Seneca Paper 1 Flashcards
Mass market advantages
Having more customers.
Benefitting from economies of scale (due to higher output levels).
Can build a strong market presence.
Mass market disadvantages
Higher levels of competition.
Lower profit margins
Niche markets Benefits:
Less competition. Specific market. Can develop specific expertise. Higher profit margins. Customer loyalty.
Disadvantages niche
No economies of scale.
Vulnerability because they have an undiverse product portfolio.
What is a brand?
A brand is a good or service that has something which is unique & recognisable. This could be from the way that the product is designed or a different feature.
A brand is more likely to become strong if it is easily recognised and distinctive.
Strong brands
Strong brands usually benefit from higher customer loyalty. Customers support the brand and will continue to go and buy their products repeatedly.
A brand can create higher profitability by itself. Some consumers will pay higher prices for items with a certain brand logo on them (e.g. Nike or Apple).
Dynamic Markets
Dynamic markets are markets that experience rapid and continuous change.
Responding to the external
Market
Businesses must identify and respond to changes in the external market.
Businesses that operate within dynamic markets must be able to respond to changing customer tastes and preferences.
For example, Blockbuster failed to respond to changes in the streaming and download market and it lost its market share to rivals like Netflix.
How markets change
Innovation. Markets can change and develop as a result of advances in technology and as a result of the changing tastes and preferences of customers.
Impact of competition
Competition can affect a business’ costs and demands as the presence of competitors may reduce demand for a business’ product or service.
Competition can force businesses to reduce their prices or increase their sales & marketing spend.
How competition affects the market- Rising costs
The presence of a competitor can also increase business costs as a business may increase its spending on promotion and advertising or may invest in research and development to improve the products offered for sale.
Risks:
Risk of failure, Financial loss, Lack of security
Uncertainty
Uncertainty is when a business cannot know how a situation will turn out.
E.g. Brexit
Uncertainty vs risk
Uncertainty is where a business is unable to foresee problems.
Risk is where there is a chance that something could go wrong & not end up as expected.
With uncertainty, it is hard to even have any expectations of what the future will be like.
Market research- demand
Market research into customers’ demands is important for business success.
Insights into customers’ wants and needs can help a business to improve the product, spot market opportunities and stay competitive.
Insights into overall demand trends can help a business to spot opportunities for growth and potential threats from new products/technology.
Competition market research
Market research into competitors can help a business understand the major threats in the market and then prepare the business to deal with these threats.
Market research for established fashion labels like H&M would identify the threats that come from online platforms like ASOS or Boohoo.
Market research target market
Market research into a business’ target market will give the business insights into their customers’ wants and needs and how they are changing over time.
Qualitative research
Qualitative research generally collects information about opinions and views rather than things that can be quantified.
For example, research into whether customers think the customer service at Waitrose is good is qualitative research.
Quantitative research
Quantitative research collects factual information on things that can be quantified and recorded easily.
For example, research into the number of cans of Coca Cola sold in the UK last year is quantitative research.
Market research- sampling
When a business is carrying out market research, sampling may be used to reduce the costs associated with market research. Sampling occurs when a business selects a sample of the population to save collecting data from everybody in that population.
1 advantage and 1 disadvantage of sampling
Sampling reduces cost as a business can choose a cross-section of the population instead of collecting data from everybody. Sampling reduces cost as a business can choose a cross-section of the population instead of collecting data from everybody.
Method of market research- technology
Technology can be used to analyse market research data by completing calculations and creating graphs and charts which can be used by managers and leaders.
Market Segmentation
Market segmentation is the process of dividing potential customers into different groups based on characteristics like age, gender, income and much more.
Businesses use market segmentation for a variety of reasons: chioosing marketing mix
When choosing the product, geographic, promotional and price segmentation can help a business to understand its customers’ needs and wants.
For example, Next provides clothing aimed at infants and toddlers using its Next Kids range.
Businesses use market segmentation for a variety of reasons:choosing promotion
Advertising in a newspaper probably is not the best way to target teenage girls, but a teenage magazine like Bliss might be.
Segmenting a market can give businesses ideas about how best to promote their products.
Businesses use market segmentation for a variety of reasons:
Market mapping is a process to identify a gap in the market by looking at what competitors offer.
Focus groups
You get a bunch of people into a room, record them, and ask them about whatever you want. From these discussions, the organizer will try to pull out some insights, or use it judge the wider society’s view on something. Generally the participants will be chosen based on certain criteria, such as demographics, interests, or occupation.
Surveys
In survey research. survey questions are given to respondents (in person, over the phone, emailed, or an online form). Questions can be close-ended or open-ended. As far as close-ended questions go, there are many different types:
Dichotomous (two choices, such as ‘yes’ or ‘no’)
Methods of Market Segmentation- location
ustomers’ wants and needs often change based upon where they live or where they are born.
There are many supermarkets focusing on Polish food on some high streets in the UK.
It makes more sense for these supermarkets to locate where there are lots of Polish families living.
Methods of Market Segmentation: income
Certain products (luxury products) need to be aimed at people who earn a certain amount of money. For example, high-end kitchens (priced at £20,000) are more likely to be effective advertising in magazines like Ideal Home or the Sunday Times because these magazines tend to have readerships with high incomes.
Methods of Market Segmentation: Age
Products can be aimed at a specific age range.
A business is unlikely to advertise mobility scooters to people under 40.
Methods of Market Segmentation: Gender
Some products are aimed primarily at either males or females.
Boohoo.com is an online fashion retailer that primarily targets females. Advertising to lots of males may not be the most effective strategy.
What are the methods of segmentstion
Gender , age, income, location,
Causes of supply curve shifts
Changes in the price of inputs (these will affect the cost of production).
A discovery of a new technology (allowing the firm to produce at a lower cost).
Changes in Government policy.
E.g taxes, regulations and subsidies.
Incentive to expand production
When a firm’s profits increase, it is incentivised to produce more output. This is because the more it produces, the more profit it will earn.
So, when costs of production fall, a firm will be incentivised to supply a higher quantity at a given price.
This is shown by a rightward shift in the supply curve.
Subsidies can lower a firms average cost per unit, encouraging them to expand production also.
Effect of tax on supply
The U.S. government imposes a tax on alcoholic drinks that collects eight billion dollars per year from producers.
Taxes are treated as a cost by businesses.
Higher costs decrease supply.
So taxes decrease supply.
Factors Determining the Supply of Goods and Services
Price of the good, technology and production, productivity and tax
Factors Determining the Supply of Goods and Services- price of the good
A rise in price will almost always lead to an increase in the quantity supplied of that good or service. This is also called an extension in supply.
This is because the increase in price incentivises the firm to increase output.
Economists call this positive relationship ‘the law of supply’.
Factors Determining the Supply of Goods and Services- technology and production
A reduction in the costs of production will lead to an increase in supply because producer profits have risen.
Technological improvements can increase the efficiency of the productive process.
This will reduce the costs of production, shifting supply to the right.
Factors Determining the Supply of Goods and Services- productivity and tax
Increases in productivity means the output per input of a factor of supply increases, so supply shifts right.
An indirect tax on supply raises the overall cost of production, shifting supply left.
Equilibrium price
This is the only price where the amount consumers want to buy is equal to the amount producers want to sell.
If the market is at equilibrium, there is no reason to move away.
Supply and demand (market forces) dictate the equilibrium quantity and price in a free market.
Disequilibrium
Disequilibrium is when the market is not at a stable price and quantity.
If the market is not at equilibrium, economic pressure arises to move the market towards a stable price and quantity.
E.g if petrol prices were to rise above their equilibrium level, the market would respond and the quantity demanded would fall.
Excess supply and demand at disequilibrium
Excess supply and demand occur at disequilibrium.
The higher price makes it more profitable for petrol producers, so output expands.
The difference between the quantity demanded and quantity supplied is now the excess supply.
When quantity demanded exceeds quantity supplied, there is excess demand.
What does pressure to reach equilibrium lead to
The market price is unstable when there is excess demand or supply.
Excess supply will force producers to cut the price because it is better to sell at a lower price than not at all. Others will follow.
Excess demand will signal to producers they can generate more profit by raising the price and they will raise price.
So excess demand and supply can lead to price change.
Design Mix
Functionality, Aesthetics, price
Possible consequences of a business behaving ethically:
Behaving ethically could increase a brand’s reputation.
2
It could also provide a unique selling point, which increases competitiveness.
3
However, behaving ethically could increase a business’ costs, which would reduce profits. Alternatively, businesses could pass on these costs to the consumer by increasing the selling price
Promotional methods
Sales promotion, sponsorships, Social media, Product placements, Advertising, public relations
Advertising
Advertising is the most obvious promotional method. Advertising is sometimes called “above the line” promotion and it involves a business paying to have their product or service promoted in a public space. It aims to make consumers aware of a product and to get them to buy the product or service.
Types of advertising platform
Advertising can happen through various platforms, such as Newspapers, Magazines, Television, Internet, Billboards or Social Media.
The platform that a business uses depends on the target market of the product or service.
Choosing an advertising platform
The platform that businesses choose is important to make sure that they reach the right target market and have the maximum impact.
For example, social media or a TV programme may be a better way to reach young people than a broadsheet newspaper like The Times.
Public Relations
Public relations (PR) is all about a business’ reputation. PR involves maintaining a good public image.
PR involves managing the spread of information about the business.
The aim of PR is to make sure this information is as positive as possible and reaches the largest possible audience.
Examples of PR
An example of PR is the use of newspaper editorials, where people in a business manage the business’ relationships with different newspapers, sending them articles to publish about the business.
Businesses do not pay the newspaper for this coverage like they would for advertising.
Sales promotion
In sales promotions, businesses try to boost sales using a temporary promotion. There are lots of types of sales promotions:
Free gifts, samples, point of sales displays, competitions, discount coupons, value for money offers BOGOF
Promotional Mix
The promotional mix is the combination of different promotional methods that a business uses. For example, a business might advertise largely through TV, but also do some social media advertising and have sponsorship deals in place with athletes.
Factors influencing the promotional mix are:
Competitor actions, target market, finance available, the nature of the product or service the nature of the market
Factors influencing the promotional mix are: competitor actions
The promotional mix of competitors might influence a business because they may want to reach consumers using the same channel as rivals.
Factors influencing the promotional mix are: target market
A business’ target market for a product (or service) will affect the promotional method that they use because different types of people use different platforms more often.
A business wants to promote its product to its potential customers.
A business that produces women’s underwear will not usually want to promote their product to middle-aged men.
Factors influencing the promotional mix are: the nature of the product or service
The type of product (or service) will influence which promotional method needs to be used.
A technical product like a laptop may want to give consumers more information about their product, whilst a simple product like orange juice (Tropicana juice for example) may not need to give info.
A fashion label like Hugo Boss does not have much information to communicate. How their products look is more important.
Factors influencing the promotional mix are: the nature of the market
As a market matures, the rate of growth changes.
If a market is growing slowly, advertising may be less important.
If a market is growing quickly, then businesses will be battling for market share and are willing to spend more on advertising as it will affect sales by a larger amount.
Reasons for Promotion
To persuade customers to buy the product, To create or increase sales, To inform/remind customers about the product, To create or change the image of a product (or service)
The Long Pocket Strategy
Palich et al (2000) published a research paper describing the ‘Long Pocket Strategy’. Their research concluded that the business with the most money in the bank normally wins a price war between businesses.
Name 4ps
Price
Place
Promotion
Product
Product life cycle
Introduction, growth, maturity, decline
Distribution- Place
Place (or location) is about when and where a product (or service) is available to the people buying it.
advantage of wholesalers
Large network of buyers (Wholesalers already have a large network of buyers. This lets a business reach a lot of customers quickly.)
Disadvantage of wholesaler
Less interaction with customers- A downside of using wholesalers is that the business will not have much personal interaction with customers.
This can lead to worse customer service.
Disadvantage of wholesaler- profit sharing
Another downside is that both wholesalers and retailers take a cut of the profit. This means that customers are likely to pay higher prices.
This may make the business less competitive on price.
Retailers advantage
Higher margins or lower prices- Bypassing wholesalers makes it likely that customers will pay lower prices because the business is “cutting out a middle man”.
Disadvantage of retailers- hard to contact retailers
It can be hard for a business, especially new start-ups, to get retailers to stock their products.
This means that it can be harder for a business to reach as many people and it could take longer to sell a business’ products.
Advantage of retailers- Control over shops (retailers)
Going directly to retailers means that a producer or manufacturer can have complete control over which shops customers can buy their products from.
A luxury brand may not want their products stocked in Tesco or TK Maxx as it may lead consumers to perceive their brand as lower quality.
Disadvantage of retailers -Higher logistics costs
Selling to retailers directly may increase a business’ delivery and logistics costs if they have to deliver all the products to a retailer themselves.
What is a retailer
A retailer is a shop that sells directly to the customer in small quantities
Direct to Consumer- advantage Nobody else takes a cut
Selling direct to consumer lets a business charge the lowest price possible to the consumer because there are no intermediaries (organisations in the middle) who take a cut of the profit.
Alternatively, the business can charge the same price and have a higher margin.
Difficulty of direct to consumer
It can be hard to reach as many customers as quickly because a business will have to invest time and money into setting up new stores or their own website.
E-Commerce
It is becoming easier to reach more consumers directly with the use of e-commerce and m-commerce.
This means that lots of businesses don’t need to set up physical stores.
Good key word
The product portfolio
Marketing for a large, mass market
The aim of marketing in a large, mass market is to spread your message and brand to as wide a group as possible.
As there will be more competitors vying for demand in the mass market, businesses need to ensure their marketing is most prominent.
This is a costly process.
Marketing for a niche market
The costs of marketing in a niche market are less than the costs in a mass market.
The success of marketing in a niche market depends on being able to strongly differentiate your product and make this appealing.
B2C marketing
B2C (business to consumer) marketing campaigns can reach lots of potential customers.
Anyone who sees an advertisement is exposed to the business’ products and may be interested in buying a product.
As such, B2C marketing is less exclusive.
Arguably, B2C marketing needs to be as eye-catching as possible. Consumers want to know as much information as they can quickly.
B2B marketing
B2C (business to consumer) marketing campaigns can reach lots of potential customers.
Anyone who sees an advertisement is exposed to the business’ products and may be interested in buying a product.
As such, B2C marketing is less exclusive.
Arguably, B2C marketing needs to be as eye-catching as possible. Consumers want to know as much information as they can quickly.
Why Do New Business Ideas Come About?
New business ideas come about because of the dynamic (changing) nature of business:
Technology (e.g VR), Changes in consumer wants (cordless vacuum), Products and services becoming obsolete (Netflix)
Reward
Businesses and entrepreneurs can also benefit from great rewards.
Financial reward, Pursue an interest, Be their own boss, Dissatisfaction with their current job,
Financial reward
If a business is successful then an entrepreneur is able to make a profit.
They also may be able to sell the business for a large sum in the future.
Be their own boss
Setting up your own business means that you can work for yourself.
This means that you are likely to have more flexible working hours and more choice over the type of work that you do.
Dissatisfaction with current job
Many entrepreneurs have had full time jobs in the past that they haven’t enjoyed which has led them to pursue their own idea.
The Role of the Entrepreneur-
The role of the entrepreneur is to organise resource, make business decisions and take the risks involved with enterprise activity. This means they must have certain qualities:
The Role of the Entrepreneur- qualities willingness to take risks
Willingness to take risks- When setting up a business there is always a risk of failure.
However, if an entrepreneur never takes these risks when investing money and giving up their current job, then their idea (or business) cannot succeed.
A business faces a constantly changing environment and even if an entrepreneur is very organised and plans well for the future, they never know what will happen.
The Role of the Entrepreneur- qualities: organised
An entrepreneur must organise or do everything needed to run a business.
This includes accounting, marketing, sales and business strategy.
To be successful, an entrepreneur must stay on top of these tasks every day, whilst also planning for the future.
The Role of the Entrepreneur- qualities Innovative
Spotting gaps in the market and providing solutions to complex problems requires entrepreneurs to think outside of the box and be innovative.
The Role of the Entrepreneur- qualities Hardworking
An entrepreneur must motivate themselves every day to work without someone telling them that they have to.
At the beginning, this can often mean working alone and without being paid.
Sole Traders
A sole trader is a single person who is the exclusive owner of a business. They can still have employees and the owner is entitled to keep all of the profits after tax but is also personally liable for the business’ debts.
Sole trader advantages
They are the easiest type of business to set up.
The sole trader gets to be their own boss.
The sole trader decides what to do with the profit.
It is easy to change the legal structure if circumstances change.
Sole trader disadvantages
Unlimited Liability means that there is no legal distinction between the sole trader’s assets and the business’ assets.
It can be hard to raise finance. Banks often see sole traders as riskier.
All the responsibility for making business decisions is yours. Having someone to share decision making with, can improve performance.
It can be harder to retain (keep) good employees as they aren’t necessarily given a share of the profits.
What is the term used to describe the lack of distinction between a sole trader’s assets and their business’ assets?
Unlimited liability
Partnerships
Partnerships are businesses that are owned by 2 or more partners. Each partner has an equal share of the profits and equal say in the decision-making process. Examples of partnerships are doctors’ surgeries, dentists or accountancy firms.
Partnerships advantages
More people means more experience and more ideas. Decisions can also be better as the owners can discuss pros and cons with each other.
It is easier to raise money because banks are more likely to lend to a partnership than to a sole trader. More investments mean increased access to finance for the firm and this supports quick growth.
Good employees can be made into partners and this means it is easier to retain the best employees.
Partnerships disadvantages
The profits are shared, so if a sole trader decides to go into business with another person, they may end up with a lower profit for themselves.
Like sole traders, partnerships have unlimited liability.
Partners may disagree about business decisions and this can be unpleasant, especially if it is a family-based partnership.
Each partner is liable for the actions of the other partners. This may lead to further friction between partners.
Types of Ownership - Private Limited Companies
Private limited companies (Ltds) are companies where ownership of shares is restricted. For the company to sell shares, all the current shareholders must agree to sell them. These companies have Ltd. after their name.
Advantages of Ltd
The key advantage over sole traders and partnerships is that shareholders have limited liability.
The fact that ownership is restricted means that all shareholders must agree to sell shares. This means that the owners retain (keep) a lot of control over how the business is managed. This can be avoided with special legal clauses, but some restrictions might stop a business owner from selling shares if other shareholders do not want them to.
It is normally easier for a limited company to get a loan than it is for partnerships, as a company is normally seen as less risky. This should increase a company’s access to finance.
Disadvantages of Ltd
Finance is needed to incorporate a business. There is an upfront fee as well as costs associated with paperwork. This means that it may not be possible for smaller firms (or brand new firms).
Unlike sole traders and partnerships, the company is legally obliged to publish their accounts each year and competitors may use these to become more competitive.
Types of Ownership - Public Limited Companies
Public limited companies sell shares on the stock exchange. This means that anybody over 18 can buy shares (often through brokers). Firms often become public companies when they want to expand because selling shares on the stock exchange allows them to raise finance for investment. In 2017, Snapchat went through this process (which is called a flotation).
PLC advantages
Selling shares on a stock exchange allows companies to raise money for investment, which enables the company to grow faster or bigger.
It is much easier for companies to raise capital (money) from banks if they are public limited companies because they present less of a risk (given the number and size of investors).
Shareholders have limited liability because the company is incorporated.
PLC disadvantages
Owners often have very little say over how the business is run. This means that it can be hard to agree on how the business is run.
Anyone can take over the company if they are able to buy enough shares. When shareholders own more than half the shares, then they will have control over the company.
The company’s accounts must be made public. This means that competitors can see how well the company is doing.
Not-For-Profit Organisations
Any profit made by not-for-profit organisations is reinvested (put back) in the business. Any profit cannot be kept by the owners. There are lots of types of not-for-profit organisations and they can have different aims
One type of not-for-profit organisation- Unincorporated association
Not-for-profit organisations can choose to be an ‘unincorporated association’ but, like sole traders and partnerships, the people who manage it have unlimited liability.
This means that they get no profit and they are legally responsible for all of the organisation’s debt.
Bigger organisations, like Oxfam, tend to be incorporated so that the people running it are protected from limited liability.
Not-For-Profit Organisations- Social enterprise
Social enterprises, like the Big Issue or TOMs are another form of not-for-profit organisation.
They are more similar to for-profit businesses in that they make a surplus through selling goods or services. This profit is reinvested to support the social enterprise’s aim.
Not-For-Profit Organisations- Charities
Charities, like Oxfam or Save the Children, are a type of not-for-profit organisation.
Getting charitable status lets a business get tax relief and lets it apply for certain grants. For a business to get charitable status, they must follow rules and regulations.
Franchising
Franchising is where a business gives someone the right to sell its products and use its trademarks. The ‘franchisee’ usually pays the business an upfront fee and a percentage of the profits.
Advantages of franchising
The business can expand without needing large amounts of investment. The firm does not incur the costs involved with opening new stores.
The business also does not have to be concerned about some of the risks of becoming a larger corporation, for example, diseconomies of scale (which may be caused by the growth from opening and operating new stores themselves).
Franchising increases brand awareness of the firm’s products or services.
Disadvantages of franchising
A disadvantage of franchising is that the franchisee does not have complete control over how they operate.
If a franchise is run badly, then a single franchise or store can negatively affect the brand image.
Example of business failure by franchising
Keating (2013) - Netflixed
Gina Keating’s book Netflixed explains that Blockbuster struggled to move into DVD by mail and online streaming because of its franchisees.
The business model of consumers going into stores was dying. Blockbuster needed to centralise the technology to ship DVDs in the post, but this would compete with the franchisees’ businesses, so many resisted the change.
Potential franchising q
Analyse franchising as a method of growth for a business.
Analyse franchising as a method of growth for a business.
1
Explain franchising
Franchising involves the franchisor selling a license to the franchisee, who can then own a business that uses the brand of the franchisor. Many large businesses, such as McDonald’s, operate as franchises. Entrepreneurs running their own franchise of McDonald’s take on less risk because people already know & like the product, and they benefit from an established brand name and product portfolio. Franchising is often used as a method for businesses like McDonald’s for external growth.
Analyse franchising as a method of growth for a business. 2
Increased reach
Allowing franchisees to open franchises allows for faster growth, both in terms of the number of stores and the number of geographic locations. The business does not have to find the finance to open every store and franchisees often have to pay a large lump sum to purchase the license. Franchisees are motivated and have the drive to start and run a new business. Franchising can be a cost-effective way of reaching a wider target market and increasing sales.
Analyse franchising as a method of growth for a business. 3 Finding the right franchisee
However, it is important for the franchisor to find the right franchisee for the business and brand. If one franchise is run badly and a customer has a particularly negative experience, this can impact the reputation of the overall business and all franchises within this. The franchisee is restricted in terms of lots of decisions (for example the branding, uniforms, processes) and so it is important for them to be bought into the business and the culture, to ensure that the individual business is aligned to the overall business that owns the brand and trademarks.
What do franchisees usually pay the franchisor?
Royalties and an upfront free
Another disadvantage of franchising
The example of Blockbuster shows a further disadvantage of franchising. Franchising can reduce the potential strategic options of a business. Once you have franchisees, technology can change & your business model may have to change. Franchisees might make it harder to change.
Advantages of becoming a PLC
Businesses that become a PLC can raise additional capital by selling shares on the Stock Exchange.
Businesses that become a PLC are usually regarded as large and well-established businesses which can raise their reputation.
Disadvantages of becoming a PLC
Businesses that become a PLC have to comply with strict accounting and reporting procedures which can be complex and time-consuming.
Businesses that become a PLC face greater public scrutiny as a result of their size and influence.
Floating on the stock exchange
Floating on the stock exchange means a business sells its shares to investors.
The benefit of this is that a business can raise lots of capital and access long-term investment.
Furthermore, a business may become more well-established and well-known by floating on the stock exchange.
Opportunity Cost
The cost of one item can be seen as the lost opportunity to consume something else. Economists call this the opportunity cost.
Tradeoffs
People face a tradeoff when they make choices.
If you choose to buy a video game, you cannot spend that income on movies.
The opportunity cost is the ‘next best alternative foregone’ - what you would use the money from the video game to buy instead.
Issues with opportunity cost
Not all factors have alternatives.
Some alternatives are unknown.
Agents may lack information on alternatives.
It can be difficult to switch some factors to another use.
Uses of opportunity cost
Opportunity cost is a useful concept when thinking about allocating resources.
E.g. consumers use it to decide how to spend their earnings.
Opportunity cost as money and time
In some cases, opportunity cost exceeds the monetary cost.
For example, attending university.
As well as the financial cost of tuition, you are giving up time that could be spent earning money at a paying job.
So the total opportunity cost is greater than the financial cost of university because of the lost potential earnings.
Opportunity cost time
If you spend your time learning on Seneca, then playing Fortnite is the opportunity cost of your time (although you may learn less if you did that).
Opportunity cost price/money
If I spend £10 on a t-shirt from Boohoo, then the opportunity cost is what I could have bought with the tenner.
Opportunity cost example of footballers
If Messi plays up front, he can’t also play in midfield. The performance he would give in midfield is the opportunity cost if he plays up front.
Net trade
Net trade is the balance of exports and imports. This can be influenced by several factors. The balance of UK exports and imports have changed in the past few years.
UK exports
In 2016, UK exports were valued at around £300bn.
The main exports in the UK were financial services, cars, wholesale medicines, gas turbines, petroleum and gold.
The leading recipients of UK exports are the USA, Germany, the Netherlands, and France.
Changes is UK exports
Since 2000 the UK has decreased its share of exports to the EU from 55% to 45%, taking advantage of the rapid economic growth of countries such as Brazil, China, Russia and India.
As London grew as a financial hub from 2000-2008, there was an increase in financial services exported to the rest of the world. This slowed after the global financial crisis of 2008, but is still a major contributor to UK exports.
UK imports
In 2016, UK imports were valued at around £500bn.
The main imports were cars, vehicle parts, aircraft, gold, petroleum and wholesale medicines.
The leading suppliers of imports to the UK are Germany, China, the USA and the Netherlands.
Changes in UK imports
Since 2000, over 50% of UK imports have come from the EU.
The rapid growth of China as an exporter has meant that lots of UK imports now come from China.
The decline of the UK manufacturing industry has meant that we import more manufactured goods, including computers.
Between 1986 and 1998 the UK average a small trade deficit of around £5bn. This then grew until 2002 where it reached £30bn and has been roughly stable ever since.
Comparative Advantage
Free trade can allow countries to specialise in the goods they are most efficient at producing. Trade means that they can buy some goods from other countries, rather than producing them themselves.
Opportunity cost of production
If a country produces sugar, it has an opportunity cost of production.
The labour and capital used to make sugar cannot be used to make wheat at the same time.
E.g. if Brazil can produce a lot of sugar cane per acre but not much wheat, and the US can produce a lot of wheat but not sugar cane, then the US has a lower opportunity cost of producing wheat than Brazil.
This can be shown using production possibility frontiers (PPFs).
Comparative advantage 2
The US has a comparative advantage in producing wheat.
Brazil has a comparative advantage in producing sugar cane.
If both countries could specialise in producing the goods they had a comparative advantage in, then:
The total world output of goods will rise.
Brazil and the US can trade wheat for sugar cane, and they both benefit.
Think of comparative advantage as what a country is least bad at - they all have to produce something!
Absolute advantage
A country has an absolute advantage in producing a good over another country if it uses fewer resources to produce that good.
E.g. if Saudi Arabia can produce corn and oil more efficiently than the US, but can only produce 100 barrels of oil or 25 bushels of corn, the opportunity cost for Saudi of producing one barrel of oil is the loss of 0.25 bushels of corn.
If the US lost a bushel of corn by producing one barrel of oil, then the US has a comparative, but not absolute advantage in corn.
Cost of international trade
Negative externalities such as pollution from freight (goods transported in bulk by truck, train, ship, or aircraft)
Risk of structural/regional unemployment because employers relocate.
While international trade may benefit skilled workers, it can be bad for low-skilled workers.
Low-skilled workers in developed countries compete against extremely low wage workers worldwide, which is unsustainable.
Causes of Globalisation- Growth in WTO MEMBERSHIP
The World Trade Organization is an intergovernmental organization that regulates and facilitates international trade. Governments use the organization to establish, revise, and enforce the rules that govern international trade
MNCs
A multinational company (MNC) is a business which operates from a location in at least one other country in addition to its home country.
MNCs impact- Employment
MNCs can affect local economies as they provide employment and reduce unemployment through job creation.
MNCs can affect local economies by providing wages and salaries to employees.
MNCs impact- competitiveness
MNCs can affect local economies as they may increase competitiveness and reduce the number of local businesses.
MNCs are likely to benefit from global economies of scale from selling in hundreds of countries. This lowers their unit cost and local businesses may not be able to compete.
Imagine a local drinks producer competing with Coca Cola on price!
How MNCs affect the community
MNCs can affect local economies as they provide goods and services for the local community.
Impact of MNCs- exploitation
MNCs can affect local economies as they exploit poor working conditions which may be legal in foreign countries, but which would not be used in the home market.
MNCs can affect local economies as they may prioritise profit and therefore use cost-effective non-renewable resources which harm the environment.
For example, Primark was accused of exploiting poor working conditions and child labour in overseas countries which affects that country’s local economy. However, what is the opportunity cost of not doing that work?
The Impact of MNCs on the National Economy- FDI
MNCs can affect national economies as they engage in foreign direct investment (FDI) which increases demand and supports growth.
FDI can provide jobs in the local construction industry, as well as the jobs created by any project directly.
The Impact of MNCs on the National Economy- balance of payments
MNCs can affect national economies as they often export to other countries which increases the balance of payments surplus for that economy.
The Impact of MNCs on the National Economy- opportunities
MNCs can affect national economies by offering training and development opportunities which allow for the development of skills.
MNCs training local people in skills to high international standards may be beneficial for that nation.
The Impact of MNCs on the National Economy- economic growth
MNCs can affect national economies as they offer consumers employment and income which can support economic growth.
The Impact of MNCs on the National Economy- tax revenues
MNCs can affect national economies as they provide tax revenues through the sale of goods and services.
For example, Starbucks contributed £8.1 million in taxation to the UK government, although many argue this was unethical as Starbucks tactics to reduce its overall tax bill.
Variables that affect the decision to enter a country
The political stability (more stable is better)
Local competition (less competition is better)
Size of the market (higher population and income is better)
Local infrastructure and incentives
Resources and minerals in that country
A* example that shows MNCs can influence political stability in a country
an American company called United Fruit owned 46% of Guatemala’s railways and 20% of the farming land in Guatemala. A new President, Arbenz, was elected in 1952.
John Cabot and John Foster Dulles were two very influential men in the US government.
John Cabot and John Foster Dulles were both big shareholders in United Fruit.
Arbenz, the new leader of Guatemala wanted to nationalise the railways and seized some of United Fruit’s plantations in Guatemala. The US supported and funded rebels in Guatemala and Arbenz was overthrown.
Global Competitiveness
There are factors which can affect the global competitiveness of a business: Exchange rates
The impact of movements in exchange rates can affect the global competitiveness of a business as the cost of imports and exports change.
A global business which competes with a national business may be affected by an exchange rate change which reduces demand for its products whilst a national business may be unaffected.
Global Competitiveness
There are factors which can affect the global competitiveness of a business: competing on cost
Competitive advantage occurs when a business has an advantage over its competitors because of a factor which rivals cannot replicate and provides a cost or revenue advantage.
Competitive advantage can occur when a business is able to compete on cost by offering products or services as a cost lower than all other competitors.
For example, Aldi and Lidl compete on price and cost, which secures their market share as competitors are unable to compete at this level.
Global Competitiveness
There are factors which can affect the global competitiveness of a business: differentiation
Competitive advantage can occur when a business is able to compete on differentiation through offering products or services which consumers find superior to those offered by competitors.
Global Competitiveness
There are factors which can affect the global competitiveness of a business: skills shortage
Skill shortages can affect a business’ international competitiveness.
A shortage of skills within an industry, country or region can affect a business’ operations and lower efficiency, productivity and quality, which affects competitiveness.
For example, the United Kingdom has a shorted of skilled nurses which reduced the international competitiveness of private healthcare businesses.
Various factors affect a business choosing an international market to enter: size of the local market
The market’s growth rate and size must be considered as a large or growing market will be more attractive.
Various factors affect a business choosing an international market to enter: political stability and culture
The political stability and culture of the country in which the international market is located must be considered as this can affect the complexity of entering the market.
Various factors affect a business choosing an international market to enter: local competition
Local competition must be considered as this can affect the likelihood of a foreign business being able to access the market with success.
Various factors affect a business choosing an international market to enter: exchange rates
Local competition must be considered as this can affect the likelihood of a foreign business being able to access the market with success.
Assessment of a Country as a Product Location: Cost of production and labour
Costs of production will affect a business’ decision whether to produce in a new location.
Skills and availability of labour force will affect a business’ decision whether to produce in a new location.
The USA has higher wages and labour costs than India.
Assessment of a Country as a Product Location: Existing infrastructure and incentives
Infrastructure will affect a business’ decision whether to produce in a new location.
Government incentives will affect a business’ decision whether to produce in a new location.
Likely return on investment will affect a business’ decision whether to produce in a new location.
Nations like Japan and Sweden have very good transport infrastructure relative to most nations.
Assessment of a Country as a Product Location: Stability and resources
Trade blocs will affect a business’ decision whether to produce in a new location.
Political stability will affect a business’ decision whether to produce in a new location.
Natural resources will affect a business’ decision whether to produce in a new location.
Political coops are a major risk for businesses.
Example of political instability
Brexit provides political instability and some businesses are considering moving their production away from the United Kingdom because of this.
4.2.3 ASSESSMENT OF A COUNTRY AS A PRODUCTION LOCATION factors to consider
costs of production, skills & availability of labour force, infrastructure, location in trade bloc, govt incentives, ease of doing business, political stability, natural resources, likely return on investment
Greenfield FDI
Build a complete new factory: business. Creates new jobs
Brownfield FDI
Buy an existing business and grow it. Helps get new technology and business innovation
