THEME 2 ALL FLASHCARDS

What are 4 objectives of growth?

What are 4 objectives of growth?

• To achieve EOS (internal or external)

• Increased market power over consumers + suppliers

• Increased market share + brand recognition

• Increased profitability

Why might firms want to achieve market power?

Extent to which one business can affect what happens in the market > this is about being able to have more control over what goes on rather than having to ‘catch-up’ with other firms, including pricing + marketing

What are economies of scale?

What are the 2 types?

The cost advantages (lower cost per unit of output) of operating on a larger scale > lower AVC

• Internal = occurs within an individual business - investing in larger scale production

• External = occurs within an industry - factors beyond control of firm

What is short run vs long run?

Short run = where one FOP is fixed and rest are variable

Long run = where all FOP’s are variable

What are the 6 types of internal economies of scale?

Technical = arise from improvements in production processes and technology

Managerial = larger firms can afford to hire specialized management teams or implement more efficient organizational structures/divide their labour

Purchasing = often negotiate lower prices from suppliers due to their larger purchasing volumes, e.g. bulk buying

Marketing = can divide marketing budgets across larger outputs > so AVC of advertising is less per unit

Risk-bearing = Larger firms may have more diversified product lines so can reducing their exposure to risks associated with fluctuations in specific markets or industries - spread cost of uncertainty (if 1 part unsuccessful fall back on other)

Financial = Larger firms often have better access to capital markets (e.g. banks) and can negotiate lower interest rates on loans

What are 3 problems that may arise from growth?

- Diseconomies of scale

- Internal communications

- Potential skills shortages

How are diseconomies of scale a problem when a firm grows?

Occurs when output passes its optimum level + AVC start to increase again bc business grown so large, could be caused by:

- Lack of motivation from workers > lack of productivity

- Lack of coordination + communication

How are internal communications a problem when a firm grows?

Becomes more difficult as the size of the organisation grows > mistakes may be made > causing loss of output or orders > bad reputation > affect on PED???

How are potential skills shortages a problem when a firm grows?

Firms compete to attract scarce employees > demand for labour exceeds supply > drives up wage costs > increase COP

What is corporate culture?

Why is it important in ensuring future success in a business?

Corporate culture = the shared values, beliefs + behaviours that define the identity of an organization - influences decision making and overall work environment

e.g. innovation, environmentalism, etc. > google focuses on ‘innovation’ and each employee should focus on their own project

• Important for determining the long-term success as it helps create a sense of direction + ensures everyone working together to achieve same goal

• If communicated inefficiently - then each section of business may have its own agenda > lead to conflict of interests

What are the 2 methods of growth?

Organic = growth within a firm, e.g. expanding output or consumer base, developing new products

Inorganic = growth outside of a firm - e.g. merger or takeover - horizontal, vertical (forwards + backwards), conglomerate

What is an advantage/disadvantage of organic growth?

• Less risky/inexpensive + less chance of a clash of cultures - can keep full control and don’t have to e.g. take out a loan can use retained profit

• Slow + limited amount of growth - often slow which can reduce the business’s ability to react to its competitors >result in the business losing market share as other competitors grow inorganically

What is a horizontal merger?

• What’s an advantage?

• What’s a disadvantage?

Horizontal merger = merging with a company at the same stage of production/similar sized competitors in same industry, e.g. Coca cola + Pepsi

• Removes competition > increase market share > market power > more consumer base + demand > EOS

• Less flexibility > clash of interests/culture > coordination messed up > less efficient

What is a vertical merger?

• What’s an advantage?

• What’s a disadvantage?

Vertical merger = merging with a firm within its supply chain (forwards - closer to consumer, backwards - supplier)

• Streamline production process > more efficient > lower lead time > happier consumers

• Less flexibility > clash of interests/culture > coordination messed up > less efficient

What is a conglomerate merger?

• What’s an advantage?

• What’s a disadvantage?

Conglomerate merger = merging with firms in unrelated industries

• Reduce risk > if business fails in one industry still have the other to fall back on

• Increased complexity - spreading across markets may lead to reallocating resources to a successful business > inefficiencies

Why might mergers/takeover fail (evaluation points)?

(4)

- Depends on consumer base - may opt out to buy from smaller businesses if gets too large

- Success may depend on cost - huge financial costs so may rely on loans > leaves a big debt if deal doesn’t work out which could lead to complications

- Winners curse - when the company buying another one pays too much for it because they were in a hurry or didn't check everything carefully > problems in long run

- Short term success - but long run may begin to face problems

What is product innovation?

What is process innovation?

Product innovation = involves the development of new or improved goods or services

Process innovation = creation or improvement of methods, techniques, or systems used to produce goods or services

What is business logistics?

don’t need to know

Business logistics = refers to the management of the flow of goods/resources throughout the supply chain - e.g. encompassing activities like procurement, production, inventory management, transportation, warehousing, and distribution

» aim of ensuring efficient and timely delivery of products or services to customers

What is one way a business can gain a competitive advantage through being more innovative?

Investment can lead to the creation of new products or processes > e.g. new technology can help process innovation > improve labour productivity > ↑LRAS and lower AVC per unit and improve dynamic efficiency in the long run

Eval: trade-off - investing in better technology may involve higher costs in the short run - however but innovation business cannot improve in long run

How can a business help increase its market power?

Why would they be incentivised to increase market power?

Through investing in R+D and helping to differentiate its products > attract consumers + build up a brand identity > consumer loyalty > more market power

Market power will give a firm:

- power over prices in the market - meaning it can be a price leader (so don’t have to change in response to consumers) > make more profit > re-invest

What is the role of state funding in R&D + innovation (why is it good for the economy and how is it done)?

(2)

Government provides grants, tax incentives, gov. support schemes > help finance R+D/innovation because:

- Makes products more desirable abroad > export to other country (injection into economy) > ↑ innovation means more demand so higher exports > ↑ econ growth/GDP > expand economy > provide more jobs > higher standards of living

- Support for merit goods > ↑ positive externalities > benefits society

What are the different stages of the product life style?

What are different examples of extension strategies?

- New features

- Promotion

- New price

What is an advantage of a price comparison website?

Increases consumer knowledge > e.g. helping consumers to compare best prices and deals for products > reduces information asymmetry between supplier and consumer > leads to more equal access of knowledge, reducing the potential disadvantage for consumers (being exploited)

What is viral marketing?

A strategy by which a firm - creates a campaign focused on causing viewers of that promotion to spread it by sending it to others via social media > e.g. Apple shot on iPhone

What are 4 reasons why businesses use social media?

- Promote products online - e.g. using targeted advertising (micromarketing)

- Gain feedback - surveys

- Links to potential employees (e.g. LinkedIn)

- Gaining info on consumers

How does the digital economy affect supply-side for businesses:

- Micro vs mass marketing

- Online retailing + distribution

- Recruiting digital staff

- Micromarketing - strategy used to target a specific/niche group compared to appealing to an entire market - e.g. targeted advertising, loyalty cards compared to tv ads and billboards

- Online retailing + distribution - able to reach a wider audience + open 24/7 + receive payments more quicker + can use data to improve offerings by tracking consumer purchases

- Recruiting digital staff - skills shortage bc high in demand so may need to spend money on training > conversely those who are skilled may demand higher wages

What does long tail mean?

Theory that consumer choice is widened through online retailing - Business can make significant profits by selling low volumes of hard-to-find items to many customers (niche markets), instead of only selling large volumes of a reduced number of popular items

What is creative destruction?

Creative destruction = where innovation/technological advances reshape industries and lead to obsolete products

What are some advantages/evaluation points for the impact of the digital economy on firms?

• Increased brand awareness > through social media > cheaper promotion > wider global market > exploit long tail

• Reduces barriers to entry/contestability > allows small firms to compete in 24hr global markets

• Reduced information asymmetry for consumers - price comparison sites

• Opportunities for micromarketing - more effective and cost efficient

Eval:

- However not enough digital workers but high demand

- Still costs for warehouses, e.g. JIT

- Depends on contestability of market

- Accelerates ‘creative destruction’

Explain different ways small businesses can survive in a competitive market?

- Differentiation/USP

- Customer service

- Competitive advantage through stakeholders - e.g. suppliers, consumers, local area/gov.

• Flexibility > respond quicker and more accurately to consumer’s preferences > dynamic efficiency

• Targeting niche markets > charge higher prices > low PED as no alternative and people want to buy

What is productivity

The amount of output per unit of input (labour, equipment, capital) in a given time period

What are factors that influence productivity/ways to improve productivity?

(6)

• Motivation of workforce - produce greater output

• Training - improve skills

• Better capital equipment - technology, etc.

• Purchasing new premises

• Better quality raw materials - reduces amount of time wasted on rejected products

• Improved organisation of production - less wastage

What are the downsides to these factors that influence productivity?

- Training

- Purchasing better equipment

- Labour force expected to be more productive

- Training - firm may face high costs, takes time + workforce may be reluctant to learn

- Purchasing better equipment - members of the workforce may see this as a threat to their job (e.g. investing in better technology may lead to unemployment)

- Labour force expected to be more productive - may want to be rewarded, e.g. higher wages

Why is productivity important?

(5)

• Improved competitiveness - if firm can make more with same inputs as rivals then this should lower unit costs > savings may be passed onto consumers > encouraging higher demand > ↑ output > or can use cost advantages to get ahead; could be invested, e.g. into R&D, marketing

• Higher wages - may encourage workers to be more efficient if they are earning more > ↑ output > also can improve SOL > boost consumption + tax rev > ↑AD

• Economic growth - trend growth of national output will ↑ + will increase LRAS > increase size of economy > more competitive internationally

• Transferable labour - productivity means labour can be released from one industry and made available to another

• Balance of trade - can increase BOT as can sell any excess its making with higher productivity levels

What is the productivity gap/puzzle in the UK?

When the output per worker employed in the UK remains well below that of many of our major competitors - had happened since 2008 financial crisis

What are some policies the UK economy could consider to improve the UK’s productivity?

(5)

• Improving education+ training

• Improving healthcare

• Improving infrastructure

• Relaxed regulation - free market

• Increase privatisation

What’s the difference between labour and capital intensive production?

Labour intensive = manufacturing that has significant reliance on staff to produce their products

Capital intensive = manufacturing that has a significant reliance on large investments of cash, e.g. machinery/technology

Describe labour intensive production in terms of:

- methods it uses/on what scale (small or large)

- impact on productivity - advantage/disadvantage

Usually produces on a small scale using job production - to produce personalised products

• More flexible - have capacity to use things, e.g. overtime, temporary staff, laying off staff if demand for product alters

• Time consuming (as products are produced by an individual)

Describe capital intensive production in terms of:

- methods it uses/on what scale (small or large)

- impact on productivity - advantage/disadvantage

Usually produces on a large scale using flow production

• Machinery can be exploited - productivity can ↑ in the long term as it can work long hours on repetitive tasks

• Costly + time consuming - if need to change the scale of production

What is capacity utilisation?

The extent to which the productive capacity of a business is used

What is full and spare capacity?

Full capacity = when a firm is using all the resources to their maximum potential

Spare capacity = when some resources are not being used to their maximum potential (under-utilised capacity)

What is underutilisation of capacity?

What is an advantage/disadvantage of using this type of production?

Underutilisation = refers to production levels falling below the capacity potential

• Room to increase output - if demand ↑ then can make sure to provide for consumers > good customer service > improved brand rep (depends on

• Quality may improve + less waste

• Productivity reduced - resources are not being fully utilized > more inefficiencies > higher costs per unit as spread across a lower level of output > ↑ AVC > reduce competitiveness > may have to lower prices? (depends on PED)

What is overutilisation of capacity?

What is an advantage/disadvantage of using this type of production?

Overutilisation of capacity = occurs when production levels exceed the maximum sustainable output

• Demonstrate strong demand for product - attract/signal to investors for possibility of future investment > improve product/↑ capacity

• AVC per unit will fall

• Low staff motivation - repeatedly overworked > low quality > ↑ staff absenteeism > lead to inefficiencies + further ↑ costs in future > unlikely to meet demand in long run/may reduce demand

What are methods to improve capacity utilisation?

(3)

• Employing more/fewer staff

• Creating more demand - through advertisement/brand promotion

• Market research - can utilise capacity to better meet demands of consumers

What is the purpose of lean production methods?

What are the 5 lean production methods?

Lean production purpose = maximise productivity and reduce waste during the production process

• Quality - control, assurance, TQM (total quality management)

• Kaizen

• JIT (just in time)

What’s the difference between quality control and assurance?

Quality control = Analysis of quality in finished good/service - corrective method (identify/fix defects in products before released)

Quality assurance = Analysis of quality in business processes that are used to produce good/service - managerial method (improve quality of business processes)

*BOTH COSTLY*

What is total quality management (TQM)?

What is an advantage/disadvantage of using it?

TQM = approach aimed at continuously improving organizational processes/products through the involvement of all employees to achieve customer satisfaction

• Competitive advantage - consistent high quality products/service will give brand a good rep > more repeat purchases + good word of mouth > could ↑ prices if loyal customers to product > lower PED

• Difficult + time consuming - requires lots of human + financial resources, e.g. to examine operational processes, evaluate and change where necessary > must put a significant investment in resources

What is Kaizen (‘continuous improvement’)?

What is an advantage/disadvantage of using it?

Toyota

Kaizen = approach focuses on continuous improvement through small changes involving all employees to enhance efficiency and quality

• Improved employee motivation/teamwork - build new team spirit which can help give employees a fresh perspective without prejudice > more productive working and higher efficiency

• Difficult to implement in existing systems - employees may not like new way/may require training > cause tensions > difficult to return to old management systems if unsuccessful

What is Just in time (JIT)?

What is an advantage/disadvantage of using it?

JIT = method in which goods are received from suppliers only when they are needed

• Less space needed - faster turnaround of stock, less warehouse space needed > reduces amount of rent > free’s up funds > can invest somewhere else

• Risk of running out of stock - sudden surge in demand may not be met > risk of losing sales and unsatisfied customers > imperative you have correct procedures in place, e.g. good relationship with supplier > takes thought and strategy

What are the overall benefits of lean production?

(4)

• Increase productivity

• Reduce waste

• Increased employee motivation (Kaizen, TQM) - shared decisions + empowerment

• Quality - streamline and improve business processes

What is the overall impact of productivity on:

- Average costs

- Waste

- Competitive advantages

• AVC - high levels of output means firms can exploit EOS, so means fixed costs are spread across a larger number of products, lowering AVC > HIGHER PROFITS > lower £ for consumers or re-invest

• Waste - Reduces waste of resources can often lead to consistent higher quality available goods > customer loyalty > more inelastic demand

• Competitive advantage - short product development lead times > by streamlining processes and being more efficient > happy consumers

What is globalisation?

The process of increasing interconnectedness and interdependence among countries and economies worldwide

What are 3 characteristics of globalisation?

• Increased investment flows

• World trade rising as a proportion of world GDP

• Increased migration

What are factors that have contributed to globalisation in the last 50 years?

• Trade liberalisation

• Capital market liberalisation

• Political change (e.g. opening up of China, formed USSR)

• Reduced costs of transport + communications

• Increased significance of global transnational companies

What is FDI?

Foreign direct investment - investment made by a someone in one country in business interests in another country, e.g. either establishing business operations or acquiring business assets in the foreign country

What is trade liberalisation?

What is an eval point of this?

Process of reducing barriers to international trade (e.g. tariffs, quotas, protectionist policies) to promote the free flow of goods between countries

Eval point: Trade diversion (trade diverted from a more efficient exporter towards a less efficient one by formation free trade agreement)

What is containerisation?

What is an advantage of a firm/industry that uses this?

The movement of goods in steel containers of a standardised size - can easily be transferred from ships, lorries and trains

- Can take advantage of external EOS - can benefit from efficiencies of standardised procedures and reduced handling costs

What is a transnational company (TNC)?

What is an advantage/disadvantage of TNS?

A company that has large operations in many different countries but is controlled from its home country, e.g. Apple (home = California, manufacturing = China)

• Facilitate economic growth - bring infrastructure, development to host country > industrialisation

• Exploit cheap labour + destroys culture/tastes

What is capital market liberalisation?

Involves removing restrictions on the flow of capital across borders to promote greater integration and efficiency in global financial markets

What was the ‘opening up of China’?

How did the end of the USSR/Cold War contribute to globalisation?

• 1978 - Open Door Policy - open country up to foreign investment + foreign businesses who wanted to set up in China

• Reduced geopolitical tensions, opened up new markets, and fostered increased economic integration among countries previously divided by ideological barriers

What have the growth rates of the BRIC nations been like in comparison to the UK?

Rapid GDP growth in developing economies (BRIC) compared with the relatively low growth rates in developed economies (UK)

• In developing economies - rapid GDP growth often reflects factors such as industrialization, infrastructure development, and increases in productivity. However, this growth may not necessarily translate into improvements in living standards, reduction of poverty, or equitable distribution of wealth and resources

• Conversely, in developed economies like the UK, slower GDP growth rates may be indicative of a mature economy where growth is steadier but perhaps less dramatic. However, these economies often have well-established social welfare systems, higher standards of living, and greater emphasis on quality of life factors such as healthcare, education, and environmental sustainability.

What are the 4 indicators of growth for a country?

• GDP per capita

• Literacy

• Health

• Human development index (HDI)

What is GDP per capita?

Why is this better than using real GDP to show standards of living?

What are the drawbacks of using this to show standards of living?

GDP per capita = average economic output per person in a country, serving as an indicator of a country’s standard of living, economic development or relative wealth

(Total GDP/population)

• Accounts for differences in population size - GDP measures total value of all goods and services, providing an indication of the size of the economy but GDP per capita allows easy comparisons between countries with different sized populations, being an indicator of economic development and/or relative wealth

• Doesn’t give any indication of distribution of wealth or welfare - 2 countries with similar GDP’s per capita may have different distributions or different welfares which lead to different SOL

Why can literacy + health rates be used to show economic development?

High literacy + health rates indicates:

- high quality education + healthcare system in a country

- can show skill level of workforce (more highly skilled more productive)

- can show welfare level (more happy more likely to be productive)

What is HDI?

What’s an advantage of using HDI rates to show economic development?

What’s a disadvantage of using HDI rates to show economic development?

Human Development Index = consists of 3 measures (education, health/life expectancy, GNI per capital - national income)

• Gives a more rounded view of living standards - measures three factors (rather than just one) + easy comparison using index value between 0 and 1 (0 = less developed, 1 = more developed)

• Accuracy + Wide divergence within countries - only measures time not quality (e.g. long life expectancy does not indicate good quality life) and widely different scores in different regions

What are mean and median incomes?

Which one is better to use?

Mean household income = average income per household

Median household income = income level at the midpoint of all households ranked (arranged) by their income

• Median - as mean incomes may be largely skewed by outliers (e.g. if someone earns a lot more) so median is more representative of the general populations income

What are characteristics of a developed, emerging and developing economy in terms of:

• Main sector base

• Standard of Living

• GDP + Economic growth

• Capital vs human intensive

• Trade

• Political stability

Developed	Emerging	Developing
Dominated by tertiary sector/quaternary sector (already industrialised)	Dominated by secondary sector (industrialisation)	Dominated by primary sector
High SOL	Rapidly rising SOL	Low SOL
High GDP but slow econ growth	Rising GDP + econ growth	Low GDP + econ growth
Capital intensive techniques	Labour intensive but some capital	Labour intensive
Trade already established - more importing	Rapidly expanding trade + increased FDI - more exporting	Low levels of trade
More politically stable + democratic	Some democratic/ authoritarian + medium levels of corruption	Politically instable + high levels of corruption

What is specialisation?

What is the difference between absolute and comparative advantage?

Specialisation = the process of focusing on a specific task or area of production

• Absolute advantage = ability of an economy to produce a certain good more efficiently than another economy can (with fewer resources)

• Comparative advantage = ability of an economy to produce a given product at a lower opportunity cost than other economies would incur in producing the same product (e.g. France might be able to produce 20 bottles of wine or cars in an hour whereas Puerto Rico can produce 10 wine bottles or 5 cars in an hour but PR has a lower OC if produces wine (only 5 cars not 20)

What’s an advantage of specialisation?

What’s a disadvantage of specialisation?

+ EVAL POINTS

Gain a comparative advantage against other countries > bc can produce at a lower opportunity cost other countries are more likely to import from them so country with comparative advantage can gain access to a larger market > expand business to take advantage of EOS > lower AVC per unit + lower prices for consumers

Higher worker turnover for firms > means employees become dissatisfied with their jobs and leave regularly > more structural unemployment as only focused on one job > means

Interdependence > may be more reliant on other countries for certain products > increased exposure to external shocks, e.g. financial crash > may spread across economies

Ev: short term vs long term - may only impact in short term

Also depends on level of interdependence, e.g. only reliant on one item or how much of a necessity it is

Evaluation points:

- How successful it will be in o

Gain comparative advantage over other countries if specialise in a particular thing > e.g. specialise in the production of valuable commodities > other countries likely to import from here than produce domestically if they can produce it at a lower opportunity costs> ↑ exports means ↑ net trade > AD > increase econ growth

Unequal distribution of growth > Specialization often leads to higher productivity + econ growth in certain industries or regions > if benefits not distributed evenly across society may exacerbate income inequality > workers in sectors that do not specialize or benefit from growth may experience stagnant wages/unemployment > widening gap of inequality

Eval:

- Problem of interdependence

- More susceptible to external shocks - only short term problem

- Grow economy in long term

- Depends if other countries begin to specialise in this in long term

- Long term environmental issues affect economy

- Depends on product type, e.g. commodity or not - how necessary it is (PED)

- Whilst specialisation may promote economic growth this is unlikely to be sustainable without diversification and structural change

- Lack of diversification so no balanced growth across the sectors of the economy leading to risk of unexpected events - e.g. failed harvest

- Low barriers to entry????

- Problem of global monopsonies??

What are 3 ways trade can lead to economic growth?

Increased specialisation - gain a comparative advantage > higher productivity + increase EOS > low production costs but higher output so can increase GDP

Access to new markets - larger/diverse markets > increase demand > increased production > EOS > more output increases GDP

Increased competitiveness - foster competition domestically/internationally > increase efficiency as strive to improve products > lower costs > pricing more competitive > increased innovation/investment in R&D

What’s the difference between visible and invisible exports/imports?

Visible = tangible goods, e.g. food, clothes, raw materials

Invisible = intangible services, e.g. tourism, financial services, and intellectual property rights

What’s an advantage/disadvantage of cheap imports on standard of living?

(4 EVAL POINTS)

Lower prices - lower prices + wider variety means people will have an increased purchasing power/can stretch further > increased AD + SOL

Potential job losses - domestic industries may struggle to compete with cheap imports > may experience lower sales so may lower wages or increase redundancy’s to prevent the business from failing > lowers SOL + increase demand deficient unemployment

• However may become interdependent (external shocks)

• Low quality - depends on consumer wants

• Lead to trade deficit

• Other factors important to improve SOL not just cheap imports

What’s a benefit/drawback of a weak pound?

dearer imports + cheaper exports

Increases demand for domestic products - increases AD + injections into economy circular flow > reduces leakages so stays flowing in UK economy

Inflation rises - COP for businesses increase as exports dearer > pushes up price for consumers > reduce consumer surplus + less purchasing power > depends if firms absorb costs and reduce profit margins

What’s a benefit/drawback of a strong pound?

imports cheaper + exports dearer

Dampened inflationary pressures

Decrease domestic products > less internationally competitive > worsen BOP (trade deficit)

What is an effective exchange rate (EER)?

+ an advantage

An effective exchange rate (EER) is a weighted average of a country's currency in relation to a basket of foreign currencies, and is used to measure the value of the currency against a group of trading partners - unlike a bilateral exchange rate which is only in comparison to one trading partner

• Comprehensive measure - broader perspective is useful for assessing a currency's competitiveness in international markets and its impact on trade and economic activity

Label the economic cycle diagram

What are characteristics of a boom vs recession:

- Econ growth

- Unemployment/employment

- Inflation

- Wages/profits

- Gov tax revenue

- Consumption/investment

- Imports

Boom	Recession
Economic growth high	Economic growth or low or negative
Low unemployment + rising employment (near full)	High unemployment and falling employment
Inflationary pressures (demand-pull) > high prices	Inflationary pressures easing > prices falling
Wages + profits high > NI high	Wages + profits low > NI lower
Gov tax revenue high	Gov tax revenue low
Consumption + investment high (confidence, income, credit access)	Fall in consumption + investment
Imports high	Imports decline

What are the implications for firms of fluctuations in economic activity - what does it depend on? (6)

(EVAL)

- PED - e.g. in a boom firm with high PED may experience a smaller increase in sales compared to a firm with low PED if it raises prices - opposite for a recession (bigger fall in sales)

- *YED* - e.g. firms who have income-elastic goods may find sales falling in a recession, as does income

- Luxury vs inferior - e.g. inferior goods may see a rise in a recession (e.g. supermarket own brands)

- Dependent on government policy changes - e.g. if they increase/decrease income tax

- Depends if they’ve already planned for it or not - firms usually plan in case of changes in economic cycle so could easily adapt

- Depends on other factors - e.g. inflationary pressures, interest rates, unemployment

What is the circular flow of income?

What are injections and withdrawals from the circular flow of income?

Injections - investment, government spending and exports

Withdrawals (leakages) - savings, taxes and imports

market at equilibrium when injections = withdrawals

more injections = economy growing

more withdrawals = economy shrinking

What is the multiplier (effect)?

When an initial injection into the circular flow causes a bigger final increase in real national income

e.g. government spending on building project like new houses - creates more jobs > more injections > more houses more flows of income > USUALLY HIGH MULTIPLIER EFFECT WHEN LABOUR INTENSIVE

(size of multiplier effected by margin withdrawals/injections from CFOI)

What is aggregate demand?

What are components that make up AD?

AD = the total spending on goods and services in an economy, in a given period of time at a given price level

C + I + G (X-M)

What are the main factors affecting AD? (5)

• Changes in real incomes and employment

• Changes in fiscal + monetary policy - gov spending + taxation/borrowing and interest rates/supply of credit

• Exchange rates - changes in the external value of a country’s exchange rate

• Changes in the rate of economic growth of trading partner nations - e.g. importing more

• Fluctuations in consumer and business confidence

What is aggregate supply?

AS = the total amount of goods and services that all industries in the economy will produce at every given price level

What are the main factors affecting AS (short (4) and long (5) run)?

Short run (COP):

- cost of raw materials

- wage rates

- price of imports (exchange rates)

- tax rates

Long run (quality/quantity):

- changes in productivity (e.g. technological advances, process innovation)

- education/skills

- population growth (migration)/demographic

- gov regulation (affect efficiency)

- competition policy (↑ competition so forcing firms to be more productive)

What is the difference between:

- inflation

- deflation

- disinflation

Inflation = a sustained rise in the average price level + fall in the value of money

Deflation = a sustained fall in the average price level a rise in the value of money

Disinflation = a fall in the rate of inflation – a decrease in the rate at which the average price level is rising

What is RPI and CPI?

What is 2 disadvantages of CPI?

RPI = retail prices index - includes housing costs, e.g. mortgages, council tax

CPI = consumer prices index - average change over time in prices paid by consumers for basket of goods (various items bought) of consumer goods/services

• Only accounts for average household

• Doesn’t take into account housing costs

What is the difference between real/constant + nominal/current values?

Nominal value = money value at different points in time

(Current prices are not adjusted for inflation)

Real values = adjust for differences in the average price level over time - e.g. real values are nominal values but with inflation taken into account

(Constant prices take into account inflation)

What’s the difference between demand-pull and cost-push inflation?

Demand-pull inflation = occurs as a result of increasing AD in an economy - prices rising as consumers try to buy increasingly scarce goods

Cost-push inflation = occurs as a result of an increase in the costs of production in an economy - rising prices as firms try to maintain profitability, e.g. rising price of oil and other imported commodities can cause it

What are 2 impacts of inflation on firms?

- Uncertainty > less investments due to higher interest rates

- Loss of international competitiveness > higher prices means less demand (depends on PED)

What are 2 impacts of inflation on consumers?

- Loss of real income > decrease in purchasing power

- Savers vs borrowers > savers may find their purchasing power of money decreasing if keeping their money in low-interest rate accounts which don’t keep up with inflation

> value of the money they borrowed reduced as well

What’s the difference between:

- employment

- underemployment

- unemployment

Employment = state of being engaged in paid work activity

Underemployment = state of being employed in a job that does not fully utilise one’s skills, qualifications or working hours (e.g. *those who work part-time but willing to work full-time*, low productivity workers)

Unemployment = state of being without paid work but actively seeking for - above the specified age (16)

What are the 2 measures of employment?

Claimant count - measures no. of ppl who are claiming unemployment-related benefits, e.g. JSA + UC

ILO (international labour organisation) - uses a survey and claims you are unemployed if you are actively looking for a job/out of work in last four weeks and are ready to work in 2 weeks > covers a larger sample than claimant count, incl. those who aren’t eligible to claim benefits (under 18’s)

What are the 5 types of unemployment?

GODTS

Geographical immobility = difficulty/inability of workers to move from one area to another due to personal, social or financial reasons

Occupational immobility = difficulty/inability of workers to change their occupation due to a lack of skills/qualifications or experience/training

Demand deficiency (cyclical unemployment) = lack of demand/AD in economy leading to a reduction in demand for labour (e.g. in recessions)

Technological unemployment = when people lose their jobs due to development of labour-saving technology, e.g. automation, digitalisation of production processes

Structural unemployment = when people lose their jobs due to a mismatch between skills or location of workers and the jobs available in the economy > due to long-term changes in economy (e.g. coal mine workers if there is now renewable energy)

What are 2 effects of unemployment on firms?

- Costs - if low unemployment, may have to offer higher wages/better incentives to attract/retain workers whereas if high unemployment have a larger pool of of workers with low wage expectations/requirements

- Revenue - lower unemployment rates will mean more consumer confidence as have a reliable source of income > higher spending > higher demand > more profit > ↑AD

> however, high unemployment means less disposable/discretionary income > YED

What are is 2 advantages + a disadvantage of unemployment on the economy?

+ some eval points

- Worsening poverty/bigger inequality gap - less income + more reliable on state benefits > ↑ budget deficit as less tax revenue (direct and indirect) > may have to invest more to get ppl employment > ↑LRAS but opportunity cost

- Reduce inflation - less spending (DP inflation)

- Reduce wage pressures for businesses + lower wage growth could attract FDI (as lower wage costs than other host country)

Depends on:

- what used to measure unemployment - age (if older ppl like economy needs young ppl - may be able to learn new skills better)

- inflation, interest rates

- how effective gov. is in tackling unemployment (policies)

What are the 4 possible macroeconomic objectives?

• Economic growth

• Low unemployment

• Low + stable rate of inflation (2%)

• Balance of payments equilibrium on the current account

What are different demand side policies?

• Fiscal policy (gov. spending + taxation):

  • Expansionary FP = gov reduce tax + increase expenditure > ↑AD + help to solve demand-deficient unemployment but could cause demand-pull inflation

  • Contractionary FP = gov increase taxes + decrease expenditure > AD decrease + solves demand-pull inflation but could cause disequilibrium demand-deficient unemployment

• Monetary policy (IR + QE)

  • Expansionary MP = reduce IR + ↑QE > ↑MPC

  • Contractionary MP = increase IR + reduce QE > stops inflation but ↑ unemployment + ↑MPS

QE = encourage borrowing but can depreciate £ + eval point - may take time for money to filter through