisation
- lower profits
- may annoy shareholders
- unsustainable
- no guarantees it will work
(other businesses may also lower prices)
What is satisficing?
+ equation
When a business isn’t aiming for maximum profit or sales but wants to make enough profit to ensure survival and a good income
+ (average cost= average revenue)
Why may a business choose the objective of satisficing?
+ common in smaller businesses where they want a ‘work-life balance’
+ may seek to reach minimum profit that keeps shareholders happy
+ resources are not all used up so can be used to achieve other aims
Reasons to avoid satisficing
- may end up with a lower quality result
- can lead to a lack of motivation
- could lead to a lack of growth
- shareholders could be relatively unhappy
What are the other business objectives? (say a reason for trying to achieve each one)
+ what happens when a business grows?
- survival
- market share
- cost efficiency
- return on investment
- employee welfare
- customer satisfaction
- social objectives
+ its objectives may change
What must business objectives be? (SMART)
Specific
Measurable
Achievable
Relevant
Time-bound
What are social objectives?
+ e.g
when a business’ objectives are desired to be achieved for the benefit of society
(e.g reducing carbon footprint)
What is a corporate aim?
What is a mission statement?
What is a strategy?
long term goals that assist a business in setting objectives
outlines the shared purpose of the stakeholders
medium to long term course of action which guides a company to achieving its objectives
1.1.3
What is a stakeholder? (internal/external meaning?)
+ what is an economic agent?
Anyone who has an interest in a specific business
internal: member of the organisation
external: not a member of the organisation
All groups of people and organisations that are involved in an economic activity and make decisions that affect how resources are used (e.g producers or consumers)
What are the different types of stakeholders?
- shareholders
- consumers
- suppliers
- government
- management
- employees
- environment
- local community
- banks/financial leaders
Who are the most important stakeholders in small businesses?
+ & in large businesses? Why?
Primary stakeholders are the owners, staff and customers
Primary stakeholders are shareholders as they can vote out directors if they believe they are running the business badly
What is a business unable to do regarding stakeholders? What do they do instead?
+ e.gs
Meet the demands of all of its stakeholders as they inevitably conflict so they make trade-offs between their interests
+ (e.g employees and shareholders , consumers & suppliers)
What is stakeholder engagement?
What must this be?
Systematic and proactive integration of feedback from those impacted by your organisation’s operations
This must be continual engagement despite different viewpoints
Why is the relationship with suppliers important?
As businesses depend on suppliers in order to continue making their products and suppliers depend on businesses to ensure they can continue to supply goods
Why are governments stakeholders in businesses?
- Economic policies affect firms costs
- Legislation regulates what businesses can do (e.g environment and health)
- Successful firms are good for the government as they create wealth and employment
- Corporate tax
What is used to show stakeholder’s power and interest in businesses?
What do these depend on?
Stakeholder maps
The size and type of business
What are the stakeholder and shareholder models?
Stakeholder= business cares about the interests of all stakeholder groups
Shareholder= business priorities shareholders’ interests
What is Corporate Social Responsibility?
The extent to which a business accepts obligations to society over and above the legal requirements (refers to how it treats its stakeholder groups)
What ethical decisions do companies need to consider?
+ examples of ethical issues in business?
- balance between capital and labour
- where to sell
- pay & working conditions
- environmental factors
+ bribes to secure contracts, counterfeit goods, animal testing, child labour, fair marketing
What are the motives for companies taking CSR?
+ want to act in a way which shows care for customers, employees & wider community as well as business survival
+ want a good reputation/corporate image as this is good for perceived quality of product and value for money
+ want a good reputation as employers to help recruit the best people
+ good practice and will eventually lead to profit max
+ cost management
+ tax relief
What does CSR involve?
- risk management in preventing corruption & fraud
- ‘good business practices’
- must be a systematic change
- involves how profits are made not spent
- social and ecological criteria must be considered
Examples of businesses who show/don’t show CSR
+ Ben & Jerry’s (ethical sourcing)
+ Unilever (very strong implementation)
+ Ikea (committed to better everyday life)
- Primark (Rana Plaza)
- Apple (factory employee suicides)
What is corporate culture?
the set of important assumptions that are shared by people working in a particular business and influence the ways in which decisions are taken there
Ways in which society needs business and business needs society?
Society needs:
- employment & wages
- investment & innovation
- profits & taxes
Business needs:
- creation of demand
- public assets & infrastructure
- legal protection
Views against CSR (Free Market View)?
- businesses’ purpose is only to create shareholder wealth
- extra costs will be incurred (passed onto consumer)
- it stifles innovation
- businesses can’t decide what is in society’s best interests
- efficient use of resources reduced
Views for CSR (CSR view)?
- ethical thing to do
- improves image & reputation
- can be profitable
- attractive to stakeholders
- increases employee motivation
- necessary to avoid regulation
What are tax avoidance and evasion?
Evasion: illegally cheating to avoid tax
Avoidance: legally structuring business and accounts to legally minimise tax to be paid
What is the effect of tax avoidance and evasion?
+ what increases opportunity for this?
Leave public authorities poorer and other taxpayers contributing more
Transnational companies such as Amazon
