Unit 2 Flashcards
Transitional economy
One in which the government is liberalising some sectors so that production and marketing decisions are made by individual organisations and people on the basis of supple and demand conditions, rather than by state employed planners
Command economic system
A command system relies on planners, directed by government, to decide what and how to produce. Command economies were characterised by low living standards and inflexibilities. Former command economies are now mixed.
Mixed economy
An economy which has both public (state) and private sectors
Public sector
The areas of economic activity which are directly controlled by the state.
Free market economy
One where activity is directly by entrepreneurs and private organisations rather than the state
Entrepreneurs
People who take responsibility for organising business activity and Carey business risks
Profit
The gain from operating a business when sales revenue earned is greater than costs incurred
Market forces
When the conditions of supply and/or demand change in a market, this is likely to lead to price changes
(Private sector)
Scarcity
In all economies individual needs and wants always exceed the availability of resources to provide them.
Choice
Involves deciding on priorities in the light of what can be afforded.
Opportunity cost
The best alternative foregone when a particular choice is made
Consumer sovereignty
A theoretical attraction of free markets it is consumers ultimately control the allocation of resources by choosing what to buy
Effective demand
Is the combination of desire for a product or service with the ability and readiness to pay.
Tastes
Involve consumer preferences for specific products. These are likely to change over time and be influenced by factors such as fashion
Substitutes
Are the alternatives to a product. Sometimes there are close subtitles, sometimes not.
Complementary goods
Tend to be used together or ‘complement’ each other.
Income
Is the flow of money received by an individual or household over time.
Population
A group of people fitting a particular description, from national to target market.
Price
The money amount paid by the buyer to the seller in a transaction.
Demand curve
A graphical representation of a relationship between quantity demanded and price, for w product in a market.
Supply curve
A graphical representation of the quantities businesses will supply to a market at different price levels
Incentive
A reward which stimulates activity. The rewards are often, but not always, financial
Benefits
A gain
Differentiate
This means making your product stand out from others, either by distinctive features or persuasive advertising.
Competitive advantage
Any quality which gives the business an edge over rivals
Equilibrium price
The price at which quantity supplied and quantity demanded are equal in a market, leaving neither excess supply nor excess demand
Market clearing
Obtaining a balance between quantity supplied and quantity demanded, normally by arriving at the equilibrium price
Profit signalling mechanism
The way that the prospect of profits will attract entrepreneurs to a market and losses will lead businesses to consider leaving a market
Price elastic demand
A situation in which quantity demanded is sensitive to price and a change in price will lead to a more than proportionate change in quantity demanded.
Price inelastic demand
A situation in which price changed lead to a less than proportionate change in quantity demanded
Price elasticity demand
Percentage change in quantity demanded decided by percentage change in price
Inferior goods
Inferior goods are products with negative income elasticity demand.
Market share
The share of sales in a market which one business or brand has
Non price competition
Included all possible inducements to buy the product other than a price cut. Design, reliability, customer service, advertising, promotions, packaging, branding and sponsorships ball provide examples
Market segment
A subdivision of a market in which consumers have distinctive characteristics and preferences.
Market orientation
Refers to the way businesses use the wishes and priorities of consumers to guide production and marketing decisions
Product orientation
Means prioritising product design, quality or performance rather than customer preferences.
Market mapping
Means plotting the position of brands in the market again the key characteristics of the product
Market positioning
Means identifying a specific market segment and focusing the product and its marketing so as to appeal directly to people in that segmentS
Marketing mix
Price
Product
Promotion
Place
Brand loyalty
May be achieved if the distinguishing features of the product create a sense of uniqueness that will induce customers to make repeat purchases and avoid competing products
Added value
Means the value of output minus the costs of inputs.
Value analysis
Involves studying a product to see how each aspect contributes to consumer satisfaction.
Diversification
Means spreading business risks by developing a range of products, the market it is sold in or both
Promotion
In marketing, promotion is the use of advertising, branding, sales promotion and public relations to directly or indirectly stimulate product sales
Informative advertising
Is paid for communication about product availability, features and price.
Persuasive advertising
involves communication which is designed to have an emotional appeal.
Corporate social responsibility
Accepting that organisations must take account of their impacts on the community and environment, show consideration and behave ethically
PGTIPPED / what determines demand
P - population G - government T - tastes I - income P- price of other goods Ed - expected price change
Barriers to entry
Economies of scale Start up costs are high Heavy investment costs Patents Collision with other firms (wiping out competition)
High level:
Branding
Advertising
Contestability
The ease in which you can enter a market
Example of how businesses compete
Lower prices
Better products
Better customer service
Incentives: freebies, coupons, sales and special deals
Advertise to say how wonderful their products are
How does competition affect the consumer
We’re better off - more options
Benefit from pricing, product quality and incentives
However, if there is too much competition this can lead to preditory pricing, businesses fail, less choice and then higher prices
Market structure (what we analyse)
Impact on consumer
Impact on firm
Perfect competition
Many small firms Many individual buyers Perfect freedom of entry and exit Homogeneous products Product knowledge from consumers No externalities
Sunk costs
Hugh start up costs that are maintained
Monopoly characteristics
Influence prices
Influencing output
Erecting barriers to entry
Pricing strategies to prevent or stifle competition
May not persue profit maximisation - as it encourages unwanted entrants to the market
Sometimes seen as a case of market failure
Adv and d’adv of monopoly
Adv
The firm should make higher profits
D’adv
Consumers may pay higher prices due to he lack of competition
Consumers may have less choice
Lack of competition
May lead to low quality and outdated goods and services
Oligopoly
Entry barriers
Mutual interdependence - due to fear of loss of market share
Intensive non price competition
Periodic aggressive price wars/ non price competition (mostly)
Strong tendency for many market structures to tend towards oligopoly in the long run
Dominated by a few (concentration ratio)
Exploitation of economics of scale
Market consolidation/power
Concentration ratio
- perfect competition: low - no clear winner
- monopolistic - below 40% - four firm
- oligopoly - above 40% - four firm
- monopoly - near 100% - four firm
- duopoly - above 40% but in the hands of two firms
CMA (competition and market authority)
Investigate and regulate control in the market
(This has replaced office of fair trade) and cc
Ofcon
Monopolistic
Low barriers to entry and exit Differentiated products Many buyers and sellers Firm has some control over price Examples: restaurants, professions, solicitors
Cartels
Sellers agree to coordinate prices and production
associated with oligopolies
Homogeneous products
Are identical to one another
Normal profits
Are just sufficient to keep the producer in the market.
Price takers
Businesses with undifferentiated products they face high price elasticity of domain in a competitive market
Productive efficiency
Means minimising the average cost of production by minimising resource use
Allocative efficiency
Occurs when resources are allocated between competing uses in a way that matches the requirements of consumers to the greatest possible extent
Barriers to entry
Obstacles which make it difficult for new firms to enter a market.
Patents
Give legal protection from competition when a new product or process is registered.
X-inefficiency
Occurs where there is weak control of costs and resource use and no competition to provide the incentive to stimulate efficiency.
Imperfect competition
Covers any market situation between the extremes of perfect competition and monopoly
Monopolistic competition
Describes a market with many sellers, easy entry and exit and product differentiation.
Oligopoly
Refers to a market structure with a few very large firms which dominate the market
Price leaders
Are leading firms in the industry with sufficient market power to decide between restricting output and charging higher prices, or reducing prices in order to increase sales
Concentration ratio
A measure of the extent to which a market is dominated by large firms
Predatory pricing
Involves setting unusually low prices with the intention of driving a competitor out of the market
Game theory
Studies the behaviour of players which are interdependent; the actions of one will have an impact on others
Brand proliferation
One producer sells multiple brands, to reach different market segments or/and as a competitive strategy
Limit pricing
Setting prices below a profit maximising level in order to attract competitors to enter a co testable market
Collusion
Means reaching agreement with other businesses, often in ways which are anti competitive
Monopoly power
Is the ability to determine price or quantity of output without having to consider competitors.
Monopoly
A market in which there is a single supplier
Natural monopoly
Where scale and fixed costs make it impractical to have more than one supplier.
Niche market
A small segment of a market with distinctive specialised requirements
Conventional wisdom
A widely accepted view which is not necessarily as try as it once might have been
Why is price elasticity of demand important to businesses
Marketing - it is extremely important for a business to know what may happens to its demand if it changes the price of its products or services
Branding - businesses try to make the demand for their products more price inelastic. They do this by advertising and branding
Total revenue - changing price can dramatically affect total revenues, depending upon whether the demand is price elastic or price inelastic.
Hierarchical structure
An organisation with multiple layers of management, often associated with centralised decision making and rigid rules
Chain of command
The sequence of authority down which instructions are passed in an organisations
Span of control
The number of subordinated directly answerable to a manager
Centralised
An approach to management that gives more decision making powers to the top staff in an organisation
Delayering
involves the removal of one or more levels from a hierarchical management structure
Delegating
means allowing people who are lower down in the chain of command to take decisions
Decentralisation
Occurs when decision making powers are given to local branches or individual divisions within the business, rather than deciding everything at the head office.
Adv and d’adv of tall organisation
Adv
Narrow span of control means each employee can be closely supervised
Clear lines of authority and control
Clearly defined roles and responsibilities
Specialist managers
Clear promotion paths
D’adv
Freedom and responsibility of employees is restricted
Can be bureaucratic - decision making may be slow as communications pass through each layer in turn
Expensive, managers tend to get paid more each time they move up a layer
Interdepartmental rivalry may reduce efficiency
Adv and d’adv of flat organisations
adv
Better communication between managers and workers
Better motivation as workers enjoy more responsibility
Less bureaucracy and quicker decision making
Reduced costs with fewer managers
D’adv
Employees not strictly controlled, some may abuse this
Roles and responsibilities mag become blurred
May limit growth
