theme 1 Flashcards
What is the economic problem?
scare resources and infinite wants
What is scarcity?
Shortage in relation to wants
What does scarcity give a rise to?
Opportunity cost
What is opportunity cost?
the value of the next best alternative forgone when a choice is made.
How does opportunity cost affect businesses?
They need to decide to take on extra staff or buy new machinery
How does opportunity cost affect governmnt?
Decide whether to invest in NHS or education
When producing goods what are 3 things an economy has to consider?
What to produce - decided by consumers, consumers decide what they want by demanding it
How to produce it - Producers want to minimise their costs as much as possible
Who to produce to - to whoever has the greatest purchasing power and is able to buy the good.
Formula for profit?
total revenue - total costs
When do firms break even?
TR=TC
When does a firm profit maximise?
When they are producing at an output which gives them the greatest profit.
When does profit max occur?
When MR=MC
Draw a profit max graph?
check pmt 1.1.2
When do profit increase?
When MR is greater than MC
What are the 3 reasons why a firm profit maximises?
Greater dividends to shareholders
Retained profits are cheap source of finance saves paying high interest rates on bank loans
Why do some firms profit max in the long term?
Consumers may not like short and quick price increases so a long term aim of profit maximising provides a stable price stability.
Which type of companies are keen to profit max and why?
PLC’s this is because if they don’t aim for high profits then they can loose their shareholders
What is sales maximisation?
Firm tries to sell as much goods and services as they can without making a loss
When does a firm hit sales maximisation
When AC=AR
What firms usually uses sales maximisation
Not for profit organisations
Give an example of a company which used sales max and what did it achieve?
Amazon kindle launch - they sold as much kindles to gain market share and keep out competitors.
What is satisficing?
Firm earns enough profits to keep shareholders happy.
Why might managers not want to aim for high profits?
There reward isn’t as great for them. they just want to earn enough to keep shareholders happy and meet their other objectives.
This is known as divorce in ownership and control.
What is survival?
New entrants firms may use this. Just to survive in the market . This is a short term objective.
Give an event which meant lost of firms tried to survive in the market?
2008 financial crisis , consumer spending dropped . Firms tried to sell as much as they can to survive in the market.
How can a firm achieve cost efficiency objective?
More cost efficient a firm is , it can lower its average costs. Or they will be pushed out by a more cost efficient firm.
What is ROI objective?
When entrepreneurs take risks the reward for taking those risks is ROI
What can ROI show?
How profitable an investment is which can be used for later planning.
What is employee welfare objective?
Making sure employees are well looked after. Happy=more productive=more likely to stay =more efficient = better quality
Give an example of a company which focuses on employee welfare?
Google - you can bring your pet dog
What is customer satisfication objection?
Improving satisfaction through good customer service and quality that they produce at.
Innovation
What can a firm do once it meets customer satisfaction objective?
If they have a reputation of good quality e.g Sainsbury’s slogan (taste the difference) this gives them reasoning to consumers on why they charge higher prices. And consumers still pay for it.
What is CSR?
Corporate social responsibility.
How can a business achieve this objective?
Through lowering its impact on the environment.
Changing suppliers e.g not supplying from suppliers which use child labour
More ethical
What is a stakeholder?
Anyone who has interest in running a business
What is the interest of a shareholder
Shareholders want the firm to make a large profit, so the
share price increases and the value of their dividend goes up.
What is the interest of an employee?
They aim for high wages and good working conditions
What is the interest of consumers?
They want goods of a high quality and a low price
What is the interest of managers?
They want to earn large bonuses and salaries, as well as personal
benefits, such as leisure time and company cars.
What is the interest of governments?
Governments aim to earn tax from the firm’s profits, such as
corporation tax.
What is the interest of suppliers?
Firms are the customers of suppliers. Suppliers want firms to
remain in business so they still have customers.
How can a manager cause stakeholder conflict?
If they feel like they have high skills they might demand higher wages but shareholders also want higher wages and they are an important source of investment. Funds are limited so both ways cant go.
What is shareholder activism?
Shareholders place pressure on management to get higher dividends
Give an example of shareholder activism?
Sainsburys shareholders blocked the decision to give the chairman £2.3 million bonus in 2004
What is specialisation?
when an individual ,company, or region focuses on a specific type of production to increase efficiency and gain a competitive advantage.
What is the division of labour?
Splitting workers into different components focusing them on to one or a few components and getting them to be highly skilled in it.
What are the pros of division of labour?
High productivity decreases costs - lower costs can be passed to consumers - high profits can mean higher wages - increased productivity mean they can move to international markets - it creates many low skilled jobs.
What are the cons of the division of labour?
repetitive tasks means demotivation- less motivation decreases quality - higher labour turnover they want more enthusatic jobs -mass products produced means they dont take into account consumer preferences and variety- if workers loose their jobs they might find it hard to find a job because they are only trained in one area.
What are the pros of specialisation?
higher productivity lowers unit costs for firms which makes their good cost competitive internationally - increased exports means economic growth- this means higher income and standard of living-income gained from purchasing goods can be used in other areas like buying imported goods from other countries
What are the cons of specialisation?
international trade in benefical for firms as they can compete globally however some firms cant compete globally and they might go out of business- many firms in an entire industry may close leading to structural unemployment- specalisation creates over depedancy on different countries e.g uk on russian gas- it also reduces the resource a lot and it increases the rate resources decrease by.
Draw a demand graph showing an decrease in the price of ice cream.
draw
What are the 5 reasons for increased demand and they shift the demand curve?
consumer preferences
price of subsitiute and complementary items
income
expectations
what is demand?
The price consumers are willing and able to buy at a certain price.
What are the 5 reasons for shift in supply?
Tech advancements - more better machines
Expectations
price of resources
government intervention
amount of suppliers
draw a supply and demand curve if ice cream was said to make you smarter?
demand shifts to right and quanitity increases and so does price
What is effective demand?
The quantity consumers are willing to buy at a certain market price.
What is market demand?
Demand of individual and firms measured by the quantity bought at certain price in certain time.
What is market demand?
Sum of all individual demands in market.
Draw a demand graph showing increasing demand due to price.
Movement
P2 shows price decrease and this increases demand to Q2
P3 shows increase in price and decrease to demand to Q3
What is the menoumic of shifts on demand curve?
PIRATES
What is P
Population - increase in pop increases demand
What is I
Income - higher disposable income increases demand.
What is R
related goods such as subsitutes and complements
What are subsititues ?
Things that can replace another good e.g Tv brands like if LG decreases in price then people will move to Lg instead of samsung.
What are complementary goods?
Things that go with another good.
e.g strawberries and cream
if price of strawberries increase then the price of cream does aswell as less people are buying strawberries.
What is A
Advertising- things brings brand loyalty which increases demand.
What is E
Expectations- e.g is speculators believe the price of the stocks will increase in the future then demand increases.
What is S
Seasons- if there is hot weather then the demand for ice creams increases.
What is the definition on supply
the price which suppliers are able and willing to supply in a given period of time.
What is joint supply?
Supply of one good increases and decreases the supply of another good. E.g producing more lamb produces more wool.
What is composite supply?
Goods and services can be obtained from a different source e.g light can be produced from candles or electricity.
What is competitive supply?
2 subsitute items e.g electricity and candles in competition to produce the need. which would be light
Why does supply increase cause price increase?
movement
price increases gives producers to supply more as they see greater profits
more new entrants because they see market as profitable
with larger outputs cost of production increases so they need to cover costs
What is the menomic of shifting supply
PINTSWC
What is P
Productivity- increased productivity means average costs of production falls
What’s I
Indirect taxes - taxes to firm causes inward shift
What is N
Number of firms - of the number of firms increases then there’s more supply.
What is T
Technology- tech advancements causes an outward shift in supply
What is W
Weather - good / sunny / raining weather in agriculture will increase supply of food
What is C?
Costs of production -lower your costs of production are the lower the more you can supply but if this increases e.g higher wages then lower your supply is.
How can exchange rate affect supply?
lower exchange rate means imports are expensive. inwards shift in supply as you may need to import your raw materials