1.1 The Economic Problem Flashcards
Define scarcity
Resources are limited in supply and so choices have to be made for their use.
= LIMITED RESOURCES AND UNLIMITED DEMANDS.
- main economic problem.
- when choices/decisions made must consider distribution/ use of resources optimally.
- Scarcity causes Opportunity cost.
Allocation of resources
= WAY ‘FACTORS of PRODUCTION’ & ‘RAW MATERIALS’ USED IN THE PRODUCTION OF PARTICULAR GOODS/SERVICES IN DEMAND.
What is the result of humans having unlimited wants?
Choices having to be made over the allocation of resources
Define the economic problem
the concept that wants are unlimited but resources are limited so choices have to be made about their use
Define opportunity cost
= NEXT BEST ALTERNATIVE FORGONE WHEN A CHOICE IS MADE.
- economic decisions come with sacrifice -> next best alt forgone is the loss of the benefit from the other choice.
Define Trade-off
the choice between 2 options
= SITUATION WHERE HAVING MORE OF 1 THING LEADS TO LESS OF ANOTHER.
Economic agents?
= GOV, CONSUMERS; PRODUCERS.
What is the importance of an opportunity cost to a consumer?
May choose to buy something of a higher quality at the opportunity cost of buying something else, due to the higher cost
What is the importance of an opportunity cost to a producer?
Choosing to sell a good at a higher price may incur the opportunity cost of the demand for that good
What is the importance of an opportunity cost to the government?
Choosing to invest money into different departments (e.g. Education) has the opportunity cost of investing it in other areas (e.g. Healthcare)
whats a Free Market Economy?
= ECONOMIC SYSTEM WHERE THERE’S NO INTERFERENCE FROM OTHER AGENCIES (economic agents) - LIKE GOV.
what are Market Forces?
= DEMAND & SUPPLY = DETERMINE ALLOCATION OF RESOURCES in market.
Give the 10 possible business objectives
= AIMS/ TARGETS BUSINESSES TRY TO ACHIEVE.
- provides them with a direction/ purpose + measures progress.
Return on Investment (ROI)
Profit Maximisation
Sales Maximisation
Satisficing
Survival
Market Share
Cost Efficiency
Employee Welfare
Customer Satisfaction
Social Objectives (CSR)
Entrepreneur
= INDIVIDUAL SET UP BUSINESS, ACCEPTS RISKS INVOLVED, MAKES DECISIONS ON WHAT/ HOW TO PRODUCE; HOW TO MARKET PRODUCT.
Return on Investment (ROI)
= (net) PROFITS ENTREPRENEURS MAKE BY TAKING RISKS WHEN MAKING INVESTMENTS/ASSETS.
- higher ROI = more attractive the investment/ asset.
ROI = (net profit / capital investment) x100%
Define Profit Max
= WHEN COSTS ARE AT LOWEST AND REVENUE IS AT HIGHEST.
- short/ long- run objective.
- usually first objective firms consider.
- cheap source of finance providing stable costs & output levels that returns greatest profit.
- greater wages 4 employees and dividends 4 shareholders (both stakeholder groups happy).
(public limited comp) PLC’s have short-run profit max as obj as shareholders expect high profits.
Define Sales Maximisation
= AIMS TO SELL AS MUCH OF GOOD/SERVICE WITHOUT MAKING A LOSS.
- important in v. Competitive Markets = keeps out competitors - detters them.
- helps business earn more profits long-term.
- usually obj 4 not-for-profit organisations.
Define Satisficing
Wanting to make profits without profit maximising (profits are important but not the be all and end all)
Define Survival
= SELL AS MUCH AS POSSIBLE SHORT-TERM 2 KEEP MARKET POSITION, EVEN IF LOSS LONG-TERM.
- short-term
- businesses entering competitive market OR during times of economic downturn until economic growth again.
Define Market Share
= PORTION OF MARKET CONTROLLED BY FIRM/PRODUCT.
- calculated: (total sales by business/ total sales in market) x100%.
- good market share = allows business to survive better in market.
- achieved by sales max.
How can firms increase market shares?
- advertise
- expand production
- reduce price
- takeover (horizontal integration)
What is Horizontal Integration?
2 businesses in same industry have joined together.
= TAKEOVER
Define Cost efficiency
COMPANY LOWERS AVG. COSTS BY FIND CHEAPER RESOURCE & MANUFACTURING PROCESSES.
- offer customers cheaper prices
- in competitive markets, will gain customers from LESS efficient producers.
Define Employee Welfare
taking care of employees (ADEQUATE PAY + GOOD WORKING CONDITIONS) so they’re more productive + do better quality job.
-> makes them more loyal to company, les likely to leave = LOWERING EMPLOYEE TURNOVER.
Define Customer Satisfaction
SOURCE OF COMPETITIVE ADVANTAGE
Improved quality or customer service => Improves competitiveness ==> improving customer satisfaction.
Good rep. means able to charge higher prices for their good/product.
Leads to customer LOYALTY
Define Social Objectives
AIM 2 CREATE BENEFITS 4 SOCIETY BY PURSUING SOCIAL/ ENVIRONMENTAL/ ETHICAL GOALS.
Businesses focus on Corporate Social Responsibility (CSR) and help local area.
(produce goods more ethically OR hire groups discriminated against)
What are the Factors of Production?
Capital, Enterprise, Lan, Labour
What is short-run?
when quantity of (at least) 1 Factor of Production is fixed - whilst quantities of others are varied.
What is long-run?
when quantities of all Factors of Production can be varied.
Define stakeholder
Someone who has an interest in the firm OR feels impact from it. each have their own OBJECTIVES.
Define internal stakeholder
People from within the organisation:
- employees
- owners/entrepreneurs
- managers
Define external stakeholder
People outside organisation with an interest:
- shareholders
- customers
- suppliers/ creditors
- society
- gov
Define Shareholder & their objective?
LEGAL OWNERS OF BUSINESS
(may’ve helped set up business OR bought Shares on Stock Exchange).
Objective:
WANT HIGH PROFITS SO THEY GET HIGH DIVIDENDS.
Define dividend?
DISTRIBUTION OF PROFITS BY CORPORATION TO ITS SHAREHOLDERS.
When earn a profit/surplus => able to pay portion of profit as dividend 2 shareholders.
(Any amount not distributed is taken + re-invested in business).
Employees’ objective?
their the biggest asset + biggest production cost of businesses.
WANT HIGH WAGES + GOOD WORKING CONDITIONS.
Consumers’ objective?
WANT HIGH QUALITY GOODS WITH LOW PRICES
Managers’ objective?
WANT HIGH SALARIES + BONUSES + PERSONAL BENEFITS
Governments’ objective?
WANT EARN CORPORATION TAX FROM BUSINESS’S PROFITS.
Suppliers’ objective?
WANT BUSINESS STAY SUCCESSFUL SO REMAIN THEIR CUSTOMER.
Define Creditors?
BUSINESS OWES THEM MONEY –> usually in exchange 4 materials/ services.
A possible stakeholder conflict?
Managers want BIG BONUS, but would decrese money 4 shareholder’s dividends = problem.
==> so when firm sells shares - relinquish some control 2 gain this investment.
==> SHAREHOLDER ACTIVISM = shareholders excercise power as part owner 2 manipulate company 2 fullfill their motives.
Business’ main goal = maximize profits + enhance shareholder value BUT labour costs are unavoidable so might upset other stakeholders: employees.
define Corporate culture
set of important assumptions shared by people working in particular business + influence ways decisions taken.
What is CSR?
CORPORATE SOCIAL RESPONSIBILITY:
- Take account shareholders’ interests
- Treat employees/ suppliers/ customers fairly
- Avoiding polluting activities
- Donating parts of profits 2 charities & foundations 2 help improve world.
(businesses may do bare min. law entails as CSR isn’t regulated).
difference between Tax AVOIDANCE and EVASION?
tax AVOIDANCE = finding legal ways 2 reduce tax liability.
tax EVASION = illegally failing 2 pay taxes due.
Define difference between Transnational (TNC) + Multinational Corporations (MNCs)
MNCs= business with operations in 1+ country
TNCs= are global
Define Business Ethics?
- Beyond CSR
- MORAL CODE OF ETHICS BUSINESS FOLLOWS.
e.g. not investing in countries which have human rights issues. - MORAL DESPITE FINANCE (COST)
e.g. Body Shop doesn’t use ingredients tested on animals.
Give 2 advantages of CSR for a business
1) Improve public image
2) Help the local community
Give 2 disadvantages of CSR
1) Reduces profits
2) Takes a lot of time
