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L4M5 - Commercial Negotiation > Chapter 2.2 > Flashcards

Chapter 2.2 Flashcards

Contrast the economic factors that impact on commercial negotiations

1
Q

Microeconomics

A

The economics of an individual, department or organisation

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2
Q

Macroeconomics

A

The economics of a nation, industry or market

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3
Q

Name 12 sources of information on micro and macroeconomics

A
  1. Office for national statistics
  2. Bank of England Statistics
  3. Gov.UK Statistics
  4. World bank
  5. Federal reserve economic data
  6. UN Comtrade
  7. Yahoo Finance
  8. Energy information administration
  9. BBC Market Data
  10. Trade Publications
  11. Communication with suppliers
  12. Trade unions
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4
Q

What does microeconomics consider

A

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

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5
Q

Opportunity cost

A

The potential benefits foregone as a result of choosing one alternative over another

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6
Q

What is the key assumption underpinning microeconomics

A

Resources are limited and therefore scarce

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7
Q

What is the law of diminishing returns

A

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

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8
Q

What are the four factors of production

A
  1. Land
  2. Labour
  3. Capital
  4. Enterprise
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9
Q

ROM prices

A

A price with a ‘rough order of magnitude’. This is similar to a ballpark figure but is usually estimated to tens, hundreds, thousands etc

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10
Q

What does microeconomics say that prices are determined by?

A

The interaction of supply and demand

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11
Q

What is the price mechanism

A

This theory assumes situations where offerings are relatively standardised and producers have a good understanding of the prices that different producers charge

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12
Q

What can you do when it is more difficult to compare suppliers offerings

A

Access other data sources including previous price paid, to inform them of market prices

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13
Q

What is also known as ballpark pricing?

A

ROM prices

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14
Q

Is demand finite?

A

Yes

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15
Q

Name 6 factors that determine demand. for a good or service

A
  1. The necessity of the item for firms/existence/subsistence
  2. The price of the good or service
  3. The prices of other goods and services, especially substitutes and complements
  4. The income of buyers
  5. The tastes and preferences of buyers
  6. Expectation of buyers about the future
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16
Q

Describe the demand curve

A

When the price increases, the quantity demanded will reduce

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17
Q

When does a shift in the demand curve occur?

A

A shift occurs when an influencing factor other than price changes

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18
Q

What is supply in microeconomics

A

The quantity of goods and services offered to the market by producers

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19
Q

Name 6 determinants of supply

A
  1. the physical feasibility and time and energy required to produce the products
  2. Price
  3. Prices of other goods and services
  4. Relative revenues and costs of making the good or service
  5. The objectives of producers and their future expectations
  6. Technology and innovation
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20
Q

What is a movement along the supply curve brought about by?

A

A change in price

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21
Q

What is a shift in the supply curve be caused by?

A

A determinant other than price

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22
Q

In microeconomics how is equilibrium price determined?

A

When the quantity demanded is equal to the quantity supplied

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23
Q

Are there shortages and surpluses at equilibrium price

A

No

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24
Q

What does elasticity refer to?

A

The responsiveness of quantity demanded or quantity supplied to a change in price or another factor

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25
Q

When is the price of a product described as being elastic?

A

If a small change in price leads to a big change in demand

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25
Q

When is the price of a product described as being inelastic?

A

If a big change in price leads to a small change in demand

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26
Q

Name 7 examples of products with inelastic demand

A
  1. Electricity
  2. Fuel
  3. Basic foodstuffs
  4. Commuter transport
  5. Tobacco
    6.Alcohol
  6. Sugar based drinks
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27
Q

What is income elasticity

A

The responsiveness of the quantity of a product demanded, to changes in customers income

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28
Q

What is cross elasticity

A

The responsiveness of quantity demanded or supplied of good X to a change in price of good Y

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29
Q

Describe market competition

A

Pure competition is perfect competition
Monopolistic competition is imperfect competition

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30
Q

Name 3 features of a perfectly competitive market

A
  1. There are many firms producing identical or very similar (homogeneous) goods or services
  2. There are no barriers to entry to the market or exit from the market - anyone can enter or leave easily
  3. Both producers and consumers have perfect knowledge of the marketplace, prices, costs of production and influences on demand and supply
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31
Q

Is it possible to increase profits through pricing in a perfectly competitive market

A

No - its impossible

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32
Q

Contract price adjustment

A

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

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33
Q

Why is a market with perfect competition the most attractive market to be buying from

A

As there are many suppliers all selling the same products, there is plenty of choice and competition

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34
Q

When does a monopoly exist?

A

When there is only one producer in the market

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35
Q

What can a monopoly refer to?

A

A single company that has a dominant presence in a market with market share above 30-50%

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35
Q

What is an exception to forming cartels being illegal

A

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

35
Q

What are monopolies usually subject to?

A

Government control or regulation

36
Q

Name 4 ways of dealing with monopoly suppliers

A
  1. Making yourself an attractive buyer
  2. Seeking out alternatives/substitutes in a private or public manner
  3. ‘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
  4. Lobbying government or campaigning, as part of an industry or trade body, for a reduction in barriers to entry that supports the monopoly
37
Q

When does an oligopoly exist?

A

When there are a small number of producers that exert a significant influence in a market

38
Q

What is a criticism of an oligopoly

A

They are more focused on their competitors next move than on their customers

39
Q

Name 4 examples of oligopolistic markets

A
  1. Global beer supply
  2. Computer game consoles
  3. Global audit services
  4. Media/transport/airline companies in regional and national markets
40
Q

Name 3 characteristic of oligopolistic markets

A
  1. Non-price competition/similar pricing for products and services
  2. High investment in marketing and branding
  3. High barriers to entry
41
Q

When does monopolistic competition exist?

A

In markets where there are many competing producers but they will try to use product differentiation

42
Q

What does their ability to differentiate allow (monopolistic competition)

A

They can act as monopolies in the short run irrespective of the actions of their competitors

43
Q

What must happen for monopolistic competition to exist?

A

Consumers must perceive differences between products sold by competing firms

44
Q

Describe barriers to entry and exit in monopolistic competition

A

There are fewer compared to oligopolistic markets

45
Q

What is a macroeconomic factor?

A

To do with the broad economy at the regional or national level, and so it affects a large population rather than a few individuals

46
Q

Name 4 generic macroeconomic factors

A
  1. Economic output
  2. Unemployment
  3. Inflation
  4. Savings and investment rates
47
Q

When may there be winners and loser

A

When a macroeconomic factor such as interest rates or exchange rated changes

48
Q

Name 7 macroeconomic factors that could influence procurement

A
  1. Economy growth rate
  2. Inflation rates
  3. Interest rates
  4. Currency exchange rates
  5. Unemployment rates
  6. Protectionism
  7. Quotas, tariffs and border controls
49
Q

Name 3 important considerations regarding macroeconomic factors

A
  1. Changes and rates of changes
  2. General versus particular effects
  3. Expectations/consumer sentiment
50
Q

What is economic growth

A

The level of buying and selling activities happening in an economy over a time period

51
Q

How is economic growth normally measured

A

By gross domestic product (GDP)

52
Q

What does GDP refer to?

A

The value of the total amount of goods and services a country produces

53
Q

What happens to demand when GDP goes down

A

Fall in demand

54
Q

What is counter cyclical demand

A

The demand for their products and services increases when growth slows and vice versa

55
Q

What do high prices do to the inflation rate?

A

High prices drive the inflation rate up

56
Q

Why should buyers be aware of relative growth rates in the economies they are buying from?

A

It may give an indication as to the future strategy of their suppliers

57
Q

What does the inflation rate refer to?

A

The rate of price increase normally measured in percentage per year

58
Q

What effect does inflation have?

A

The effect of reducing the value in purchasing power of a fixed unit of money over time

59
Q

What can inflation rate measures be applied to?

A

A whole country through general measure (CPI) or (RPI)

60
Q

How many inflation affect payments?

A

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

61
Q

What can high inflation encourage?

A

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

62
Q

What does high inflation directly affect the strength of?

A

The strength of your currency relative to currencies with lower inflation rates

63
Q

Is deflation rare?

A

Yes

64
Q

Name a country that has experienced deflation?

A

Japan

65
Q

What are interest rates?

A

Charges levied by the banks for extending credits

66
Q

What are interest rates influenced by?

A

The inflation rates which act as a ‘floor’ rate

67
Q

What will increases in interest rates lead to?

A

Higher interest expenses payable by businesses that need to borrow and will therefore increase overheads

68
Q

How may increases in interest rates affect consumers?

A

It may affect consumers who need to borrow or have outstanding loans by increasing their servicing costs and reducing their disposable income

69
Q

What may happen if interest rates are too low and credit is too?

A

Cheap rates can fund a spending boom with consumers and businesses buying more than they can afford to pay back

70
Q

When importing when should buyers seek to pay?

A

In their own home currency as their costs and profits are expressed in their currencies and so exchange rate uncertainty is avoided

71
Q

What are currency exchange rates determined by?

A

Macroeconomic factors and demand and supply

72
Q

Name 4 factors that determine a country’s relative exchange rate with another at any point in time

A
  1. relative inflation rates
  2. Relative growth rates
  3. Demand and supply of the country’s currency
  4. Economic, social and political stability
73
Q

What is the unemployment rate

A

The number of unemployed people as a percentage of the labour force

74
Q

What are unemployed people

A

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

75
Q

What is the unemployment rate seen as?

A

A key indicator of economic activity in a country

76
Q

Describe demand in countries with high unemployment

A

Consumer demand is likely to be supressed as many people will not be earning a salary

77
Q

How do countries with high unemployment stay in business

A

They may need to export and find new markets in order to stay in business if domestic demand is depressed

78
Q

What are low unemployment rates often accompanied by?

A

Upward pressure on wages particularly in countries where there is little migration permitted

79
Q

What are protectionist policies?

A

Measures a national government may introduce in order to restrict the quantity of goods imported into the country, such as quotas and tarrifs

80
Q

What is protectionism designed to protect against?

A

The potential short term risks of liberal trade policies

81
Q

Name 2 negative impacts protectionism can have on the economy

A
  1. It harms consumers by raising costs of imported goods
  2. Harms the exporters of goods both in the protectionist country and in the countries being protected against
82
Q

Does protectionism harm economic growth?

A

Yes

83
Q

Name 2 things that encourage economic growth

A
  1. Free trade
  2. Deregulation
84
Q

Who are quotas and tarriffs introduced by?

A

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

85
Q

Why may countries try to dump product into other economic regions at very low costs?

A

Due to surplus production in their own market or as a weapon to destabilise the receiving nations economic interests

86
Q

What do border controls require

A

The organisation or person moving goods between nations to ‘declare’ their goods, a situation which often requires payment of duties and tarriffs

87
Q

What does the demand for tariff payments lead to?

A

Illegal smuggling across borders

L4M5 - Commercial Negotiation (12 decks)

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