The Economic Environment of Business and Finance Flashcards
What are macro and micro economic environments?
Macro - national and global influences
Micro - how mechanism works
What are the 4 factors of production and their returns?
Land - rent
Labour - wages
Capital - interest
Entrepreneurship - profit
What is the difference between private sector and public sector investments?
Private - retained profit, shares
Public - higher taxation or increased deficit
What is the business cycle?
Recession
Depression
Recovery
Boom
What happens in a recession?
Consumer demand falls
Production and employment fall
Prices fall
Investment low
What happens during business recovery?
Output, employment and income rise
More investments
Price level slowly rising
What happens in a business boom?
Demand rises
Business profitable
Optimistic
What is inflation or deflation?
Increase in prices - lower purchasing power
Falling prices - low rates of growth
What are the 2 types of inflation?
Demand pull - caused by fiscal or credit
Cost push
What policies do the government use to control inflation?
Monetary policy
Fiscal policy - taxes
What are the 3 fiscal stances?
Increased borrowing and spending - expansionary
Increased tax - contractionary
Increased tax and spending - broadly neutral
What is quantitative easing?
Expansionary monetary policy - gov buying existing gov bonds to add liquidity
What does the demand curve look like?
Downward sloping curve y=-x
What factors determine demand?
Price
Marketing research
Product R&D
Advertising
Sales promo
Training of sales force
Effectiveness of distribution
After sales service
Credit to customers
Prices of substitute and complimentary goods
Income
Fashion
What are substitute and complementary goods?
S- alternative goods
C- goods bought together
What causes a shift to the right of the demand curve?
Rise in household income
Rise in price of substitutes
Fall in price of compliments
Positive change in tastes
What factors influence supply?
Price obtainable for goods
Prices of other goods
Cost of making goods
Changes in tech
Change in price shifts along curve
What is equilibrium price?
Volume demand = volume supply
When do you have excess supply and excess demand?
S - higher than equilibrium price
D - lower than equilibrium price
What is the formula for price elasticity demand?
(Q2-Q1/Q1)/(P2-P1/P1)
What is elastic and inelastic demand?
E - value >1
I - value <1
What is perfectly inelastic, perfectly elastic and unit elasticity of demand?
PED=0 - no change in demand, regardless of change in price
PED= infinity - only up to particular price level
PED=1 - y=-x
What are Giffen and Veblen goods?
G - everyday items
V - luxury items pay more for name
What factors influence price elasticity of demand for a good?
Availability of substitutes
Time horizon
Competitor pricing
Luxuries and necessities
Percentage of income spent
Habit-forming goods
What is the formula for income elasticity of demand?
IED = Change in quantity/Change in income
What type of goods are income elastic and inelastic?
E - >1 luxury goods
I - 0-1 necessities
What is the formula for cross elasticity of demand?
CED = Change in quantity of good A/ Change in price of good B
What is the formula for price elasticity of supply?
PES = Change in quantity/ Change in price
What are the 5 types of market structure?
Perfect competition
Monopolistic competition
Oligopoly
Duopoly
Monopoly
What is perfect competition?
Many small buyers and sellers that have no influence
No barriers
Perfect information
Homogeneous products
No collusion
What is a monopoly?
One dominant supplier
Many buyers
Barriers to entry
What is monopolistic competition?
Many buyers and sellers
Differentiation in products
Branding
Customer loyalty
Few barriers
Advertising
What is an oligopoly?
A few large sellers but small buyers
Product differentiation
Mutual interdependency
What is a duopoly?
2 dominant suppliers
Possible collusion
What are the 2 types of potential efficiency?
Allocative
Productive
What causes market failure?
Market imperfections
Externalities
Public goods
Economies of scale
What are the internal economies of scale?
Specialisation of labour
Division of labour
Specialised machinery
Dimensional economies of scale
Buying economies
Indivisibility of operations
Holding inventories
What are the external economies of scale?
Large skilled labour force
Specialised ancillary industries
