Topic 2 - Consumers and Businesses Flashcards
What is consumer sovereignty?
Consumer sovereignty is a concept in which consumers decides what goods and services will be produced through exercising their freedom to choose what to buy. Because of this, business will produce what goods and services are in demand by the consumers
What is structural change?
The change in the structure of an economy
What are some factors which undermine consumer sovereignty? (4)
Marketing
Misleading/deceptive conduct
Planned obsolescence
Anti-competitive behaviours
How does marketing undermine consumer sovereignty?
Advertising and marketing exerts influences over spending patterns in consumers, thus it isn’t completely consumer sovereignty, but the businesses trying to influence consumer sovereignty
How does misleading/deceptive conduct undermine consumer sovereignty?
Consumers are deceived by false/dishonest claims about a certain product.. This leads to consumers paying for items that they don’t exactly want to buy (because misleading), and thus undermines consumer sovereignty (no freedom)
How does planned obsolescence undermine consumer sovereignty?
Because the goods are designed to have a limited life, it forces the consumer to have to pay for further purchases of the product to keep using it. This means that the firms manipulate consumers in having to re-buy, thus undermining consumer sovereignty
What does planned obsolescence mean?
Basically means that goods are designed to make the product have a limited useful life or a frail design so that it becomes dysfunctional quickly.
How does anti-competitive behaviour undermine consumer sovereingty?
This is where there are markets with a few competitors, which reduce the ability of consumers to choose what they want to buy. Because of this, consumers can’t decide how much they want to spend if they need to buy that good or service
What is the return to labour?
Wages
I.e. Fringe benefits, employer contribution, wage/salary
What is the return to land
Rent
I.e. Investment property might generate property income
What is the return to capital?
Interest (return from the ownership of capital)
What is the return to entrepreneurial skills (enterprise)
Profit
From what can a consumer get an income?
Wages (labour), Interest (capital), profit (enterprise), rent (land), social welfare
What is social welfare?
Social welfare is where income is collected through tax and then transferred from governments to certain target consumers. Some examples include:
Age pension
Parenting payment
Disability support pension
Jobseeker payment
What is the aim of social welfare?
To provide a minimum income ‘safety net’ which allows consumers to purchase the basic necessities
What are the top 2 forms of income?
Wages and salary (57%) and then transfer payments (12%) 2020-2021
What are the 5 factors which influence an individual’s consumer choice?
Level of income Price of good or service Price of substitute and complementary goods Consumer Tastes and Preferences Advertising
What is utility?
Utility is the perceived satisfaction or pleasure received from the consumption of a good or service
How is utility maximised?
Consumers make a choice between what goods and services to buy first and thus picks the good or service which has the largest utility for them
How does level of income affect an individual’s consumer choice?
Typically someone with a higher income will be able to purchase a higher range of products, inversely those with lower incomes have a lower range of products able to be purchased.
Because of this, the poorer consumer has to choose the products which are necessary first before choosing unnecessary ones, as they have a lower range of products which they can purchase
How does the price of the good or service affect an individual’s consumer choice?
The consumer has to decide whether they want to pay a nominated price for an item given their income. Some goods and necessities have to be purchased regardless of price.
Because of price, the consumer may decide to purchase a cheaper good or service over another, and look at which one is more ‘worth’
How does the price of a substitute or complement good affect an individual’s consumer choice?
This is because the quantity of a good demanded at a certain time will be affected by the price of other goods that could replace it. If the substitute good is cheaper, then the substitute good is more likely to be bought. Same vice versa. For complement goods, if a complement good is getting cheaper, the good it is complementing is most likely to be in higher demand.
How do consumer tastes and preferences affect an individual’s consumer choice?
An individual will decide whether or not to purchase a good or service that will provide the individual consumer the highest level of utility or personal satisfaction. If it doesn’t provide much utility, it is unlikely to be bought, same vice versa.
How does advertising affect an individual’s consumer choice?
An individual will be affected by advertising as advertising sometimes creates demand for a good or service. Through advertising, potential consumers may find out about a certain product they didn’t know of before, and choose to purchase it
What is a firm?
A firm is any business organisation which uses resources to produce goods and services to satisfy consumers’ needs and wants, normally in return for a profit
What is the process of incorporation?
The process in which a firm becomes a separate legal entity in the eyes of the law. With this comes the benefit of limited liability, in that if a business goes into debt, the owners are not liable to pay off the debts with their own personal wealth.
What is an industry?
An industry is a group of firms producing a similar range of goods and/or services
What are the key features of an unincorporated business enterprise?
These include sole traders, partnerships. The key features include:
Unlimited liability for business debts
Owners of business will be liable for debts
Capital provided by owners or financial institutions
Expands through borrowing and profits
What are the key features of an incorporated business enterprise?
These include private (proprietary company - pty ltd) and public companies. The key features include:
Limited liability for business debts
Managed by a board of directors
Sells shares in the company
Expands through borrowing and profits
(research difference between private and public) (look at sheet printed in bok)
What are the different industries?
Primary Secondary Tertiary Quaternary Quinary
What are primary industries?
These consist of firms engaged in the extraction of natural resources (such as agriculture, mining, fishing, etc)
What are secondary industries?
These consist of firms engaged in the manufacturing of usable products from natural resources produced by the primary industry
What are tertiary industries?
These consist of firms selling final goods and services to consumers and other businesses
What are Quaternary industries?
Refers to information technology services provided by individuals and firms in the ICT industry
What are Quinary industries?
Refers to those who provide services directly to other firms and individuals in the economy
What are the production questions a firm attempts to answer?
What goods and services to produce?
What quantities of goods or service to produce?
How to Produce?
How to organise and manage production?
What are the 6 different goals of the firm?
Profit maximisation Maximising sales or total revenue Maximising growth Increasing market share Meeting shareholder expectation Satisficing behaviour
Why does a firm want to maximise profit?
To be able to earn the most money. Profit maximisation occurs when there is the greatest positive difference between total revenue and total cost. Without making a profit, there is basically no point to a business unless it is a charity
Why does a firm want to maximise sales or total revenue?
through increasing the amount of sales or total revenue, the firm increases the amount of market share it has relative to other competitors. This can be done through an increase in advertising
Why does a firm want to maximise growth?
This ensures the firm survives in the long run. Growth also increases the amount of market share it has relative to other competitors. To do this, the firm may need to borrow a lot of money and reinvest into the business
Why does a firm want to increase market share?
Market share refers to the proportion of the market owned by the firm. A greater market share typically leads to increase in profitability in the long run
Why does a firm want to meet shareholder expectations?
The firm needs to maintain a good firm image for shareholders, the shareholders also expect that business increase profit, and if the firm wants to keep the shareholders, need to make sure they are satisfied with how the firm is doing in regards to their expectations
Why does a firm want satisficing behaviour?
Satisficing behaviour refers to the theory where managers attempt to meet a range of goals that meet profit and performance projections. This is important as a firm wants to be aiming high not low (kinda ). Also contributes to a good profit maximisation.
What does the law of diminishing returns state?
if one input in the production of a commodity is increased while all other inputs are held fixed, a point will eventually be reached at which additions of the input yield progressively smaller, or diminishing, increases in output.
Is the statement ‘in the economy as a whole, as income rises, the level of saving increase’ true or false?
True
What is Marginal Physical Product?
Marginal Physical product (MPP) refers to the change in TPP (Total physical product) that results from the addition of one more variable factor to our given fixed factors
Need to practice irl
What is Average Physical Product?
Average physical product (APP) refers to the average output per variable factor (Calculated by having the TPP divided by the number of variable factors used in production)
What is Total Physical Product?
Total Physical Product (TPP) refers to the total amount of output that results from combining the given factors of production
What are increasing returns?
Each additional variable input adds more to TPP than the one before
What are diminishing returns?
Each additional variable input adds less to TPP than the one before
What are negative returns?
When the addition of a variable input causes TPP to decline
What does it mean by ‘short run’
The short run is a period of time in which the quantity of at least one input is fixed and the quantities of the other inputs can be varied
What does it mean by ‘long run’
The long run is a period of time in which the quantities of all inputs can be varied
What is a fixed factor?
A fixed factor is one whose quantity does not alter as the level of output changes. It is independent of the level of output
What is a variable factor?
Those factors whose quantities can be altered, which is the opposite of a fixed factor
What does economies of scale mean?
Refer to the reductions in average cost or cost per unit of output as output increases
What do internal economies of scale mean?
It means that businesses have control of cost via manipulating the level of output. E.g. more efficient in allocating internal resources
What do external economies of scale mean?
It means that cost is influenced by factors out of a business’ control. E.g. government regulations.
What does the graph of an ‘economies of scale’ look like?
A parabola
Practice irl
What does diseconomies of scale mean?
Refers to the increases in average cost or cost per unit of output as output increases
Practice irl
How do changes in the external economies of scale affect the graph?
Moves the graph (of the parabola) up or down. Going up is bad (diseconomies of scale), going down is good (economies of scale)
Practice irl
How do changes in the internal economies of scale affect the graph?
You move along the graph. Going down until the middle of the graph is good (economies of scale), going up after the middle of the graph isn’t good (diseconomies of scale)
Practice irl
What is the technical optimum on the economies of scale graph?
The lowest point of average cost or cost per unit of output as output increases. (cheapest)
What are some factors which contribute to internal economies of scale? (6)
Increased specialisation and division of labour
Increased specialisation of capital
Lower input costs
Access to cheaper finance
By products or waste materials may be used from large scale production
Research and Development
What are some factors which contribute to internal diseconomies of scale? (3)
The management of the firm may become too complex and costly
Increased output ay only occur with more variable factors
Congestion in the production process
What are internal diseconomies of scale?
Refers to increase in production costs per unit as output increases
What are external diesconomies of scale?
These result from increases in average costs due to factors outside the firm’s direct control
What are some factors which contribute to external economies of scale? (6)
Lower resource costs
Improved transport facilities
Access to cheaper power and infrastructure
Proximity to a healthy, educated, trained and skilled labour force
Research and development
Access to a lower cost of finance
What are some factors which contribute to external diseconomies of scale? (4)
Higher resource costs
Increased government regulation
Higher labour costs
Increased congestion and pollution
How can productivity be maximised? (3)
Division and specialisation of labour
Specialisation or localisation of land or industry
Specialisation of capital or large scale production
What are some different factors which influence level of spending and saving in an economy? (6)
Income levels and future expectations
Cultural factors
Confidence and future expectations
Life stage and age distribution
Government policies
Availability of credit
How does income affect spending or saving
As income rises, people tend to save a higher proportion of their income. As income rises, people do not need to spend as much of their income on essential items
How does age play a role in spending or saving?
An individual’s income stream and propensity to consume and save are not constant throughout their life.
Young people tend to receive lower levels of income and thus spend more income and save little
Working people tend to receive an income and thus consume smaller proportion of their income and start saving more
Retirement people tend to consume past savings or wealth because they no longer earn an income
What is dissaving?
Dissaving is when a person or government is spending all available funds without saving, and is borrowing to stay afloat
What is Average propensity to consume (APC)
The proportion of an individual’s income that is spent on consumption
What is Average propensity to save (APS)
The proportion of an individual’s income that is saved
What is marginal propensity to save (MPS)
The proportion of each extra dollar of income tht is saved
What is marginal propensity to consume (MPC)
The proportion of each extra dollar of income that goes to consumption
