Mod 2 Flashcards
2.1 What is a Business
An organisation that uses Entrepreneurship to organise factors of production to create goods and services
2.1 What is an industry
A collection of competing firms/businesses
2.1 Goals of businesses/firms
- Profit maximisation
- Meeting shareholder expectations
- Increasing market share
- Maximising growth
2.1 What is business productivity?
Refers to the production of the business’s good/service at the lowest possible cost and as efficient use of resources possible, how much we can produce with a given quantity in a certain amount of time.
2.1 Why is productivity important and desirable
Increased productivity is desirable because it means that the business is making more efficient use of limited resources, allowing a greater amount demand to be fulfilled using the same level of resources.
2.1 How does the economy benefit from productivity?
- Higher income for Australians as businesses are making more money using the same resources as they are being used more efficiently.
- Higher value of exports as Australian goods are more competitive compared to foreign businesses.
- A lower inflation rate as businesses do not have to spend as more goods/services can be made from the same resources, leading business to have more money.
2.1 How do businesses increase productivity?
Specialisation
2.1 What are the types of Specialisation?
- Specialisation of Labour/Division of Labour
- Specialisation of natural resources/Location of industry
- Specialisation of capital/Large Scale Production
2.1 What is Specialisation of Labour?
Occurs when businesses breakdown their production process into sub-processes, allowing labour to specialise in a particular part of a process rather than an employee moving from one process to another. For example a production line.
2.1 What is Specialisation of Natural Resources?
Occurs when a large number of businesses in a similar industry congregate to one area to reduce production costs as they share similar infrastructure requirements. For example an industrial area.
2.1 What is Specialisation of Capital?
Occurs when businesses are growing large so they can use highly specialised capital equipment to speed up their production process, making more efficient use of resources by producing more units of goods/service per unit of resource.
2.1 How do businesses solve the Economic Problem?
Businesses collectively solve the economic problem by
Making decisions about how to most effectively use factors of production to satisfy consumers. Businesses who do this effectively will be rewarded with higher profits.
2.1 What are Economic Factors underlying business decision making
Pricing Strategies
Marketing Stategies
Cost minimising - Production and Resource use/capital use
Industrial Relations
2.1 What do pricing strategies refer to?
Tradeoff between prices - Higher price means a higher profit per unit but selling less units. Lower price means make less per unit but sell more units.
2.1 What do marketing strategies refer to?
Price depends on target market, need to appeal to target market.
2.1 What does ethical production vs norma; production refer to?
Save costs to produce goods/services unethically for example sweat shop labour or spend more on producing things ethically e.g. green packaging
2.1 What do industrial relations refer to?
Decisions regarding paying staff, e.g. saving costs by paying minimum wage or increase productivity by rewarding efficiency with higher wages.
2.1 What does resource use/capital use refer to?
Increasing profit in the short-term with cheap equipment which will reduce initial costs but less efficiently use resources and requires more maintenance or spend more on advanced capital equipment which will more efficiently use resources and require less maintenance - providing more profit over time.
2.1 What do quality and quantity of Factors of Production refer to?
How much goods/services the economy can output (GDP) remembering output uses up factors of production.
2.1 Why is quantity and quality FOP important?
Higher quality/quantity of FOP increases the output produced from these resources (FOP) which increases money in return.
2.1 How is quality/quantity relevant to Land?
Land size is unlikely to change, however new businesses can develop new technology to harness and access limited natural resources. For example accesses natural gas which was thought to be an in accessible resource.
2.1 How is quality/quantity relevant to Labour?
Successful business are attractive to skilled migrants - increasing quality and quantity of labour. Remembering migration affects quantity of labour, and education increases quality of labour.
2.1 How is quality/quantity relevant to Capital?
Larger businesses and larger amounts of business require more capital. Therefore businesses will invest in more capital, and quality capital is important for increasing productivity.
2.1 How is quality/quantity relevant to Enterprise?
Quality entrepreneurs are influenced by successful businesses promoting entrepreneurial talent which develops new ideas for e.g. harnessing natural resources (LAND) or creating quality equipment (CAPITAL) and therefore attracting skilled migrants (LABOUR)
2.1 How does technology impact businesses and industries positively?
Technological change has vastly improved productivity. Technological change allows firms to more swiftly identify and respond to changes in demand - increasing profitability. Technological change has also improved the ability of consumers to compare products and prices. Furthermore Technological change, has eroded national borders. Commerce (buying and selling) now happens on a global scale.
2.1 How does technology impact businesses and industries negatively?
Technological change has made many jobs redundant (e.g. many manufacturing jobs are now automated) – but has also created new types of jobs (e.g. software design). This process, called “Creative Destruction”.
2.2 How do businesses measure how large their business should be?
Long Run Average Cost (LRAC) Curve
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2.2 What are costs associated with production?
- Production costs increase constantly with production e.g. if your production doubles your production cost also doubles (constant costs)
- Production costs decrease with increased production e.g. if your production doubles your production costs are less than double. (decreasing average costs)
- Production cost increases with increased production e.g. if your production doubles your production cost is more than double. (increasing average costs)
2.2 What is a fixed cost?
Costs that do not go away & are predictable with fluctuation
2.2 What is a variable cost?
Costs that you can do something about as they fluctuate heavily/go away.
2.2 What are Internal Economies of Scale
Internal Economies of Scale = the average cost per unit of production falls as the firm grows, due to internal factors.
2.2 What are factors involved with Internal Economies of Scale
Specialisation of Labour
Specialisation of Capital
Bulk buying inputs
Investment into Research and Development (capital)
2.2 What are Internal Diseconomies of Scale
Internal diseconomies of scale = after a certain point, average costs of production for an individual firm will start to rise as the size of output grows.
2.2 What are factors involved with Internal Diseconomies of Scale
Distance between workers and management (leading to ineffective decision making)
Overlog of paperwork making something take much longer than it should and involves more procedures, forms, or rules than make sense.
Larger workforces can lead to strong unions - increasing wages and therefore costs of production.
2.2 How do Internal Economies/Diseconomies of Scale interact with the LRAC curve
Internal Diseconomies of Scale refers to the right portion of the LRAC where average cost per unit of output is rising.
Internal Economies of Scale refers to the left portion of the LRAC where average cost per unit is falling.
2.2 What is the Technical optimum of the LRAC?
It is the midpoint between Internal Economies/Diseconomies of Scale where costs are minimised per unit
2.2 What are External Economies of Scale
External economies of scale = the average cost per unit of production for an individual firm falls due to the influence of external growth.
2.2 What are factors involved with External Economies of Scale
Growth of an industry often leads to specialisation of natural resources firms gather in the same area, reducing costs e.g. lots of other dairy farms in the one valley = enough work for a permanent vets in the area, reducing call-out fees
A growing industry often attracts support – government encouraging jobs, R&D
2.2 What are External Diseconomies of Scale
External diseconomies of scale = the average cost per unit of production for an individual firm increases due to the influence of external growth.
2.2 What are factors involved with External Diseconomies of Scale
Growth of an industry often leads to increased pollution – declining health of workers increases labour costs… declining ability of local environment to supply natural resources increases input costs.
Growing industry causes increase in traffic “bottlenecks”, increasing transport costs.
Very large industries increase demand for natural resources such as water so much to the point that their demand drives up prices
2.2 How do External Economies/Diseconomies of Scale interact with the LRAC curve
External Economies of Scale shift the LRAC curve down as lower costs for all outputs.
External Diseconomies of Scale shift the LRAC curve up as higher costs for all outputs.
2.2 How do we know what to do with the LRAC curve?
Are cost changes happening due to internal or external factors?
Internal = due to change in size of the firm (Move the dot)
External = due to change in size of the industry (Move the curve)
Are the costs per unit of the business rising or falling?
Falling costs per unit (cost savings) = economies
Rising costs per unit = diseconomies
2.3 What are Decisions consumers make?
Time - Enjoy retirement/leisure now OR work now and enjoy retirement/leisure later
Education - Earn money now instead of education OR education and Earn more money later
Income - Spend now, enjoy lower value benefit now OR Save now, enjoy higher value benefit later.
Politics - This party or That party
2.3 How does individual decision making affect the economy?
Affect quality of labour - Education
Affect party policies - Politics
Affect GDP - Labour (education)/Income
2.3 How can individuals obtain income (Y) and how do we calculate it?
From returns for providing FOP
1. Wages from Labour
2. Rent from Land
3. Interest on Capital such as savings/bonds/shares
4. Profit from entrepreneurship
From Government Benefits (NOT FOP)
5. Welfare payments
Calculation
Income= Consumer Expenditure + Savings + Taxation + Imports
2.3 How do we calculate our Disposable Income (Income after tax)
Disposable Income = Total Consumption + Savings
2.3 How do we calculate if consumers will spend or save?
Average Propensity to consume (APC)
Average Propensity to save (APS)
Marginal Propensity to Consume (MPC)
Marginal Propensity to Save (MPS)
2.3 What does APC refer to
Proportion of an individual’s total income that they will spend (consume)
2.3 What does APS refer to
Proportion of an individual’s total income that they will save
2.3 What does MPC refer to
Proportion of each additional dollar of income that is spent (consumed)
2.3 What does MPS refer to
Proportion of each additional dollar of income that is saved
2.3 How do we calculate APC
Total Consumption / Total Disposable Income
OR
1-APS
2.3 How do we calculate APS
Total Savings / Total Disposable Income
OR
1-APC
2.3 How do we calculate MPC
Change in Consumption / Change Total Disposable Income
(Final Consumption - Initial Consumption /
Final Disposable Income - Initial Disposable Income)
OR
1-MPS
2.3 How do we calculate MPS
Change in Savings / Change Total Disposable Income
(Final Savings - Initial Savings /
Final Disposable Income - Initial Disposable Income)
OR
1-MPC
2.3 What are Economics factors Underlying Individual Decision making and how does this affect APC?
Cultural Factors - Socio Cultural Context - some societies value consumption/saving e.g. America vs. China.
(Higher Consumption Society = Higher APC)
Personal/Family Factors - Propensity for change & risk - can you afford to lose on an investment? Do you have dependents?
(Lower propensity of risk = Lower APC, Dependents mean more spending = Higher APC)
Confidence & Expectations of the Future - Low confidence = Low APC
Future Spending plans = Lower APC as saving for a big purchase
Tax Policies e.g. Superannuation - Forced Savings = Low APC
2.3 What is the consumption function?
A graphical (linear) display of APC and MPC showing how the economic factor of income influences APC/MPC.
2.3 What does the consumption function tell us about APC?
People with low income must spend most of it to survive and thus have a HIGHER APC. Living pay-check-to-pay-check due to necessities costing as much if not more than your weekly wage is the reality of being poor. As you get richer, the amount you consume does increase, but the proportion of your income that you spend decreases.
2.3 What does the consumption function tell us about MPC?
The MPC of this simple consumption function is constant. In reality, the first additional dollar of income we receive is mostly spend, but the tenth, hundredth, etc., is mostly saved as Y rises, MPC falls; this is known as a ‘diminishing marginal propensity to consume’.
2.3 What positive effect does APS have on the economy?
As income rises, APS rises. In the economy as a whole, the level/ total amount of saving increases.
Assuming the financial sector is functioning as intended, the savings by consumers turn into investments in capital by firms. Capital has the power to shift out the PPC and this will improve our productive capacity in the long run.
2.3 What negative effect does APS have on the economy?
As income rises, APS rises. In the economy as a whole, the level/ total amount of saving increases.
Higher savings means higher leakages, thus reducing the proportion of income that is going to consumption expenditure. Businesses will have lower profits and will hire less workers than otherwise. GDP will be lower in the short run..
2.3 How does age affect APC?
Young people have larger APC as they only earn a small amount of income.
Older people usually have larger APC as they earn larger amounts of income.
2.4 What is consumer Sovereignty
Consumers have power over produces (businesses) because consumers buy the companies products and is the only way businesses can make money.
2.4 What are individual consumption factors?
Factors deciding what we spend our money on:
- Consumer tastes/preferences
- Level Of Income
- Advertising
- The price of the good or service being considered.
- The price of substitute goods/compliment goods
2.4 What are consumer tastes/preferences
Consumer tastes/preferences are different between different cultures and time periods. This leads to the concept of “Consumer Sovereignty”: collectively, consumers spend their money on the products that best meet their tastes/preferences.
2.4 How do consumer tastes/preferences affect production.
What is produced - firms that meet consumer’s demand will make sales; firms that are not producing what consumers want will not make sales.
How much of a product is produced (if consumers want more, firms will see profit opportunity and make more)
The price a product sells for (if consumers aren’t willing to pay a high price, firms will be forced to offer a lower price)
2.4 How does Level of Income affect production?
Groups with lower income have less power to influence production and what is produced can reflect the sovereignty of those with higher income rather than all consumers.
The TOTAL income level of a society also influences consumer sovereignty. As income level changes, consumers demand different types of goods and services, thus changing what is produced in the economy.
2.4 How does advertising affect production?
Rather than responding to the wants of consumers, marketing often attempts to create and/or intensify consumer wants in ways that are beneficial to the business (thus distorting consumer sovereignty).
2.4 How does price of a good or service affect production?
Consumers prefer prices to be lower for “normal” goods.
However for “luxury goods”, lowering prices may cause consumers to reduce demand.
2.4 How do the price of other goods or services affect production?
Consumer decisions are influence not just by the price of the goods/services they are buying but also by the price of other goods/services in the economy.
2.4 What are Substitute Goods
Substitute Goods = when the price of one increases, demand for the other increases.
For example
The relative price of Maccas as compared to KFC is more important than the price of Maccas.
2.4 What are compliment goods
Complement Goods = when the price of one increases, demand for the other decreases.
For example
The system price of racquet + ball is more important than the price of just a racquet.
