Theme 1 - Markets, Consumers and Firms Flashcards
What is the basic economic problem?
Resources are finite and needs/wants are infinite, so resources must be used optimally.
Define scarcity
When there is a shortage of resources in relation to the quantity of needs/wants.
Define opportunity cost
The value of the next best alternative foregone.
What 3 things must we consider when producing a good?
- What to produce
- How to produce it
- Who to produce it for
Name a few different business objectives
- Profit maximising
- Sales maximising
- Survival
- Market share maximising
- Customer satisfaction
What is profit satisficing and when might a firm choose to advocate this?
Occurs when a firm earns just enough profits to keep shareholders happy.
Occurs when there is a divorce of ownership and control, whereby managers will make enough profits to keep shareholders happy, whilst still maintaining their own objectives.
Give the equations for:
1. Profit maximising
2. Sales maximising
- Marginal Cost = Marginal Revenue (MC=MR)
- Average Cost = Average Revenue (AC=AR)
What is Corporate Social Responsibility (CSR)?
A form of self-regulation, whereby firms take responsibility for their actions that harm the environment, and aim to maximise social welfare.
Recall an example of Corporate Social Responsibility (CSR)
As global warming and climate change is becoming an increasingly worrying issue across the world, firms could attempt to reduce their carbon footprint by investing in green energy.
Name the different types of stakeholders (economic agents)
- The shareholders
- Employees
- Consumers
- Managers
- Government
- Suppliers
Give a brief description of the principal-agent problem
Describes how the agent - who makes decisions for the principal - acts in their own best interests, linked to the theory of asymmetric information.
Occurs when the owners of the firm sell their shares, thereby partially losing control of its day-to-day operations.
Give a brief description of the theory of Creative Destruction
Proposed by Schumpeter, this is the idea that new entrepreneurs are innovative and grow more productive than old, idle firms who are eventually forced out of the market.
Give one example of Creative Destruction
Technological advancements have led to the creation of DVDs, to the introduction of Blu-Ray, to the expansion of downloadable films, which has now triggered the downfall of DVDs.
What is the main incentive for entrepreneurs?
Taking risks for profit.
How do entrepreneurs make a profit?
By bringing together all 4 factors of production:
- Land
- Labour
- Capital
- Enterprise
Recall two non-financial motives an entrepreneur might have
- Ethical stance and social entrepreneurship.
- Independence and working from home.
Define all 4 factors of production
Land: natural resources such as oil and coal
Labour: human capital
Capital: goods which can be used in the production process
Enterprise: the innovator and risk-taker
What is specialisation?
Each worker completes a specific task in the production process, aimed at improving efficiency and thus the average cost of production.
Give a few benefits and drawbacks of specialisation
✓ Higher output
✓ Opportunities for greater economies of scale
X Work becomes monotonous and demotivating
X Give rise to structural unemployment, as some
skills may not be transferable
Why would higher interest rates be seen as a disadvantage to firms?
Higher interest rates implies getting a loan is more expensive, which raises the cost of production for firms.
It also encourages more saving and less spending on the consumer side, which results in less profits for firms.
What is the relationship between exchange rates and the level of imports/exports?
High exchange rate: Imports cheap, Exports dear -SPICED
Low exchange rate: Imports dear, Exports cheap - WPIDEC
How could a high rate of unemployment benefit firms?
An increase in unemployment mean there is a larger supply of labour, which gives firms bargaining power and the ability to reduce wages, thus lowering overall costs of production.
What could unpredictable inflation imply for firms?
Unpredictable inflation reduces overall business confidence, as it is difficult to anticipate future interest rates, unemployment rates, economic growth, etc. Therefore, firms cut down on their investment and wait for calmer economic conditions.
Define:
1. Effective demand
2. Individual demand
3. Market demand
- The quantity that consumers are willing to buy at the current market price
- The demand of an individual or firm
- The sum of all individual demands in the market
How do prices affect the demand/supply curve?
Prices cause movements along the demand and supply curves.
Prices do not cause shifts in the demand and supply curves.
What does each letter in the PIRATES mnemonic stand for?
Population
Income
Related Goods
Advertising
Tastes and Fashions
Expectations
Seasons
What are the 3 different types of supply?
- Joint supply
- Composite supply
- Competitive supply
Recall 3 reasons why the supply curve is upward sloping
- If price increases, it’s more profitable for firms to supply the good
- High prices encourage new firms to enter the market
- Larger output increases costs, which are passed onto
consumers in the form of higher prices
What does each letter in the PINTSWC mnemonic stand for?
Productivity
Indirect Taxes
Number of Firms
Technology
Subsidies
Weather
Costs of Production
How will the exchange rates affect the level of supply?
A decrease in the exchange rate boosts the costs of imports (raw materials), which increase the cost of production for firms, thus shifting the supply curve to the left.
Define the market equilibrium price
This is the price where supply meets demand, and has no tendency to change (P1Q1).
What are the cons of using the supply and demand model to explain real-world problems?
X They only show certain markets
X Assume price increases means firms will supply more
X Assume perfect information
X Assume perfectly competitive markets
What phrase describes the mechanism that determines market price?
The ‘invisible hand of the market’
What are the 3 different functions of the price mechanism?
- Rationing
- Incentive
- Signalling
What is the difference between a mass market and niche market?
A mass market is the largest group of consumers for a product.
A niche market is a smaller market, focused on a specific product.
Why are niche markets generally better at allocating resource?
As niche markets target the consumers directly, rather than generally, they are closer to the consumer and therefore have a better idea of who needs what goods.
Describe the difference between primary and secondary research
Primary research is carried out directly (e.g. surveys), whereas secondary research is carried out via a third-party (e.g. governments).
Evaluate the use of primary research over secondary research
Primary research is expensive but produces more specific findings than secondary research, which may not be as useful.
Define market research
The collection of data in order to learn about the needs and wants of consumers.
What is a disadvantage to using samples to analyse the market?
The sample used may be biased, and therefore give invalid results.
What is market segmentation?
This is when the market is divided into categories of consumers based on their characteristics, needs, etc.
How could market segmentation benefit firms?
By categorising consumers based on their needs/wants, firms can better target their goods to fulfill these specific needs.
How does a market map work?
It illustrates all the positions a product can take based upon two dimensions which are significant for consumers.
It then identifies which existing products meet which consumer needs, thus identifying gaps for new market participants to fill.
