Complete Business & Economics Unit 2B Revision

Complete Business & Economics Unit 2B Revision

Quick Recap Notes On Unit 2BAS Level

2.3.1b How Businesses Respond To Their Markets


The Nature of Markets

• Dynamic markets are constantly changing. • Markets are dynamic as they are shaped by

market forces.• New Substitutes: factors that affect demand

include:1. Changes in tastes and fashions2. Advertising 3. Branding4. New Technologies

2.3.1

Allocation of Resources

• Resources Include:1. Land: raw materials and the land itself.2. Labour: human input.3. Capital: used to produce something (equipment)4. Enterprise: combining all factors above. • Free Marketing Economies are those which have

no inference from outside agencies and the forces of demand and supply are allowed to operate freely.

2.3.1

Profit Signalling Mechanism

• Profit Signalling Mechanism is the feedback loop that controls the allocation of resources in an economic system.

• Consumer Sovereignty is when the desires and needs of the consumer determine the output that is produced.

• Markets are Competitive. Factors that effect competitiveness for businesses include:

1. Product Differentiation2. New Technologies3. Innovation

2.3.1

Changes in Demand & SupplyChanges In Demand Changes In Supply

Change in tastes and fashions Taxation

Advertising Quotas

Branding Subsidies

New Technologies Bad/Good Harvest of Raw Materials

Demand Shift to the

left

Demand Shift to the

right

Supply Shift to the

Right

Supply Shift to the

left

2.3.1

Price Elasticity of Demand

• Price Elasticity of Demand (PED) measures the responsiveness of quantity demanded to a change in price.

• PED = % Change in Quantity Demanded % Change in Price

2.3.1

Name What it Means Numerical Value

Price Elastic A change in price causes a greater change on QD.

Beyond -1

Unitary Price Elasticity A change in price causes the same change on QD.

-1

Price Inelastic A change in price causes a smaller change on QD.

Between 0 and -1

The Impact of PED

• Marketing can make goods inelastic. Prices may be changed by businesses in order to impact costs or act on competitors actions.

• Branding can make a company’s goods more price inelastic. This will allow them to increase prices without affecting quantity demanded significantly.

• Total Revenue can be dramatically impacted by changing prices, depending on the elastic or inelastic nature of a product.

2.3.1

The Impact of PED

• Factors that affect the degree of price Inelasticity include:

1. Branding2. Substitutes3. Whether it is a Luxury or Necessity 4. Consumer Loyalty5. Income 6. Time Scale

2.3.1

Income Elasticity of Demand

• Income Elasticity of Demand (PED) measures the responsiveness of quantity demanded to a change in income.

• PED = % Change in Quantity Demanded % Change in Income

2.3.1

Name What it Means Numerical Value

Income Elastic A change in income causes a greater change on QD.

Greater than 1

Unitary Income Elasticity A change in income causes the same change on QD.

1

Income Inelastic A change in income causes a smaller change on QD.

Between 0 and 1

Impact of Income Elasticity

• Normal Goods are those which experience an increase in demand if income or the economy increases. These goods are popular in an economic high (such as branded products).

• Inferior Goods are those which experience a decrease in demand if income or the economy increases. These goods are popular in a recession (such as supermarket own brand products).

• Luxury products are income elastic and have high positive values.

• Necessities are income inelastic and have low positive values.

2.3.1

Marketing• The Marketing Mix is tactics or strategies used by companies to promote

and sell products. This consists of the 4 P’s: • Price is more important when entering a new, competitive market and

less important if there is little competition or strong branding.• Product is more important when quality or reliability is essential, to

differentiate from competition and in high tech markets. It is less important if selling standardised or mass market products.

• Promotion is more important when a product is new, sales are falling and competition is high. It is less important if there few competitors and consumers are aware of the product.

• Place is more important when launching new products or when consumers need to see and be aware of products. It is less important as the Internet has made a physical place less important.

2.3.1

Non-Price Competition

• Some markets, such as oligopolies, adopt non-price strategies in order to develop a brand that appeals to consumers instead of relying solely on price. Examples of non-price competition include:

1. Branding2. Product Design3. Advertising4. Consumer Loyalty

2.3.1

Micromarketing

• Micromarketing is the marketing of products or services designed to meet the needs of a very small section of the market.

• Originally this was applied to small businesses operating in niche markets.

• It is an effective technique for small companies to build and sustain and grow their own brand.

2.3.1

Marketing Ethics

• Marketing Ethics means applying standards of fairness and morality to marketing decisions and strategies.

• Corporate Social Responsibility (CSR) is a business policy that ensures a business will act responsibly and ethically within a market and how they may achieve this.

2.3.1

Marketing is Good Marketing is Bad

Informs consumers about products they may want.

Designed to manipulate consumer behaviour

Informs consumers about products they do not know about.

Encourages to consume products that are not good for you.

Helps make rational choices. Misleading, makes rational choices harder.

Helps markets operate efficiently and increases consumer sovereignty.

£20bn could be better used in economy.

2.3.2b How Does Market Structure Affect Business


Competition & Markets

• Competition is beneficial for markets as it allows the mechanism to operate freely and allocate resources efficiently.

• Price competition is likely in competitive markets as companies try to capture market share, and lower prices by doing so.

• Non-price competition is also used in markets where there are high barriers to entry (oligopolies) as companies rely on branding and consumer loyalty to gain market share.

2.3.2

Efficiency

• Technical Efficiency is when production is taking place at the minimum average costs.

• Allocative Efficiency is when resources are used to yield the maximum benefit to everyone.

• Factors that interfere with the workings of a market are described as market imperfections, these include:

1. Barriers to entry2. Government intervention3. Imperfect knowledge

2.3.2

Barriers to Competition• Barriers to Entry are factors that prevent a business from entering a

market. Collusion is when businesses agree with each other not to compete. This is illegal.

• Companies use product differentiation and branding to become unique compared to competition, allowing them to charge premium prices. This allows them to have some degree of control over prices.

• Factors preventing barriers to entry include:1. Established brand reputation2. Large well established businesses3. Strong brand loyalty4. Patents5. Collusion between existing firms6. Retaliation from existing firms

2.3.2

Pricing Strategies

• Price Takers can only charge the going rate within the market.

• Price Makers have the ability to choose from different pricing strategies.

• If there is little competition, large firms are able to push up prices as consumers have no cheaper alternatives.

2.3.2

Changing Nature of Markets

• Technological Change has impacted the way markets work, especially the rise of the Internet as a market itself.

• Online Retailing is when commercial transactions are conducted electronically over the internet.

2.3.2

Consumers Businesses

Greater convenience

Reach global market

Greater choice Online sales add to existing sales

Access to new products & services

Expand beyond physical limits

Price transparency

Consumers Businesses

Not all consumers can or will use it

Increase competition globally

Risk of fraud Greater consumer knowledge leads to price decrease

Positives Negatives

The Long Tail

• The Long Tail shows how online retailing has created a new kind of market. As there are no physical constraints involved in retailing, companies can offer a range of specialist products to niche markets alongside bestsellers, which have a mass market.

• No storage constraints.• Revenue from niches can outweigh bestsellers.• Internet encourages specialised creativity, leading to

more consumer choice.

2.3.2

The Long Tail2.3.2

Market Structure

• A Market Structure is how many businesses are within a market and how they relate to one another.

• Factors that can affect competition and profitability within the market include:

1. Number of businesses2. Amount/Type of competition 3. Nature of product4. Degree of power each company has5. Degree of power consumer has6. Extent to which price or output can be influenced7. Profit Levels8. Pricing strategies9. Non-price competition 10. Barriers to entry and exit11. Impact on efficiency

2.3.2

Spectrum of Competition• The closer a market is towards monopoly, the less competitive it

becomes. • The closer a market is towards perfect competition, the more

competitive it becomes. Perfect Competition is a market situation where many small firms sell the same product. Imperfect competition include all market structures excluding perfect competition.

• A Duopoly is when two large firms dominate the market. • A Pure Monopoly is when one first has 100% of the market and no

other firms exist.

2.3.2

Market Power• Normal Profit is the level of profit that covers only the production

process and no more. Abnormal Profits are profits over and above normal profits.

• The closer a market gets towards a monopoly, the greater the level of abnormal profit. The greater the barriers to entry, the greater the level of abnormal profit. Monopoly power allows a company to:

1. Affect price levels. Either by charging premium prices or lowering them to take market share away from rivals.

2. Restrict output3. Affect outcomes in the market and dictate what happens.

2.3.2

Monopoly• A Monopoly is when there is one firm in the market and no other firms

exist (e.g. Water Companies) • A Legal Monopoly exists when a firm has 25% or more of the market. • A Natural Monopoly is when it would be wasteful for more than one

company to provide a service. • Monopolies have the ability to set price or output levels.• Prices tend to be high within a monopoly (premium prices). • There are considerable barriers to entry. • Consumer choice may be restricted.• Profits are higher than within competitive markets. • There is a danger of X-Inefficiency. This is when there is a lack of

competition within the market and the leading firm has little or no incentive to control costs or resource use.

2.3.2

Oligopoly• An Oligopoly is when few large firms dominate the market and

account for 60% or more of market share (e.g. Energy Market) • Oligopolists have considerable monopoly power.• This market is characterised by non-price competition (branding). • Price wars in markets can damage profit levels. • There is a danger of collusion. • There are high barriers to entry. • Abnormal profits will be made. • Oligopolies may adopt Predatory Pricing strategies in order to

undercut competitors, charging prices that they cannot compete with. This is illegal as it is an anti-competitive practice.

• The Concentration Ratio measures the extent to which few large firms dominate the market.

2.3.2

Monopolistic Competition

• A Monopolistic market is where there are many firms in the market offering slight differentiated products and all competing with each other (e.g. Hairdressers).

• There is product differentiation • There are many producers and consumers in the market.• Consumers aware of price and non-price differences

among competitors’ products. • Relatively low barriers to entry and exit. • Producers have some control over prices. • Firms make some abnormal profits.

2.3.2

Perfect Competition

• Perfect Competition is a theoretical idea that defines the greatest possible degree of competition.

• The product is homogenous (suppliers sell identical products e.g. fruit).

• There are many buyers and sellers• Firms have no control over price. They are price takers. • There are no barriers to entry or exit. • There is perfect knowledge. Consumers and suppliers

know about everything that happens.• Only normal profit is made.

2.3.2

Monopoly & Competition2.3.2

Perfect Competition Topic Monopoly

More Competitive Less Competitive

More Number of firms Fewer

More intense Competition Less intense

Lower Prices Higher

Less Profits Greater

Less Market Power Greater

Fewer Barriers to Entry Greater

Less Monopoly Power Greater

Greater Consumer Power Less

Greater Consumer Choice Less

Greater Efficiency Less

Oligopoly & Competition

• A Contestable Market are those where entry is enough enough for abnormal profits to attract newcomers.

• If profits within the market rise, new entrants will appear and increase competition.

• Existing firms will try to avoid charging high prices in order to stay ahead of competition. This is good for consumers as they are reasonably well protect from escalating prices.

2.3.2

2.3.3b What Makes Firms Effective?


Organisational Structure

• Corporate Culture covers all the attitudes, customs and expectations that influence the way decisions are made within a business.

• Effective structure make working conditions better. Communication will be improved whilst flexibility and creativity allow the company to improve their efficiency and productivity.

2.3.3

Hierarchical Organisations

• A Hierarchy shows the layers of management in an organisation.

• The Chain of Command is the sequence of authority down which instructions are passed.

• The Span of Control is the number of subordinates directly answerable to a manager.

• Delayering is reducing layers of management in an organisation to create a flatter structure.

2.3.3

Hierarchical Organisations2.3.3

Organisation A could be described as a Tall organisational structure. These have a long chain of command and a narrow span of control. This is often associated with an Autocratic leadership style.

Organisation B could be described as a Flat organisational structure. These have a short chain of command and a wide span of control. This is often associated with an Democratic leadership style.

Organisational Structure2.3.3

Tall Structures Flat Structures

Narrow span of control means employees can be closely supervised

Better communication between managers and workers

Clear lines of authority and control

Better motivation as workers enjoy responsibility

Clearly defined roles and responsibility

Less bureaucracy and quicker decision making

Clear promotion paths

Reduced costs with fewer managers.

Specialist managers

PositivesTall Structures Flat Structures

Freedom and responsibility of employees is restricted

Employees not strictly controlled, some may abuse this

Bureaucratic May limit growth

Decision making slower as communication passes each layer

Roles and responsibilities become blurred

Expensive, managers get paid more

Negatives

Changing Structures

• Matrix Management is when individuals are assigned to teams according to their specialism and work on a particular project. This encourages teamwork, empowerment and creativity whilst also giving flexibility.

• Entrepreneurial Structures are similar to a matrix system but on a smaller scale. They suit businesses where there is an entrepreneur at the center.

• Decentralising is moving decision making away from the central head office and spreading it throughout the organisation.

2.3.3

Changing Structures2.3.3

Advantages of Decentralisation Disadvantages of Decentralisation

Senior managers concentrate on most important decisions

Lack of clear accountability

Decision making is a form of empowerment which can increase motivation

Service may lack consistency

Those lower in the hierarchy have a better understanding of customers, making decisions more effective than senior managers

Employees may not want extra responsibility

Local managers react faster to changes

Motivation

• Delegation is giving more individuals responsibility for making decisions.

• Consultation involves discussions with employees about working methods and practices.

• Empowerment is used to describe how employees can make independent decisions without consulting a managers.

• These measures could be applied to give employees improved motivation, which is key for productivity.

2.3.3

Raising Output & Quality• Team Working is when employees are organised into teams that

share responsibility and decision making. • Job Enrichment is giving employees meaningful tasks rather than

boring, repetitive fragments of work.• Flexible Working is an arrangement that allows employees to have a

more variable work schedule. • Total Quality Management (TQM) is when employees are involved in

quality control and take responsibility for the quality of their and their team’s work.

• Cell Production is splitting processes into areas where teams can be accountable for each part of the process.

• Multiskilling involves training so that workers can undertake a range of different tasks.

2.3.3

Increasing Productivity

• Productivity is a term given to the process of combining inputs to produce products.

• Physical Capital refers to tools and machines that enable labour to be more efficient and productive.

• Human Capital refers to the skills of the workforce. Education and training improves these skills.

• Organising resources more efficiently is important as it can increase productivity.

2.3.3

Capital & Labour Intensity

• Capital Intensive production uses large amounts of capital and relatively little labour.

• Labour Intensive production uses large amounts of labour and relative little capital.

• As markets are dynamic, businesses must adapt their resources to yield the maximum possible benefit. Factors that may be affected by dynamic change include:

2.3.3

Capital Labour

Tools and machinery become obsolete Skills may no longer be needed

Failure to upgrade could lose the company’s competitive advantage

New investment in human capital needed

New investment in capital needed Retraining is needed

Capacity Utilisation

• Capacity Utilisation measures what proportion of the theoretical maximum output is actually produced.

• It is calculated by: Current Output Maximum Possible Output• Under-Utilisation of Capacity is that productivity is

lower than it could be and average costs are likely to rise.• Over-Utilisation of Capacity means that a business is

trying to produce more than its capital equipment was designed for. This can lead to an increase in average costs and that the business are not as competitive as they could be.

2.3.3

x 100

Capacity Utilisation

• Ways to reduce under-utilisation of capacity include:1. Extend the product range2. Find new markets3. Increase demand by promotion4. Rent excess capacity to other businesses5. In the long run, close excess capacity (e.g. sell property or

machines and make workers redundant) • Ways to improve over-utilisation of capacity include: 1. Identify and tackle bottlenecks and shortages2. Outsource or sub-contract production to other businesses3. In the long rung, invest in increased capacity

2.3.3

Lean Management

• Lean Management is a general term given to any system of production that tries to minimise costs during the production process. The different lean management methods include:

1. Just-In-Time (JIT)2. Kanban3. Kaizen4. Time-Based Management5. Total Quality Management (TQM)6. Cell Production7. Job Enrichment & Empowerment

2.3.3

Just-In-Time

• JIT is a stock control system that does away with the need to hold large quantities of stocks or raw materials.

• Frequent delivers of small quantities of supplies are made as and when they are needed. This reduces average costs, increasing competitiveness.

• This means it is no longer necessary to hold large reserve stocks which are expensive to buy and store.

2.3.3

Advantages of JIT Disadvantages of JIT

Reduced costs in terms of buffer stocks and handling

Will not benefit from reduced unit costs for bulk purchases

Less need for storage space Heavy reliance on reliability of supplier

Greater flexibility in responding to changes in demand

If there is a break in supply, production will be lost

Kanban & Kaizen• Kanban is the idea that production takes place only after an order

had been placed. 1. This reduces wastage 2. Does away with the need for holding pre-made stocks. • Kaizen is the Japanese word for continuous improvement. 1. These improvements seem small but when spread throughout the

business, add up to a continually improving product or service. 2. Customers benefit from a better quality product3. The Zero-Defects policy means waste is minimised, reducing

overall costs. • Time-Based Management involves minimising product

development lead times.

2.3.3

Lean Production2.3.3

Advantages of Lean Production Disadvantage of Lean Production

Reduces wastage and related costs Does not suit all production processes

Reduces costs of storage and handling Failure by one small supplier halts the entire production process

Improves quality Workers may dislike greater responsibility

Fewer reject costs Managers may not be flexible enough

Customers more satisfied with quality

Greater flexibility

Shorter lead times

More motivated staff

Less staff turnover

2.3.4b Businesses Big and Small


Business Expansion• The following factors influence business expansion: 1. Sales turnover and profit. Most businesses exist to make profits and

to increase them.2. Market share. Increased market share leads to increased turnover,

profit and power. 3. Market power. Market leaders can have a degree of control over

prices and marketing strategies. 4. Monopoly power. This will allow companies to influence price or

output levels.5. Monopsony power. This gives firms the ability to dictate prices and

terms with suppliers, driving down costs.6. Possible advantages of economies of scale. Leads to a fall in average

costs.

2.3.4

How Businesses Grow

• Organic Growth is when a firm grows using its own resources without taking over or merging. This growth comes from expanding output and sales.

• Inorganic Growth is when a firm grows by joining another film by merging or taking over. This, combined with organic growth, can lead to industries turning into oligopolies.

• A Merger is when two firms join into a single business with approval from shareholders and managers concerned.

• A Takeover occurs when one firms bids for another and secures over 50% of shares.

2.3.4

Why Merge?

• Increasing efficiency can lead to falling costs and increased productivity.

• Economies of Scale lead to falling average costs. • Sharing Overheads leads to saving money are there is no

duplication of management. • Reducing competition can lead to the ability to change

higher prices. • Increased market power for defensive reasons to capture

market share from leading firms. • Acquisition of Assets, Patents and brand names, improving

brand image from loyal consumers.

2.3.4

Mergers

• Synergy is when two firms work together as they are able to increase efficiency and grow father than they would have as separate firms.

• Complementary Strengths are strengths gained when joining with another firm to make them more complete as a whole.

• Diversification is when businesses from different markets help to spread risk when joined together.

2.3.4

Economies of Scale

• Economies of Scale occur when average costs fall due to the increase in the size of a business.

• This is good as they can keep prices as they are and gained increased profits, which can be reinvested into the business to generate more growth.

• The business could also drop prices and maintain profit levels, but gain a competitive advantage over rival firms.

2.3.4

Economies of Scale

• Technical Economies is when the larger a business gets, the easier it is to make use of specialist equipment and machinery.

• Marketing Economies is when a businesses gets larger, marketing costs can be reduced as fixed costs are spread over a wider target market.

• Managerial Economies occurs when larger businesses can afford to use specialist managers with particular skills.

2.3.4

Economies of Scale

• Financial Economies occurs when the increasing size of a business makes it able to negotiate better prices for inputs. Bulk buying means average costs per unit can be reduced. Larger businesses can also secure better terms when negotiating loans and finance as they are less risky.

• Risk-Bearing Economies is when a business gets larger, it is likely to have diversified to supply more to one market. This spreads risk as the company is not reliant on one product or market.

2.3.4

Minimum Efficient Scale

• The Minimum Efficient Scale is the lowest level of output where costs are being minimised.

2.3.4

Diseconomies of Scale

• Diseconomies of Scale is the level of output at which further increase in size begin to increase average costs as inefficiencies set in. There are possible reasons as to why this may happen:

1. Effective communication becomes difficult as the size of a business grows.

2. Managing and coordinating a larger organisation becomes harder as it expands.

3. Flows of information can be slow or lost. Employees can become to feel de-motivated.

2.3.4

Market Power

• Monopoly Power brings the ability to:1. Influence price levels. Either by charging

premium prices to increase profit margins or reducing them to capture market share from smaller rivals.

2. Restrict output, driving up prices.3. Affect outcomes in the market through the

use of marketing (advertising and branding).

2.3.4

Market Power

• Monopsony Power tends to go hand in hand with monopoly power. As there is a dominant buyer in the market, this gives them power to dictate prices and terms with suppliers.

• Monopsony power is often exerted when a large firm deals with a smaller supplier.

2.3.4

Stakeholders2.3.4

Stakeholder Advantages Disadvantages

Shareholder Yield greater profits and dividends X-inefficiency can lead to a fall in profits and dividends

Too much power can trigger an investigation

Customer Cost savings from economies of scale may be passed on as lower prices

Lack of competition could lead to higher prices

High profits could be reinvested to produce innovative new products

Restricted choice as well as a decline in quality

Employees Higher sales revenue may lead to increased wages and promotion prospects

Terms and conditions may deteriorate if there is no competition

Greater job security

Competitors X-inefficiency my harm competitors reputation and performance giving firms a chance to increase market share

Unable to compete effectively

May have to leave the market

Suppliers Contracts to supply big companies become lucrative

Contracts can be lost without warning

Prices can be forced down by monopsony power

Monopsony power impact on stakeholders:

Small Business Objectives

• Small firms are becoming increasingly popular, some reasons include:

• Easy to set up and run. They do not require complex legal structures that larger firms need.

• Profit satisficers means owners want enough profit to keep them happy, but no more.

• Limited Market may limit the size of the business. • Niche provider allows niche markets to be exploited

by charging premium prices.

2.3.4

Small Business Objectives

• Greater flexibility can be a source of a competitive advantage as they can react quickly to change.

• Personal Service can only be applied to niche markets as larger firms have to used standardised procedures.

• Better communications with staff and customers can lead to increased motivation, efficiency and greater consumer loyalty.

• Technology has allowed smaller firms to flourish, such through the Internet and e-tailing.

2.3.4

2.3.5b An Uncertain Future


Uncertainty

• Uncertainty exists when the outcome of a particular situation is impossible to predict. Some sources of uncertainty include:

• Markets are dynamic, rivals will be trying to take away market share.

1. Marketing tactics, price reductions, promotions by rival firms

2. Innovation can lead to firms production new versions or new products

3. New firms may enter the market

2.3.5

Uncertainty

• The economy is always changing, impacting macroeconomic factors that will impact the trading environment.

1. Business cycle, fluctuations in GDP and growth of the economy affect spending.

2. Unemployment affects income, confidence and spending.3. Inflation can impact international competitiveness.4. Exchange rates fluctuate causing problems for imports

and exports. 5. Interest rates may change, affecting consumer spending.

2.3.5

Uncertainty

• The government exerts control over an economy. 1. Direct and Indirect taxation can impact income and

spending.2. Government spending may affect businesses who

rely on funding. 3. Laws and regulations can restrict freedom of trade. 4. Trade negotiations can affect businesses 5. The EU can use legislation that affects UK

businesses.

2.3.5

Uncertainty

• Geopolitical events are a mixture of political and geographical impacts that can affect trade and economies.

1. Supplies of raw materials can be disrupted2. Access to markets controlled3. Protectionism can reduce demand4. Raw materials and rise in price is production is

reduce by geopolitical events5. Prices of raw materials can increase by rising

demand.

2.3.5

Shocks

• Shocks are unexpected events that happen suddenly and without warning.

• Businesses have to adapt when unexpected events affect demand. Government intervention may affect business, such as an increase in tax that reduces demand.

• Competition Laws are also in place to protect consumers from companies exerting too much control. This includes preventing mergers that increase too much market share, which would reduce consumer choice.

2.3.5

Business Problems

• Uncertainty can be a problem for various reason, including:

1. Increased risk2. Disruption to planning3. Diverts resources away from core activities of a

business4. Expensive to cope with. Capital is needed to keep

competitive with rival’s innovation.5. Managers may find solving problems stressful. 6. Reduces profitability

2.3.5

Reducing Uncertainty

• Market Research gives a company greater understanding of a market. The better equipped a business will make it easier to deal with changes within the market.

• Good market research will make it easier to target consumers. This will make it harder for rivals to take market share away.

• Actions of competitors may be easy to predict.• Trends and opportunities may be found in advance.

2.3.5


• Contingency Planning is having a plan in advance to ensure a business acts logically to an unexpected event.

• Helps planning in advance as it makes the firm think about potential problems.

• The business is ready can can save time and expense if an event occurs that they can solve.

2.3.5


• Research & Development by monitoring indicators can make it possible to predict the state of the economy and react accordingly.

• GDP growth figures can be used to understand what stage the economy is. Declining figures could indicate an economic downturn.

2.3.5


• Diversifying spreads risk over a wider area and ensures a business can secure sales in one area if another is falling.

• Collaboration between competitors may help to cut costs.

• Hedging can be used by importers to reduce the risk of exchange rate changes.

2.3.5

Risky Projects

• Risky ventures allow businesses to make higher profits. Though diversifying into new markets can be less risky, a more daring product line may have the ability to reap significant abnormal profits for a firm.

• Established firms can use their reputation to sell a product, and are therefore generally more secure and less risky.

2.3.5

2.3.6b how Does Macroeconomic Change Affect

Business?Quick Recap Notes On Unit 2B

AS Level

Economic Cycle

• The Economic Cycle described the fluctuations in the levels and rates of growth of GDP over a period of time. There are four stages within the economic cycle:

1. Boom: a time of rapid growth and expansion in the economy.

2. Downturn: the boom slows and the rate of growth decreases.

3. Recession: two consecutive quarters of negative growth.4. Recovery: positive growth returns.

2.3.6

Economic Boom1. Sales of income elastic goods will increase2. Sales of normal goods will rise3. Unemployment is low: consumers have more disposable income and

feel more confident4. Output of normal goods will rise5. Investment will be increased6. New businesses start up and others expand7. Sales on inferior goods will wall as consumers choose the substitute

normal good8. Output of inferior goods will fall9. Prices may rise as demand exceed supply10. Costs may rise as resources become scarce, increasing prices11. Rising inflation can cause problems for business

2.3.6

Economic Recession

1. Sales of income elastic goods will fall2. Sales of normal goods will fall3. Unemployment is high: consumers have less disposable income

and feel uncertain4. Output of normal goods will fall5. Investment will fall6. Businesses may fail and others cut back output7. Sales of inferior goods rise as they are the cheaper alternative for

normal goods8. Output of inferior goods will rise9. Prices may fall as supply exceeds demand10. Costs may fall as resources become plentiful, reducing prices

2.3.6

Inflation

• Inflation is a general rise in prices or the fall in the value of money. Inflation often causes problems, some of which include:

• Low confidence: the real value of savings are reduced.

• The nominal rate of interest may be less than the rate of inflation.

• Inflation makes those on fixed incomes lose out due to a fall in real income value.

2.3.6

Inflation

• Borrowing increases, putting people under pressure to pay back debts.

• Leads to uncertainty about the future.• Businesses become less competitive

internationally.• Depreciation in exchange rates can cause

uncertainty for exporters.• Skills shortages: occur when employers want to

recruit people who have scarce and valuable skills.

2.3.6

Unemployment• Unemployment refers to the number of people who are willing and

able to work but cannot find a job. • Structural Unemployment occurs when people have the wrong

skills for the employment on offer, or are in the wrong place to take up other employment.

• Cyclical Unemployment is caused by a downturn in the economic cycle.

• Frictional Unemployment consists of people who are between jobs.• Regional Unemployment is the rate of unemployment in different

areas throughout the UK.• Seasonal Unemployment occurs when employment is only

available at certain times of the year.

2.3.6

Cost of Unemployment

• Unemployment can be seen as an opportunity cost. The alternative would be employment, which would contribute to GDP.

• Direct cost to economy in terms of welfare benefits and financial aid that unemployed receive.

• The government receive little tax revenue and spend on benefits. The unemployed do not pay tax, therefore are not contributing.

• Areas of high unemployment can lead to social problems, such as housing, education and crime.

2.3.6

Effect on Businesses2.3.6

Rising Unemployment Falling Unemployment

Fewer people in work can lead to less demand for goods, reducing profitability

More people in work should generate greater demand for businesses, increasing sales and profitability

Income elastic goods see a big drop in sales as unemployment means less disposable income

Income elastic goods become popular as falling unemployment leads to more disposable income for consumers

Consumers switch from higher priced goods to cheaper substitutes

Sellers of cheaper substitutes may see sales fall as spending is switched to higher priced goods

Job vacancies easier to fill as the pool of available labour increases

Harder to recruit people as the pool of available labour shrinks

Wages may be static or decrease, reducing costs

Upward pressure on wages and employment expenses, leading to higher costs overall.

Structural Change

• Structural Change occurs when economies change over time. The patterns of demand change and we produce and consume different things.

• New technologies mean that more processes are mechanised and computerised, saving on labour costs

• Businesses outsource production to economies where labour is cheaper

2.3.6

Structural Change

• Geographical Immobility of Labour is when labour cannot move to areas where jobs are available.

• Occupational Immobility of Labour is when people do not have the necessary skills for the jobs that are available.

• Flexibility is key when dealing with change and the rise of the knowledge economy. Retraining will be needed to adapt to new trends in the market.

• The Knowledge Economy is where intellectual skills, knowledge, understanding and ideas are central to economic activity and more important than physical effort.

2.3.6

Adapting to Change2.3.6

Businesses The Wider Economy

More emphasis on research and development

Education becomes more important

Invest in new technology and communications

Retraining of those with non transferrable skills in necessary

The need to adapt to rapidly changing markets

Certain skills such as IT and science need encouraging

Employees need training and updating Investment in infrastructure is needed

Managers need to keep up with new developments

Intellectual property rights (IPR) need to be protected

New ideas will need protecting Areas of structural decline need investment and help

More competition domestically and internationally