economics - paper one

Economic Problem

Economic Problem

as people we have infinite wants while our resources are scarce

economic groups

producers, consumers, government

opportunity cost

the benefit forgone of the next best alternative

factors of production

Capital, Enterprise, Land, Labour

capital

manufactured goods used to make other goods and services - interest eg machines, roads

enterprise

a profit opportunity - profit eg entrepreneur

land

any natural resource - rent eg trees water landstock

labour

human service - wages eg workers, education

specialisation

when households,firms or countries focus on producing certain products eg apple and technology

division of labour

seperation of a work process into a number of tasks/products, each task performed by a seperate person of group of persons

primary

extracting raw materials eg farming, fishing, mining - Middle East

secondary

processing and refining eg manafacturing - China

tertiary

providing services to public or private sector eg education, health, retailing - UK

good

tangible and physical product eg baked beans

service

intangible and non physical eg haircut

market

buyers and sellers exchange goods and services at a given price

factor markets

markets in which productive resources are bought and sold

product markets

where goods and services are bought and sold

demand

the quantity of a good/service that consumers are willing and able to buy at a given price

supply

quantity of a good/service a producer is willing and able to sell at a given price

law of demand

consumers buy more of a good when its price decreases and less when its price increases

factors that impact demand change

price, advertisement, complentary products, government prolicy, income, substitution

price elasticity of demand

The responsiveness of the quantity demanded to the change in price of a product

elastic demand

describes demand that is very sensitive to a change in price eg tesco bread

inelastic demand

demand in which changes in price have little or no effect on the amount demanded eg petrol

law of supply

marked price of good increases, increase in supply

factors that affect supply

price, production costs, technology, government & taxes, climate conditions, price of similar products, competition

Equilibrium price

state of equality between demand and supply

Revenue (Sales)

Price x Quantity

subsitute products

alternatives; if price of product A increases demand for product B will increase eg coke and pepsi

complementary products

used together; if demand for product A increase demand for product B will also increase

Composite demand

increase in demand for one good will restrict availability for another use. eg increase demand for oil for plastic will lead to decrease supply in oil for petrol

derive demand

demand that arises from the demand for the product the resource produces. eg increase demand for baked beans will lead to increase demand for tins

joint supply

occurs when production of a products creates a by-product that can also be supplied eg increase in production of sheep for meat will lead to increase supply of wool.

PED

percentage change in quantity demanded/percentage change in price

factors that affect PED

number and closeness of substitutes, proportion of income, influence of habit (addictive), needs vs wants, branding, time

elastic supply

Exists when a small change in price causes a major change in quantity supplied. eg fidget spinner, taxi service

inelastic supply

exists when a change in a good's price has little impact on the quantity supplied eg housing, water

factors that affect PES

Level of spare capacity, level of stocks and work in progress, production lags, sustainability of factors of production, time period

PES

percentage change in quantity supplied/percentage change in price

fixed costs

Costs that do not vary with the quantity of output produced

variable costs

costs that vary with the quantity of output produced

total costs

fixed costs + total variable costs

average costs

Total costs / output

total variable cost

units x variable cost

social costs/poor ethics

exploitative labour, bullying suppliers, false info to customers, water, air or noise pollution, destruction of environment

efficiency

making best possible use of resources, maximise output from given inputs and so minimise their costs

production

total amount made by a business in a given time period

Productivity

how much an employee can produce in a given time

profit

total revenue minus total cost

market share

the portion of a market controlled by a particular company or product.

economies of scale

reduction in average cost caused by an increase in the scale of production

technical

large scale machinery will cost more but can operate much faster and cuts average cost eg bakery

managerial

when large firms can afford a specialist to manage particular areas of the company eg season sales executives

financial

more favourable rates of borrowing as lenders see larger businesses as more reliable compared to smaller businesses

risk-bearing

allows a firm to spread risk by having different products to fall back on eg supermarket

purchasing

achieved via buying in bulk eg costco

internal growth

opening new stores or launching new products, expansion from within

external growth

buying out a business, expansion by joining other businesses

franchisor

A company that develops a product concept and sells others the rights to make and sell the products.

franchisee

an individual or business that is granted the right to sell another party's product

internal growth exampes

opening new stores (physical) , e-commerce (online sales, trading 24/7) , outsourcing (3rd party to carry your business)

external growth examples

merger or takeover

merger

Combination of two or more companies into a single firm under joint ownership A + B = AB

takeover

where one business buys another business out, manager of dominant business will be in control A + B = A

advantages of external growth

• gaining access to new customers and markets

• avoiding entry barriers to new overseas markets

• acquiring existing business equipment

• benefit from existing brand name

• having opportunity to benefit from economies of scale

disadvantages of external growth

it can be expensive to takeover/merge with another business managers may lack the experience to deal with the other businesses

advantages of internal growth

• low risk

• using business' own strengths

• no risk of a clash of culture

disadvantages of internal growth

• long period between investment and return on investment

• growth may be limited

diseconomies of scale

occurs when a business becomes inefficient because of growth this leads to a rise in unit costs

communication

as business grows it is difficult to keep everyone informed, message can become distorted, relationship with supplies may become difficult to maintain, reduced staff motivation can lead to employees feeling overwhelmed, reduces productivity

co-ordination

increased number of resources are difficult to coordinate to make sure everything is being used efficiently

barriers to entry

restrictions that will block potential entrants from entering a market profitably

examples of barriers to entry

costs, regulations, market shares, design

patents

exclusive rights to make or sell inventions for a number of years

limit pricing

reducing the price of a good to just above average cost to deter the entry of new firms into the market. Prices are set at levels which are likely to make it unprofitable for potential entrants who might consider coming into the market

cost advantages

a firm that can produce a particular product or service at a lower cost than the competition.

advertising and marketing

developing consumer loyalty by establishing branded products can make more succesful entry into the market

research and development

leads to new products while also allowing firms to improve production and unit costs

presence of sunk costs

some industries have high start up costs or high ration of fixed to variable costs which may be unrecoverable

barriers to exit

difficult for firms to leave a market and use their resources to produce a different good/service

competitive market

a market in which there are many buyers and many sellers, firms may use non price competition to differentiate

• low/no barriers to entry

• similar/identical products

examples of competitive market

dairy industry, stock market

market structure

number of firms within an industry and the way those businesses behave

perfect competition

a market structure in which a large number of firms all produce the same product

• no barriers to entry

• price elastic

firm differentiation

quality, design, promotion, branding, packaging

unique selling point

Something that distinguishes a firm's product from those of its competitors

branding

The promotion of a product or service by identifying it with distinct characteristics (usually associated with public perception, quality or effectiveness)

imperfect competition

exhibits some but not all elements of perfect competition

• less firms in market

• some sort of product differentiation

• some barriers to entry & exit

• suppliers can influence prices

monopolistic competition

a market structure in which many companies sell differentiated products, barriers to entry are low, easy for firms to enter market, mix between monopoly power and competition leads to term monopolistic competition

non competitve markets

• firms have some power to influence price

• monopoly has least competition ( price inelastic)

monopoly

price leaders charge high prices but often restricted from doing so by the government, government refers to business with at least 25% market share as monopoly

duopoly

an oligopoly consisting of only two firms

oligopoly

A market structure in which a few large firms dominate a market, not tend to compete on price in the long run, speand heavily on new products and branding

labour market

to enable workers who are willing and able to sell their labour to meet employers who are willing and able to give them a job

factors that affect supply of labour

education and training, taxes and benefits, working age/retirement, migration, employment laws

factors that affect demand for labour

derived demand, demand for goods/services, improvement in techology, profit and market structure

wage differentials

the difference between the wage received by one worker or group of workers and that received by another worker or group of workers

wage differentials (within occupation)

age/experience, qualifications, responsibilities, location, public/private sector, discrimination

wage differentials (between occupation)

availabilility of skilled workers, demand for goods/services, safety, working conditions/environment, profit of firms, non financial benefits, market structure