Unit Four

What is growth?

Economic activity is the amount of buying and selling that goes on in a country over a particular period of time

GDP is the total value of output produced in an economy in a year

Economic growth is the percentage increase in GDP per year

Economic growth can be increased by increasing output by purchasing more resources or using existing resources more efficiently. Resources include:

• Land
• Labour
• Machinery

An investment is when a business spends money on improving the number or quality of their resources.

Physical capital investment - Spending on new assets such as factories or machinery which enable a firm to produce more output

Human capital investment - Spending on training and education which allows workers to be able to produce more output in the future

The government can contribute in economic growth by encouraging investments through reducing taxes on profits and providing grants. The government can also improve the resources that it owns, allowing firms the ability to produce more such as improving transport infrastructure. Infrastructure is a major limiting aspect of economic growth in LEDCs.

Does growth increase the standard of living?

Standard of living is the amount of goods and services a person can buy with their income in a year.

Economic growth > GDP rises > Average standard of living rises

GDP per capita is the value of output produced by a country in a year divided by the population of that country.

Problems using GDP:

• Distorted GDP when population of the country is small
• GDP assumes that everybody in a country is equal

Income inequality is where there is a difference in income between different groups of people within a country

Alternative to GDP:

• Quality of life- An individual’s overall sense of wellbeing. It can be measured by health, education or the amount of goods and services a person buys
• Infant mortality rates- The percentage of those who do not survive past their fifth birthday
• Life expectancy- Average age which people are expected to live up to
• Literacy rates- Percentage of adults who are able to read and write

Can growth be bad?

Negative externalities:

• Congestion
• Non-Renewable resources being wasted
• Waste
• Pollution

Can growth be sustainable?

Sustainable economic growth - An increase in GDP which minimises negative externalities faced by future generations

Renewable resources - Resources that are not limited in supply and are naturally replaced in the environment (such as solar)

Energy from Renewable resources are generally more expensive

A CSR report is expected by businesses. Arguably businesses treat their shareholders better in an attempt to add value and charge more for their products (Green wash).

Ethical responsibility - Where a business takes a moral stand point and ensure that its behaviour does not impact stakeholders in a negative way

What can the Government do?

What the government can do to change behaviour:

• Taxes (price of product rises, demand goes down)
• Subsidies (price of product goes down, demand goes up)
• Legislation (laws passed by the government. Legislation can cause the restriction or ban of production of something considered ‘bad’. Those who break the rules are punished)
• Regulation (A set of rules imposed to govern the way something is carried out)

Internalising an externality - Turning an unconsidered external cost into a considered private cost which is paid in money. Example includes making the driver of a heavily polluting vehicle pay more tax.

If a business’s costs increase they can pass the cost increase to the consumer or try and increase efficiency by cutting costs elsewhere.

Unit Three

How do businesses grow?

A business grows when it sells more goods and services in one time period than a previous period. Growth enables a business to:

• Increase profits
• Increase market share (having more control in a market may force rivals out of business)
• Take advantage of economies of scale (larger businesses can achieve lower average costs)

Internal growth - A business increases in size by selling more goods/services

How?

• Changing the marketing mix
• New product development

External growth - A business grows in size due to merger or takeover

• Horizontal integration - Acquisition takes place between two businesses at the same stage of the production process
• Backward vertical integration - Two businesses at different stages of the chain of production joining together (e.g. Body Shop buying the farms which produced the natural ingredients for their products)
• Forward vertical integration - A business joins with another which is further forward in the chain of production
• Conglomerate merger - Two businesses join together which have no common business interest

Disadvantages of external growth:

• Job losses
      o      Costs are saved by closing facilities which are duplicated (e.g. Head Offices)
• Combined business may lead to the loss of identity for individual businesses.

Why do businesses grow?

Why?

• Survival
• Larger returns for owners
• Economies of Scale
• Spreading the risk

Bulk-buying economies - When businesses can gain discounts on large orders from suppliers

Technical economies of scale - Reduction of average cost of production due to the use of more advanced machinery

Market power - A measure of the influence of a business over consumers and suppliers. Linked with market share. If you’re in a monopoly, you can increase prices knowing customers wouldn’t shift as there isn’t an alternative. Can also pay less to small suppliers, as the small suppliers need them.

Diseconomies of scale include:

• Communication within the business can become more problematic
• Workers may feel alienated feeling that they are only a small cog in a large wheel
• Large firms may lose their ability to adapt quickly to changes in the market

ICT is helping to avoid some of the communication issues.

Monopoly

Monopoly - A business which has a market share of 25% and therefore can influence the market
It is good for the business as they have market power and therefore their sales and profits are likely to be higher than if there was competition. It is bad for consumers as they may have to pay more

Disadvantages of a monopoly:

• High prices
• Less choice
• Excessive profits made by the business

Advantages of monopoly:

• Potentially cheaper prices if larger businesses negotiate lower prices for their raw materials and components (bulk buying economies of scale)
• Development of new products (more money for patents)
• Natural monopolies- One large business can supply the market with products at lower costs than if the market was supplied by many producers
• Better having one set of pipes for a water supply service than many different companies putting their pipes down

Can a big business be controlled?

The Competition Commission investigates mergers, markets and regulated industries. They can block mergers, force companies to sell off assets and make changes to the way markets operate. Any monopoly is subject to investigation by them.

Regulators are independent bodies set up by the government to monitor and regulate business activity. Each industry is assigned a regulator (e.g. Office of Rail Regulation). Only really interested in monopolies.

Regulator monitors:

• Prices
• Quality of service provided
• Seeing that the business is acting in public interest

A business can self-regulate where an industry body made up of representatives from businesses within the industry monitor the actions of members to ensure rules and guidelines are followed.

Pressure group: An organisation which aims to influence the decision of businesses, government and individuals.

Unit Two

Ways in which success can be measured

• Profits, however may give false impressions. £1 million profit sounds good but if £100 million worth of sales then it is pretty poor (only 1% profit)

• Market share - (The quantity sold by a business / Total sales in the market)*100

• Competitiveness - The strength of a business position in the market based upon market share and profit. It reflects whether people are prepared to use the business over its rivals.

• Competitive advantage - Advantage a business has over its rivals which help to win customers. The advantages should be difficult to copy (defensible) and unique (distinctive)

• Social success - Performance of a business, taking account of social, environmental and ethical factors

• Corporate Social Responsibility (CSR) Report - Gives details of the costs of a business’s activity on society and the environment and the measures they are taking to reduce these costs

Business failure

Businesses fail when the revenue they earn from sales cannot cover the costs of production. The business gradually becomes insolvent where they do not have sufficient funds to pay expenses and therefore cannot continue to trade.

Causes of Business failure:

• Cash flow, Credit terms - Payments do not need to be made for 30 to 60 days however costs such as wages need to be paid up front
• Lack of competitiveness
• Change in demand
• Failing to get the marketing mix right
• Productivity, or Business efficiency

Productivity - Measure of output per worker or machine per period of time

Changing demand:

• Falling income
• Changing taste and preferences
• Fashions
• Advertising
• Competition

What problems does the economy face?

Changing demand - Demand refers to the amount of spending that takes place in the economy. The level of demand in the economy may change due to:

• The level of economic activity (depends on buying and selling that takes place in an economy)
• Interest rates
• Consumer confidence
• Demand from foreign customers

Interest rates - High interest rates = cost of borrowing is high. This may put off those thinking of taking out a loan, which is important for expensive items such as cars. Households with a mortgage are also affected.

Families may have more or less disposable income which may affect how much they spend.

Consumer confidence -  The measure of how prepared consumers are to spend money.  If unemployment was rising then people would have less consumer confidence as they would believe their job is under threat.

When the economy is doing well, people may be prepared to spend money on items regarded as luxuries such as new cars.

Inflation - Measures the change in the average level of prices in an economy. Measured using CPI (Consumer Price Index) which  compares the price of a typical  basket of goods in one time to another time period.

Inflation may be caused by:

• Rise in costs of production being passed on to the consumer at higher prices. Due to;
      o Rising raw material prices
      o Higher wage costs
      o Increase in the process paid for imported goods
• A rise in the level of demand in the economy- especially when supply is unable to keep up
      o Rising wages
      o Increased customer confidence

External shock: An unanticipated change in demand or inflation caused by factors beyond the control of the country e.g. Increase in oil prices

Internal shock: An unanticipated change in demand or inflation caused by factors within the country. For example a drought causing wheat prices to increase which would disadvantage consumers and business which use wheat.

Unemployment can be measured using:

• Claimant Count (monthly count of those claiming unemployment benefits)
• Labour Force Survey (measure based on a monthly survey to identify who is seeking work)

Costs to an individual of unemployment:

• Lower level of income > lower standard of living
• Loss of self-esteem
• Losing skills
• Family break-up

Costs to society of unemployment:

• Less Tax revenue to the government
• Cost to government for benefits
• Crime
• Impact on other businesses

Exchange rates

Changes due to supply and demand. If Britain increased their rate of interest, the demand for pounds would increase as foreign investors would convert their currency to pounds to save in the UK banks which now have had higher interest rates. The increase in demand would mean the exchange rate of the pound increases.

Unit One

In economics, the major problem is scarcity of resources where resources are limited in supply e.g. raw materials, time.

Trade-off: The selection of one choice results in the loss of another

Opportunity cost: The loss of the next most desired alternative when choosing a particular course of action

Price sensitivity 

A service/product is price insensitive when changing the price, leads to a small change in demand. Reasons for price insensitivity include:

• It’s a necessity
• Few substitutes
• Only takes up a small proportion of an individual’s finance

Stakeholders

Stakeholder - Groups interested in the performance of a business

Shareholders - Owners of a limited company. Shares bought represent part ownership of the company.

Competition Commission - The body which investigates when firms merge or are taken over. They decide whether such activity is in the public interest. It can prevent merges or take-overs where these are seen to reduce the level of competition.

Dividends - Payments made to shareholders from the profit of a company.

Examples of stakeholders:

• Shareholders
• Workers
• Customers
• The Government
• Local community

Externalities

Third party - Groups or individuals who are not directly involved in a decision/action

Externalities - Effect of an economic decision on individuals and groups outside who are not directly involved

Negative Externalities - Costs arising from business activity which is paid by people of organisations outside the firm

Positive externalities - Benefits arising from business activity experienced by people/organisations outside the firm. The firm do not receive a payment for the benefits received.