Topic 2- Consumers and Businesses

What is consumer sovereignty?

It means that consumers ultimately determine which goods and services are produced by exercising freedom to choose what they want to buy.

What is the result of consumer sovereignty?

Technical efficiency is enforced (produce goods at the least cost to maximise profits), enforce allocative efficiency (allocate resources in a way to satisfy consumer preferences) and enforce dynamic efficiency (changing to consumer preferences and technological improvements over time).

What factors diminish consumer sovereignty and why?

Marketing (exert a powerful influence over the spending patterns of consumers), misleading or deceptive information (false or misleading claims about a product, leading them to buy something that they did not really want, planned obsolescence (production of goods that are designed to wear out quickly in order for customers to buy their products more frequently), and monopoly behaviour (firms that operate in a market where there are limited suppliers limit the ability for customers to choose).

What does the formula Y= C+S represent?

This formula represents disposable income (Y), which is the sum of consumption (C) and saving (S).

What is the proportion of an individual’s total income that is spent on consumption called?

Average propensity to consume (APC). This figure is calculated by dividing consumption (C) by total income (Y).

What is the proportion of an individual’s income that is saved called?

Average propensity to save (APS).

What factors influence decisions to save or consume?

Cultural factors, personality factors, consumer confidence/ future expectations, future spending plans, tax policies and availability of credit.

What usually happens to consumption as income rises?

People tend to save more of their income, therefore APS rises and APC falls. The opposite is true, people with less income usually spend more of their available income rather than saving it.

Outline the factors influencing individual consumer choice:

Income, price of complements, price of necessities, price of substitutes, preferences/ taste, and advertising.

What is social welfare and what is its aim?

It is income collected through taxation and redistributed from the government to consumers. It is aimed to provide a minimum "safety net” which allows all members of society to buy necessities.

What is a business firm?

An organisation involved with using entrepreneurial skills to combine the factors of production in order to produce a good or service and create a profit.

What is an industry?

A collection of business firms that are involved in making the same product and generally compete with each other.

What must businesses determine, and who is this influenced by?

Businesses must determine what to produce, how to produce, and how much to produce. In a free market economy, these are generally determined by the market, and consumer demand.

What determines what is produced?

The skill and level of the business operator, consumer demand, specific business opportunities (eg. a particular area has a very niche market for something), and the amount of capital required.

What determines how much is produced?

The level of consumer demand for the product/ service.

What determines how to produce?

How to combine inputs in order to create outputs, the relative efficiency of the four factors of production, and the entrepreneur’s business plan.

What are the goals of a firm?

Profit maximisation, meeting shareholder expectations, maximising growth, increasing market share, and “satisficing”.

What is profit maximisation?

It is the greatest profit possible, or the smallest loss possible. It is the main goal of most firms, and is calculated as the difference between the firm’s total revenue and cost of production.

What can profit maximisation lead to?

Economic growth, employment, regional development, infrastructure development and productive capacity

What is satisficing?

Pursuing a satisfactory level in all goals rather than maximising a single goal.

What is productivity?

The quantity of goods and services an economy can produce with a given set of inputs.

How is productivity measured?

Output per unit of input per unit of time. Often measured as labour productivity or multifactor productivity.

What are the benefits of high productivity?

Higher standards of living, less wastage of resources, lower production costs and higher profits, lower inflation rate, higher income and improved international competitiveness.

What is production?

The total amount of goods and services produced.

What are the outcomes of increased production?

This allows a firm to satisfy a greater number of needs and wants using the same resources.

How is productivity increased?

Production proportionality must be increased more than the increase in inputs of resources. This stimulates an increase in outputs per unit of inputs.

What are a few ways productivity can be increased with few additional inputs?

Specialisation, division of labour, location of industry and large scale production.

What is specialisation?

One of the most common was to increase productivity. It includes using the factors of production more intensively for a smaller number of production processes.

What is division of labour?

A person is trained to do one specific thing.

What is location of industry?

A number of businesses producing similar goods and services congregate in the same area to reduce production costs by sharing common infrastructure.

What is large scale production?

When a business grows so large they can use highly specialised capital. This is also known as an “internal economy of scale”.

What are internal economies of scale?

The cost advantages that are a result of a firm expanding its scale of operations. Economies of scale are achieved when average costs per unit of production falls as output increases.

State the formula for technical optimum:

Per unit costs of production = Average cost (AC) = Total Cost (TC) ➗Quantity (Q)

What are internal diseconomies of scale?

The cost disadvantages faced by a firm as the result of a firm expanding its scale of operations beyond a certain point. Generally related to management problems. As the size of the business grows, management may become inefficient in organising all areas of production. When this happens, the firm is above technical optimum.

What are external economies and diseconomies of scale?

The advantages/ disadvantages that occur to a firm because of external factors. An example is the growth of the industry that the firm is operating in, but no changes in the actual firm’s operations.

What are some things that may cause internal diseconomies of scale?

Management may lose touch with the day-to-day running of the firm, allowing inefficiencies to occur, larger firms may experience more regulations, problems may arise within the staff as management no longer knows everyone personally (less aware of problems arising between staff), and there is a general decrease in managerial and administrative efficiency.

What are some things that may cause internal economies of scale?

Specialisation of labour, ability to invest in high quality, efficiency driving capital, raw materials can be purchased in bulk, resources can be put towards research and development, and can pay for high quality labour and the training of their labour force.

What is investment?

The purchase of new capital to increase production in the future.

What is technology?

“New” information/ knowledge.

What is ethical decision making?

Considering the impacts production has on society (rather than just considering profit maximisation).

What are the impacts of technology on production?

Makes production costs lower, less labour intensive, and more efficient.