Theme 1: Markets, Consumers and Firms
1,1 Scarcity, Choice and Potential Conflicts
1.1.1 The Economic Problem
1.1.2 Business objectives
1.1.3 Stakeholders (economic agents) and their objectives
1.2 Enterprise, Business and the Economy
1.2.1 Role of an entrepreneur in the economy
1.2.2 Entrepreneurial motives
1.2.3 Factors of Production
1.2.4 Specialisation
1.2.5 The Wider Economic Environment
1.3 Introducing the Market
The problem of scarcity
Choices and potential trade-offs
The importance of opportunity costs to consumers, producers and government
The Economic Problem: there are finite resources available to supply infinite or unlimited wants
this lack of resources creates scarcity
opportunity cost: the benefit lost (value) of the next best alternative forgone
choices need to be made so resources are allocated and used optimally
there is an opportunity cost for all decision made by economic agents
when producing goods, the economy has to consider the following:
What to produce?
How to produce?
Who to produce for?
trade-off: the range of alternatives that have been given up
Profit maximisation
sales maximisation
satisficing
Survival
market share
cost efficiency
return on investment
employee welfare
customer satisfaction
social objectives
operating at the price and output which derives the greatest profit
profit = total revenue - total cost
provides greater wages and dividends for entrepreneurs
occurs when MC=MR so each extra unit provides no loss or revenue
retained profits are a cheap source of finance - lower interest rates on loads
short run: owners and shareholders are most important as they aim to maximise gain from the firm - important for PLCs to keep them happy
long run: consumers don't like rapid price changes, provides stable price and output
the firm aims for the highest amount of sales by either value or volume - without making a loss
non-for-profit organisation may use this
AC = AR
used to sell the most products in order to gain market share so they can earn more profits in the long run - detering competition
this is earning just enough profits to keep shareholders happy
managers may do this as personal reward is small compared to shareholders
therefore keeping shareholders happy whilst achieving other objectives
occurs when there is a divorce of ownership and control
to continue to exist as a business
when consumer spending plummets, firms might have survival as their objective, until there is economic growth again.
most important short term objective
primary objective for new firms or those in difficult economic periods
might aim to sell as much as possible to keep their market position, even if it is at a loss in the SR
needs sufficient cash for every day expenses
the proportion of total market sales a firm has
firm A sales/market sales x100
helps increase the chance of surviving in the market, and it can be achieved by maximising sales
cost efficiency lowers average costs
allows the maximum value of outputs with the lowest value of inputs - supports profit maximisation
gives them a competitive advantage as lower prices
ensures they aren't competed out of the market by more efficient firms
to look after the physical and economic welfare of employees
motivated employees are more productive
increases loyalty to employer