Theme 1 Flashcards
Survival
Not go bankrupt or try to break even
Market share
% of sakes by a business compared to the whole market
SMART Target
Specific Measurable Achievable Relevant Time-bound
Specific
State exactly what is to be achieved
Measurable
Capable of measurement- so you are able to determine if it has been achieved
Achievable
Realistic and the resources available to the business
Relevant
Objectives should be relevant to the people responsible for achieving them
Time-bound
Should be set with a time frame in mind, these deadlines also need to be realistic
What are the functions of objectives?
A focus for all activity Targets for individuals or groups A means of measuring performance Provide a clear focus for decision making Motivate employees Reduce uncertainty Provide sense of unity
As you go from mission to corporate/strategic to functional to team to individual, the objectives get…
Increasingly detailed and as you go up it gets increasingly strategic
What is marketing as a function?
Promote brand Product Price Place Promotion Advises on customer trends Collates and analyses markets research Decides how to advertise and promote new brands
Human Resource objectives
Plan for recruitment
Consider how to plan for equal opportunities and redundancy
Financial objectives
Monitors spending and controls costs
Identifies which budgets can be set for each customer
Operational objectives
People doing the service Customer satisfaction Oversees quality Manages a supply chain Oversees the delivery to the customer
Why do businesses need to make business choices?
Due to limited resources, businesses have to make choices
Decisions are made under circumstances of uncertainty
What resources are scarce in a business?
Finance- particularly cash
Time
Capacity - stock,machinery, buildings
Skills and capabilities
Opportunity cost
The cost of missing out on the next best alternative when making decision
What does the business mean to be organically?
Just the business
What does the business mean to be inorganic?
Buying and merging with a company
What are some personal opportunity costs?
An entrepreneur may miss out on a regular income as a consequence of starting their business
Investment will occur in assets at the expense of personal excitement
Long hours could be worked at the expense of family time
What are opportunity costs of developing business ideas?
One idea is chosen whilst another idea is sacrificed
Cost of launching idea at the expense of further development
Committing capital to investment in assets, may restrict other opportunities
What are the factors considered when making a decision on which alternative will be the opportunity cost?
Budget
Time
Consequence or risk
Considering potential sales from each idea
Considering the cash/financial commitment requires
Whether the decisions fit your skill set
What is a trade off?
It leads from an opportunity cost. A trade off arises where having more of one thing potentially results in having less than another
What is the trade off for this choice?- less market research
Less successful new product launch - lower sales
What is the trade off for this choice?-higher quality standards to build reputation
More quality control and assurance costs
What is the trade off for this choice?- higher advertising online
Reduces adverting on tv can’t target older audience
What is the trade off for this choice?- choose lower risk investments
Gain lower rewards
What is a partnership?
An organisation owned by 2-20 people
Positives of partnerships
Partners can add capital finance
Support - no long hours
Negatives of partnership
Unlimited liability
Disagreement between partners
Complicated to set up
LTD - private limited company
A business that is owned by shareholders and run by directors - have to get approval to sell shares -family and friends
Positives of LTD
Limited liability
Controls who buys the sells
Negative of LTD
Limits amount of finance you can raise
Dilute ownership -spilt profits
Expensive and time consuming to set up
Competition can see how well your doing
Limited liability
Company has a separate legal entity - company is separate to owner
Sole traders
Owned by and run by an individual
Positives of soles traders
Maintain power in decisions
All profit goes to owners
Small and easy to start up
Negative of sole traders
Unlimited reliability - responsible
Work for long hours
Lack of creativity and support from other people
Social enterprise
Is a business that trades for a social and or environmental purpose. They trade in order to benefit the community. These businesses have social aims as well as financial
-not a charity, they achieve a social aim through donations and grants through not trading
Lifestyle businesses
The aims is to provide a great quality of life for the owner
Owners start a business hoping to sustain a certain level of income
Start a business doing something they really enjoy
Allows an entrepreneur to live how they want and still run a business
Online business
Easy to setup
Available to customers 24/7
Manages from anywhere, owner not in office
What is a franchise?
The legal right to use the name and logo of an existing firm and sell the same products -KFC
What is a franchisee?
The person who buys the rights from a franchisor to copy a business format
What is the franchisor?
Established, well known brand. Grants a license to another business to allow it to trade sing the brand or business format
Drawbacks for the franchisee
You don’t control many decisions
-you have to follow the rules-you can’t sell without the franchisors permission
-you must buy supply’s from the franchisor
Higher than expected costs - start up, royalties, suppliers and franchise renewals can be expensive
Benefits of franchisee
The brand is known and established
Less likely to fail with the backing of the company
The franchisor provides assistance with
-start up costs, management, financial, marketing, training
Benefits of the franchisor
A quick way to expand the business
The franchisee provides much of the finance and takes responsibility for setting up and running the business
Motivation-franchisee has own capital tied up in business
Economics of scale
-buying power and mass advertising
Receives royalty payments from the franchisee
Drawbacks of the franchisor
Doesn’t get all the profits from the franchisee - only a %
A loss of control- cannot manage day to day activities
Bad customer service or hygiene at any of the franchises tarnishes the reputation of the brand
Business
A business is an organisation that exists to provide goods and services on a commercial basis to customers
Goods
Physical products - consumer electronics, cars
Services
Intangible products - insurance, dental service, cleaning
Benefits of business to society
Creates employment and develops human capital
Drives innovation through R+D and new products
Pay taxes on profits earned and collect taxes from government
Create wealth by providing returns on investment
Enterprise
the skills and abilities to take risks aims create profits
The creation of a business to meet the needs and wants of customers
Entrepreneur
A person who organises, operates and assumes the risk for a business venture - a person who takes the risk in starting a new business
Start up
A new business enterprise, formed by one or more entrepreneurs
How to be a good entrepreneur?
Creativity
Driven and determined
Risk taker
Spots business opportunities -looks for gaps in the market
Take calculated risks in order to gain possible returns
Acts as a catalyst for the creation and growth of new business enterprises
What is the importance of business ideas to entrepreneurship?
Solve a problem Offer a better cheaper way Simple and practicable Can be delivered quickly Have a clear focus Anticipate trends and exploit growing markets
Sources of business ideas
Business experience Personal experience Observations Innovations Brainstorming Market mapping
Business experience
Good way of getting insights into what works and more realistic business plan and less need for market research
Personal experience
Day to day activities,interests and hobbies
Bad experiences or frustrations
Observations
Watching closely what happens to customers and look for poor customer service
Innovations
Taking an idea that already exists but improving it
Brainstorming
Variables are plotted to identify niches
Market mapping
A technique used to analyse key variables within a market place and identify any niches
Variables differentiate brands
Monitor existing brands
Used to position brands
What do you have to do to develop and expand a business?
Carry out market research to see if there isa demand to justify expansion
Raise finance
Invest in new technology and better equipment
Take on more skilled staff
Intrapreneurship
Involves people within a business creating or discovering new business opportunists, which leads to the creation of new parts of the business or even new businesses
Intrapreneur
An employee within a larger business who thinks like an entrepreneur Takes risks Solve problems Drives innovation Understands trends
Ways to encourage intrapreneurship in a business
Look out for entreprenurial activity
Give employees ownership of projects
Make risk taking and failure acceptable
Give employees time outside the confines of their job description
What are some barriers to entrepreneurship?- financial
Lack of start up capital
Lack of cheap labour
Lack of investment
What are some barriers to entrepreneurship?- political
Unstable political landscape
What are some barriers to entrepreneurship?- personal
Lack of self esteem Risk averse -don’t want to take risk Fear of failure Lack of technical skills Gender Viable idea
What are some barriers to entrepreneurship?-economic
Taxation
Market entry regulations
Uncertainty
When a business is unable to predict external shocks or future events - contingency plan
Risk
The probability that things will not go as well as planned
How successful entrepreneurs deal with risk?
Take calculated risks rather than gamble
Spread risk by diversifying
Look for higher returns to take account of the risks
Keep going despite adversity - persistence is a key quality
What are the rewards for enterprise?
Profits made by the business Capital gains made by selling the business Self esteem Personal development Sense of control Satisfaction from building something
Organisational design
Creates a formal hierarchy that establishes who is accountable to whom throughout an organisation -people and management
What does organisational design show?
Authority and responsibility
Job roles and titles
Accountability
How communication flows
Hierarchy
The number of layers of management or suspension in the organisation structure
Tall hierarchy
6 levels
Flat hierarchy
4 levels
Span of control
The number of employees for whom a manager is responsible
Narrow - 3
Wide -6
Advantage of narrow span of control
Allows for closer supervision of employees
More layers in the hierarchy may be required
Helps more effective communicate
Advantages of wide span of control
Gives subordinates the chance for more independence
More appropriate if labour costs are significant - reduce number of managers
What is the chain of control?
it describes the lines of authority within a business, this is the flow of authority, power and information through the organisation
What does a leader do?
delegates trust
relationship building with staff
relationships within and outside of the business
What does the entrepreneur do?
Hands on - does lots of the work
What is leadership?
a relationship through which one person influences the behaviour or actions of other people
What is the traditional view of leadership?
Command and control
decision-making
What is the modern view of leadership?
Inspiring employees
creating a vision
shaping core values and culture
building effective teams
What does autonomous mean?
when someone has the power delegated to them to make decisions without any supervision
Why is leadership becoming increasingly important?
Changing organisational structures - flatter and more delegation
teamwork
coaching, support and empowerment
Rapid change - soft skills of leadership and management increasingly important
Management
The process of dealing with or compelling things or people
Leadership characteristics
motivating and inspiring
innovators
creates change
respected and trusted
Management characteristics
directing and monitoring
problem solver
has employees
position of responsibility
Authoritarian
takes all decisions, top-down approach, command and control
Paternalistic
Leader looks after staff like a father
takes all decisions but does so in the interest of employees
Democratic
workers may have a say in decision making
consultation takes place before decisions are made
Laissez faire
workers have the freedom to make their own decisions and are trusted
What is motivation?
The will to work. When people do something because they want to do it; desire to achieve a result
-it comes from enjoyment of work itself and from desire to achieve certain goals
What might happen if employees are demotivated? - They might
lack commitment or loyalty to the business
have a high absenteeism
have a low productivity
All of which affects profitability
What might happen if employees are very demotivated?
Industrial disputes, or they may leave and the business may have a high labour turnover
What is Mayo’s motivation theory? - 1800-1949
Employees are motivated. by relational factors - camaraderie, attention
What was Mayo’s investigation?
Tests done in 1920 found that improved lighting and work breaks only temporarily increase productivity
He conducted interviews where employees could express their opinion. - after this the group increased productivity as leadership changed and more socialising
What are the core principles of Mayo’s theory?
Better communication
Greater participation from managers
Working in groups inspired productivity from each individual
What are the outcomes of Mayo’s theory?
Involving workers in decision making improved motivation
Financial/environment did not help
businesses should reorganise production to encourage team working
What is the investigation that Herzberg did for motivation?
Research done in 1950s where he asked employees to describe recent events that had given rise to good feelings about their jobs and then asked about events giving rise to bad feelings
Herzberg motivation factors?
Achievement, recognition, the work, responsibility, advancement
Herzberg Hygiene factors?
Company policy, administration, suspension, salary, interpersonal relations, working conditions
What did herzberg feel about money as hygiene factor?
Saw pay as a hygiene factor, not a motivator
A feeling of being unpaid could lead to a grievance; but. high pay would soon be taken for granted
What is Maslow’s Hierarchy of needs?
It explains that everyone has the same needs all of which can be arranged into hierarchy.
What is the outcome of Maslow’s theory?
Methods to motivate employees will depend on where they are in the hierarchy
What are Taylor’s principles of his theory?
Workers don’t naturally enjoy work so need to be under supervision and control
Workers are paid according to the number of items they produce in a set period of time
As a result workers are encouraged to work hard and maximise their productivity
What were the outcomes of Taylor’s theory?
Tall hierarchy’s may be better so that workers can be supervised and controlled
autocratic leadership style links with this theory
Performance related pay would be a good motivator according to Taylor
Financial incentives for motivation
Profit share commission bonus piecework performance - related pay
What is piecework?
Employees are payed per finished item or unit
Advantages of piecework
Experienced and efficient workers can earn more
Incentive is to complete the work
Employees may work more hours to get the work done
Home workers can start and finish when they want to - lits round family time
Disadvantage of piecework
As workers speed up they may cut corners
Quality may suffer
Slower workers may fall under the national minimum wage
Commission
Sales- people may be paid commission only, or low basic salary and commission
May be paid a % of unit price or per unit sold
Advantages of commission
Skilled sales people can make very good money
Motivates employee to sale more
Employer is not paying for down time when the employee is not selling
Disadvantages of commission
Salespeople on commission only could earn no money at all
Not a steady income
Risky in recession
Employees are just selling and not necessarily meeting the need of the customers
temptations to pressure sell or oversell
Bonus
Is a lump some of money that is paid on top of a salary or wages
Can be for:
- sales for meeting targets
- Performance - for meeting output or quality targets
- Christmas - a yearly bonus
Advantages of a bonus
Can be used for appreciation for an employees hard work throughout the year
Can be used as an incentive, especially in sales or where people must meet certain goals
Disadvantages of bonus
Can be costly for any company, so a business may offer a gift card instead
When an employee receives a bonus, it becomes part of their total income, at the end of the year, the employee will also be paying tax on their bonus
Profit Share
Employees may be paid an annual dividend based on the level of profits made by the firm
Encourages teamwork, employees become more loyal to the company
Advantages of profit share
Brings employees together- work towards a common goal
The employee focus will be profitability
Bridges the gap between the employer and the employee
Promotes the well-being of the employee
Disadvantages of profit share
The salaries of the employees go up equally not on the basis of merit or promotion
The focus of the employee may be on profit rather than quality
Start-ups - drastic fluctuations in the earnings of the company, may effect earnings of the employee
performance related pay
A line manager sits in an appraisal and decides a set of objective which are set as targets
Some will give a bonus: good 5% bonus, excellent 10% bonus
Advantages of performance related pay
There is a direct link between performance level and amount employees are paid
Easy for manager to rank the staff when they look at who to promote
Disadvantages of Performance related pay
Critics say it causes jealousy and unrest
Those who don’t meet their targets may get demotivated and blame their line manager - bonuses are often too low to act as an incentive to work towards targets
Examples of non financial motivation methods
Delegation, consultation, empowerment, team working, flexible working, job enrichment, job rotation, job enlargement
Delegation
Involves allocating tasks to employees
A manager has to delegate work to their subordinates
Advantages of delegation
Gives manager confidence, empowers managers to make decisions and allocate tasks
Makes sure teams potential is maximised
Builds trusts between employee and managers
Disadvantages of delegation
Managers often want to delegate work when they are overloaded not when they want to motivate an employee
Managers may not always choose the most suitable employee to delegate work to
Consultation
Involves giving employees the chance to be part of the decision making process
Employees have discussions with managers about what to improve
by Law they have to consult about- health and safety, redundancies, changes to contract
Advantages of consultation
Can help avoid any minor issues in the business become larger
Can help the employees feel motivated as their views are asked on certain matters
Disadvantages of consultation
Employees may not know what it needs to run a successful business
Employees may come up with grudges against the company or between themselves
Empowerment
Involves allowing employees more authority to delegate tasks to others
Advantages of empowerment
Staff that are recognised for their ability, trusted and given control over decisions, therefore less frustrated with business and have increased productivity levels.
Empowered employees are close to issues and problems, may be more effective at problem solving on that level
Great involvement means great loyalty to the business
Disadvantages of empowerment
Sometimes regarded as cost cutting, a way of delayering, making management redundancies, makes managers insecure, and has an associated cost of training
Some see this as giving employees more to do for the same pay
Lack of experience in the job can increases mistakes being made
Team working
Involves grouping employees to work in teams, through collaboration and discussion a team can often produce a better product or solution that an individual
Advantages of team working
Pooled talents, individuals specialise, shared responsibility, ideas through brainstorming, more likely to take risks
Well managed work place teams can produce better results
Peer pressure in group can help motivation levels keep high
Disadvantages of Team working
Tensions can occur, not everyone gets along, team suffer from too many meetings, a team is not the solution to every problem
Sometimes an individual approach would be better, some work better independently
Flexible working time - flexitime
Involves offering a variety of working patterns so that employees can achieve a work-life balance
Part time, homeworking, job share
Advantages of flexible working time
Greater cost effectiveness and efficiency, such as savings on overheads when employees work from home or less downtime for machinery when 24 hour shifts are worked
The chance to have extended operating hours
More job satisfaction and better staff motivation
reduced levels of sickness absence
Disadvantages of flexible working time
It can be difficult to fit shifts and schedules to fit everyone
Some staff may take advantage of the flexible system and not work as hard or when they should - home working
Job enrichment
Involves giving the employee a greater variety of tasks of a higher responsibility
Means the job m ay be redesigned so that it is more challenging and less repetitive
Advantages of job enrichment
Employee has more interesting job role - motivating and increases employee productivity and lowers absenteeism rates
- the employee will feel more loyal to the organisation and that they the sense of achievement
- prepares the employee for possible promotion in the future
Disadvantages of job enrichment
May feel their job has become harder
May mean the employee will have to be trained on new machinery, computer or other job skills to perform the new tasks
Not all jobs can be enriched
Job rotation
Involves moving employees from one task to another
Means that staff can be trained in a variety of skills so can be better utilised when there are shortages
Advantages of job rotation
Business gets multi-skilled employees who can carry out more that one task
- job is less monotonous and boring for the employees, reducing labour turnover rates
- easy and cost effective way to motivate employees and improve productivity
Disadvantages of job rotation
Many employees may be unwilling to change jobs for something they don’t know, or work with a different team
Takes time for employees to learn the new skills and get up to speed
Job enlargement
Involves giving an employee more tasks of the same level of responsibility
- Designed to prevent the employee from getting bored and to expand the scope of their job at the same level
Advantages of job enlargement
- makes job less boring and repetitive
- Employee productivity may be improved
- Improves employee retention and absenteeism
Disadvantages of job enlargement
May be added stress as employee may see it as more tasks to get done in a working day
Needs to be linked to a clear career progression to make sense to the employee
4 Reasons to recruit staff
- business expansion - increasing sales of existing products, developing new products, entering new markets
- Existing employees leave - retirement, maternity lave
- Businesses need employees with new skills - innovation
- Business is relocating
What is internal recruitment and examples?
Advertising and offering a job within the business and recruiting someone who is already an employee
- Email, flyers, notice board, intranet
What is external recruitment and examples?
Advertising a job to anyone and recruiting someone who doesn’t work for the business - Online, social media, businesses website
Internal recruitment examples
promotion/transfer
notice board
personal recommendation
External recruitment examples
Recruitment agencies
Job centres
Internal recruitment benefits
Cheaper - don’t need to pay for induction training - low advertising costs
Promotion/Varied job opportunities can be used to motivate employees
Internal recruitment drawbacks
Another vacancy may be create as a result
Ideas generated may stagnate due to lack of new employees and new ideas in the company
External recruitment benefits
A bigger choice of alternative candidates
New ideas and perspectives
External recruitment drawbacks
Expensive and time consuming
Induction training costs
Don’t know the person
What are the stages of recruitment?
Write job description, person specification
Shortlist applicants based on CV’s
Use selection methods
Shortlisted candidates are interviewed
Another recruitment activity - psychometric test
Psychometric testing
To see if their personality and attitudes fit with the business culture
Aptitude test
To test a candidates skills/ abilities
In tray exercises
May have to complete skills in a certain time
Skills test + and -
Selects the person best suited
May put people off with lots of tests
Telephone interview + and -
Quick and easy
may not get a full representation of the person
Costs of recruitment and selection
lost output from replacing an employee
Logistical cost of running a recruitment and selection process
advert
agency fees
Loss of productivity while new employee inducted
Loss of management time
Hidden costs - up to half of all employees leaves within first year
Training
The process of equipping employees with the skills and knowledge necessary to carry out their job efficiently
On the job training
Where an employee learns in the workplace from experienced employees
Off the job training
Which is any form of education that takes place outside of the workplace
Why is it important to train employees?
Ensure they have skills to conduct their work efficiently
Provides a sense of motivation- increase skill level
Reflects externally - business is viewed as a desirable place to work for - increases candidate pool for recruitment and selection
What are the costs of training?
Productivity time lost by the employee receiving training
Productivity time lost by a second employee if training is provided in the house
Fees paid to an external training provider plus employees travel cost
What does induction training include?
Information on important policies and procedures such as health and safety
a tour of the organisation and an introduction to colleagues.
Details of employment; payment arrangements, holiday entitlements
Methods of on the job training
Demonstration/instruction showing the trainee how to do the job
Coaching - intensive training that involves a close working relationship between an experienced employee and the trainee
Job rotation
Trainee given jobs in several roles in succession to gain experience of a wide range of activities
Projects team
Employees join a project team - gives the exposure to other parts oft the business and allows them to take part in new activities
Off the job methods
- Day or part time attendance at college
- Professional development courses
- Online or distance learning
- Sandwich courses
- Sponsored courses
- Self-study, computer based training
On the job positives
- Tailored to the businesses way of working
- Saves time and money instead of sending people out
- Trainee faced with real life scenarios
- No need to pay pro trainee
- Motivation as employee hands on straight away
On the job negatives
- Risk of expensive errors -customer service
- can be distracting to other employees
- potential to pick up bad habits
- loss of productivity
off the job benefits
- Employer likely to train others at the same time
- Opportunity to use specialist trainers which can raise standards
- Raise awareness of the importance of training
- Can concentrate without the pressures of work
Off the job drawbacks
- May often be unsupervised or away from control of supervisors
- Costs of having a skilled trainer
- Worker is unproductive while training is taking place
What does staff as an asset mean?
- Treat employees as the most important resource, a source of competitive advantage
- Treated as individuals and their needs are planned accordingly
What does staff as a cost mean?
- Treat employees simply as a resource of the business
- Strong link with corporate business planning
Staff as a cost- key features
- minimal communication from top down
- pay -enough to recruit and to retain staff
- Appraisal systems
- Tall structure
- Autocratic leadership style
Staff as an asset - key features
- flat structure
- democratic style
- employees are empowered and encourages to seek delegation and takes responsibility
Staff as a Cost - benefits
- start up may lack finance so need to focus on costs - competitive markets are price sensitive
- May result in more cost effective workforce where decision making is quicker and focussed on senior management
Staff as a cost - drawbacks
-cost based approach might expect to suffer from higher absenteeism and staff turnover and less successful recruitment
Staff as an asset - benefits
Rewards employees performance and motivates staff more effectively - increase productivity, less staff turnover, less cost for recruitment
Staff as an asset - drawbacks
Being too soft when all the employee benefits are added up, the cost of the workforce may leave a business at a competitive disadvantage.
Flexible working
Working arrangements were there are a variety of options offered to employees in terms of working time, working location, and the pattern of working
Part time
Describes various methods of employing people who don’t work a full working week
Home working
People working from their home or from other premises, for payment
Flexible hours
Give employees some choices over the actual times they work their contracted hours
Multi-skilling
Where staff are allowed to carry out a variety of tasks rather than specialise
Outsourcing
Delegating one or more business processes to an external provider.
Examples of flexible working
Flexitime, Team -time working, work from home
Career breaks
Positives of flexible workforce
- Reduce costs - part time and peak time
- Retain staff - staff can fit job around other commitments
- Access to a bigger pool of people
- Productivity may increase due to high motivation being in a relaxed environment
- costs saving through office space
- multiskilling so less staff needed
- Job shares to reduce redundancies
- less travel time to and from work
Negatives of flexible workforce
- difficult to communicate
- may lack communication -homeworking
- decrease productivity - informal environment
- Admin to set up flexible hours
- Inability to substitute for certain skills if certain employees are absent
Multi-skilling
Where staff are allowed to carry out a variety of tasks rather than specialise. Common in service sectors
Positives of multi - skilling
enables greater use of job rotation - increases motivation
Negatives of multi-skilling
Requires more training
Temporary staff
Where staff are on a contact with a fixed length
Negatives of temporary staff
Often have less rights and hiring and firing is cheaper so is easier
May not be fully committed, may not understand the business aims and culture
Relying on temps can be a sign that there is a problem with recruitment and retention
Dismissal
gross misconduct or poor performance of an individual
Redundancy
the job no longer exists
Outsourcing
Delegating one or more business processes to an external provider, who then owns, manages and adminsiters the selected processes to an agreed standard
- used if the job is not the core function of the business
Positives of outsourcing
Enables the business to focus on its primary function
A contractor may have more expertise and greater economies of scale in this function
Negatives of outsourcing
Outsourced businesses don’t necessarily share your companies culture, vision or goals or ‘go the extra mile’.
If you have signed a contract with the business then your supplier may get complacent and service levels may fail
Off-shoring
The work is done overseas by your own business
Outsource
Someone else does the work for you
Demand
The amount of a product that will be bought to a given price level
Demand curve
Shows how much will be consumed of a good at each and every price level
- there is generally a negative relationship between a price and quantity demanded
Shift to the right
Increase in demand
Shift to the left
Decrease in demand
How do you find the revenue from a demand curve?
The area under the price and quantity
Factors that increase demand
Increase in income
Advertising campaign
Summer/xmas - seasonal
Substitute
An alternative to a product
There is a positive relationship between the price of a substitute and demand for a good
Complement
Is a good that is bought with another good
There is a negative relationship between the price of a complement and demand for a good
Inferior goods
One where demand falls as income rises
If income falls, demand falls
Normal goods
a good where demand rises as income rises
Factors that affect demand
- Changes in prices of substitutes and complementary goods
- changes in consumer incomes
- fashion, trends and preferences
- advertising and branding
- demographics
- seasonality
- external shocks
Supply
The number of goods and services producers are willing and able to supply at any given price
What does price change cause?
it causes a movement along the curve - direct relationship
Supply curve - shift to left
decrease in supply
Supply curve - shift to right
increase in supply
Supply - new technology
Increase in supply
Supply - Increase in production costs
decrease in supply
Supply curve
A graphical representation of the relationship between quantity supplied and price for all suppliers
Determinants for supply
- Changing costs of production
- Technological processes
- prices of other goods and services
- other factors- expectations (weather)
- government policy - taxes and subsides
When are supply and demand equal? What is this called?
When output Q1 and price P1 - Equilibrium is determined by the point where supply and demand meet
What is price elasticity of demand (PED)?
PED is a measure of how sensitive customers are to a change in price
Inelastic
If a customer isn’t sensitive
Elastic
If a customer is sensitive
Why do businesses need to know PED?
To forecast what will happen to sales volume and sales revenue if they change their price
Understanding PED helps a business to set its prices to achieve its revenue budget, in order to deliver its cash flow forecast and profit budgets.
How do you calculate PED?
PED = % change in Quantity demanded / % change in price
Percentage change
(new-old)/old x 100
PED = 0
Perfectly inelastic
- this means that when the price changes there is zero change in quantity demanded (theoretical)
PED = 0 to -1
Inelastic
- This means that quantity demanded changed by proportionally less than the change in price - cigarettes and petrol
PED = Exactly -1
Unitary
-This means that the % change in price was exactly the same as the % in quantity
PED = -1 and up
Elastic
- The quantity demanded change proportionally more than the change in price - luxuries, goods with lots of substitutes, little brand loyalty
PED = Infinity
Elastic
- The quantity demanded changes infinitely when the price changed (theoretical only)
Factors determining PED
- Availability of consumer substitutes
- Necessity or luxury
- Proportion of income spent
- Loyalty
- Time/habits
Income elasticity of demand
Measures the responsiveness of demand to a change in income Y
How do you calculate YED?
YED = % Change Quantity demanded/ % change in income
What does a negative YED mean?
Inferior good - one where demand falls as income increases
-demand rises as income falls
What does a positive YED mean?
Normal good
- one where demand increases as income increases
- demand falls as income falls
How does price change demand?
-income, value
Higher the price:
- the less people are able to afford it
- the less good value the product has compared other ways of spending the money
- shows the value of the product, low prices should increase sales but firms must be aware of ruining image for quality
How does prices for substitutes change demand?
Success of one is at the the expense of the other
-as competitors increase price, decrease price to increase sales
How does prices for changes in consumer income affect demand?
Normal goods - as average income increases, demand increases
Inferior goods - as average income increase, demand falls
Advertising and branding - how does it affect demand?
Advertising can boost demand
- long term - branding is more important that advertising, as it is important for customer loyalty if the customer is dedicated to the business
- The value of a brand is its ability to demand for higher price and to achieve high levels of customer loyalty
Demographics - how does it affect demand?
Demographics breaks down the population data
-the biggest opportunity is older people
External shocks - how does this affect demand?
Natural disasters - flooding UK
a change in law - sugar tax on drinks
unexpected change of mind of a large customer or supplier
Seasonal factors - how does this affect demand?
A well run business can predict the seasonal variations in demand; and then has a plan for coping
Demand risks - undiversified demand
This occurs when a business relies on just on product
- puts the business in a vulnerable position as it could lead to high costs for external shocks
- Spread risk by finding new sources of demand and being less reliant on one single resource
Demand risks - overtrading
Some businesses grow so fast they can’t find the cash to meet the rising bills due to the rising production levels
- meeting next months demands requires extra cash today for materials and staff.
How does changes to cost of production change supply?
cost of production includes materials, rent, salaries and advertising
The higher the cost the lower the incentive to supply because the higher the costs the lower the profit per unit.
- if all competitors face cost increase, you may assume that if everyone puts their prices up, market share figures will remain the same.
Introduction to new technology - how does this affect supply?
Significant affect on costs of production and efficiency
- a large increase in the supply of machinery can lower production costs and boost production capacity - supply is cheaper and more of it - cost of sales decrease, higher profit
Government subsides - how does this affect supply?
The government handout to a supplier e.g farmer
- this is where the government want to promote supply and therefore gives business a financial contribution for supply
- subsides encourage extra supply
External shocks - how does this affect supply?
Natural disaster - can disrupt supply lines causing particular problems for manufacturers or retailers who choose to carry very low stock
- a supply shortage leads to price rise
Indirect taxes - how does this affect supply?
Taxes that are levied by government on goods and services - 20% VAT
- duty tax - put onto goods that are socially undesirable, petrol and alcohol - if the government decide to increase the duty on petrol, this would add to the cost of supply therefore oil companies would wish to supply less petrol to the market - pushes price up
Physical constraints - how does this affect supply?
KFC - switched to a cheaper distribution company which left fresh chicken in the warehouse
-without physical supplies they had to close
Markets
a market is any place that buyers and sellers
