STARRED = GLOBAL ECONOMY Listing Points

economy

system that attempts to solve the basic economic problem

private sector

provisions of goods and services by businesses owned by individuals or groups of individuals

public sector

government organizations that provide goods and services in the economy

shareholders

people or organisations that own shares in a company

Aims of private sectors (4 points)

Survival, profit maximization, growth, social responsibility

What does ‘social responsibility’ mean for the aim of private sectors?

Some firms aim to be good corporate citizens to please a wider range of stakeholders.

dividends

part of a company’s profit that is divided among the people with shares in the company

assets

things or resources belonging to an individual or business that has the value or power to earn money

liabilities

amount of debt that is owed or must be paid

Aims of public sectors (4 points)

Improving the quality of services, Minimizing costs, Allow for social costs and benefits, (sometimes) profit

Market or free enterprise economy

Vast majority of goods and services are provided by private businesses, with only a few reliant on public sectors. Market demand/supply determine the allocation of resources.

Command/planned economy

An economy that relies fully on public sectors to choose, produce and distribute goods.

Mixed economy

An economy that relies on both public and private sectors to provide goods and services.

market failure

where markets lead to inefficiency

3 questions mixed economies use to attempt to solve the basic economic problem

What to produce?, How to produce?, For whom to produce?

What to produce? - mixed economy description

Some goods and services are best provided by private sectors, but others such as education, roads, and street lighting are best provided by public sectors. Public sectors tend to provide goods and services that private sectors may not sufficiently provide.

How to produce? - mixed economy description

Since competition exists, firm use production methods that help maximize quality and minimize costs.

For whom to produce? - mixed economy description

Goods produced by private sectors are available to those who can afford them, whereas goods produced by public sectors are usually free to everyone and are paid for from taxes.

Reasons for market failure (leading to the need for intervention)

Externalities, Lack of competition, Missing markets, Lack of information, Factor immobility

merit goods

goods that are underprovided by the private sector

public goods

goods that are not likely provided by private sectors

Two characteristics of public goods (that make it not possible for private sectors to provide)

Non-rivalry, Non-excludability

Problem if private sectors provided for public goods

Free rider problem

Free rider problem

individuals that enjoy the benefit of a good but allows other to pay for them

Privatization

Act of selling a company or activity controlled by the government to private investors

nationalized industries

public corporations previously part of the private sector that were taken into state ownership

natural monopolies

situation that occurs when one firm in the industry can serve the entire market at a lower cost than would be possible if the industry were composed of many smaller firms

3 reasons for privatization

To generate income (for the govt), public sectors were inefficient, to reduce political interferences

Effect of privatization of consumers

Consumers can benefit from privatization because businesses come under pressure to meet consumer needs, therefore provide good quality products and offer reasonable prices.

Effect of privatization on workers

In order to reduce costs, many people may be laid off. Existing workers may be pressured into raising their productivity in order to increase efficiency.

Effect of privatization on businesses

Firms have to face competition, and their objectives change. Firms may also increase investment and diversify into new markets.

diversified

if a company or economy diversifies, it increases the range of goods and services it offers

hostile takover

takeover that the company being taken over does not want or agree to

takovers

act of getting control of a company by buying over 50 percent of its shares

Effect of privatization on governments

More revenue is generated for governments, and governments can focus more on other roles of the government. However, governments may face criticism for privatization, or be subject to hostile takovers.

competition

rivalry that exists between firms when trying to sell goods to the same group of customers

Features of a competitive market

Large number of buyers and sellers, products sold in are close substitutes, Low barriers to entry, Firms have no control over the price charged, Free flow of information about products

barriers to entry

obstacles that might discourage a firm from entering a market

innovative

commercial exploitation of a new invention

product differentiation

attempt by a firm to distinguish its product from that of a rival

Advantages of competition to consumers (3 points)

Lower prices (product differentiation), More choice, Better quality

Disadvantages of competition to consumers

Market uncertainty (unprofitable firms leave the market), lack of innovation (lack of profit)

Competition impact on economy

Resources are allocated more efficiently, but resources may be wasted when firms leave the market

3 ways to measure the size of afirm

Turnovers, No. of employees, balance sheet total

Advantages of small firms (5 points)

Flexibility, Personal service, Lower wage costs, Better communication, innovation

Disadvantages of small firms (4 points)

Higher costs, lack of finances, difficulty attracting staff, Vulnerability (at difficult times/ takeovers)

Advantages of large firms

Economies of scale, market domination, large-scale contracts

Disadvantages of large firms

Too bureaucratic, coordination and control, poor motivation (insignificant efforts)

Factors influencing growth of firms

Government regulation (preventing monopolies), Access to finance, Economies of scale, Desire to spread risk, Desire to take over competitors (to reduce competiton)

Reasons firms stay small

Size of market, nature of market (+niches/low barriers to entry), lack of finance, aims of entrepreneur, diseconomies of scale

market niche

smaller market, usually within a large market or industry

monopoly

situation where there is one dominant seller in the market

Features of a monopoly

One business dominates entire market, unique product, price maker (by restricting supply), barriers to entry

List of barriers to entry

Legal barriers, high startup costs, technology, marketing budgets, patents

new entrant

company that starts to sell goods or services in a market where they have not sold before

price maker

where a dominant business is able to set the price charged in the whole market

patent

a license that grants permission to operate as a sole producer of a newly designed product

Advantages of a monopoly

Efficiency, innovation, economies of scale

Disadvantages of a monopoly

Higher prices, restricted choice, lack of innovation, inefficiency (diseconomies of scale, no incentive to lower costs)

market segments

groups of customers that share similar characteristics such as age, income, social class, and interests

Acronym for features of oligopoly + each point

(Friendly Llamas Dance Beneath Colorful Neon Palms) fewer firms, large firms dominate, different products (product differentiation), barriers of entry, collusion, non-price competition (advertising), price competition (price wars)

Acronym for advantages of an oligopoly + each point

PIEQC (price wars, innovation, economies of scale, quality, choice)

In advantages of oligopoly: Explain choice

Oligopolists may introduce new brands into the market to support niche markets, thus giving consumers more choices.

Acronym for disadvantages of an oligopoly + each point

CCLP (cartel, collusions, price fixing, lack of choice)

niche market

market for a product or service, perhaps an expensive or unusual one, that does not have many buyers, but that may make good profits for companies that sell it

cartel

where a group of firms or countries join together and agree on pricing or output levels in the market

globalization

growing interconnection of the world’s economies

Do trading blocs encourage or discourage FDI?

encourage

Order of increasing economic integration

FTA, PTA, customs union, common market, economic union

PTA (preferential trading areas)

limited removal of trade barriers (not all products)

FTA (free trading areas)

all barriers to trade are removed between members

Customs union

Like FTA but members impose a common set of trade barriers on non-members

Common markets

Like custom unions but allow free movement of factors of production (labor and capital)

Economic union

Even greater levels of economic and political intergration (same policies, e.t.c)

interdependence

where the actions of one country or large firm will have a direct effect on others

Reasons for globalization

Fewer tariffs and quotas (if you set up inside the country itself), reduced cost of transport (improved transport networks), reduced cost of communication (technological advancements), increased significance of MNCs (minimizing costs)

multinational corporations (MNCs)

corporations that operate in many different countries

saturated

market in which there is more of a product for sale than people want to buy

Impact of globalization on individual countries

If a global company uses another country to set up it benefits because gains are generated from overseas.
For the country providing the site to the MNC, they also may benefit from higher GDP and employment and economic growth. However, economics events such as recession can spread an impact on the other country.

Impact of globalization on governments

Profits made by global companies are taxed by the host nation, increasing tax revenue which can be used to improve government services or lower taxes.

Impact of globalization on producers (4 points)

Access to huge markets, lower costs, access to labor, reduced taxation (good location)

Impact of globalization on consumers

If businesses costs are lower, prices are likely to be lower, and consumers may have increased choice. (improve living standards)

Impact of globalization on workers

Creates new jobs particularly in developing countries. Greater freedom of movement also allows people to work in developed countries. However, some may be unemployed when offshoring occurs.

Offshoring

practice of getting work done in another country in order to save money

Impact of globalization on the environment

More economic growth resulting from globalization causes more environmental damage due to increased use of transport and depletes resources.

Features of MNCs

large amount of assets, high levels of human capital, marketing capability, latest technology, economic and political influence, economies of scale

foreign direct investment (FDI)

investment of a company in a foreign country. FDI occurs when a firm gains ownership of atleast 10% of an asset in another country, representing that it is long term and significant

Reasons for the emergence of MNCs/FDI

Economies of scale, Access to natural resources/cheap material, Lower transport and communication costs, Access to customers in different regions

Advantages of MNCs/FDI (to the country it is set in)

Job creation, investment in infrastructure, Developing skills (provided by MNC or govt who may do this to attract MNCs), Developing capital, contributing to taxes

Disadvatanges of MNCs/FDI

Tax avoidance, environmental damage, moving profits abroad (repatriation of profit)

repatriation

where an MNC returns profit from an overseas venture to the country it is based, typically from developing country to developed country

tax avoidance

practice of trying to pay less taxes in legal ways

Reasons for free trade (3 points)

Selling off unwanted commodities (like oil in Qatar), obtaining goods that cannot be produced domestically, obtaining goods that are cheaper bought overseas

free trade

situation in which the goods coming in or out the country are not controlled or taxed

Advantages of free trade

Lower prices and increased choice for consumers, Lower input prices (raw materials), wider markets for businesses

Disadvantages of free trade

Competition for domestic businesses, unemployment (because of foreign competition)

protectionism

government intervention to protect domestic producers from competition faced by international trade

trade barriers

measured designed to restrict imports

Reasons for protectionism

Prevent dumping, protecting employment, protecting infant industries, gain tariff revenue, prevent import of harmful/unwanted goods, reduce current account deficits, retaliation

dumping

when an overseas firm sells large quantities of a product below cost in the domestic market