Flashcards · 4EC1 · Topic 1.2

Business economics flashcards

34 cards on Topic 1.2, subtopics 1.2.1 to 1.2.6. Pick a subtopic or study them all.

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1.2.1 Production

The four factors of production: Land: all natural resources. Labour: human effort, mental and physical. Capital: man-made goods used to make other goods (equipment, not money). Enterprise: organising the factors, deciding and bearing risk.
Primary, secondary and tertiary sectors: Primary: extracting or growing natural resources (farming, fishing, mining). Secondary: making and building (manufacturing, construction). Tertiary: services (retail, banking, education, transport).
How does the importance of the sectors typically change as an economy develops?: Primary share of jobs falls (machinery needs fewer farm workers; people spend a smaller share of income on food). Secondary share rises during industrialisation, then often falls. Tertiary share rises as higher incomes raise demand for services.
Services jobs: 30% of 10 million in Year 1, 45% of 12 million in Year 2. Find the change in jobs and in the share: Jobs: 3.0 million → 5.4 million, a rise of 2.4 ÷ 3.0 × 100 = 80%. Share: 45 − 30 = 15 percentage points.

1.2.2 Productivity and division of labour

Productivity: Output per unit of input. Labour productivity = total output ÷ number of workers (or per hour).
8 workers make 960 units; then 10 workers make 1,150 units. What happens to productivity?: Before: 960 ÷ 8 = 120 per worker. After: 1,150 ÷ 10 = 115. Productivity falls by (115 − 120) ÷ 120 × 100 ≈ −4.2%, even though output rose about 19.8%.
How can the productivity of land, labour and capital be raised?: Land: fertiliser, drainage, irrigation, reclamation. Labour: education and training (human capital), skilled migrants. Capital: more machines per worker, new technology.
Division of labour: Splitting production into separate tasks, each done by a different worker or group.
Advantages and disadvantages of division of labour for businesses: Advantages: higher output per worker, lower unit cost, consistent quality, quick training. Disadvantages: low morale causes absence and turnover; production halts if a worker is missing; inflexible; errors pass along the line.
Advantages and disadvantages of division of labour for workers: Advantages: learn a task quickly, skill grows, higher pay possible if the firm does well. Disadvantages: boredom, narrow skills, harder to change job, low motivation.

1.2.3 Business costs, revenues and profit

Formulas for TR, TC, ATC and profit: Total revenue = price × quantity sold. Total cost = total fixed costs + total variable costs. Average (total) cost = TC ÷ quantity. Profit = TR − TC (a negative answer is a loss).
A stall sells 250 scarves at 14. Rent is 600 and each scarf costs 6 to make. Find profit and average cost: TR = 250 × 14 = 3,500. TVC = 250 × 6 = 1,500. TC = 600 + 1,500 = 2,100. Profit = 3,500 − 2,100 = 1,400. ATC = 2,100 ÷ 250 = 8.40.
Economies of scale, and internal vs external economies: Economies of scale: a fall in average cost as the scale of production rises (long run). Internal: arise inside a firm because it has grown. External: arise because the industry or area has grown.
Name the six internal economies of scale: Purchasing (bulk buying), marketing, technical, financial, managerial, risk bearing.
Diseconomies of scale, with two causes: A rise in average cost as the scale of production rises beyond a certain point. Causes: bureaucracy, communication problems, lack of control, distance between top management and workers.
Describe the long-run average cost (LRAC) curve: Cost per unit on the vertical axis, output on the horizontal. U-shaped: the downward part shows economies of scale, the lowest point is the most efficient output, and the upward part shows diseconomies of scale.

1.2.4 Business competition

Effects of competition on efficiency, choice, quality, innovation and price: Efficiency: pressure to cut waste and cost. Choice: more sellers and variety. Quality: firms improve to keep customers. Innovation: firms race for new ideas. Price: held down by rivals.
Factors that help a firm grow and factors that keep firms small: Growth: access to finance, economies of scale, spreading risk, taking over competitors. Staying small: lack of finance, small size of market, niche market, aims of the entrepreneur (control, free time).
Monopoly: definition and features: One business dominates the market. Features: one dominant business, a unique product, it is a price-maker, and barriers to entry.
Barriers to entry: Legal rights and licences; patents; heavy marketing budgets; technology and know-how; high start-up costs. They keep newcomers out, so the dominant firm keeps its share and can price above the competitive level.
Oligopoly: definition and features: A market where a few large firms supply most of the output. Features: few large firms dominate, different (branded) products, barriers to entry, possible collusion, non-price competition and price competition.
Collusion, cartel and price war: Collusion: firms agree prices or output; a group doing so is a cartel, which raises price and cuts sales (illegal in many countries). Price war: repeated price cuts; consumers gain at first, weak firms may close and survivors may raise prices later.

1.2.5 The labour market

Derived demand (for labour): Demand for labour (or another input) that arises only because people want what it produces.
What shifts the demand curve for labour?: Right: higher demand for the final product, dearer machines, higher productivity of workers. Left: lower product demand, cheaper or better machines replacing workers. A change in the wage moves along the curve; it never shifts it.
What shifts the supply curve of labour?: Right: population growth, immigration, a higher retirement age, more women in paid work, more skills, better mobility. Left: emigration, an ageing population, a higher school-leaving age (short run).
Human capital, and how training affects labour cost per unit: Human capital: the skills, knowledge and health of the workforce. Training raises output per worker, so labour cost per unit falls. Example: wage 12 an hour, output 20 → 26 per hour; cost per unit 0.60 → about 0.46.
Labour market diagram: what happens to wage and employment when labour supply shifts right?: Axes: wage (vertical) and quantity of labour (horizontal). Supply shifts right: the wage falls and employment rises.
How can a trade union affect the labour market?: Through collective bargaining and the threat of industrial action it can win higher pay and better conditions. If the wage is pushed above equilibrium, employment falls. Firms face higher costs, so higher prices or lower profit.

1.2.6 Government intervention

Five government policies to correct negative externalities: Taxes, subsidies (for cleaner alternatives), fines, regulation (limits or bans) and tradable pollution permits.
Pollution permit: A right, which can be sold on, to release a set amount of waste. The government caps the total; firms that can cut pollution cheaply cut more and sell permits.
A firm saves 24,000 by dumping waste. The chance of being caught is 30%. Does a fine of 60,000 deter it?: Expected fine = 0.3 × 60,000 = 18,000, which is less than the 24,000 saved, so it does not deter. A fine of 100,000 (expected 30,000) would.
Ways a government regulates competition: Promote competition (lower entry barriers, support small firms); limit monopoly power (ban cartels, fine abuse of dominance, price caps); protect consumers (safety, honest labelling); control mergers and takeovers.
A minimum wage of 12 is set where equilibrium is 10 with 500 employed. At 12, 400 are demanded and 600 supplied. What happens?: Employment falls from 500 to 400 (−20%) and there is a surplus of labour (unemployment) of 600 − 400 = 200. Those still employed earn 2 more an hour. A minimum below equilibrium has no effect.
Reasons for and drawbacks of a national minimum wage: Reasons: reduce poverty and inequality, stop exploitation, make work pay more than benefits. Drawbacks: unemployment if set above equilibrium, higher costs and prices, informal work, enforcement cost.