Chapter 2.2 Flashcards
Contrast the economic factors that impact on commercial negotiations
Microeconomics
The economics of an individual, department or organisation
Macroeconomics
The economics of a nation, industry or market
Name 12 sources of information on micro and macroeconomics
- Office for national statistics
- Bank of England Statistics
- Gov.UK Statistics
- World bank
- Federal reserve economic data
- UN Comtrade
- Yahoo Finance
- Energy information administration
- BBC Market Data
- Trade Publications
- Communication with suppliers
- Trade unions
What does microeconomics consider
The factors that affect individual economic choices, the effect of changes in these factors on the individual decision makers, how their choices affect and are affected by markets and how prices and demand are determined in individual markets
Opportunity cost
The potential benefits foregone as a result of choosing one alternative over another
What is the key assumption underpinning microeconomics
Resources are limited and therefore scarce
What is the law of diminishing returns
If one keeps adding a variable factor of production (such as labour) to fixed factors (such as land), you will get proportionally less output from each additional unit of factor added until eventually overall output will start to decrease with each additional unit of factor added
What are the four factors of production
- Land
- Labour
- Capital
- Enterprise
ROM prices
A price with a ‘rough order of magnitude’. This is similar to a ballpark figure but is usually estimated to tens, hundreds, thousands etc
What does microeconomics say that prices are determined by?
The interaction of supply and demand
What is the price mechanism
This theory assumes situations where offerings are relatively standardised and producers have a good understanding of the prices that different producers charge
What can you do when it is more difficult to compare suppliers offerings
Access other data sources including previous price paid, to inform them of market prices
What is also known as ballpark pricing?
ROM prices
Is demand finite?
Yes
Name 6 factors that determine demand. for a good or service
- The necessity of the item for firms/existence/subsistence
- The price of the good or service
- The prices of other goods and services, especially substitutes and complements
- The income of buyers
- The tastes and preferences of buyers
- Expectation of buyers about the future
Describe the demand curve
When the price increases, the quantity demanded will reduce
When does a shift in the demand curve occur?
A shift occurs when an influencing factor other than price changes
What is supply in microeconomics
The quantity of goods and services offered to the market by producers
Name 6 determinants of supply
- the physical feasibility and time and energy required to produce the products
- Price
- Prices of other goods and services
- Relative revenues and costs of making the good or service
- The objectives of producers and their future expectations
- Technology and innovation
What is a movement along the supply curve brought about by?
A change in price
What is a shift in the supply curve be caused by?
A determinant other than price
In microeconomics how is equilibrium price determined?
When the quantity demanded is equal to the quantity supplied
Are there shortages and surpluses at equilibrium price
No
What does elasticity refer to?
The responsiveness of quantity demanded or quantity supplied to a change in price or another factor
When is the price of a product described as being elastic?
If a small change in price leads to a big change in demand
When is the price of a product described as being inelastic?
If a big change in price leads to a small change in demand
Name 7 examples of products with inelastic demand
- Electricity
- Fuel
- Basic foodstuffs
- Commuter transport
- Tobacco
6.Alcohol - Sugar based drinks
What is income elasticity
The responsiveness of the quantity of a product demanded, to changes in customers income
What is cross elasticity
The responsiveness of quantity demanded or supplied of good X to a change in price of good Y
Describe market competition
Pure competition is perfect competition
Monopolistic competition is imperfect competition
Name 3 features of a perfectly competitive market
- There are many firms producing identical or very similar (homogeneous) goods or services
- There are no barriers to entry to the market or exit from the market - anyone can enter or leave easily
- Both producers and consumers have perfect knowledge of the marketplace, prices, costs of production and influences on demand and supply
Is it possible to increase profits through pricing in a perfectly competitive market
No - its impossible
Contract price adjustment
A legal clause whereby the contract price can be varied, either up or down, by reference to an agreed formula, e.g., inflation rate or some other recognised index
Why is a market with perfect competition the most attractive market to be buying from
As there are many suppliers all selling the same products, there is plenty of choice and competition
When does a monopoly exist?
When there is only one producer in the market
What can a monopoly refer to?
A single company that has a dominant presence in a market with market share above 30-50%
What is an exception to forming cartels being illegal
OPEC (The Organisation of the Petroleum Exporting Countries) which very explicitly and somewhat successfully seeks to control the price of oil by restricting production in its member states
What are monopolies usually subject to?
Government control or regulation
Name 4 ways of dealing with monopoly suppliers
- Making yourself an attractive buyer
- Seeking out alternatives/substitutes in a private or public manner
- ‘Designing out’ the requirement that forces you to go to the monopoly supplier, or seek to make the product, or threaten to make it yourself if feasible
- Lobbying government or campaigning, as part of an industry or trade body, for a reduction in barriers to entry that supports the monopoly
When does an oligopoly exist?
When there are a small number of producers that exert a significant influence in a market
What is a criticism of an oligopoly
They are more focused on their competitors next move than on their customers
Name 4 examples of oligopolistic markets
- Global beer supply
- Computer game consoles
- Global audit services
- Media/transport/airline companies in regional and national markets
Name 3 characteristic of oligopolistic markets
- Non-price competition/similar pricing for products and services
- High investment in marketing and branding
- High barriers to entry
When does monopolistic competition exist?
In markets where there are many competing producers but they will try to use product differentiation
What does their ability to differentiate allow (monopolistic competition)
They can act as monopolies in the short run irrespective of the actions of their competitors
What must happen for monopolistic competition to exist?
Consumers must perceive differences between products sold by competing firms
Describe barriers to entry and exit in monopolistic competition
There are fewer compared to oligopolistic markets
What is a macroeconomic factor?
To do with the broad economy at the regional or national level, and so it affects a large population rather than a few individuals
Name 4 generic macroeconomic factors
- Economic output
- Unemployment
- Inflation
- Savings and investment rates
When may there be winners and loser
When a macroeconomic factor such as interest rates or exchange rated changes
Name 7 macroeconomic factors that could influence procurement
- Economy growth rate
- Inflation rates
- Interest rates
- Currency exchange rates
- Unemployment rates
- Protectionism
- Quotas, tariffs and border controls
Name 3 important considerations regarding macroeconomic factors
- Changes and rates of changes
- General versus particular effects
- Expectations/consumer sentiment
What is economic growth
The level of buying and selling activities happening in an economy over a time period
How is economic growth normally measured
By gross domestic product (GDP)
What does GDP refer to?
The value of the total amount of goods and services a country produces
What happens to demand when GDP goes down
Fall in demand
What is counter cyclical demand
The demand for their products and services increases when growth slows and vice versa
What do high prices do to the inflation rate?
High prices drive the inflation rate up
Why should buyers be aware of relative growth rates in the economies they are buying from?
It may give an indication as to the future strategy of their suppliers
What does the inflation rate refer to?
The rate of price increase normally measured in percentage per year
What effect does inflation have?
The effect of reducing the value in purchasing power of a fixed unit of money over time
What can inflation rate measures be applied to?
A whole country through general measure (CPI) or (RPI)
How many inflation affect payments?
In countries with high inflation, suppliers may demand payment in cash upfront or payment in another currency from a country with a lower inflation rate
What can high inflation encourage?
People to spend now or buy assets as opposed to saving cash in the bank as the purchasing power of their money is decreasing faster than in lower inflation situations
What does high inflation directly affect the strength of?
The strength of your currency relative to currencies with lower inflation rates
Is deflation rare?
Yes
Name a country that has experienced deflation?
Japan
What are interest rates?
Charges levied by the banks for extending credits
What are interest rates influenced by?
The inflation rates which act as a ‘floor’ rate
What will increases in interest rates lead to?
Higher interest expenses payable by businesses that need to borrow and will therefore increase overheads
How may increases in interest rates affect consumers?
It may affect consumers who need to borrow or have outstanding loans by increasing their servicing costs and reducing their disposable income
What may happen if interest rates are too low and credit is too?
Cheap rates can fund a spending boom with consumers and businesses buying more than they can afford to pay back
When importing when should buyers seek to pay?
In their own home currency as their costs and profits are expressed in their currencies and so exchange rate uncertainty is avoided
What are currency exchange rates determined by?
Macroeconomic factors and demand and supply
Name 4 factors that determine a country’s relative exchange rate with another at any point in time
- relative inflation rates
- Relative growth rates
- Demand and supply of the country’s currency
- Economic, social and political stability
What is the unemployment rate
The number of unemployed people as a percentage of the labour force
What are unemployed people
Those who report that they are without work, that they are available for work and that they have taken active steps to find work in the last four weeks
What is the unemployment rate seen as?
A key indicator of economic activity in a country
Describe demand in countries with high unemployment
Consumer demand is likely to be supressed as many people will not be earning a salary
How do countries with high unemployment stay in business
They may need to export and find new markets in order to stay in business if domestic demand is depressed
What are low unemployment rates often accompanied by?
Upward pressure on wages particularly in countries where there is little migration permitted
What are protectionist policies?
Measures a national government may introduce in order to restrict the quantity of goods imported into the country, such as quotas and tarrifs
What is protectionism designed to protect against?
The potential short term risks of liberal trade policies
Name 2 negative impacts protectionism can have on the economy
- It harms consumers by raising costs of imported goods
- Harms the exporters of goods both in the protectionist country and in the countries being protected against
Does protectionism harm economic growth?
Yes
Name 2 things that encourage economic growth
- Free trade
- Deregulation
Who are quotas and tarriffs introduced by?
Either by the nation receiving the goods (or potentially by the World Trade Organisation otherwise known as the WTO) to manage the impact of goods and services on the local economy of the receiver of imported goods
Why may countries try to dump product into other economic regions at very low costs?
Due to surplus production in their own market or as a weapon to destabilise the receiving nations economic interests
What do border controls require
The organisation or person moving goods between nations to ‘declare’ their goods, a situation which often requires payment of duties and tarriffs
What does the demand for tariff payments lead to?
Illegal smuggling across borders
