Core Knowledge Flashcards
Line of analysis for PED
Due to a change in the factors that affect PED the business’ product or products might become more price
- Due to poor customer service for example a business’ products may become price elastic
- Leading to customers being less loyal to the brand
- Therefore if price increases there will be a significant fall in demand
- Leading to pressure to keep prices low
- Leading to lower revenue
- Reducing gross profit margin
Line of analysis for Price inelastic
If the business does any of the above then they are more likely to be price inelastic …
- Customers are loyal to the good or brand
- Therefore if the price rises they continue to buy the product meaning there will only be a small fall in demand
- Therefore businesses can charge higher prices in order to generate more revenue
- Leading to an increase in gross profit margin
- Potentially increasing operating profit which can be retained to improve liquidity or invested in non current assets to increase scale.
Line of analysis for luxury good
Luxury goods
- If a business only sells luxury goods then they are vulnerable to changes in average incomes
- Therefore if many people within a country lose their jobs then there will be a fall incomes
- This will lead to a significant fall in demand for a business’ goods as consumers switch to cheaper alternatives
- Leading to a fall in revenue resulting in a fall in gross profit
- This could lead to them making an operating loss putting them under pressure to reduce their expenses
- This could involve selling their non-current assets such as stores and factories
- Reducing scale
Line of analysis for a normal good
Normal goods
- If a business sells normal goods then they are likely to have stable, predicable sales • This is because when incomes change demand does not change very much
- This means that they are unlikely to see a significant fall or rise in profits when incomes change
- This means the business is attractive to banks as it is a safe investment
- Meaning they are unlikely to make a loss and can therefore keep up with loan repayments
- This could result in them getting low interest rates on loans leading to lower expenses
Line of analysis for Inferior goods
Inferior goods
- When unemployment is high then incomes will be lower and therefore the demand of inferior goods will increase
- The business may then need to be flexible to be able to respond to an unexpected change in income so they can increase production of a good to meet the new demand
- This will lead to an increase in gross profit.
- This flexibility will also help them reduce production when incomes rise again
- This will ensure that they can reduce operating expenses when demand falls therefore avoiding a loss
Line of analysis for purchasing economies of scale
Purchasing economies of scale
- If sales increase.
- There will be an increase in volumes ordered from suppliers (use the case study to identify what they will be buying more of – be specific - E.g. plastic and metal).
- Leading to a potential discount from bulk buying.
- Leading to lower average cost of sales/variable costs.
- Resulting in increased gross profit margin.
Line of analysis more marketing economies of scale
Basic analysis
- When businesses have increased sales.
- Increase sales volume. • Meaning the fixed costs of marketing e.g…. a) Market Research b) Advertising c) Research and development
- Can be spread over more units.
- Lower unit fixed costs.
- Making the above more affordable and can therefore can do more of it.
- Link to the advantages of doing more of the above – improved product development, increased brand awareness, improved innovation.
Line of analysis for financial economies of scale
Basic analysis
- Large businesses have significant non-current assets.
- Meaning they have more collateral for loans
- Lower risks for banks.
- Lower interest rates.
- Lower fixed costs (interest payments are a fixed cost).
- Lower unit fixed costs
Line of analysis for technocal economies of scale
Basic line of analysis
- As businesses grow they begin to make better use of capital/machinery or have the resources to invest in more.
- Further/increased use of machinery will improve productivity and further increase output.
- Spreading fixed costs of production (labour, rent, utilities) over more units.
- Lowering unit cost of producing a product.
- Allowing business to lower selling price / increase profit margin (choose one).
Line of analysis for multiple intermediaries
Basic Analysis
- A business may choose to distribute their products through multiple intermediaries, eg – multiple retailers/online.
- This improves the accessibility of the product as it will be more widely available.
- Therefore, more customers may purchase the product.
- Leading to an increase in sales for the business.
- Link to EOS, increased capacity utilisation, lower cost per unit.
Line of analysis for direct distribution
- A business may choose a more traditional distribution channel and sell their products directly.
- This gives the business more control over the customer experience.
- Improved customer service.
- Makes business more differentiated.
- Business become more price inelastic.
- Increase selling price and not experience significant fall in demand.
- Higher revenue.
Line of analysis for specialisation
- Focus cash reserves and resources on being an expert in one field - product or industry
- Increased investment on research and development within the chosen field as cash/spending not spread across a wider product portfolio
- More advanced product development
- Gives business a competitive advantage
- Increased volumes sold
- Fixed costs of the R&D spread over more units Lower unit costs
Downside to specialisation
However…
Specialisation means a business has a focus on one product or industry
The business does’t have spread risk so is vulnerable to external factors
e. g: - Changes in incomes (more of an issue if the good is income elastic)
- Changes in competition
– new businesses enter the market and become more advanced in that area
– lose competitive advantage
- Social trends change
– product no longer in demand
- Shortage of supply:
- Labour – skill shortage
- Raw materials – commodities run out
Line of analysis for differentiation Strategies (porter)
- increased differentiation…
- make the product/ service unique
- persuading customers to buy it over competitors
- making the product less price elastic
- consumers less sensitive to a change in price
- the business can charge higher prices and therefore increase gross profit margin
Line of Analysis for low cost strategies (porter)
Line of Analysis for low cost strategies
- Lower variable/fixed costs
- Increased gross/operating profit margins
- Therefore able to reduce the selling price
- Become more price competitive within a price elastic market
- Leading to a significant increase in demand
- Therefore increasing output, allowing the business to benefit from economies of scale