M1: Micro Environment Flashcards
What is microeconomics?
Microeconomics concentrates on understanding the behaviour of individual people and businesses in
specific situations.
What is the difference between microeconomics and macroeconomics?
Macro explores large scale or general economic factors e.g. global economies whereas micro is about individual people and businesses in specific situations.
What is a market?
A market is a place where people, businesses and institutions gather (it can be online or a physical place), enabling them to be able to exchange goods or services.
What is perfect competition?
Perfect competition is a theoretical market structure characterised by:
- A large number of small buyers and suppliers
- Perfect information, where buyers have complete knowledge about alternatives and costs.
- Homogeneous, interchangeable products
- No barriers to entry
- No transaction or switching costs
Give examples and explain four types of markets which are not perfect competition.
Monopoly - A monopoly is the opposite extreme, with only one supplier dominating the market. Unless regulated, a monopoly can dictate prices due to a
lack of alternatives.
Oligopoly - An oligopoly involves a small number of dominant suppliers in a market. These suppliers may collude, explicitly or implicitly, to protect their
interests. (Competition and Markets Authority (CMA) investigates any collusion.)
Monopolistic Competition - Monopolistic competition occurs when many producers offer differentiated products, often through branding and promotion. This allows companies to charge premium prices.
What is market analysis?
Market analysis involves research encompassing various factors, including;
* market size
* customer preferences
* segment analysis
* seasonality
* Key competitors’
* economic factors affecting the market
* emerging trends
What are the three market positioning strategies?
1) Cost leadership involves offering products or services at the lowest sustainable cost in an industry. This strategy aims to outperform competitors in pricing while maintaining quality.
2) Differentiation focuses on providing unique products or services compared to competitors in the market. This can be achieved through features, exclusivity, branding, promotion, or company values.
3) Focus strategy entails targeting a specific market segment. Companies may choose to compete based on cost within this niche or emphasise perceived
qualities.
What is strategic group analysis?
Strategic group analysis helps companies understand their competitive landscape by analysing which businesses in their industry are in effective competition with them and those that are not.
e.g. geographic reach, strategy, product range, distribution channels, pricing, and differentiation.
What are market disruptors and give some examples?
Market disruptors are businesses that can transform industries, business models, and profitability.
e.g. Amazon started as an online book retailer and expanded into various sectors (Television, groceries, computing services) by leveraging technological innovation.
What is demand theory?
Demand theory explains consumer behaviour concerning price changes.
What are the three factors which help to explain the law of demand?
The law of demand states that as the price of a good increases, the quantity demanded decreases,
and vice versa. Three factors contribute to this phenomenon:
- The Law of Diminishing Marginal Utility: As consumers acquire more units of a product, the
additional benefit of each unit decreases, reducing the price they are willing to pay. - The Income Effect: Limited income constrains consumers from buying more units as prices rise.
- The Substitute Effect: Consumers switch to substitute products as prices of the original product
increase.
Explain and be able to draw a demand curve.
The relationship between price and demand is visually represented on a graph called a demand curve.
These curves typically exhibit a downward slope, indicating the inverse relationship between price and
quantity demanded.
Top left to bottom right slope
How can existing market participants respond to market disruptors?
- Commercial retaliation, such as discounting and promotions.
- Lobbying for government regulations that protect their interests.
- Differentiation by offering unique experiences.
- Investment in research and development or acquisition of competitive skills and resources.
- Exiting the market and shifting focus to other business interests.
What factors cause a demand curve to shift to the right (increase) or the left (decrease) in demand?
- Price of Substitutes: When substitute goods become cheaper, consumers are more likely to
opt for those substitutes, reducing the demand for the original product and shifting the demand
curve to the left. - Price of Complements: Conversely, when complementary products become more affordable,
demand for the original product may increase, causing the demand curve to shift right. - Consumer Incomes: For “normal goods,” an increase in consumer income leads to greater
demand, shifting the demand curve to the right. In contrast, for “inferior goods,” an increase in
income decreases demand, shifting the curve left. - Tastes and Trends: Consumer preferences and trends play a significant role. If a product
becomes fashionable or is well-advertised, demand may increase, pushing the demand curve
to the right. - Expectations of Future Prices: If consumers anticipate price increases in the future, current
demand may surge, causing the demand curve to shift right. So if we think that, say, cars will
double in price next year, demand now will increase, moving the curve to the right.
Conversely, if buyers think price cuts are coming, they will hang back now and the curve will
move left. - Legislation: Government regulations can also impact demand. For example, a ban on using
mobile handsets while driving increases the demand for hands-free kits, shifting the demand
curve to the right.
What is the law of supply?
The law of supply suggests that as the selling price of a good increases, the quantity supplied of that good will also rise, and vice versa.
Bottom left to top right slope
