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