Theme 2 Flashcards
Economies of scale
Fall in average total cost as the scale of production increases.
Internal economies of scale
Occur due to an increase in the scale of production of a firm.
External economies of scale
Occur due to an increase in the scale of production within the industry in which the firm operates.
Forms of economies of scale
- Purchasing economies
Discounts for bulk-buying - Technical economies
The use of specialist equipment - Managerial economies
Specialist labor - Financial economies
Better credit ratings, lower interest rates
Diseconomies of scale
Occur when there is an increase in average total cost as the scale of production increases
- Internal communication
- Coordination
Branding
Promotional method that involves the creation of an identity for the business that distinguishes that firm and its products from other firms.
Internal growth (Organic)
Opening new branches, new product development
External growth (Inorganic)
Mergers and takeovers
Innovation
Development of an idea into a new product or process.
Product/Process innovation
Changing a product/process of production that already exists or developing an invention into a brand new product or process of production
Product life cycle
Technique used to track the stages a product goes through during its life
- Development
- Introduction
- Growth
- Maturity
- Decline
- Extension strategies
Digital economy
Use of any form of digital technology.
- Social media
Customer satisfaction
Can be measured by whether the product has met or surpassed customer expectations
Price elasticity of demand (PED)
Measure of how responsive demand is to a change in price
% Change in qunatity demand / % change in price
- Elastic more than proportional change in demand
- Inelastic less than proportional change in demand
PED coefficient
0 - Perfectly inelastic
0<1 - Inelastic
1 - Unitary elasticity
1>∞ - Elastic
∞ - Perfectly elastic
Cost plus
Percentage mark up is added to the cost of producing a good or service to calculate the selling price.
Price skimming
Setting a high initial price for a product in order to recoup costs.
Penetration pricing
Setting a low initial price for a product in order to gain market share.
Predatory pricing
Prices are set low for a short period of time to force competitors out of the market.
Competitive pricing
Prices are based on the prices charged by competitors.
Media Advertising
Communication used to inform potential customers about products and persuade them to buy the products.
Sales promotions
Short-term method designed to attract customers into purchasing a product.
Distribution
Process of getting the firm’s product to the market.
- Short distribution channels, producer sells either directly to the customer or through a retailer
- Long distribution channels, more than one intermediary person.
Income elasticity of demand (YED)
Measure of how responsive demand is to a change in income
- Elastic demand changes at a higher proportion than the increase in income.
- Inelastic demand changes at a lower proportion than the increase in income.
YED coefficient
-1<+1 - Inelastic
< -1 or > +1 - Elastic
Productivity
Output in relation to units of input in a given time period.
- Total output/number of employees
Economic Growth
An increase in the long-run productive capacity of an economy.
Capacity Utilization
Measure of the percentage of potential output being achieved
- Current output / maximum possible output x 100
Lean production
Working practices that focus on cutting waste whilst maintaining, or improving quality
Just-In-Time (JIT)
Technique used to minimize stock holdings at each stage of the production process.
Kaizen
Technique that focuses on small, but frequent, improvements in every aspect of the production process
Quality
Ability of a product or service to meet customers expectations.
Quality systems: Quality control
Checking of a good or service before it is delivered to a customer.
Quality systems: Quality assurance
Checking of a product or service at each stage of its production.
Quality systems: Quality circles
Informal groups of workers who volunteer to meet on a regular basis to discuss issues relating to the workplace.
Quality systems: Total Quality Management
Sees quality as the responsibility of all employees.
Productive efficiency
Occurs where no additional output can be produced from the inputs available.
Globalization
Process of greater integration and inter-connectedness between countries.
Characteristics of globalization
Increased investment flows
World trade rising as a proportion of world (GDP)
Increased migration
Factors contributing to globalization
- Trade liberalization
WTO assisted in the reduction or removal of trade barriers - Capital market liberalization
Relaxation on the rules surrounding the movement of capital - Political change
- Reduced costs of transportation and communications
- Increased significance of global (transnational) companies
Indicators of growth
GPD per capita
- National income/ population
Health
- Absence on injuries
Literacy
- Ability to read and write
The Human Development Index (HDI)
Measures progress through the achievement of people rather than through income and growth figures.
- Life expectancy at birth
- Years of schooling
- Real Gross National Income per capita
Absolute Advantage
When a country can produce a good or service using fewer resources than another country.
Comparative Advantage
When a country can produce a good at a lower opportunity cost than another.
Trading bloc
When the governments of a group of countries agree to trade together freely with no barriers.
Types of trading blocs
- Preferential trade areas
Reduced barriers on select number goods - Free trade areas
Reduced barriers on all goods - Customs unions
Reduced barriers, common approach with countries outside the bloc - Common markets
Reduced barriers and freedom of movement on factors of production - Economic unions
Custom unions common market
Aggregate Demand
Total demand for goods and service within the economy.
C + I + G + (X-M)
Aggregate Supply
Total supply for goods and service within the economy.
Circular Flow of Income
Shows the flow of goods and services, the factors of production and payments between households and firms in an economy.
Injections/Withdrawals
Withdrawals
- Savings
- Taxes
- Imports
Injections
- Government expenditure
- Investment
- Exports
Demand-Pull Inflation
Caused by excessive demand in the economy for goods and services
- Too much money chasing too few goods and services
Cost-Push Inflation
Firms respond to rising costs of production by increasing prices
Deflation
Decrease in the general price level
Disinflation
Fall in the rate of inflation, prices are rising at slower rate.
Causes of unemployment
- Structural unemployment
- Occupational immobility
- Geographical immobility
- Technological unemployment
- Cyclical unemployment
Macroeconomic objectives
-Economic Growth
- Unemployment
- Inflation
- Balance of Payments
Fiscal Policy
Manipulation of government spending, taxation and government borrowing to influence the level of economic activity.
- Expansionary, contractionary
Monetary Policy
Manipulation of the rate of interest, the money supply and exchange rates to influence the level of economic activity.
- Expansionary, contractionary
Supply-side policy
Policies that seek to improve the long run productive potential of the economy.
