Business in the Market Economy

Question 1

Define INDUSTRY

Answer 1

Consists of firms involved in making a similar range of products that usually compete with each other.

Question 2

Factors influencing WHAT TO PRODUCE for businesses… (4)

Answer 2

1. Skills and experience of the business operator
2. What consumers demand
3. Specific business opportunities
4. Amount of capital required to startup

Question 3

Factors/Challenges influencing HOW MUCH TO PRODUCE for businesses… (5)

Answer 3

1. Consumer demand for something
2. Research into market conducted
3. Difficult for startup firms with new products
4. Established products/firms (eg sunglasses) easier for -look at past trends.
5. Hard when large production needed for efficiency - lack of capitol

Question 4

Production decisions concerning HOW TO PRODUCE… (2)

Answer 4

1. Choose the combination of FOP that is most efficient.

2. Relative efficiency of each FOP may change over time.

Question 5

What a business contributes to the economy… (5)

Answer 5

1. Healthy private sector generates ECONOMIC GROWTH
2. Reduces Unemployment
3. Contributes to regional development
4. Increases economics productive capacity
5. Funds services provided by governments

Question 6

Goals of the firm (5)

Answer 6

1. Maximising profits
2. Meeting shareholder expectations
3. Increasing market share
4. Maximising growth
5. Satisficing behaviour

Question 7

What compromise may be made when Increasing Market Share?

Answer 7

Managers may get paid for increasing sales not profits - compromise between objectives.

Question 8

Define satisficing behaviour

Answer 8

Firms don’t attempt to maximise any particular objective, but rather seeks to achieve what it regards as an adequate level of attainment in each area.

Question 9

Problems with maximising only profits (2)

Answer 9

Attract other firms to industry

Provoke government regulation.

Question 10

Define Productivity

Answer 10

Refers to the quantity of goods and services the economy can produce with a given amount of inputs such as capital and labour.

Question 11

Productivity contributes to an improvement in the standard of living in 5 ways…

Answer 11

1. Less wastage of scarce resources
2. Lower production costs and higher profits
3. Lower inflation rate (firms don’t need to raise prices)
4. Higher Incomes
5. Improved international competitiveness of our industries.

Question 12

Major way firms can increase productivity…

Answer 12

Specialisation

Question 13

Define Specialisation

Answer 13

Where factors of production (labour, natural resources and capital) are used more intensely for a smaller number of production processes.

Question 14

Examples of Specialisation of Labour, Natural Resources, Capital

Answer 14

Production line,
Concentration of similar businesses in small area,
Large wine producer using specialised machine to bottle, label wines etc

Question 15

Internal Economies of Scale

Answer 15

The cost saving advantages that result from a firm expanding its scale of operations. (Below technical optimum).

Question 16

Internal Diss-economies of scale

Answer 16

The cost disadvantages faced by a firm as a result of expanding its operations. (Beyond the technical optimum)