Theme 2 - The Wider Economic Environment Flashcards
What are the 2 types of economies of scale?
Internal and External economies of scale
Define both types of economies of scale
Internal - Occurs when a firm grows and average cost of production decreases
External - Occurs within the industry
What are all the economies of scale
- Risk-Bearing
- Managerial
- Financial
- Technological
- Marketing
- Purchasing
Define financial economies of scale
When a firm grows, it is seen as less risk to banks so can acquire loans easier and at lower interest
Describe purchasing economies of scale
As output increases, firms can bulk-buy raw materials so cost per unit decreases
Give one way diseconomies of scale can occur
As a firm grows, employees may feel devalued and therefore demotivated to work productively
How do large firms have control over markets
They can set prices and discourage new firms from entering the market
When does a firm have a competitive advantage?
When its goods/services are deemed better quality than its competitors by customers
Why would firms ensure their employees are well looked after?
To boost employees’ motivation, which in turn increases productivity and output
What is inorganic growth?
This is when a business expands by merging and acquiring other firms.
What is organic growth?
This is when a business grows by increasing output, expanding their customer base and developing new products.
What are the disadvantages of organic growth compared to inorganic growth?
It takes time to grow this way, and in this time other firms may gain a competitive advantage over the market, which may become a problem for shareholders.
Define vertical integration
This occurs when a firm merges with or acquires another firm in the same industry but different step in the supply chain.
Which vertical integration is closer to the producer: forwards or backwards?
Backwards vertical integration
Define horizontal integration
Occurs when a firm marges with or acquires another firm in the same industry and same stage of production.
How is horizontal integration beneficial for firms?
It gives them a competitive edge over the market as their market share increases, leading to increased output
What is conglomerate integration?
The joining of two firms with no common connection (i.e. two different industries)
Recall the definition of R&D
Research & Development is investment in research with the intention of improving goods, introducing new ones and improving methods of production
How can R&D increase market power?
It differentiates products from their competitors, making them more unique and thus helps increase brand loyalty
Why does the state often provide funding for R&D?
The positive externalities of R&D are not always fully understood, so the state intervenes to ensure more investment in R&D
Draw a graph showing the product life cycle and describe each stage
R&D, Introduction, Growth, Maturity, Decline
How have price comparison sites been beneficial to consumers?
They have helped reduce information gaps by increasing the quantity of knowledge consumers have about a good or service
What is viral marketing?
A form of marketing whereby the good/service is promoted on social media, where it can be shared with friends
What is micro-marketing?
This is where advertising is focused on a small group of consumers, rather than the market as a whole
What is the long tail theory?
The long tail theory suggests consumers get a wider choice when it comes to online retailing
Give two ways online stores have an advantage over their brick-and-mortar counterparts
- Online businesses are not restricted to physical space, so can target customers worldwide
- Online stores have lower costs, so can charge lower prices and therefore gain a larger portion of the market share
What does the acronym USP stand for?
Unique Selling Point
Why can most small firms NOT benefit from economies of scale?
Since they are small firms, they do not produce enough output to lower their average costs.
How could small firms act as monopolists?
They can create a local, more personal service and a niche market.
Draw and locate the ‘economies of scale’ and ‘diseconomies of
scale’ on the economies of scale graph
Graph should look like a U shape with economies of scale as the first half and diseconomies of scale as the second half
Define and give the formula for Price Elasticity of Demand
PED is the responsiveness of quantity demanded given a change in price
PED= Δ%QD / Δ%P
Does a PED graph with a slight downward slanting line to the right represent a PED elastic or inelastic good?
PED elastic good
What does PED = 1 represent?
A unitary elastic good, whereby the change in price is equal to the change in quantity demanded
Draw the graph for a perfectly inelastic good
Should be a straight vertical line
If price increased by 22% and quantity demanded decreased by 30%, is the good PED elastic or inelastic?
-30 / 22 = -1.36
Therefore a PED elastic good
Name the 6 factors influencing elasticity of demand
- Necessity
- Substitutes
- Habitual consumption
- Proportion of income spent
- Durability
- Peak/off-peak demand
How does the number of substitutes affect the elasticity of demand for the good?
The more substitutes there are, the more PED elastic the good is
Would peak demand for a good make it PED elastic or inelastic?
PED inelastic
If good ‘A’ is PED elastic and the price of the good increases, what happens to revenue?
The fall in quantity demanded is proportionally larger than the increase in price, so overall revenue falls
Describe the concept of price skimming
A short-term pricing strategy that usually occurs when a new product is released, whereby a high price is set before new firms enter the market and increase competition
How does predatory pricing differ from price penetration?
Predatory pricing aims to push incumbents out of the market, whereas price penetration aims to boost customer loyalty
List the 3 factors that determine the most appropriate pricing strategy
- Number of USPs
- Price elasticity of demand
- Stage in the product life cycle
If good ‘A’ has a high PED, will firms give it a high or low price, and why?
A low price because the good is dependent on price so if the good was expensive, firms’ profit margins would be at risk
Give the formula for income elasticity of demand
YED = Δ%QD / Δ%Y
Define inferior goods and give their YED value
Goods that experience an increase in demand as income falls.
YED less than 0
Name the type of good with a YED greater than 1
Normal luxury goods
During an economic recession, what type of goods are firms more likely to produce, and why?
Inferior goods, because recessions usually accompany a reduction in income, so inferior goods will experience an increase in demand
Define productivity
The output per unit of input per unit of time
What are the implications of higher productivity for firms and the overall economy?
Lower average costs of production → lower prices → increase in demand → lower unemployment → higher GDP growth
How can a firm’s credit history determine how productive it can be?
Good credit scores increase the loans given to firms, which they can invest in R&D and become more productive through technological advancements
What is capital-intensive production?
This occurs when firms have access to cheap credit, whereby capital is cheaper to purchase than labour
Give the formula for capacity utilisation
(Actual level of output / Maximum possible output) x 100
Why would a firm possibly be operating under maximum capacity?
A reduction in demand from consumers means there is no need to be producing extra units of output
How could operating at full capacity affect the quality of goods produced?
Operating at full capacity implies a rushed process where employees are demotivated, thereby diminishing the quality of goods
Give one benefit of under-utilised capacity
Firms have the flexibility to change its level of output according to changes in the economic cycle (e.g. an economic boom means firms are able to produce extra units of output without exhausting its capital)
If a firm entered a new market, how would it affect its capacity utilisation?
It would improve capacity utilisation, as more labour and capital is required to produce the extra output now that the firm has entered a new market
What is lean production?
The process of minimising waste during the different stages of production
Describe the difference between quality control and quality assurance
Quality control ensures the products meet the minimum standards, whereas quality assurance encourages collaboration between design, production and marketing
How can small, continuous improvements (kaizen) reduce average costs of production?
Constantly making small ‘tweaks’ in a firm reduces the need for major capital investments
Describe JIT management of stock
Just In Time ensures stock arrives as and when it is needed, based on consumer demand, thereby reducing costs of storage
Give two disadvantages of JIT
- The firm is dependent on the supplier for stock in a short timeframe
- The firm won’t be able to handle huge, unexpected surges in consumer demand
What is lead time?
The time between a decision being made and then carried out
Describe globalisation
The integration of the world’s economies in a single market, whereby tariffs and quotas are eliminated
How has transport contributed to an increase in globalisation?
It’s now easier and more efficient to transport goods to and from different countries, thereby encouraging more trade
Name the international institution that regulates global trade
World Trade Organisation (WTO)
What are MNCs?
Multinational Corporations - corporations that manage the production of goods/services in multiple countries
