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BTF > The Economic Environment Of Business And Finance > Flashcards

The Economic Environment Of Business And Finance Flashcards

1
Q

What is a market?

A

Where potential buyers and sellers come together for the purpose of exchange

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2
Q

What is the market mechanism?

A

The interaction of supply and demand for a particular item

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3
Q

Demand definition

A

The quantity consumers are willing and able to buy at a given price

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4
Q

Usual demand curve

A

Quantity demanded goes up as price goes down

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5
Q

Determinants of demand

A
  1. Price of the good itself
  2. Price of other goods
  3. Substitutes (e.g. different brands)
  4. Complements (e.g. shirts and ties)
  5. National income effect on demand for normal/inferior goods
  6. Fashion
  7. Population size
  8. Credit terms
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6
Q

Causes of a shift of a demand curve to the right

A
  1. Increase in household income
  2. Increase in price of substitutes
  3. Decrease in price of compliments
  4. Good becoming more fashionable
  5. Expectation good will increase in price
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7
Q

Price elasticity of demand equation

A

PED = change in demand/change in price

Convention to ignore sign as usually negative

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8
Q

Inelastic PED =

A

PED < 1

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9
Q

Elastic PED =

A

PED > 1

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10
Q

Perfectly inelastic PED =

A

PED = 0

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11
Q

Perfectly elastic PED =

A

PED = infinity

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12
Q

Unitary elasticity PED

A

PED = 1

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13
Q

Factors affecting PED

A
  1. Availability and closeness of substitutes (generally increases elasticity)
  2. Time (generally demand is les elastic in short term)
  3. Competitors pricing (copying price cut = same demand = inelastic. Not copying = fall in demand = elastic)
    (Can create ‘price stickiness’)
  4. Nature of the product (generally demand for luxuries is more elastic, necessities less elastic, habit-forming products are inelastic)
  5. Proportion of income accounted for by a good. (Large = elastic)
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14
Q

Significance of price elasticity

A

Prediction: Allows managers to predict effect of price changes on demand and revenue

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15
Q

What will happen when increasing the price of inelastic products?

A

Total revenue will increase even though fewer units are sold

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16
Q

What will happen when increasing the price of elastic products?

A

Revenue will decrease if fewer units sold
Price must be due to increase revenue

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17
Q

Similarities of Giffen and Veblen goods

A

Upward sloping demand curves
Positive price elasticity of demand

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18
Q

Giffen goods

A

Price increase causes people to buy more
E.g. bread

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19
Q

Veblen goods

A

Bought for ostentation
So higher price makes them more exclusive and desirable

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20
Q

Income elasticity of demand looks at

A

The degree demand is affected by changes in household income

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21
Q

Income elasticity of demand formula

A

YED = (%ΔDemand)/(%ΔHousehold income)

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22
Q

YED > 0 for

A

Normal goods

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23
Q

YED > 0 for

A

Inferior goods

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24
Q

YED > 1 for

A

Luxury goods

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25
Q

Cross elasticity of demand looks at

A

Degree demand affected by changes in price of other products

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26
Q

Cross elasticity of demand formula

A

XED =
(%ΔDemand for product A)
/(%ΔPrice of product B)

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27
Q

XED > 0 for

A

Substitutes

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28
Q

XED < 0 for

A

Complementary goods

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29
Q

XED = 0 for

A

Unrelated goods

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30
Q

Supply of a good definition

A

Quantity suppliers (and would be suppliers) are willing and able to supply at a given price

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31
Q

Supply curves show

A

Supply v price

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32
Q

Usually what happens in most supply curves

A

Quantity supplied usually extends as price increases:

Existing suppliers produce more
New suppliers switch to making the product

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33
Q

Price elasticity of supply looks at

A

Degree to which supply is affected by changes in the price

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34
Q

Price elasticity of supply formula

A

PES = (%ΔSupply)/(%ΔPrice)

(Usually positive as supply curve is upward sloping)

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35
Q

Perfectly inelastic supply

A

Supply remains constant at all prices

E.g. antiques

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36
Q

Perfectly elastic supply

A

Supply infinite at a particular price
Below this the supply drops instantly to zero

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37
Q

Determinants of supply

A
  1. Price of good itself
  2. Price of other goods
  3. Price of joint products
  4. Costs
  5. Changes in technology
  6. Other (weather, harvests)
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38
Q

Supply effect of changes in price of joint products

A

Price rise in one will make production of both more attractive

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39
Q

Factors influencing elasticity of supply

A
  1. Market period
  2. Short run
  3. Long run
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40
Q

Market period influencing elasticity of supply

A

Inelastic, as changes in supply limited to availability of inventory

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41
Q

Short run factors influencing elasticity of supply

A

Can change production plans but still limited by capacity (e.g. due to fixed plant and machinery)

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42
Q

Long run factors influencing elasticity of supply

A

Can expand capacity
New firms can enter industry - more elastic

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43
Q

Equilibrium price

A

Price where supply and demand is equal

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44
Q

What happens if price is too high in market?

A
  1. Supply exceeds demand, leading to surplus
  2. Short term goods returns to manufacturers, reduced orders, products binned
  3. Supplier will lower prices to attract more demand
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45
Q

If price is too low in market

A
  1. Demand will exceed supply causing shortage
  2. Short term empty shelves, queues, increased orders at high 2nd hand values
  3. Supplier will increase prices to reduce shortage
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46
Q

Why would gov define max prices?

A

Ensure essential goods are affordable

Limit inflation as part of a ‘prices and incomes’ policy

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47
Q

Result of max prices?

A

Excess demand
Queues
Rationing
Black markets

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48
Q

Why would gov define min prices?

A

Protect suppliers (e.g. EU CAP)
Minimum wage agreements

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49
Q

Results of min prices?

A

Excess supply (butter mountains, farmers paid to not grow crops, unemployment?)

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50
Q

How is the national output of goods and services measured?

A

GDP

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51
Q

GDP 4 factors considered which generate a return

A
  1. Land
  2. Labour
  3. Capital
  4. Entrepreneurship
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52
Q

GDP Land return

A

Rent

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53
Q

GDP Labour return

A

Wages

54
Q

GDP Capital return

A

Interest

55
Q

GDP Entrepreneurship return

A

Profit

56
Q

GDP is

A

Amount of expenditure spent on output

57
Q

Gov influences on national economy

A
  1. Producing goods and services
    E.g. education, health
  2. Purchasing goods and services
    E.g. uniforms, supplies
  3. Investing in capital projects
    E.g. new roads, schools
  4. Transferring payments from one area of the economy to another
    E.g. taxes to fund unemployment payments
58
Q

Consumer influence on national economy

A

Spending their disposable income on goods and services instead of saving it

59
Q

Amount consumers spend disposable income depends on

A

Changes in disposable income and marginal propensity to consume (spend v save)
Changes in distribution of wealth
Gov policy (tax and spending)
Major new products development
Interest rates
Price expectations

60
Q

Savers impact on national economy

A

Investing what they choose not to spend

61
Q

Amount saved depends on

A

Income
Interest rates
Need for long term savings

62
Q

Businesses impact on national economy

A

Amount invested in capital goods
Which drive growth of economy

63
Q

Business/trade cycle

A

Growth and fall of GDP

64
Q

The four main phases of the business cycle

A
  1. Recession
  2. Depression
  3. Recovery
  4. Boom
65
Q

Does a recession begin relatively quickly?

A

Yes

Cutting back adds momentum to the recession

66
Q

Depression

A

Aka stagflation

If demand isn’t stimulated a period of full depression will set in

67
Q

Is recovery fast?

A

No

Takes time to grow consumer confidence

68
Q

How does gov try to limit depression?

A

Boosting demand in economy as a whole

69
Q

Boom

A
  1. Demand may outstrip supply causing inflation
  2. Businesses tend to be profitable
  3. Expectations of future very optimistic
70
Q

Inflation

A

Increase in general price levels
Decrease in purchasing power of money

71
Q

Deflation

A

Generally falling prices
Normally associated with lower growth and recession

72
Q

What type of prices do most governments aim for?

A

Stable

73
Q

Why is high inflation undesirable?

A
  1. Fewer people can afford goods
    E.g. low/fixed income
  2. Wage inflation
    Productivity falls while new rates agreed
  3. Exports fall
    As imports appear cheaper (exchange rates usually alter to accommodate this)
  4. Consumers may stockpile
    Fearing price increases
    Leads to shortages
    Leads to further price increases
74
Q

Types of inflation

A
  1. Cost-push
  2. Demand-pull
75
Q

Cost push inflation

A

Price rises due to increase in costs of production

E.g. imported raw materials or wage increases

76
Q

Demand pull inflation

A

Price rises from persistent excess of demand over supply

Supply cannot grow any further once ‘full employment’ is reached

77
Q

2 main causes of demand pull inflation

A
  1. Fiscal
  2. Credit
78
Q

Fiscal cause of demand pull inflation

A

Increase in gov spending
Or reduction in taxes

Raises demand in economy

79
Q

Credit cause of demand pull inflation

A

Levels of credit extended to customers increases

Expenditure rises

(Inflation likely to be accompanied by customers’ debt burdens)

80
Q

Gov macroeconomic policies used to grow the economy and control inflation

A
  1. Monetary policy
  2. Quantitative easing
  3. Fiscal policy
  4. Supply-side policies
81
Q

Monetary policy

A

Interest rates

Exchange rates

Money supply

82
Q

Effects of rise in interest rates

A

Price of borrowing in the economy will rise

83
Q

Impact of interest rate rise on companies

A

Reduced borrowing and investment in non-current assets

84
Q

Impact of interest rate rise on households

A

Increased saving decreased spending

Unwillingness to borrow for house purchase

85
Q

Outcome of rising interest rates

A

Reduced aggregate demand in economy

86
Q

Results of higher sterling exchange rate

A
  1. Cost of exports higher
    Cost of imports lower
  2. Foreign investors attracted to sterling investments
  3. Reduction in spending and investment
87
Q

Economic outcome of higher sterling exchange rate

A

Reduction in aggregate demand in economy

88
Q

Quantitative easing

A

Central bank buying financial assets (e.g. gov and corporate bonds) using money generated electronically

Form of relatively unconventional expansionary monetary policy

89
Q

Fiscal policy

A

Government spending:

Taxation
Borrowing

90
Q

Government spending uses

A

Stimulate aggregate DEMAND
Influence DISTRIBUTION of wealth

91
Q

Taxation uses

A

raise funds
influence the distribution of wealth
suppress economic growth

92
Q

Government borrowing

A

Based on fiscal stance

93
Q

Main source of gov spending

A

Tax

94
Q

Three fiscal stances

A
  1. Expansionary
  2. Neutral
  3. Contradictionary
95
Q

Expansionary fiscal stance

A

Gov spending > tax = increased borrowing

96
Q

Contradictionary fiscal stance

A

Gov spending < tax = reduced borrowing

97
Q

Neutral fiscal stance

A

Gov spending = tax

98
Q

Supply wide economics

A

Policies to encourage suppliers to produce more goods at lower prices

99
Q

Main supply side macroeconomic policies

A

More involvement of the private sector in the provision of services

Reduction of taxes to increase incentive to supply

Increasing flexibility in the labour market by reducing the power of trade unions

Improving education and training so quality of labour is enhanced

Increasing competition though deregulation and privatisation of utilities

Abolition of exchange controls and allowing free movement of capital

100
Q

Market structure definition

A

Description of the number of buyers and sellers in a market for a particular good and their relative bargaining power

101
Q

Four main types of market structure

A
  1. Perfect competition
    (Infinite firms in the industry)
  2. Monopolistic competition
  3. Oligopoly
  4. Monopoly
    (One firm in industry)
102
Q

Perfect competition structure

A

Large number of buyers and sellers
None can influence market price alone
(No collusion)

Free entry/exit to market place in long run

Free access to perfect info on all market conditions
Resulting in identical cost structures

Homogenous/identical products

103
Q

Perfect competition implications

A

Single market-wide selling price

Suppliers are ‘price takers’
Can sell as much as they like but only as market price

Suppliers only make ‘normal’ profits in long run
(So seen as good for consumers)

104
Q

Monopoly structure

A

One supplier

Many buyers

Barriers prevent new entrants
E.g. size/economies of scale
Patents
Public sector protection
Unique talent
Access to unique resources

105
Q

Monopoly implications

A

Supply can fix price or quantity
(Other determined by demand curve)

Firms make super-normal profits
(Hence often seen as bad for consumers)

106
Q

Types of monopoly

A

{I’m getting a PANG for a monopoly}

  1. Pure monopoly
    Only one supplier
  2. Actual monopoly
    One dominant supplier
  3. Natural monopoly
    Not due to legal factors
    (E.g. monopolies of scale)
  4. Government franchise monopoly
    Based on gov policy e.g. NHS
107
Q

Monopolistic competition structure

A

Many buyers and sellers

Some differentiation of products
E.g. by branding/advertising

Some customer loyalty

Few barriers to entry

108
Q

Monopolistic competition implications

A

Firms have some freedom to set prices
(Face downward-sloping demand curve
So price rises will lose customers)

Lack of barriers to entry ensure only normal profits in the long run

109
Q

Oligopolies structure

A

Few large suppliers

Differentiation of products

High degree of mutual dependency

110
Q

Oligopolies implications

A

Difficult to predict the actions of competitors
E.g. follow the leader pricing
Rivals copy price cuts but not increases
Price wars

May prefer non-price competition
E.g. advertising

Collusion from cartels
E.g. OPEC

111
Q

Perfect competition examples

A

Fruit markets
Stock market?

112
Q

Monopolistic competition examples

A

Pubs
Hairdressers

113
Q

Oligopolies examples

A

Oil industry
Banking
Washing powder

114
Q

Market failure definition

A

Free market fails to produce optimum allocation of resources

115
Q

4 factors in market failure

A
  1. Market imperfections
  2. Externalities
  3. Public goods
  4. Economies of scale
116
Q

Market imperfections

A

Markets don’t satisfy assumptions of perfect competition

E.g. monopolists charge higher prices
Powerful customers drive prices too low
Imperfect information poor decisions
Time lags

117
Q

Public goods

A

Goods that would not be provided at all without gov intervention

E.g. street lighting, police force, national defence

118
Q

Public goods properties

A

Non-excludability

Provision to one person allows rest of society to benefit

Consumption by one doesn’t reduce amount available to others
So market for this type of goods doesn’t exist

119
Q

Non-excludability

A

Can benefit from good without having to pay for it (free rider)

120
Q

Externalities in market failure

A

Costs or benefits the market mechanism fails to take into account because the market only incorporates private costs and benefits

121
Q

4 Externalities

A
  1. Private cost
  2. Private benefit
  3. Social cost
  4. Social benefit
122
Q

Private cost

A

Cost to supplier of producing good

123
Q

Private benefit

A

Benefit obtained directly by supplier/buyer

124
Q

Social cost

A

Cost to society as a whole of producing good

125
Q

Social benefit

A

Benefit obtained by society as a whole

126
Q

Negative externalities

A

Social cost > private cost
E.g. pollution

127
Q

Positive externalities

A

Social benefit > private benefit
E.g. training staff who then leave

128
Q

What does perfect competition involve?

A

Many smaller firms

129
Q

Can economies of scale result in lower prices for consumers than under perfect competition?

A

Yes

130
Q

Types of economies of scale

A

Internal economies

External economies

131
Q

Internal economies of scale

A

Arising from side of firm

Specialisation/division of labour

Indivisibilities in inputs
(More efficient utilisation of capacity)

Financial economies
(E.g. bulk discounts, inventory policy)

132
Q

External economies of scale

A

Arising from size of industry

Specialisation in local labour force that reduces training costs

Agglomeration economies
I.e. provision of ancillary backup service industries

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