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Core Knowledge Flashcards

1
Q

What is price elasticity?

A

How consumers react to prices of goods/services

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2
Q

Price elastic

A

Sensitive to a change in price

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3
Q

Price Inelastic

A

Insensitive to change in price

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4
Q

Name factors that affect PED

A

Brand image
Quality
Price
Ethics
Aesthetics

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5
Q

What is the calculation for PED

A

Percentage change in quantity demanded/percentage change in price

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6
Q

Price elastic disadvantage line of analysis

A
  1. Due to poor customer service a business product may become price elastic
  2. Leading to less customer loyalty
  3. If price increases there will be a significant fall in demand
  4. Leading to pressure to keep prices low
  5. Leading to lower revenue
  6. Reducing gross profit margins
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7
Q

Price inelastic line of analysis

A
  1. By conducting R&D a business is more differentiated compared to competitors
  2. Therefore there will be an increase in customer loyalty as the businesses products are unique
  3. Making them price in elastic so they can charge higher prices without a fall in demand
  4. Leading to an increase in revenue
  5. Increasing gross profit margins
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8
Q

What is income elasticity of demand?

A

How consumers react to a change in income. This is a study how consumers change what they buy due to income change.

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9
Q

Luxury

A

Income elastic
+1

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10
Q

Normal

A

1-0
Income inelastic

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11
Q

Inferior

A

Negative number
Income elastic

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12
Q

Calculation for income elasticity of demand

A

Percentage change in quantity demanded/Percentage change in income x YED

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13
Q

Luxury goods line of analysis

A
  1. Business is vulnerable to change in average income
  2. Many people lose their jobs there will be a fall in demand
  3. Significant fall in demand as consumers switch to a cheaper alternative
  4. Leading to a fall in revenue and gross profit
  5. As well as operating loss meaning they will have to reduce their expenses
  6. Meaning they have to sell their non current assets so they won’t be able to operate.. reducing scale
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14
Q

Normal goods line of analysis

A
  1. A business that sells normal goods are likely to have stable and predictable sales
  2. This is because when income changes demand does not change very much
  3. This means they are unlikely to see a significant fall in profits when incomes change
  4. Unlikely to make a loss and be able to keep up with loan repayments
  5. Meaning they get lower interest rates in loans leading to lower costs
  6. Therefore the business is attractive to banks as it is a safe investment
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15
Q

Inferior goods line of analysis

A
  1. When unemployment is high incomes will be lower and demand for inferior goods will increase
  2. The business may need to be flexible to able to respond to an unexpected change in income so they can increase production of a good to meet the new demand
  3. This will lead to an increase in gross profit
  4. The flexibility will also help them reduce production when incomes rise again
  5. This will help ensure they can reduce operating costs when demand falls and therefore avoid a loss
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16
Q

How can you reduce risk?

A
  1. By selling products around the world
  2. By having a wide product portfolio
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17
Q

Line of analysis for spreading risk (positive)

A
  1. If a business sells normal, luxury and inferior goods
  2. They will have a balanced product portfolio
  3. They will be less vulnerable to changes in consumer incomes
  4. Therefore, if incomes fall
  5. Businesses will still experience a consistent demand, as consumers switch from luxury to inferior
  6. Consistent cash inflows as sales haven’t dropped
  7. Positive net cash flow
  8. Able to pay day to day bills
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18
Q

Spreading risk line of analysis (negative)

A
  1. However by having a balanced product portfolio
  2. Business will need to identify needs of multiple segments
  3. For example.. consumers with high incomes and consumers with lower incomes
  4. Collecting valid data from multiple groups will require a large sample
  5. Business will need specialist researchers
  6. Who require high salaries
  7. Increased expenses
  8. Fall in operating profit
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19
Q

What is economies of scale?

A

The reduction of average costs by a business as output rises

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20
Q

Calculation for unit costs

A

Total fixed costs + total variable costs/total number of units

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21
Q

What are the 4 types of Economies of scale?

A
  1. Purchasing
  2. Marketing
  3. Financial
  4. Technical
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22
Q

What is purchasing economies of scale?

A

Where a business buys a product in bulk to get a discount

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23
Q

What is marketing economies of scale?

A

The idea of spreading fixed costs of marketing over more units

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24
Q

What is financial economies of scale?

A

The idea that larger businesses are seen by lenders as more reliable or worthy of credit due to their size, whereas smaller businesses will tend to pay higher rates of interest as they aren’t as reliable as don’t have as much collateral.

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25
Q

What is technical economies of scale?

A

The idea that a larger businesses more readily have the capital to invest in newer and better technology, which can bring them cost advantages smaller businesses are otherwise unable to achieve.

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26
Q

Purchasing economies of scale line of analysis

A
  1. If sales increase
  2. There will be an increase in the amount of .. from suppliers
  3. Leading to a potential discount from bulk buying
  4. Leading to lower average cost of sales/variable costs
  5. Increased gross profit margin
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27
Q

Marketing economies of scale, line of analysis

A
  1. When businesses have increased sales
  2. Increase sales volume
  3. Meaning the cost of market research etc can be spread over more units
  4. Lower cost per unit
  5. Making the above more affordable and can therefore can do it more
  6. Link to the advantages of doing more of the above (improved product development)
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28
Q

Financial economies of scale, line of analysis

A
  1. Large businesses have significant non current assets
  2. Meaning they have more collateral for loans
  3. Lower risks for bank
  4. Lower interest rates
  5. Lower fixed costs
  6. Lower fixed costs per unit
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29
Q

Technical economies of scale, line of analysis

A
  1. As businesses grow they begin they begin to make better use of capital/machinery or have the resources to invest in more
  2. Further/increased use of machinery will improve productivity and further increase output
  3. Spreading fixed costs of production.. labour, rent and utilities over more units
  4. Lowering unit cost of producing a product
  5. Allowing businesses to lower the selling price/ increase gross profit margin
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30
Q

What is distribution?

A

The route a product takes from producer or manufacturer to consumer

31
Q

Factory/producer

A

Where goods are made

32
Q

Wholesaler

A

Buys goods in large quantities from the factory and then sells them on at a higher price than the retailers

33
Q

Retailer

A

Located in the community, need to be accessible to the target market

34
Q

Customer

A

Who the product was intended for

35
Q

What is a markup?

A

A price change to make sure a profit is made

36
Q

What are some issues with selling direct?

A
  1. IT problems
  2. Transport single items instead of bulk
  3. Increase rent
37
Q

Traditional (using intermediaries) Line of analysis

A
  1. Choosing to sell through intermediaries e.g. wholesaler
  2. Makes the product more widely available
  3. Increasing accessibility for customers
  4. Therefore more customers may purchase the product
  5. Increase in sales volume
  6. More raw material/stock needed for suppliers
  7. Can buy in bulk
  8. Gain purchasing economies of scale
  9. By negotiating a discount
  10. Lower variable cost per unit
  11. Increased gross and operating profit margins
38
Q

Drawback of Traditional

A
  1. However, intermediaries may have high levels of buyer power
  2. This means that they will able to dictate terms to the business
  3. E.g lower prices and longer period of trade credit
  4. Therefore reducing cash inflows
  5. Lowering net cashflow
  6. Reducing cash reserves
  7. May suffer from poor liquidity
  8. Unable to keep up with bills
  9. May have to sell non current
  10. Not able to operate
39
Q

Benefit of Direct

A

Choosing to sell directly to customers
1. Increase the amount of control over customer experience
2. Able to offer better customer service
3. Increase differentiation from competitors
4. Increase customer loyalty
5. More price inelastic
6. Can increase prices without a significant fall in demand
7. Increasing revenue
8. Increase gross and operating profit margins
9. More retained
10. Able to invest capital into expansion

40
Q

Drawback of Direct

A
  1. Requires high investment
  2. Need to set up their own distribution network
  3. Will need to purchase non current assets
  4. For example stores
  5. Using lots of cash
  6. Reducing cash reserves
  7. May suffer from low liquidity
  8. Can’t pay bills
  9. Have to sell non current
  10. Can’t operate
41
Q

Specialisation

A

When a business focusses on one product or a narrow range of products

42
Q

Specialisation Benefit

A
  1. By producing a narrow range
  2. They can focus cash reserves on R&D of a single product, improving durability
  3. More developed product
  4. Improved differentiation
  5. Reduced power of substitute manufacturer
  6. Product becomes price inelastic
  7. Can charge higher price without a fall in demand
  8. Increased revenue
43
Q

Specialisation Drawback

A
  1. If they only focus on a narrow range
  2. They will be more vulnerable to changes in.. changes in competition, social trends, shortage of supply etc
  3. If one or more of these changes
  4. Business will experience a fall in demand for their product
  5. Without having an alternative to rely on
  6. Reduction in cash inflows
  7. Poor liquidity
44
Q

Porters Generic Strategies

A

The different strategies a business may use to gain a competitive advantage over their rivals

45
Q

What are the 4 strategies of Porter

A
  1. Cost leadership
  2. Differentiation
  3. Cost focus
  4. Differentiation focus
46
Q

Differentiation

A

Usp, what makes them different in the market

47
Q

Differentiation focus

A

Avoid competing in the mass market by targeting a smaller segment. They then highly differentiate their product to make it very specific to the needs of the market segment

48
Q

Cost leadership

A

Minimising their costs as much as possible, this way they can sell their product/service at a lower price than competitors

49
Q

Cost focus

A

Involves targeting a small market segment and focusing on reducing costs within this market.

50
Q

Porter Line of analysis

A
  1. Pursuing his strategy
  2. Business will develop usp
  3. Competitive advantage
  4. product becomes less price elastic
  5. Customers will be less sensitive to price change
  6. Business can increase price without a fall in demand
  7. Increasing sales revenue and gross profit
51
Q

Productivity

A

The output per worker or per machine in a given time

52
Q

What are some ways to improve productivity?

A
  1. Improve employee motivation
  2. Training skills for employees
  3. More advanced machinery
53
Q

Improved productivity Benefit

A
  1. Improved productivity
  2. By innovation in production technology or by the improvement in worker motivation
  3. Leads to an increase in output per worker or machine
  4. Leads to fixed costs/expenses being spread over more units
  5. Leading to lower unit fixed costs
  6. Leading to lower unit costs increasing operating profit
54
Q

Difficulty with improving productivity

A
  1. In order to improve productivity
  2. Businesses must invest in new technology or improvement in employee motivation
  3. This will increase their cash outflows
  4. Potentially risking a negative net cash flow in short term
  5. Meaning they have less cash to use elsewhere
  6. Such as R&D for new product development
55
Q

Capacity utilisation

A

The percentage of total capacity that is actually being achieved in a given period

56
Q

Calculation for capacity utilisation

A

Actual level of output (current)/Maximum possible output x100

57
Q

Benefit of a high capacity utilisation - manufacturing business

A
  1. Output/Sales revenue
  2. Spread fixed costs over more units
  3. Lower unit fixed costs
  4. Operating margins increase
  5. More retained or lower costs
58
Q

Drawback of high capacity utilisation -
Manufacturing

A
  1. Can lead the poor customer service
  2. Due to the large amount of people they it may be noisy/large lines
  3. Giving the brand a negative brand image
  4. Products become price elastic
  5. Less revenue and gross profit margins
  6. Can no longer benefit from purchasing economies of scale
59
Q

Benefit of low capacity utilisation - Manufacturing

A

1.Operating with low cu
2. Will mean they have time to service the machines
3. To reduce the chance of machine failure
4. As machinery will not need to be in constant operation, as cu is low
5. Reducing the businesses expenses
6. As less likely to need repair
7. Or will retain positive brand reputration/No delay in production process

60
Q

Drawback of low capacity utilisation - Manufacturing

A
  1. Operating with low cu
  2. Will mean that business is not fulling utilising its resources
  3. Low levels of productivity
  4. Reduced output
  5. Fixed costs of production spread over less units
  6. Increased unit fixed costs
  7. Lower operating profit margins
  8. Less profit to retain and reinvest
61
Q

Benefit of high capacity utilisation - Service

A
  1. Good customer service leads to more differentiated
  2. Business will have high volumes
  3. Increased number of seats filled
  4. improved cu
  5. Fixed costs of service spread over more units
  6. Lower unit fixed costs
  7. Increased operating margin or decrease selling price
62
Q

Drawback of high capacity utilisation - service

A
  1. Operating with high cu
  2. Will mean that employees may be working long hours
  3. To ensure the brand image stays positive
  4. And high percentage of seats are full
  5. Employees may feel overworked
  6. Safety needs won’t be met
  7. Employees become demotivated
  8. May look for elsewhere
  9. Increase expenses due to finding someone else for the job
63
Q

Benefit of low capacity utilisation - Service

A
  1. Operating with low capacity utilisation
  2. Will mean that employees will not work for long periods of time
  3. As service may not be busy
  4. Improving work conditions and ensuring safety needs are met
  5. Ensuring employees remain highly motivated and deliver good customer service
  6. Increasing level of differentiation
  7. Service becomes more price inelastic
64
Q

Drawback of low capacity utilisation - Service

A
  1. Operating with low cu will mean the business is not fulfilling utilising its recourses
  2. Lower percentage of seats filled
  3. Lower sales volume
  4. Fixed unit costs of service spread over more units
  5. Increased fc
  6. Lowering operating profit margin
65
Q

Motivation

A

Factors that stimulate desire and energy in a job

66
Q

Financial methods of motivation

A

Salaries
Commission
Bonus
Profit sharing
Performance related pay
Share options

67
Q

Piece rate

A

Payment for each product you produce

68
Q

Fringe benefits

A

Work phone/car etc

69
Q

Taylor

A

Scientific management
Splitting harder tasks into smaller jobs
Piece rate

70
Q

Mayo

A

employees are motivated far more by relational factors such as attention and camaraderie than by monetary rewards or environmental factors, such as lighting, humidity and more

71
Q

Herzberg

A

Two factor theory
Hygiene factor
Motivators

72
Q

Maslow

A

theory of motivation which states that five categories of human needs dictate an individual’s behavior.

73
Q

Hygiene factor

A

Something that workers don’t necessarily want but if it’s taken away it will demotivate them

74
Q

Autocratic

A

management style wherein one person controls all the decisions and takes very little inputs from other group members

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