Micro Economic Factors Flashcards
The micro environment refers to…
the immediate operational environment including:
- Suppliers
- Customers
- Stakeholders and
- Intermediaries
Drucker holds that to generate a profit, it is necessary to…
…create a customer - the distinguishing characteristic of business organisation
The micro environment has 4 ‘phases’:
- Inputs (Materials, money, men, machines, minutes
- Organisation (Functions, structure, management, systems and procedures, staff, culture, competencies and skill, strategy, mission, objectives and goals)
- Outputs (Added value, goods, services, knowledge, information, stakeholder satisfaction, social consequences)
- Consumption
Mullins identifies at least 4 factors required by all organisations to function:
- People; human interactions
- Objectives
- Structure
- Management
The ‘customer value proposition’ consist of…
the sum total of benefits which a vendor promises that a customer will receive in return for their associated payment
(what the customer gets for what the customer pays!)
Value propositions can be evaluated on 2 dimensions:
- Relative performance (relative to competitors)
2. Price (Payment + access cost)
A market can be defined as…
a situation in which potential buyers and potential sellers of a good or service come together for the purpose of exchange
Utility describes…
the pleasure, satisfaction or benefit derived by a person from the consumption of goods
Marginal utility is…
the satisfaction gained from consuming 1 additional unit of a good or the satisfaction foregone by consuming 1 unit less
Assumption: Customers act rationally meaning…
- Consumers prefer more goods to less
- Providing the price is right, a consumer is willing to substitute 1 good for another
- Choices are transitive (A over B and B over C, then A over C)
Demand is…
the quantity of that good or service that potential purchasers would be willing and able to buy or attempt to buy at any possible price
Market demand is…
The total quantity of a product that all purchasers would want to buy at each price level
Factors affecting demand for a good: (6)
- Price
- Household’s income
- Price of substitutes
- Tastes / fashion
- Expectations of price changes
- Distribution of income
Ceteris paribus means…
‘all other things remain equal’
Substitutes are…
…goods that are alternatives to each other;
Swtiching demand from 1 good to another ‘rival’ good
Complements are…
goods that tend to be bought and used together
Elasticity is…
the relationship between 2 variables
Price elasticity of demand explains the relationship between…
Change in quantity demanded and changes in price
The coefficient of PED =
% change in quantity demanded /
% change in price
Income elasticity of demand indicates…
the responsiveness of demand to changes in household incomes
Income elasticity in demand =
% change in quantity demanded /
% change in income
Normal goods are those goods…
whose income elasticity of demand is positive; demand for them will rise when household income rises
Inferior goods are those goods…
whose income elasticity of demand is negative; demand for them falls as income rises
Necessities have an elasticity of demand…
which is inelastic; between 0 and 1
Cross elasticity of demand is…
the responsiveness of quantity demanded for 1 good following a change in price of another good
Cross elasticity of demand =
% change in quantity demanded of good A /
% change in the price of good B
Indices tending towards 0 and 1:
Indices tending towards 1 or -1 indicate a strong relationship
Indices tending towards 0 indicate a weak relationship
Demand curves shifting could be caused by: (6)
- Rise in household income
- Rise in price of substitutes
- Fall in price of complements
- Changes in taste
- An expected rise in price
- Population increase
Shifts along a demand curve are called…
movements (expansions / contractions) and are caused solely by changes in price
Shifts in demand curves are called…
shifts in demand and are caused by variations in the conditions of demand
Supply refers to…
the quantity of a good that existing suppliers or would-be suppliers would want to produce for the market at a given price
The quantity of a good supplied to a market varies up / down for 2 reasons:
- Existing suppliers increase / reduce output
2. Firms stop production & leave / new firms enter and start production
A firm will continue to produce in the short run when price is less than total average cost because if it didn’t…
it would be worse off, having still to pay for it’s fixed costs.
Quantity supplied depends on: (5)
- Costs of production
- Prices of other goods
- Expectations of price changes
- Changes in technology
- Other factors (Weather, Natural disasters, industrial disruption)
A rightward / downward shift in the supply curve is caused by: (4)
- A fall in production costs
- A fall in the price of other goods
- Technological progress
- Improvements in production (more efficient)
A leftward / upward shift in the supply curve might be caused by:
- An increase in the cost of production
- A rise in the price of other goods
- An increase in indirect taxes / reduction in subsidy
Maximum prices: A price ceiling has to be below the equilibrium price or else…
it will have no effect on the operation of market forces.
The 2 reasons why minimum prices lead to mis-allocation of resources is because…
- Surplus quantities build up
2. They have to be stored or destroyed
The solution to mis-allocation of resources during minimum prices is…
Production quotas - each supplier is only allowed to produce up to a maximum quantity and no more
Having a minimum wage above the current wage level would have 2 consequences:
- Raise wage levels above the equilibrium wage rate
2. Reduce the demand for labour and so cause job losses
Restrictive practices adversely affect the market in the following ways: (7)
- Dumping
- Exclusive dealing (Bound by contract)
- Price fixing
- Refusal to deal
- Limit pricing (monopoly)
- Retail price maintenance (Re-sellers cannot set prices)
- Government subsidies (Unfair to competitors)
