Business and Economics
Edexcel GCSE
Topic 5.1
Trade Off
A Trade Off exists when there are two routes to take, but only one can be taken. For example,
choosing between spending Birthday money on a PS3 or an Xbox 360 – if you buy one, you won’t
have enough money left to buy the other as well.
What you lose out on is called the ‘Opportunity Cost’. This is the loss of the next most desired
alternative when choosing a particular course of action.
The Economy consists of lots of choices each day, but the choice taken means that someone,
somewhere thought that the benefits gained from choosing that outweighed the benefits from
the other choice(s).
Price
Price is the amount of money required to buy a good or service. It affects demand for a product,
because if it is too expensive then fewer will sell, but if it is too cheap then producer won’t make
enough profit to cover the costs no matter how high demand is.
Revenue is calculated by multiplying price by quantity sold.
There are some items, however, that are price sensitive and insensitive:
Price sensitivity = where changing the price of a product leads to a much bigger change in
demand. E.g. Cadbury’s Dairy Milk.
Price insensitivity = where changing the price of a product leads to little or no change in demand.
E.g. oil.
Stakeholders
Stakeholders are groups of people who are interested in the performance of a business. For
example, workers at the local ASDA are stakeholders in the company and so are the customers.
These are not to be confused with shareholders who are the owners of the business. However,
they too are interested in the performance of the business, meaning they are also stakeholders.
Conflicts of Interest occur when different groups want different things. For example, a takeover of
a business would probably lead to higher profits and so a higher dividend for shareholders, but
this takeover could lead to the loss of jobs and so a conflict of interest occurs between the
shareholders and the workers as they want opposite things.
Externalities
Externalities are the effect of an economic decision on individuals and groups outside who are
not directly involved in the decision. They are both positive and negative externalities which are
good and bad effects respectively on stakeholders (third party groups). A business does not
receive any payment for positive externalities, but the stakeholders pay the costs of negative
externalities.
For example, a firework display to reward the workforce at the end of a successful year for a
business creates positive and negative externalities. It attracts people to the local pubs as the
gardens could have good views of the display, but the noise can disturb local residents and the
waste has to be cleaned up by the local council.
Topic 5.2
Measuring Success
Profits are the main measure of success for a business. The higher the profits, the better the
business has done in that year. However, profits need to be relative to the size of the business (a
profit of £1 million may sound a lot, but if the company had a revenue of £10 million it isn’t
actually very much in comparison) and also to the profits of the previous year (£5 million in
profits in one year is impressive, but not if it was £10 million last year).
Market Share is another way of measuring success and is the quantity sold by a business as a
percentage of total sales in a market.
Social Success is the performance of a business which takes into account social, environmental
and ethical factors.
Failure of a Business
A business fails when the revenue coming in from sales cannot cover the costs of production. This
usually happens with customer’s having credit terms, so payment does not usually come in for a
few months after purchasing the products meaning the business cannot pay short-term costs.
When this occurs, it is called insolvency and is to do with Cash Flow (the amount of money going
in and out of a business at any one time – in can be either positive or negative).
Demand for a product can also fluctuate. This occurs for a number of reasons:
•
Falling Income Levels
•
Changing tastes and preferences
•
Fashions
•
Advertising e.g. Apple’s iPod
•
Competition
Getting the Marketing Mix right is crucial too – everything should be balanced. For example, an
excellent product must have good advertising.
Productivity is also important. If it is high, then costs for a business will generally be lower so they
can charge lower prices or increase profit margins this way.
Problems in the Economy
Changing demand can be a killer for many businesses and is governed by:
•
The level of economic activity
•
Interest Rates
•
Consumer Confidence – a measure of the extent to which consumers are prepared to spend
money.
•
Demand by foreign consumers
Inflation is probably the biggest problem in the economy. It measures the change in the average
level of prices in an economy. The rate of inflation in the UK is calculated by the CPI (Consumer
Price Index) – this is measured by comparing the price of a ‘typical basket of goods’ at one time
period with the same ‘basket’ at another time period. The ‘typical basket of goods’ is made up of
goods and services that households buy on a weekly and monthly basis. It changes due to
fluctuations in cost of production for products and in the level of demand. Dramatic changes in
inflation are referred to as shocks. A shock can be internal (within the country) or external
(outside the country).
Another problem the economy can face is unemployment. This is when people who want to work
cannot do so and it causes all sorts of problems for the individual and also for society.
Exchange Rates
The Exchange Rates affect Imports and Exports. An import is buying goods or services from
another country and an export is selling goods or services to other countries.
An exchange rate is the amount of one currency that has to be given up in order to acquire
another currency.
It is governed by the buying and selling of foreign currencies on world currency markets.
A weak exchange rate would be when £1=$1.8 but now it’s £1=$1.5.
A strong exchange rate would be when £1=$1.6 but now it’s £1=$2.
Remember it as SPICED (Strong Pound Imports Cheap Exports Dear…)!
Government Methods of Control
The interest rate is the percentage of the price that has to be paid to borrow money and also that
will be gained while saving. A higher interest rate means lower spending, less business
investment and increased savings, whereas a lower interest rate means more spending and
increased business investment with little savings. The use of changes in the interest rate to
control inflation is called the Monetary Policy.
Taxes are on almost everything nowadays, but it is needed to generate money for government
spending on areas such as Health and Education. The money raised through taxes is called the tax
revenue. The Fiscal Policy is the use of taxation and government spending to achieve Government
objectives.
Topic 5.3
Business Growth
There are two types of growth: Internal and External.
Internal growth (or organic growth) occurs when a business grows by selling more than it
previously did. This can be achieved also by changing the marketing mix and through new
product development.
External growth is growth through mergers and takeovers. There are four types: Horizontal,
Backward vertical, Forward vertical and Conglomerate.
Why do businesses grow?
Reasons include:
•
Survival
•
Larger returns for the owners
•
Advantages of Economies of Scale
•
Spreading the risk
The aforementioned advantages of Economies of Scale means that average costs for a business
will fall, helping to increase profit margins.
With greater size, the business gains greater power allowing it to use it’s market power which can
influence consumers.
However, by trying to grow, businesses can make wrong decisions which can cost them a lot of
money – ITV’s acquisition of Friend’s Reunited for example.
Furthermore, becoming too big can lead to diseconomies of scale (average costs of production
increase as output increases) as it becomes more difficult to co-ordinate the business and to keep
efficient communication methods.
Monopoly Power
A Monopoly is a business with a market share of 25% or more and can therefore influence the
market. In a pure sense, it means ‘one seller’, however, this is very rare.
Bad:
•
Price – where little competition exists, businesses can charge higher prices.
•
Choice – monopolies restrict choice for consumers.
•
Excessive profits – monopolies can make very high profits due to the lack of competition as
nearly everyone buys from them.
Good:
•
Value for money – monopolies can use economies of scale to negotiate lower prices for raw
materials and components.
•
Developing new products – the cost of this can be very high, but monopolies have the
money and power to do so, and they can also patent their new product which makes it a legal
monopoly.
•
Natural monopolies – this is when one large business can supply the market with products at
a lower price than if there were numerous producers.
Controlling Big Business
The Competition Act of 1998 created the Competition Commission, a government body that
investigates mergers, markets and regulated industries under UK law. It has the power to block
mergers, force companies to sell off assets and change the way in which a market operates.
However, they cannot investigate itself, but considers complaints by the public or cases referred
to it by other regulatory organisations, such as the Office of Fair Trade (OFT).
Regulators are government bodies set up to monitor and regulate business activity. Separate
regulators are listed below:
•
Ofwat – Water
•
Ofgem – Gas and Electricity
•
ORR – Rail
•
OFCOM – Communications
Self Regulation – where an industry body made up of
representatives from businesses within the industry
monitors the actions of it’s members and ensures rules and
guidelines are followed.
Pressure groups – an organisation which aims to influence
the decisions of businesses, governments and individuals.
They all used to be state owned, but were privatised by the government to ensure these
industries did not abuse their market power and so the operated in the public’s interest.
These regulators responsibilities are:
•
Prices
•
Monitoring the quality of service provided
•
Seeing that a business operates in the public’s interest
Topic 5.4
What is growth?
The size of a country’s economy is measured through the GDP (Gross Domestic Product). This is
the total value of the output produced in an economy in a year.
Economic growth is the percentage increase in GDP per year, which can either be positive or
negative. Economic Growth is caused when a country produces more goods or services in a year.
To increase output, businesses need more resources or investment in new technology and
equipment to increase efficiency. Firms can invest money in human capital (spending on training
and education for workers) or physical capital (spending on new assets such as factories or
machinery).
The government also has a role in economic growth. They can:
•
Provide grants for businesses to invest with
•
Improve infrastructure (better transport etc)
Standard of Living
The Standard of Living refers to the amount of goods and services that a person can buy with
their income. When income rises, so does standard of living, so when the GDP of a country
increases, so does the average standard of living. GDP per capita is a better way of seeing
standard of living of a country as it is the GDP divided by the population, so it is the average
amount that everyone has. However, there are people in a country that are far below the average
and also far above the average (called income inequalities), so it is no entirely accurate.
There are other ways of measuring standard of living though:
•
Infant Mortality Rates
•
Life Expectancy Rates
•
Literacy Rates
Don’t get mixed up with Standard of Living and Quality of Life. Quality of Life is an individuals
sense of well being. This can be measured by health and education as well as the amount of
goods and services a person can buy.
Can growth be bad?
Negative Externalities:
•
Congestion – as standard of living has improved, more and more families own cars which
causes traffic jams and pack the roads in the cities.
•
Non-renewable resources being used up – Oil is used in nearly everything somewhere today,
whether it be transport or the production of plastics, but one day it will run out as the Earth
does not have an unlimited supply of it.
•
Waste – economic growth means more goods are being produced which means more
packaging and waste which has to be disposed of somehow.
•
Pollution – as the number of humans on the planet increases, the amount of noise, air and
water pollution increases.
Sustainable Growth?
Sustainable Economic Growth is an increase in GDP that minimises negative externalities faced by
future generations. This is mainly done by using renewable resources such as wind and solar
power. It means it does not affect the quality of life for future generations.
By doing this, businesses show their corporate social responsibility (CSR).
However, a company can greenwash which means that it tries to give the impression that it is
environmentally friendly when its claims many not be entirely true or justified.
Some companies take it a step further, and show ethical responsibility – where a business takes a
moral standpoint and ensures that its behaviour does not impact stakeholder groups in a
negative way; it tries to do the ‘right’ thing.
What can the government do?
There are four things the government uses to change behaviour:
•
Taxes – this can reduce demand for products that are deemed ‘bad’.
•
Subsidies – this is the opposite of tax: it is money given to a business to help to produce a
product considered ‘good’.
•
Legislation – these are laws passed by the government to ban or restrict a product that is
‘bad’.
•
Regulation – this is a set of rules that govern the way something is carried out.
One example of using taxation to reduce demand for ‘bad’ products is by increasing the VED
(Vehicle Excise Duty) on the most polluting cars, encouraging the owners to get a less polluting
vehicle instead. This is called internalising an externality. Thus, taxation can create incentives for
people to change their behaviour.
The effects on the business are normally that it’s costs increase. This gives them two routes to
take:
•
Pass the cost of the increase onto consumers by raising the prices
•
Try and increase the efficiency by cutting costs elsewhere.
Topic 5.5
Is Everybody Equal?
Poverty is relative to the person’s surroundings. One person’s poverty can be someone else’s
‘rich’. There are two terms used when describing poverty:
•
Absolute Poverty – this is when people are unable to afford the basics to support life e.g.
food and shelter.
•
Relative Poverty – this exists when a person is unable to access goods and services that might
be considered ‘normal’ for others in the same country. Essentially, it is when they can’t afford
simple luxuries.
In most countries, there is something called a poverty line. It is used to measure the extent to
which people in the country live in poverty. In Britain, a couple with two children aged between
5-14 needs £346 per week in order to not fall below the poverty line.
In the UK, the existence of the welfare state has almost eliminated absolute poverty. The welfare
state is the system of state benefits and free Government services paid for through taxation. Its
aim is to reduce inequality between different groups of people. Universal benefits are payments
made by the government to people regardless of their level of income. Means-tested benefits are
payments made by the Government to people which are determined by the amount of income or
savings a person has.
Can International trade help?
International trade is the exchange of goods and services between countries. It allows countries
to sell their products for money which can then be spent on goods and services that will aid their
country’s economic growth.
However, it has it’s drawbacks. The country will most likely be selling mainly one product, oil for
example, which is fine when the world prices are high, but when they fall the country has a
problem. Also, products can be cheaper in other countries which can mean the industry for the
same product in the country can disappear.
Free trade can be restricted in a number of ways:
•
Tariffs
•
Quotas
•
Non-tariff barriers
Other help?
International Debt is the sum of money owed to richer developed countries by the LEDCs (Less
Economically Developed Countries). The amounts of money that these countries have to pay back
is so great that it keeps them undeveloped. However, is the debt was wiped, they could spend
the money on much more worthwhile things such as education and their health services.
There are also other methods of reducing world poverty:
•
Encourage diversified industry – aim to make LEDCs less dependant on one product or
market.
•
Encourage investment – investments in machinery and facilities would drastically increase the
country’s economic growth.
•
Limit Population Growth – by doing this, the country’s resources are divided up amongst
fewer people, which allows the Government to increase its spending on other things.
•
Encourage Free Trade – access to more markets allows the country to export more,
generating a higher GDP.
Charities and NGO’s campaign for debt relief for LEDCs and this can encourage other MEDCs to
follow suit in cancelling debt.