business module Flashcards
what is meany command economy
- Command; where the government tells us production that are permissible and the prices that may be charged for goods and services
what is meant by free market economy
an economic system in which prices are determined by unrestricted competition between privately owned businesses. Can have whatever you want as long as you can afford it
what is meant by mixed economy
a system that combines aspects of both capitalism and socialism. A mixed economic system protects private property and allows a level of economic freedom in the use of capital, but also allows for governments to interfere in economic activities in order to achieve social aims. Where the government intervenes
what is meant by fiat money
a government-issued currency that is not backed by a commodity such as gold. Fiat money gives central banks greater control over the economy because they can control how much money is printed. Most modern paper currencies, such as the U.S. dollar, are fiat currencies.
what is meant by commodity money
money whose value comes from a commodity of which it is made. Commodity money consists of objects having value or use in themselves (intrinsic value) as well as their value in buying goods.
what are the essential features needed in marketing
Ø Branding;
Ø 4-Ps of Marketing:
- Product;
- Price;
- Promotion;
- Positioning.
Ø Porter’s Generic Strategies (CL vs D vs F);
Ø Porter’s Five Forces of Competition model.
what is needed in intellectual propert
- Patent
- Trade marks
- Copyright
- Design rights
- Regd. Designs
what is meant by intellectual property
Legal property rights over creations of the mind, both artistic and commercial, and the corresponding fields of law. IP includes copyrights, trademarks, patents & trade secrets.
what is the difference between trademark and registered designs
The trademark symbol (TM) is a mark that companies often use on a logo, name, phrase, word, or design that represents the business. The registered symbol (R) represents a mark that is a registered trademark with the United States Patent and Trademark Office (USPTO).
what is meant by inflation
means a rise of cost and the maximum rate of inflation is 2%
comparing the cost of things today with how much they cost a year ago. The average increase in prices is known as the inflation rate. So if inflation is 3%, it means prices are 3% higher (on average) than they were a year ago.
what are the two types of economics
macro and micro economics
what is meant by micro economics
Microeconomics: The study of the economic problems of firms and individuals and, the economic behavior of firms in industries and individuals in markets.
what is meant by macroeconomics
Macroeconomics: The study of the country as a whole: prices, inflation, monetary policy, national income, output, taxation etc. Also directed at government policy dealing with these issues.
what is scarcity
unlimited wants and limited resources which leads to scarcity and that leaves people with a choice
Ø Scarcity forces choices to be made; this involves an opportunity cost:
Ø The quantity of other goods and services that must be foregone in order to obtain another unit of a good or service.
what is meant by economy
The mechanism that allocates scarce resources among alternative users
what is the mechanism that achieves outcomes
Ø Who will produce/consume?
Ø What will be produced?
Ø Where will it be produced?
Ø When will it be produced?
name the type of economy which has the lowest and highest government intervention ( lowest to highest)
free market economy, mixed economy, command economy
how is WHAT to produced decided in command economy and free market
in command economy the produce is decided by central committee and in free market economy the produce is decided by firms responding to demand
how is HOW to produced decided in command economy and free market
in command economy it is decided by state enterprises and in free market how to produce is determined by firms operating in factor markets
how is FOR WHOM to produce decided in command economy and free market
in command economy it is determined by the people and in free market economy it is determined by people with disposable income
what are the 5 outcomes that are needed for factrs of production
Ø The five outcomes are achieved by the Factors of Production:
Ø Land: all the land, whatever is beneath it and the sky above it;
Ø Labour: the time and effort devoted to producing goods or services;
Ø Capital : all the equipment, buildings, tools and other manufactured goods used to produce goods and services;
Ø Entrepreneurship - special type of resource that enables management of the first three factors, and assumes the risk of doing so.
what is the definition of economics
Ø The decision makers that dictate the above are the household, the firms and the government.
what is money
Ø Without money the only way of getting all the things you need is by barter;
Ø In order for barter to work effectively there has to be a coincidence of needs;
Ø You must have something I want and I must have something that you want;
Ø Moreover this needs to be at the same time;
Ø And we need to agree on how much of what you have equals how much of what I have….
what is meant by coincidence of needs
Ø If I want a bag of apples then I have to find a greengrocer who wants a lecture;
Ø We then have to agree on how many apples = 1 of my lectures;
Ø I must do the same for every commodity or service I want;
I have to agree a rate of exchange.
what is the relationship between coincidence of needs and exchange rates
Ø The equation describing the relationship between the # of commodities and the # of exchange rates is:
Ø C=n!(n-1)/r!
Ø Simplifies to C = n(n-1)/2;
Ø Where:
C = number of exchange rates and;
n = number of commodities.
define coincidence of need
is an economic phenomenon where two parties each hold an item that the other wants, so they exchange these items directly without any monetary medium. Within economics, this has often been presented as the foundation of a bartering economy
what is meant by barter
Barter isan act of trading goods or services between two or more parties without the use of money
describe the parable of the goldsmith
Ø Money was originally a receipt for a deposited mass of gold;
Ø When you reclaimed ‘your’ gold it didn’t need to be the bar you deposited as long as it’s the same amount of gold i.e. fungible);
Ø The Goldsmiths worked out that since not all depositors claimed their gold each day they could lend out some;
Ø They then worked out that rather than lending out the gold bars that were not reclaimed they could lend out receipts;
Ø As long as the receipt holders were confident that they could reclaim their gold if they wanted to, they saw no need. The receipts needed to be as ‘good as gold’;
Ø As soon as that confidence waned, there was a ‘run on the bank’.
So:
Ø If 100 bars were deposited, the goldsmiths would issue 100 receipts. They could then lend out 80 bars (assuming they projected no more than 20 would be reclaimed each day);
They then worked out that if they just kept the 100 bars as the reclaimable 20% they could just lend receipts
Ø They would then lend 400 receipts to go with the 100 they had already lent;
Ø Total bars on deposit = 100;
Ø Total receipts in circulation 500 (original 100 + 400 new loans);
Ø This is the basis of the Fractional Reserve Banking System
what are the two types of money
fiat and commodity money
what is meany by fiat money
Ø Fiat money: has no intrinsic value
Ø e.g. like fake money the belief that you can exchange it for goods
eg in the island of yap large stones were used as money
Ø GB£ & US$ & ZAR
what is meant by commodity money
Ø Commodity money: has intrinsic value:
Ø e.g. eg in prison can get cigarettes and phone card
Ø Beaver pelts, Krugerands, gold sovereigns, gold doubloons, pieces of eight, snout
what are the different functions of money
Ø Medium of exchange;
Ø Means of deferred payment;
Ø Store of value;
Ø Unit of account.
what should the different attributes of money be
- Difficult to counterfeit
- Must be universally accepted and instill confidence in the recipient;
- Must be Transportable;
- Relatively cheap to manufacture plus the cost of any numismatic token must not exceed the value of it;
- Divisible;
- Value must also remain relatively stable over time.
what are the two extreme of economy
Ø Command Economy (Socialism) and;
Ø Free Market Economy (Capitalism);
Midway between these is the Mixed Economy, where the government acts much like a wise parent, intervening where necessary.
what is meant by the law of diminishing utility
The Law of Diminishing Marginal Utility refers to how the marginal utility of each successive unit of good decreases
what is meant by utility
Utility is an economic unit which measures pleasure, joy, benefit and other positive attribute of consuming the next unit of good. utility is a term used to determine the worth or value of a good or service
E.g. the first cup of coffee is better than the second and by the time you get to the fouth cup of coffee is not wanted.
what is meant by marginal utility
Ø Marginal utility is the change in total utility that results from a one-unit increase in the quantity of a good consumed;
Ø As the quantity consumed of a good increase, the marginal utility from consuming it decreases;
Ø this decrease in marginal utility as the quantity of the good consumed increases is the principle of diminishing marginal utility.
what happens when the quantity of good consumed increases
the marginal utility decreases
what is positive marginal utility
all the things that people enjoy and want more of have a positive marginal utility. Some objects and activities can generate a negative marginal utility- and lower total utility . for example hard labour and pollution. But all the good and services that people value and that we are thinking about her is positive marginal utility. Total utility increases as the quantity consumed increases
describe what is meant by law of diminishing utility
Total utility increases with the consumption of a good.
The marginal utility gets less as you go on e.g. things that you consume
Even though the units of utility increases the marginal utility gets smaller e.g. when you have your first cup of coffee its good but the want for coffee decreases as you have more cups
This doesn’t apply to petrol and energy because we continuously need it
how can we infer MU values
we can infer the MU values from the prices (up to an arbitrary constant of multiplication). Because in consumer equilibrium, MUM/PM = MUS/PS = , we know that MUM = PM and MUS = PS. (Use this second explanation carefully, and don’t use the math as densely as we’re using it here. Spell it out at greater length in words and with intuition.)
what occurs to the marginal utility as the consumption of good increases
Marginal utility decreases with the consumption of a good.
The total utility increases but the marginal utility decreases. This is known as the diminishing marginal utility
what is meant by utility maximising choice
Consumers want to get the most utility possible from their limited resources. They make the choice that maximises utility.
To discover this choice we combine the constant imposed by the budget and the consumers preference and find the point on the budget line that gives the consumer the maximum attainable utility
what is meant by law of diminishing returns
refers to how the marginal production of a factor of production starts to progressively decrease as the factor is increased, in contrast to the increase that would otherwise be normally expected
what are the 4 categories of law of diminishing returns
- Land
- Labour
- Capital
- Enterprise
how does diminishing returns occur
Diminishing returns occur in the short run when one factor is fixed (e.g. capital)
If the variable factor of production is increased (e.g. labour), there comes a point where it will become less productive and therefore there will eventually be a decreasing marginal and then average product.
This is because, if capital is fixed, extra workers will eventually get in each other’s way as they attempt to increase production. For example, think about the effectiveness of extra workers in a small café. If more workers are employed, production could increase but more and more slowly.
This law only applies in the short run because, in the long run, all factors are variable.
what is meant by monetary policy
Ø Monetary policy is the process by which the government, central bank, or monetary authority of a country controls
Ø the supply of money;
Ø availability of money;
Ø cost of money or rate of interest.
what are the priorities of monetary policy
Ø The objectives of monetary policy are economic stability and growth;
Ø The direct goals include stable prices and low unemployment;
Ø There are two policy extremes, expansionist and contractionist;
Ø An expansionist policy is used during recession to combat unemployment and involves increasing the money supply;
what are the two types of monetary policy
expansionist and contractionist
what is meant by expansionist policy
means letting people buy there their stuff.
Expansionary policy is a type of macroeconomic policy that is implemented to stimulate the economy and promote economic growth. Expansionary policies are used by central banks in times of economic downturns to reduce the adverse impact on the economy.
what does expansionist policy aim to do
Expansionary monetary policy aims to increase aggregate demand and economic growth in the economy.
Expansionary monetary policy involves cutting interest rates or increasing the money supply to boost economic activity.
It could also be termed a ‘loosening of monetary policy’. It is the opposite of ‘tight’ monetary policy.
when do you pursue expansionary monetary policy
The recession in 2008/09, caused the Bank of England to cut interest rates dramatically to try and boost economic recovery. Interest rates fell from 5% to 0.5% in a few months
The MPC of the Bank of England has an inflation target of 2% +/-1. They also consider other economic objectives such as economic growth and unemployment. If inflation is forecast to fall below the target, they can consider loosening monetary policy to target higher inflation and enable a higher rate of economic growth.
Also, if the economy is forecast to enter into a recession, they are likely to cut interest rates and try to boost economic growth.
In some cases, they may pursue expansionary monetary policy, even if inflation is above target – if they think inflation is temporary and there is a greater risk of recession
how does expansionary monetary policy work
If the Bank of England cuts interest rates, it will tend to increase overall demand in the economy.
Lower interest rates make it cheaper to borrow; this encourages firms to invest and consumers to spend.
Lower interest rates reduce the cost of mortgage interest repayments. This gives households greater disposable income and encourages spending.
Lower interest rates reduce the incentive to save.
Lower interest rates reduce the value of the Pound, making exports cheaper and increase export demand.
In addition to cutting interest rates, the Central Bank could pursue a policy of quantitative easing to increase the money supply and reduce long-term interest rates.Under quantitative easing, the Central bank creates money. It then uses this created money to buy government bonds from commercial banks. In theory, this should:
Increase the monetary base and cash reserves of banks, which should enable higher lending.
Reduce interest rates on bonds which should help investment
what is the effect of expansionary monetary policy
In theory, expansionary monetary policy should cause higher economic growth and lower unemployment. It will also cause a higher rate of inflation. To some extent, the expansionary monetary policy of 2008, helped economic recovery. But, the recovery was weaker than expected showing limitations of monetary policy.
Why expansionary monetary policy may not work
Cutting interest rates isn’t guaranteed to cause a strong economic recovery. Expansionary monetary policy may fail under certain conditions.
If confidence is very low, then people may not want to invest or spend, despite lower interest rates.
In a credit crunch, banks may not have funds to lend, therefore although the Central Bank cuts base rates, it is still difficult to get a loan from a bank.
Commercial banks may not pass the base rate cut on.
In the Credit crunch, banks standard variable rate (SVR) didn’t fall as much as the base rate.
It depends on other components of aggregate demand. Expansionary monetary policy may boost consumer spending, however, if we are in a global recession, then there may be a strong fall in exports which outweighs the improvement in consumer spending.
Time Lags. It can take up to 18 months for interest rate cuts to increase spending. For example, people may have a two-year fixed rate mortgage. Therefore, they only see the impact of the rate cut when they remortgage
Did Expansionary Monetary Policy of 2008 Work?
The recession of 2008-2009 was very deep. The UK was hard hit by the credit crunch and knock to the financial sector. Despite interest rate cut and £200bn of quantitative easing, the economy was quite slow to recover. In 2011, this weak recovery petered out.
However, without the expansionary monetary policy, the recession could have been even deeper. Also, the double-dip recession of 2011-2012 was partly caused by a tightening of fiscal policy (higher tax, lower spending)
what is monetary policy
Ø An contractionist policy is used during an overheating economy to combat excessive inflation;
Ø Both policies involve intervening in (i) the physical amount of money in the economy OR (ii) the velocity of its circulation;
Ø (i) involves altering interest rates and quantitative easing. (stealing money by printing)
- Prices go up and therefore money is taken off people by increasing the interest rate
how does monetary policy control the economy
Ø Controlling the amount of money n the economy results in controlling spending;
Ø Interest rates achieve this; if I pay £1 more to my lender because they are paying £1 more to the Bank of England I can spend £1 less on goods;
Ø The extra £1 is literally taken out of circulation.
what is contractionary policy
Contractionary policy is a monetary measure referring either to a reduction in government spending—particularly deficit spending—or a reduction in the rate of monetary expansion by a central bank. It is a type of macroeconomic tool designed to combat rising inflation or other economic distortions created by central banks or government interventions. The main contractionary policies employed by the government include raising the Federal reserve rate, increase bank reserve requirements, and selling government securities
what are the key points of contractionary policy
Contractionary policies are macroeconomic tools designed to combat economic distortions caused by an overheating economy.
Contractionary policies aim to reduce the rates of monetary expansion by putting some limits on the flow of money in the economy.
Contractionary policies are typically issued during times of extreme inflation or when there has been a period of increased speculation and capital investment fueled by prior expansionary policies.
Contractionary Policy as a Monetary Policy
Contractionary monetary policy is driven by increases in the various base interest rates controlled by modern central banks or other means producing growth in the money supply. The goal is to reduce inflation by limiting the amount of active money circulating in the economy. It also aims to quell unsustainable speculation and capital investment that previous expansionary policies may have triggered.
how does the economy work
Ø Each £1 less on goods spent means that demand for goods goes down and so prices must follow; inflation is then reduced.
Ø The downside to this is that productivity suffers and GDP (and therefore economic growth) decreases;
Ø Another tool used in monetary policy is the purchase or sale of treasury bills, government bonds, or foreign currencies;
Ø If there is too much money in circulation and the MPC does not want to raise rates, the Government can make an issue of ‘safe’ government bonds;
Ø The money used to pay for these is taken out of the cycle;
Ø The government buys back bonds in the opposite case.
what are the two types of inflation
demand-pull inflation and cost-push inflation
