Week 1 Flashcards
what is the microeconomic environment?
it includes all the economic factors that are specific to a firm operating in its own market. eg one firm may operate in a competitive market wheras the other doesn’t
what is the macroeconomic environment?
this is the national and international economic situation in which business as a whole operates. eg social/cultural factors, technological factors, environmental (ecological factors), legal factors
what is PEST analysis?
where the political, economic, social and technological factors shaping a business environment are assesed by a business so as to devise future business strategy
what is a STEEPLE analysis?
where the social, technological, economic, environmental, political, legal and ethical factors shaping a business environment are assessed by a firm to devise future business strategy
what affects how a firm operates?
the state of the industry it is in and the competition it faces
what is primary production?
refers to the profuction and extraction of natural resources eg minerals and sources of energy. includes outputs from agriculture
what is secondary production?
refers to the output of the manufacturing and construction sectors of the economy
what is tertiary prodution?
refers to the production of services, and includes a wide range of sectors such as finance the leisure industry, retailing and transport
what is GDP?
the value of output produced within the country typically over a 12 month period
what is deindustrialisation?
the decline in the contribution to production of the manufacturing sector of the economy
what is the quaternary sector?
refers to the knowledgebased parts of the economy and includes services such as education, information generation and sharing, research and development, consultation, culture and parts of government
what is an industry?
refers to a group of firms that produce a particular category of product, such as the electrical goods,
what is industrial sectors?
industries can be grouped into broad industrial sectors such as manufacturing, construction or transport, based on the products or services provide
why does classifying firms help?
helps to analyse trends in the economy, including areas of growth and decline and those parts of the economy with specific needs such training.
- helps economists to understand and predict the behaviour of firms that are in direct competition with each other
what is the standard industrial classification? (SIC)
the name given to the formal classification of firms into industries used by the government in order to collect data on business and industry needs
what does the SIC allow us to do?
- consider how the UK industry has changed over time, in terms of output and employment
- consider which areas of the economy are particularly susceptible to the strength of the economy
what is industrial concentration?
the degree to which an industry is determined by large business enterprises
what is structure-conduct-performance paradigm?
the analysis of business performance that is influenced by the market structure within which the firm operates. the structure of an industry depends on factors such as consumer demand, tastes and whether there are close substitutes
what affects the performance of a business?
- the aims of the business (internal factors)
- internal structure (the way in which the firm is organised will affect its costs, etc)
- information - the better informed a business is about its markets, its costs of production
- competence of management
- quality of the workforce
- systems eg IT, systems for motivation, technical systems
what is scarcity?
the excess of human wants over what can actually be produced to fulfill these warns
what are the factors of production (or resources)
the inputs into the production of goods and services, labour, land, and raw materials and capital
what is labour?
all forms of human output, both phsyical and mental into current production
what is land and raw materials?
inputs into production that are provided by nature, eg unimproved land and mineral deposits in the ground
what is the capital?
all inputs into production that have themselves been produced eg factories, machines and tools
what is consumption?
the act of using goods and services to satisfy wants, this will involve purchasing the goods and services
what is production?
the transformation of inputs into outputs by firms in order to earn profits
what is microeconmics?
the branch of microeconomics that studies individual units eg households, firms, it studies the interrelationships between these units in determining the pattern of production and distribution of goods and services
what is macroeconomics?
the branch of economics that studies economic aggregates, for example the overall level of prices, output and employment
what is aggregate demand?
total spending on goods and services made in the economy, consists of four different elements
- consumer spending (C)
- investment (I)
- government spending (C)
- expenditure on exports (X)
- any expenditure of foreign goods and services (M)
AD = C+I+G+X-M
what is aggregate supply?
the total amount of firms that plan to supply at any given level of prices
what is opportunity cost?
the cost of any activity measured in terms of the best alternative forgone, the production of consumption of one thing involves the sacrifice of alternatives
what are rational choices?
choices that involve weighing up the benefit of any activity against its opportunity cost
what are marginal costs?
the additional cost of doing a little bit more of an activity
what are marginal benefits?
the additional benefits of doing a little bit more of an activity
what is the planned or command economy?
an economy where all economic decisions are taken by the central authorities
what is a free market or laissez-faire economy?
an economy where all economic decisions are taken by individual households and firms, with no government intervention
what is a mixed economy?
an economy where economic decisions are made partly through the markets and partly by the government, in practice all economies are mixed
in microeconomics what are the 3 key questions?
- what to produce
- how to produce
- for whom to produce
what happens in a command economy?
it is the role of the state to allocate resources, it will decide how much should be invested and in which industries, it may tell each industry what to produce and how much
what are the advantages and disadvantages of the command economy?
ADV:
- governments can achieve high rates of growth through allocation of resources to investment
- avoid unemployment by dictating the allocation of labour
goods and services such as education and polling would be provided and governments can take accounts of such things
DISADV:
- likely to be a significant amount of bureaucracy and the administrative costs of a command economy are prohibitive
- incentives may be very limited, eg if income is distributed relatively equally between individuals thus reducing incentive to work
- consumers and producers may lack individual liberty through being told what to produce
what happens in a free market economy?
it is the firm who decides about what to produce and they will respond to consumer tastes, as consumer demand or supply changes, prices can adjust
what are the advantages and disadvantages of a free market economy?
ADV:
- resources are used more efficiently, as firms and consumers have an incentive to act in their own self
- these incentives can help to minimise economic problem of scarcity
- allows individuals to have their liberty and make their own decisions so administrative costs are lower
DISADV:
- without a government some goods and services may not be protected,
- others may be over or under produced including education
- unemployment may be high and society could be unequal
-
what happens in a mixed economy?
some goods and services are left entirely to the free market, where producers respond to signals from consumers when deciding what to produce and how much
- other goods some light-touch intervention eg through regulation of price or quality eg energy or water
- in cases where some goods aren’t made its upto the government to ensure sufficient allocation of resources
what is the rate of inflation (annual)?
the percentage increase in the level of prices over a 12-month period
what is the balance of trade?
exports of goods and services minus imports of goods and services. if exports exceed imports, there is a ‘balance of trade surplus’ ( a positive figure). if imports exceed exports, there is a ‘balance of trade deficit’ (a negative figure)
what is a recession?
a period where national outputs falls for a few months or more. the official definition is where real GDP declines for two or more conservative quarters
what is unemployment?
the number of people who are actively looking for work but are currently without a job
what is demand-side policy?
governments policy designed to alter the level of aggregate demand and thereby the level of output, employment and prices
- governments can do this eg if theres a recession, they increase government spending or reducing interest rates, boost level of spending (aggregate demand) by cutting taxes
what is supply-side policy?
what is barter economy?
an economy where people exchange goods and services with one another without any payment of money. workers would be paid with bundles of goods
describe a circular flow of income diagram?
- the consumers of goods and services are labelled as ‘households’
- the producers of goods and services are labelled ‘firms’
- firms and households are in a twin ‘demand and supply’ relationship
- on the RHS, households demand goods and services and firms supply goods and services
what is a market?
the interaction between buyers and sellers
what is a firm?
an economic organisation that co-ordinates the process of production and distribution
what are transaction costs?
the costs incurred when firms buy inputs or services from other firms as opposed to producing them themselves. they include the costs of searching for the best firm to do business with them, the costs of drawing up, monitoring and enforcing contracts and the costs of transporting and handling products between the firms
why are transaction costs associated with individual contacts made through the market unlikely to be substantial?
- the uncertainty, its unlikely that decision makers will have perfect knowledge of their production processes
- complexity of contracts
- monitoring contracts
- enforcing contracts - if one party breaks the contract the legal expense of enforcing the contract may be significant
what is a joint-stock company?
a company where ownership is distributed between a large number of shareholders
what is profit-satisficing?
where decision makers in a firm aim for a target level of profit rather than the absolute maximum level. by not aiming for the maximum profit, this allows managers to pursue other objectives such as sales maximisation of their own salary or prestige
what is the principle-agent problem?
one where people (principles) as a result of a lack of knowledge cannot ensure that their best interests are served through their agents ie the (managers).
what is asymmetric information?
a situation in which one party is in an economic relationship knows more than another, eg where a manager is hired by an owner as they have specialist knowledge
what are the challenges of principal-agent situation? What are the ways principles may overcome this?
one party having more knowledge than other makes it ore difficult for the principal to judge in whose interest the agent is operating.
- monitor the performance of an agent eg through annual general meetings
- establishing a series of incentives to ensure that agents act in the principles best interest eg managerial pay could be linked to business performance
what does sole proprietor mean? What are the ADV and DISADV?
the business is owned by just one person
ADV:
- these businesses may flourish if the owner is highly committed to the business and responds to changing market conditions
DISADV:
- limited scope for expansion as finance is limited to what owner can personally raise
- unlimited liability - the owner is personally liable for any losses that the business might make
what is a partnership? and its advantages and disadvantages?
- its where two or more people own the business
ADV:
- with more than one owner there’s more scope for expansion as more finance can be raised
DISADV:
- the risks of business failure are higher,
- decision making is shared so = loss of control
what is a company?
its legally separate from its owners. this means that it can enter into contracts and owns property. any debts are its debts, not the owners’.
- the owners are shareholders, each of whom receives is or her share of the company’s distributed profit through ‘dividends’ and the size will depend on the profit made and the number of shares held
what does limited liability mean? what are the advantages and disadvantges?
it means that if the company goes bankrupt, the owners will lose the amount of money they have invested in the company
- their personal assets cannot be seized
ADV:
- encourages people to become shareholders and so raise large finance funds which creates a greater scope for expansion
what does public limited company mean?
its not a nationalised industry, its still in the private sector. it is ‘public’ because it can offer new shares publicly, by issuing prospectus
- these companies must hold an annual shareholders meeting
what are private limited companies?
they cannot offer their shares publicly. shares have to be sole privately, this makes it more difficult for private limited companies to raise finance and they tend to be smaller than public companies.
- they’re easier to set up than public companies
what is a consortia of firms or consortium?
its common especially in large civil engineering projects that involve very high risks, for many firms to work together as a consortium
what are consumer co-operatives?
eg old high street shops Co-op are officially owned by the consumers, but consumers play no part in their running they are run by managers
what are producer co-operatives?
these are firms that are owned by their own workers, who share in the firm’s profit according to some agreed formula
- sometimes formed by people in the same trade coming together, other times formed by workers buying out their factory from the owners likely due to loss of jobs
what are public corporations?
these are state owned enterprises eg the BBC
- they have a legal identity separate from the government, they are run by a board but the members are appointed by the government minister
what is a U-form business?
one in which the central organisation of the firm (the ceo or a managerial team) is responsible both for the firms day to day administration and for formulating its business strategy
- one entity with specialist functions by a peak coordinator
what is bounded rationality?
when individuals have limited abilities to find and process the relevant information required to make the best decisions i.e purchase the goods than generate the most consumer surplus
what is M form business?
one in which the business is organised into separate departments, such that responsibility for the day to day management enterprise is separated from the formulation of the business’s strategic plan`
who adopts a u-form?
small to medium sized firms, one entity with specialist functions but when firms get bigger, the u-firms become inefficient, this can arise from difficulties in communication, coordination and control.
- the ceo suffers from bounded rationality
what happens when a u-form tries to regain control?
its likely a further managerial layer will be inserted. the chain of command then becomes lengthened which leads to:
- communication costs increase
- messages and decisions may be misinterpreted and distorted
- firm experienced a decline in organisational efficiency as various managers tend to seek to maximise their personal departmental goals
who adopts an m-form business?
medium to large firms, the firm is divided in divisions in which they’re each responsible for a particular product or market
- the day to day running is done by managers which leads to:
- reduced length of information flows
the ceo being able to concentrate on overall strategic planning
- enhanced level of control
- economises on information
what is an flat organisation?
one in which technology enables senior managers to communicate directly with those lower in the organisational structure. middle managers and bypassed
- the speed of info flows reduces impact of bounded rationality on decision making
what is a H-form or holding company?
an organisation in which the present company holds interests in a number of other companies or subsidiaries
- they are highly complex
- its adopted as firms are de-integrating and outsourcing a means of improving efficiency
what does the success of a business depend on?
its influenced by its organisatoonal structure. as a firm grows, its organisational structure will need to evolve
what is transnational association?
a form of business in which the subsidiaries of a company if different countries are contractually bound so the parent company to provide output to or receive input from other subsidiaries
what is global sourcing?
where a company uses production sites in different parts of the world to provide particular components for a final product
what are transaction costs (3 reasons)?
Transaction Costs are costs of dealing in market:
i) Costs of discovering the relevant price
ii) Costs of negotiating and enforcing contracts
iii)Costs due to uncertainty and risk.
= If transaction costs high its worthwhile to form a firm
when does asymmetry of information and information impactedness occur?
Exists when:
a) Uncertainty/complexity
b) One person has more information than another and uses it to gain advantage (‘opportunism’).
c) Small number of exchange relationships
what does asymmetry information cause? how can firms adapt?
a) Adverse Selection
b) Moral Hazard
c) Hold-up
Individuals and firms adapt to this by:
1. Devices for revealing or better using information
2. Learning by market interactions
3. The ability to adapt to unforeseen events
what are the advantages and disadvantages of a u-form?
ADV:
- Specialisation & division of labour
- If strong interdependence of functional divisions better managed as a whole
- Allows sequencing of flows of products down a vertical chain
- Delegation of functional divisional authority - chief executive free to concentrate on strategic issues
- Chief executive also able to implement strategy across divisions
DISADV:
i) Each department deals with only own given agenda = Lack of flexibility;
- Profitability cannot be observed
ii) Decisions are outcomes of negotiations
- Different Interests of owners, managers, divisions
iii) Peak co-ordinator information overload
iv) Control loss as heirarchical levels increase
v) Inhibits growth
* problems when firms expand beyond certain size
* bounded rationality
* communications costs
what are the drawbacks to an m-form?
- Power balance
* between Central Interference / Strengths of Divisional Managers - Cost of management hierarchy
- Competition between divisions.
What is the basic maximisation problem?
TR-TC
- firms maximise in the short run but the ultimate goal is maximising long run profit ie value of the firm
- short run firms maximise at output MC=MR
Where do consumers maximise their consumption?
Where marginal benefit = marginal cost
What is multi-variate demand functions?
- Functions created by linear functions
- can be used to find elasticities kf demand against changes in any of the factors
