L4M5 CHAPTER 2 2.2 Contrast the economic factors that impact on commercial negotiations

Question 1

What is the definition of Demand in microeconomics?

Answer 1

Want backed by money. Human wants may be infinite but demand is finite.

Question 2

What is the definition of Supply in microeconomics?

Answer 2

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

Question 3

What are the factors that determine demand for a good or service?

Answer 3

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 (influenceable by marketing)
Expectations of buyers about the future

Question 4

What are the factors that determine supply of goods or services?

Answer 4

The physical feasibility and time and energy required to produce the products
Price
Prices of other goods and services
Relative revenues and costs making the good or service
The objectives of producers and their future expectations
Technology and innovation

Question 5

In microeconomics what causes a Surplus?

Answer 5

When supply exceeds demands - price falls

Question 6

In microeconomics what causes a Shortage ?

Answer 6

When demand exceeds supply - price increases

Question 7

What is Economic growth?

Answer 7

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

Question 8

What is the definition of GDP?

Answer 8

Gross Domestic Product (GDP) is the value of the total amount of goods and services a country produces. When the GDP rate falls or slows down, there will be a fall in demand for goods and services demanded in the economy, with a fall in firms’ revenue and profit margins. When GDP is rising, there will be an increase in demand.

Question 9

What are the four (4) main structures of industries in market competition?

Answer 9

1. Perfect or pure competition - there are many firms producing identical goods or services. There are no barriers to entry to the market or exit from the market. Knowledge of the marketplace know by both producers and consumers
2. Monopoly competition - there is only one producer in the market.
3. Oligopoly - there are a small number of producers that exert a significant influence in a market e.g. global beer supply, computer games consoles.
4. Monopolistic competition - there are many competing producers but they will try to use product differentiation, e.g. branding to distinguish themselves form other producers in the market.

Question 10

What are procurement and negotiation implications for a perfect competition industry?

Answer 10

The price is determined by market forces with no individual supplier or buyer able to influence it significantly. Prices are much more variable even within long term contracts and seeking a fixed price would create financial risks for both the buyers and the suppliers. It is often intelligent to agree to contract price adjustment mechanism (a legal clause whereby the contract price can be varied either up or down, by reference to an agreed formula), to allow for market price changes so both sides share risk.

Question 11

What are procurement and negotiation implications for a monopoly industry?

Answer 11

Monopoly type organizations generally have a greater bargaining power. Their BATNA is stronger in the short run, but over time their power can be challenged effectively.

Ways of dealing with monopoly suppliers are: making yourself an attractive buyer. Seeking out alternatives/substitutes in a private or public manner. Designing out, seek to make the product or threaten to make the product. Lobbying government for a reduction in barriers to entry that support the monopoly.

Question 12

What are procurement and negotiation implications for a Oligopoly industry?

Answer 12

An Oligopoly exists when there are a small number of producers that exert a significant influence in a market.

There a fewer players to understand and they can be highly competitive and desperate to win business from each other through offering better deals to customers to win the from competitors and keep them. From a procurement perspective, intelligent market engagement can yield significant benefits and procurement professionals can add more value through market insights, careful negotiations, planning and execution.

Question 13

What are procurement and negotiation implications for a Monopolistic industry?

Answer 13

Through market research it can be distinguished what the real differences or differentiators are that make a difference between products. Procurement professionals will know the difference between ‘real’ quality and perceived quality created in customers minds on the back of clever advertising or branding. Some differences or differentiators may be: customer service or pricing.

Question 14

What is a macroeconomic factor?

Answer 14

Anything that influences the direction of a particular large-scale market.

Question 15

What are the key macroeconomic factors?

Answer 15

Economy growth rate
Inflation rates
Interest rates
Currency exchange rates
Unemployment rate
Protectionism

Question 16

What is inflation rate?

Answer 16

The rate of price increase normally measured in percentage per year (pa).

Question 17

What are the potential impact on commercial negotiations for inflation?

Answer 17

If the inflation rate is high then obtaining credit is difficult or expensive as money in the future will be worth less that money in the present.
High inflation affects the strength of currency relative to currencies with lower inflation rates.
Suppliers may demand payment in cash upfront.
Suppliers may demand payment from a country with a lower inflation rate ( a more stable store of money value.

Question 18

In microeconomics what is Equilibrium price?

Answer 18

Price determined when the quantity demanded is equal to the quantity supplied. There are no shortages and no surpluses.

Question 19

What are the barriers of entry for a monopoly market?

Answer 19

Barriers to entry prevent or discourage competitors from entering the market. These barriers include: economies of scale that lead to natural monopoly; control of a physical resource; legal restrictions on competition; patent, trademark and copyright protection; and practices to intimidate the competition like predatory pricing. Intellectual property refers to legally guaranteed ownership of an idea, rather than a physical item. The laws that protect intellectual property include patents, copyrights, trademarks, and trade secrets. A natural monopoly arises when economies of scale persist over a large enough range of output that if one firm supplies the entire market, no other firm can enter without facing a cost disadvantage.

Question 20

What is interest rates?

Answer 20

Charges levied by banks for extending credit and are influenced by the inflation rate.

Question 21

What are the potential impact on commercial negotiations for interest rates?

Answer 21

Increases will lead to higher interest expenses payable by businesses that need to borrow and will therefore increase overheads.

If interest rate are too low and credit is too, cheap rates can fund a spending boom with consumers and businesses buying (investment) more than they can afford to pay back.

Question 22

What is Elasticity?

Answer 22

Elasticity refers to the responsiveness of quantity demanded or quantity supplied to a change in price or another factor:

• The price of a product can be described as being elastic if a small change in price leads to a big change in demand.
• The price of a product can be described as being inelastic if a big change in price leads to a small change in demand.

Question 23

What are the main characteristics of an Oligopoly?

Answer 23

• Interdependence -
  in decision­-making of the few firms which comprise the industry. This is because when the number of competi­tors is few, any change in price, output, product etc. by a firm will have a direct effect on the fortune of its rivals, which will then retaliate in changing their own prices, output or products as the case may be.
• Importance of advertising and selling costs -
  various firms have to employ various aggressive and defensive marketing weapons to gain a greater share in the market or to prevent a fall in their market share. Therefore, there is a great importance of advertising and selling costs.
• Group behaviour -
  the proper solution to the problem of determination of price and output under, it analysis of group behaviour is impor­tant.