Chapter 1:The business organization, itsstakeholders and the external environment Mahfuzah Binti Ahmad
Chapter 1: The business organization, itsstakeholders and the external environment1. The purpose and types of business organisation2. Stakeholders in business organizations3. Political and legal factors affecting business4. Macro economic factors5. Micro economic factors6. Social and demographic factors7. Technological factors8. Environmental factors9. Competitive factors
1.1 The purpose and types of businessorganisation: Definition & Reason formationA. Definition of organisation – social arrangement for the controlled performance of collective goals (Buchanan and Huczynski).B. Reason of formation: – Overcome people individual limitation whether physical and intellectual – Enable people to specialize – Save time – combine work (multi tasking work by different people at the same time, effective and efficient application of resources). – Accumulate and sharing knowledge – quality, speed – To create synergy advantages
1.1: C. Features: Common, distinguished characteristics and basic component Common features: • Formal, documented systems and procedures • Different people do different things or specialize in one activity. • Variety of objectives and goals. • Obtain inputs, process and convert to outputs. Distinguished characteristics: • Ownership and control • Activity • Profit or non-profit orientation • Size – small, medium, family & multinational • Source of finance – bank, government funding Basic component part – resource inputs (e.g. labour, raw materials), organizational activities (e.g. purchasing, manufacturing, accounting) and outputs (e.g. products/services, taxes, waste, employment)
1.1: Commercial / profit seeking org. Cooperatives Not-for- profit (NFPs D. Types or NPO) of business Non- Public governmental Sector org
1.1: D. Types of business organisationi. Commercial / profit seeking organisationa) General and applies to any group(s) with "specific aim" of making a profit.b) Make a profit for the owner, shareholders, or both, by providing products and services. Followed by continue in existence, maintained growth, etc.c) E.g. commercial organizations specialize in entertainment, commercial broadcasting, banking, agriculture and organized crime, etc.ii. Not-for-profit (NFPs or NPOs)a) Do not consider profit but to satisfy particular needs of their members or the sectors of society that they have been set up to benefit.b) E.g. clubs, associations, charitable organizations, government department.
1.1: D. Types of business organisationiii. Public sectora) Owned and run by the government and local government (part of economy and services).b) Referred - the state sector or the government sector.c) Composition varies by country, but in most countries includes services such as the police, military, public roads, public transit, primary education and healthcare for the poor.d) Services that cannot be excluded from (such as street lighting), services which benefit all of society rather than just the individual who uses the service (such as public education), and services that encourage equal opportunity.iv. Non-governmental organizations (NGOs)a) (NGOs) is an independent voluntary association of people acting together for some common purpose (other than achieving government office or making profit).b) General characteristics - independence from the direct control from government, not constituted as a political party and non-profit making.c) E.g. Amnesty International, WWF, etc.
1.1: D. Types of business organisationv. Cooperativesa) An autonomous association of persons who voluntarily cooperate for their mutual social, economic, and cultural benefits. For example housing, retail, workers, agricultural, consumer, insurance, banking, etc.b) There may be for-profit or not-for-profit organizations.c) Legal entity owned and controlled by its members. Members often have a close association with the enterprise as producers or consumers of its products or services, or as its employeesd) Features: Voluntary and open membership Democratic member control Economic participation by members Autonomy and independence, education, training and information, Concern for community.
1.2 Stakeholders in business organizations: Definition • Those persons, groups or organisations that have an interest in the strategy of and organisation. (legitimate interest)Stakeholder • Consider only the relationship between the principalAgency (shareholders) and agents (e.g. top management team, CEO) to maximize the shareholders’ wealth.theory • Every corporation or organization was created to serve more than just its shareholders, but instead to serve a diverseStakeholder range of people who have a legitimate stake in the theory organization’s outcome and performance and indeed to serve a broad societal purpose.
1.2: B. Types of stakeholders 1. Internal stakeholder – those are intimately connected to the organization and their objectives are likely to have strong influence on how it is run. For example, directors, sub-board management, company secretary, managers, employees, etc.2. Connected stakeholder – can be viewed as having contractual relationshipwith organization.For example, shareholders, suppliers, finance creditors, trade unions.3. External stakeholders – those are individuals and groups that do not have corecontractual connections with the organization but impacted by the corporate andsocial actions of the organization.These groups will have diverse objectives and have varying ability to ensure thatthe organization meets their objectives.For example government (national and local), lobbying groups(environmentalists), local communities, regulators, external auditors, professionalbodies, competitors, etc.
Different objectives of stakeholders lead to: CONFLICT? Solve
1.2: C. Mendelow’s stakeholder mapping matrixCategory of matrix ExplanationLow power and low interest • Can be largely ignored when considering(A) – minimal strategic objectives.effort/direction • They are more likely to accept what they are told and follow instruction. • Ethical view, they should still be considered as ignoring them may awaken their interest.Low power and high interest • Kept informed and not underestimated.(B) – keep • Lobby others to support their strategy orinformed/education and alternatively join forces to pressure thecommunication organisation. • The company’s strategy must be presented in a logical way and shown to be rational; this may stop them joining forces with more powerful dissenters.
1.2: C. Mendelow’s stakeholder mapping matrixCategory of matrix ExplanationHigh power and low interest • Kept satisfied and stay dormant to avoid them(C) – keep gaining interest.satisfied/intervention • If they become more interested, they can easily become key players (might frustrate the adoption of a new strategy). • Therefore, the organisation must reassurance them of the likely outcomes of the strategy well in advance.High power and high interest • The organization must put extra priorities on the(D) – key key players.players/participation • The stakeholder has the ability to prevent the company achieving its strategy (e.g. upsetting customers will drive them to competitors). • The organization should communicate to assure them that the change is necessary, followed by discussions on the implementation of the strategy and how it affects them.
1.3 Political and legal factors affecting business 3. Government policy affect the organisation 2. Three levels of political a. Law and regulations – criminal law, system to analyze and company law, employment law, health and apply: safety, data protection a) Global - WTO b. Taxation – based on profits, capital gains, VAT, etc. b) National – National c. Economic policies – e.g. low inflation, low government policy. interest rates, appropriate exchange rate. c) Local – local government d. Government policies/incentives (include policy trade policy).Government also can imposed policy on industry entry barriers such as tariff to protect local car. Government incentives in the forms of subsidies1. Definition of and tax relief will influence the organization’s strategy.political system - setof formal legalinstitutions that A. Political systemsconstitute a and government"government" or a policy affect the"state." organization
1.3: B. Sources of legal authority • Include statute law, case law • Stature law – acts created by national parliaments or equivalents bodies.1. National • Case law – judge-made law based on available precedent and in the absence of prior decisions. The decisions become binding on future courts and important as statute law • Regional/state governments pass resolutions2. Regional and may have the authority to levy taxes. E.g. the State and Federal system within the USA. • Forms of law come from bodies outside of the national jurisdiction. For example, The3. Supra- European Union, The World Trade Organisation (WTO), etc.national • The World Trade Organisation (WTO) – set upbodies to promote free trade and resolve disputes between trading partners with the objectives to help producers of goods, services, exporters and importers in their business.
1.3: C. Employment lawa. The body of law that governs the employer-employee relationship, including: Individual employment contracts, the application of TORT and contract doctrines, and large group of statutory regulation on issues such as the right to organize and negotiate collective bargaining agreements, protection from discrimination, wages and hours, and health and safety.b. The organization must be aware on the employment laws which protect the employee’s interest to prevent legal action taken on them that could result in bad publicity.c. Employment law covers: Employment contract - basic principles, procedures and responsibilities between employer and employees. Basic remuneration (minimum level) and working hours (e.g. Malaysia employment act does not allowed the employees to work more than 48 hours or exceeding 8 hours a day excluding a period of rest, 5 consecutive hours of work without a period of rest of not less than 30 minute). Working environment and conditions - safe and healthy working environment against dangerous machinery, hazardous materials, and noise, etc. Termination of employment - unfair dismissal, proper compensation, etc. Discrimination at workplace on the basis - race, colour, religion, national origin, or sex, etc.
1.3: C. Employer’s and employee’s responsibilities – health and safety Employees Employers 1. If employees have long hair or wear 1. Plant and machinery is safe a headscarf, make sure its tucked out to use, and that safe working of the way (it could get caught in practices are set up and machinery). followed. 2. To co-operate with employer, ensure employee get proper training 2. All materials are handled, and understand and follow the stored and used safely and companys health and safety policies. provide adequate first aid facilities 3. If the employees operate machinery, to tell the employer if 3. Ventilation, temperature, take medication that makes himself lighting, and toilet, washing and drowsy - employer should rest facilities all meet health, temporarily move him to another safety and welfare requirements. job if they have one for him to do.
1.3: D. Data protection and security • Protecting individuals personal data against the misuse of information helda. Data by organizations (protection fromprotection misuse of personal information stored on electronic systems and manual). • Keeping data safe from various hazards that could destroy or compromise it.b. Data • Data corruption (due to viruses,security hacker), the organization must install anti-virus and firewall software, passwords and user number limits and off-site back-up copies of data files.
1.3: D. Data protection and security cont’d…• The UK Data Protection Act includes eights Data Protection Principles which data users must comply. The principles as follow:1) Personal data shall be processed fairly and lawfully and, in particular, shall not be processed unless fulfil certain condition.2) Personal data shall be obtained only for one or more specified and lawful purposes, and shall not be further processed in any manner incompatible with that purpose or those purposes.3) Personal data shall be adequate, relevant and not excessive in relation to the purpose or purposes for which they are processed.4) Personal data shall be accurate and, where necessary, kept up to date.5) Personal data processed for any purpose or purposes shall not be kept for longer than is necessary for that purpose or those purposes.6) Personal data shall be processed in accordance with the rights of data subjects under this Act.7) Appropriate technical and organisational measures shall be taken against unauthorised or unlawful processing of personal data and against accidental loss or destruction of, or damage to, personal data.8) Personal data shall not be transferred to a country or territory outside the European Economic Area unless that country or territory ensures an adequate level of protection for the rights and freedoms of data subjects in relation to the processing of personal data.
1.3: E. Consumer protection – general principle, simple contract and sale of goods a. Contract - A contract is an agreement between two parties that creates an obligation to perform (or not perform) a particular duty.b. Legally enforceable contract - an offer, acceptance and consideration (in exchange for goods).c. A consumer user of goods and services. Any person paying for goods and services , expect that the goods andservices are of a nature and quality promised to him by the seller.d. Any business buying and selling goods is considered making and discharging contract either written orunwritten or implied by behavior (e.g. purchase groceries at supermarket).e. If one party of the contract fails the agreement, the other party can take legal action for breach contract orcontract void (e.g. either party disappears without trace).f. Sale of good and supply of services: 1. This transferred legal responsibility to the retailer ("caveat vendor" - let the seller beware). 2. Seller to ensure that goods are of merchantable quality, as described, fit for their purpose, and conforms to sample. Services must be provided by persons with due skill, the materials used must be of merchantable quality and any goods supplied as part of the service must be of merchantable quality. 3. Signs limiting the liability of retailers were now to be illegal. 4. Guarantees could not affect statutory rights and the time period must be clearly stated. 5. Hire purchase goods are protected by the act but the consumer may complain to either the retailer or HP Company. 6. Unsolicited goods (unordered goods sent to your home) may be kept within thirty days of telling the seller to collect them or within six months if no notice is given. 7. Motor vehicles sold privately have an implied condition that the car must be free from any defect, which renders it dangerous to the public.
1.4 - Macro-economic factors1. Definition2. Determination of business activity a. GDP: principle & component (private consumption, investment, government, balance of payments). b. other factors: recession, confidence, capital and exchange rate. c. business cycles: recession, depression, recovery and boom.3. Impact of economic issues: inflation, unemployment, stagnation, international payments disequilibrium4. Types of economic policies: a. monetary policy; and b. fiscal policy
1.4 - Macro-economic factors A. Definition of macroeconomic: • Studies the behaviour of the aggregate economy. • Macroeconomics examines economy-wide phenomena such as changes in: • Unemployment, national income, rate of growth, gross domestic product, inflation and price levels. • The objectives of macro economics: • To achieve full employment, growth national income, real economic growth, price stability, balance of export and import, etc.
1.4: B. Determinant of business activity - GDPGross Domestic Product (GDP) – The total market value of all final goods and services produced within the country in a given period of time (calculated on annual basis).The components of GDP consist the following: GDP = private consumption + gross investment + government spending + balance of payments (exports − imports), or Principle: High GDP, lead to better business activity.
1.4: B. GDP - ComponentsComponents Explanation1. Consumption Based on private consumption (except for purchase of new house) and determined by the level of household incomes, the rate of tax and portion of a household’s income saved. a) Higher the overall taxation, the lower will be the amount of net income for spending on consumption (includes both direct and indirect taxes). b) High tax rate imposed on goods and services - reduce private consumption. The same apply for portion of income that is saved where Depend on fluctuation of saving interest rate (high interest rate, consumer will save more).2. Investment Investment made on capital items. a) Business investment in equipment, but does not include exchanges of existing assets. b) E.g. construction of a new mine, purchase of software, or purchase of machinery and equipment for a factory. Spending by households (not government) on new houses is also included in Investment. c) Investment in GDP does not mean purchases of financial products. Buying financial products (e.g. stock and bond) is classed as saving, as opposed to investment.
1.4: B. GDP - ComponentsComponents Explanation3. Government a) Government spending of final goods and services and investmentspending (e.g. infrastructure). b) Includes salaries of public servants, purchase of weapons for the military, and any investment expenditure by a government. c) It does not include any transfer payments, such as social security or unemployment benefits.4. Balance of Represents the net of import and export value. If export is more thanpayments import, the balance will be positive (favourable) and vice versa.
1.4: B. Determinant business activity – Others factors • Defined as decline in a country’s GDP (features by jobRecession losses, plant closures). • Increase level of customer confidence will result to higher demand for product and services and thus greaterConfidence business activity within the economy. • Low, interest rate, R&D, product innovation will attract customer spending. • Availability of capital resources (share capital or loan) willCapital increase or reduce the business activity within the economy. • Strengthening currency will make export more expensive and reduce demand for exports.Exchange • Imports on the other hand more cheaper (encouragerate business activities for organization that rely on imported resources).
1.4: B. Determinant business activity – Business cycles
1.4: B. Determinant business activity – Business cyclesComponents Explanation1. Recession a. General definition of recession is declining in GDP rate for two or more consecutive quarters. b. In the recession phase, the country will suffer the decline in consumer demand, low return on investment, closure business operation, reduce inventory level, etc. c. Government will usually adopt a budget deficit and reduce the tax rates in order to boost aggregate demand.2. Depression a. Severe economic downturn that will usually last several years (long-term economic downturn). b. Government policy (e.g. low interest rate) to reduce the impact of recession was failed to achieve the objectives. c. Depression are characterized by: a. "unusual" increases in unemployment, b. restriction of credit, c. shrinking output and investment, d. price deflation or hyperinflation, numerous bankruptcies, e. reduced amounts of trade and commerce, f. highly volatile/erratic relative currency value fluctuations, mostly devaluations.
1.4: B. Determinant business activity – Business cyclesComponents Explanation3. Recovery a. A period of growth after the economics recession and depression. b. The consumer confidence has returned to business which leads increasing in production (demand increase), sale, profit levels, employment, high investment in new capital equipment and hence increase of GDP. c. Usually followed by a series of good news.4. Boom a. When the recovery continues, the output level will rise above the general trend line, entering into the boom phase. b. Capacity and labour become fully utilized leading to increasing costs as competition for limited resources intensifies or the demand is met through importing. c. Increasing the sale prices may also be a result of trying to control demand. d. Households will have higher incomes due to higher salaries, higher share of profits and higher dividends. e. Demand level peaks, the expansion reaches and unsustainable level and correction occurs within the economy - trigger to short term of recession.
1.4: C. Impact of economises 1. Inflation 2. Unemployment 3. Stagnation 4. International payments disequilibrium
1.4: C. Impact of economises - InflationDefinition: increase in aggregate and general price level in aneconomy over a period of time (decline in the purchasing power andreal value of money) Consequences of inflation: - High inflation will follow by high interest rate as lenders know that inflation will erode the value of their money, so they increase the interest rate to compensate for the loss.The Consumer - Impact on standard of living and health (e.g. unable toPrices Index purchase healthy food, obtain medical treatment) especially for(CPI) is a those on low income.common - Discourage saving as the purchasing power of investment maymethod of be reduced with interest rate unable to compensate formeasuring inflation. E.g. the value of today will cost more for tomorrow.inflation. - Economys exports become more expensive and importer cheaper that affect the balance of trade. - Social unrest and revolts - inflation can lead to massive demonstrations and revolutions.
1.4: C. Impact of economises - UnemploymentOverview: The amount of jobless in the economy. A person is generally unemployedif they are willing and able to work but cannot find employment.Measurement rate: No. of unemployed persons divided by the no. of people in thelabor force, where the labor force is the no. of unemployed persons plus the no. ofemployed persons. Fictional Seasonal –Real wage unemployment Cyclical - economy Due to theunemployment – Temporary seasonal nature of Structural – is in recession and–Trade unions unemployment. the job itself. No demand depression. Whenand labor An individual is Certain industries available workers the employmentorganization out of his will have different with particular rate moves in thebargain for current job and demand for skill due to opposite directionhigher wages, looking for labour within the structural changes to the GDP rate another job. seasons (e.g. within an industry. where GDP wouldwhich leads to spring, summer, For example the be decliningstrikes and The time period autumn and closure of coal during recessionlockouts and of shifting winter). The steel, technology and depressionresult in the fall between two affected industries replacing manual butin the demand jobs is known as would be farming, procedures, etc. unemployment frictional tourism, winter increasing.for labor. unemployment. sports, etc.
1.4: C. Impact of economises - Stagnation Stagnation – relatively long period of very low or no economic growth, usually accompanied by high unemployment. – Under other definitions, growth less than 2-3% per year is a sign of stagnation. Stagnation should be differentiated with stagflation. stagflation is an economic situation where there is a coupling of sluggish economic growth, high inflation rate and often unemployment (Stagflation occurs when the economy isnt growing but prices are). Consequences of stagnation: – The economy is unable to reduce existing unemployment levels. – Lead to slow demand for goods and services, which adversely affect the company’s profit and lead to recession
1.4: C. Impact of economises – International payment disequilibriumOverview: occurs when a country’s balance of payments (BOP) is negative (deficit).BOP: Accounting record of all monetary transactions between a country and therest of the world.BOP consist of: Current account, financial account & capital account. Capital account: The current account: Financial account : All international capital transfers are recorded. This Mark the inflow and outflow International refers to the acquisition or of goods and services into a monetary flows disposal of non-financial assets country. Earnings on related to (for example, a physical asset investments, both public and investment in such as land) and non-produced private, are also put into the business, real estate, assets, which are needed for current account bonds and stocks are production but have not been documented. produced, like a mine used for the extraction of diamonds.Long term trade deficits has to be financed.Long term trade surplus can store up significant problem - inflation
1.4: D. Economic policy implemented by government1) Monetary policy: Government policy on money supply, the monetary system, interest rates, exchange rates and the availability of credit for the purpose of promoting economic growth and stability.2) Fiscal policy: Government policy on expenditure and revenue collection (taxation) to influence the economy (e.g. taxation, public spending and budget deficit or surplus).3) Supply side approach – kindly refer Note 2(1)4) Taxation – kindly refer Note 2(1)5) Privatisation – kindly refer Note 2(1)
1.5 - Micro-economic factors1. Definition: a. Supply & demand b. Demand – demand curve, factors & substitute, complements goods c. Supply – Supply curve, factors, short run supply d. Equilibrium curve e. Price regulation2. Elasticity: a) Elasticity of demand, b) Arc elasticity, c) Elastic & inelastic of demand, d) Cross elasticity of demand & e) Price elasticity of supply.3. Market competition: a) Perfect competition, b) Imperfect competition c) Pure oligopoly.
1.5: A. Micro-economic factors - Definition1) Microeconomics : Branch of economics that studies the behaviour of individual households and firms in making decisions on the allocation of limited resources.2) The price mechanism: Term used to describe the means by which the many millions of decisions taken each day by consumers and businesses interact to determine the allocation of scarce resources between competing uses.3) A market: Defined as a situation in which potential buyers and potential sellers (suppliers) of a good or service come together for the purpose of exchange. Utility is the word used to describe the pleasure or satisfaction or benefit derived by a person from the consumption of goods.4) Total utility: The total satisfaction that people derive from spending their income and consuming goods.5) Marginal utility: The satisfaction gained from consuming one additional unit of a good or the satisfaction forgone by consuming one unit less
1.5: A. Micro-economic factors – Demand Curve The demand curve of a single consumer or household is derived by estimating how much of the good the consumer or household would demand at various hypothetical market prices.
1.5: A. Micro-economic factors – Demand CurveLaw of demand: Q demanded increases when price fall, and Q demanded decreases when price rises, other things held constants (ceteris paribus).
1.5: A. Micro-economic factors – Demand Curve Factors determining demand for a good. • The price of the good • The size of households income (income effect) • The price of other substitute goods (substitution effect) • Tastes and fashion • Expectations of future price changes • The distribution of income among households – Normal goods & inferior goods Substitute goods: Alternatives to each other, so that an increase in the demand for one is likely to cause a decrease in the demand for another. E.g. Tea and coffee Complement goods: Tend to be bought and used together, so that an increase in the demand for one is likely to cause an increase in the demand for the other. For example bread and butter
1.5: A. Micro-economic factors – Demand CurveFactors determining demand for a good continues: • The distribution of income among households – Normal goods & inferior goods. For example fresh vegetables (normal goods) and frozen vegetables (inferior goods).Normal goods: Demand rises as household income increases. Q , IncomeInferior goods: Demand eventually falls as income rises. (Customers can afford to switch demand to superior products). Q , Income
1.5: A. Micro-economic factors – Supply curve Supply refers to the quantity of a good that existing suppliers or would-be suppliers would want to produce for the market at a given price.
1.5: A. Micro-economic factors – Supply curveLaw of Supply: Q supplied increases when price increases, and Q supplied decreases when price decreases, other things held constants (ceteris paribus).
1.5: A. Micro-economic factors – Supply curveFactors influencing the supply quantity. The costs of making the goods The prices of other goods. • Substitutes in supply: An increase in the price would make the supply of another good whose price does not rise (less attractive to suppliers). • Joint supply or complements in production: When a production process has two or more distinct and separate outputs. E.g. Meat and hides. If the price of beef rises, more will be supplied and there will be an accompanying increase in the supply of cow hide. Expectations of price changes Changes in technology Other factors - changes in the weather (for example, in the case of agricultural goods), natural disasters or industrial disruption
1.5: A. Micro-economic factors – Short run supply curve• Firm needs only to cover its variable costs, at Q1 below because: – covering variable cost ensures than an output can be produced in the future. If variable costs cannot be covered then no further output can be made.• In the short run, the firms supply curve is its MC curve above AVC (at B). Below this point it will shut down. Hence the firm would be willing to supply at P, but not at P1. At point B marginal revenue (P) is equal to marginal cost.• Graph of short run curve:• Dgjdgjjfdgjdgj
1.5: A. Micro-economic factors – Long run supply curve• The supply curve was upward sloping in the short run because of diminishing returns on the marginal cost. It will be downward sloping because of benefits of economies of scale.• Graph of short run curve:• Dgjdgjjfdgjdgj
1.5: A. Micro-economic factors – Equilibrium price• The equilibrium price for a good is the price at which the volume demanded by consumers and the volume that firms would be willing to supply is the same.
1.5: A. Micro-economic factors – Equilibrium price• The equilibrium price for a good is the price at which the volume demanded by consumers and the volume that firms would be willing to supply is the same.• Maximum price (or price ceiling) the maximum price a seller is allowed to charge for a product or service.• Minimum price (or price floor) lowest price that a government allows a good to be sold for a good.
1.5: B. Micro-economic factors – Elasticity1. Price elasticity of demand – elastic and inelastic demand2. Arc elasticity and point elasticity of demand3. Income elasticity of demand4. Cross elasticity of demand5. Price elasticity of supply.
1.5: B. Micro-economic factors – Elasticity of demand1. Elasticity: Elasticity measures the responsiveness of one variable following a change in another variable.2. Price elasticity of demand (PED): Measure of the extent of change in the market demand for a good in response to a change in its price.
1.5: B. Micro-economic factors – Elasticity of demand 1. The coefficient of price elasticity of demand (PED):• Elastic – luxury goods• Inelastic – necessity goods
1.5: B. Micro-economic factors – Elasticity of demand1. The coefficient of price elasticity of demand (PED):
1.5: B. Micro-economic factors – Elasticity of demand1. Elasticity of demand: Greater than 1 @ (>1)• If demand is elastic and the price goes up from $1 to $2, what happens to TR?• P=$1: TR = P x Q = $1 x 40 = $40• P=$2: TR = P x Q = $2 x 10 = $20 It will decrease
1.5: B. Micro-economic factors – Elasticity of demand1. Inelasticity of demand: Less than 1 @ (>1)• If demand is inelastic and the price goes up from $1 to $4, what happens to TR?• P=$1: TR = P x Q = $1 x 20 = $20• P=$4: TR = P x Q = $4 x 10 = $40 It will increase
1.5: B. Micro-economic factors – Elasticity of demand 1. Inelasticity of demand: Less than 1 @ (>1)• If demand is unit elastic and the price goes up from $1 to $3, what happens to TR?• P=$1: TR = P x Q = $1 x 30 = $30• P=$3: TR = P x Q = $3 x 10 = $30 It will not change
1.5: B. Micro-economic factors – Elasticity of demandFactors influencing price elasticity of demand for agood: Percentage of income spent on the good Availability of substitutes Necessity The time horizon Competitor pricing Habit
1.5: B. Micro-economic factors – Arc elasticityArc elasticity: Measures elasticity between two points on the demand curve (responsiveness of demand to a large change in price).
1.5: B. Micro-economic factors – Elasticity of demand & Arc elasticityQuestion:• Price increases from 10p to 12p.• Quantity falls from 40 to 20.Solutions:• Arc elasticity of demand assumes that we should calculate using the midpoint between 40 and 20 which equals 30• The % change in quantity is 20/ 30 = - 0.667• The % change in price is 2p / 11 = 0.18• Therefore PED = -0.667 / 0.18 = -3.7 elastic since greater than 1(Ignore the minus sign)
1.5: B. Micro-economic factors – Point elasticity of demand Point elasticity of demand: Measure the responsiveness of demand at one particular point in the demand curve (assumed the demand curve is straight).
1.5: B. Micro-economic factors – Point elasticity of demandExample: point elasticity of demandThe price of a good is $1.20 per unit and annual demand is 800,000. Marketresearch indicates that an increase in price of 10 cents per unit will result in afall in annual demand for the good of 70,000 units.Required:Calculate the elasticity of demand at the current price of $1.20.SolutionWe are asked to calculate the elasticity at a particular price. We assume thatthe demand curve is a straight line. At a price of $1.20, annual demand is800,000 units.% change in demand=70,000/800,000 × 100% = 8.75% (fall)% change in price= 10c/120c × 100% = 8.33% (rise)Price elasticity of demand at price $1.20=(-8.75)/8.33 × 100% = -1.05%
1.5: B. Micro-economic factors – Income elasticity of demandIncome elasticity: indicates the responsiveness of demand to changes in household incomes.
1.5: B. Micro-economic factors – Cross elasticity of demand Cross elasticity of demand : the responsiveness of quantity demanded for one good following a change in price of another good.
1.5: B. Micro-economic factors – Price elasticity of SUPPLY Price elasticity of supply: Responsiveness of supply to a change in price.
1.5: B. Micro-economic factors – Price elasticity of SUPPLY Factors influence price elasticity of supply: Existence of inventories of finished goods Availability of labour Spare capacity Availability of raw materials and components Barriers to entry The time scale: • The short run • Long run • The secular period
1.5: C. Micro-economic factors – market competition• Perfect competition• Imperfect competition and –Monopolistic competition; –Oligopoly; –Monopoly; –Monopsony; and –Oligopsony• Pure monopoly
Definition: Markets such that no participants are large enough to have the market power to set the price of a homogeneous product. Characteristics: - Infinite buyers and sellers Perfect - Zero entry and exit barrierscompetition - Perfect factor mobility - Zero transaction costs - Perfect information - Profit maximization - Homogeneous products
Definition: market situation where individual firms have a measure of control over the price of the commodity in an industry. Arises when an industrys output is supplied only by one, or a relatively small number of firms. Consists of: Imperfectcompetition - Monopolistic competition - Oligopoly - Monopoly - Monopsony - Oligopsony
1.5: C. Micro-economic factors – market competition• Monopoly: – which there is only one seller of a goods. Has complete control over an industry, for example Meralco is sole distributor of electric power in Metro Manila.• Characteristics: – Profit maximiser. – Price maker: Decides the price of the good or product to be sold. – High barriers to entry: Other sellers are unable to enter the market of the monopoly. – Single seller: In a monopoly there is one seller of the good which produces all the output. – Price discrimination: • A monopolist can change the price and quality of the product. • He sells more quantities charging less price for the product in a very elastic market and sells less quantities charging high price in a less elastic market.
1.5: C. Micro-economic factors – market competition• Oligopoly: – Oligopoly, characterized by a small number of relatively large competitors (dominated by a small number of sellers), each with substantial market control. – Exhibit interdependent decision making - lead to intense competition among the few and the motivation to cooperate through mergers and collusion.• Characteristics: – Profit maximisation conditions: An oligopoly maximises profits by producing where marginal revenue equals marginal costs. – Ability to set price. – Entry and exit: Barriers to entry are high. – Number of firms: There are so few firms that the actions of one firm can influence the actions of the other firms. – Long run profits: retain long run abnormal profits. – Product differentiation: Product may be homogeneous (steel) or differentiated (automobiles). – Perfect knowledge: Assumptions about perfect knowledge vary but the knowledge of various economic actors can be generally described as selective. – Interdependence. Each firm is so large that its actions affect market conditions.
1.5: C. Micro-economic factors – market competition• Monopolistic competition: – Many sellers producing highly differentiated goods. – The output of each producer is a close but not identical substitute to that of every other firm, which helps satisfy diverse consumer wants and needs.• Characteristics: – Product differentiation. The cross price elasticity of demand between goods in such a market is positive. – Many firms. – Free entry and exit in the long run. This assumption implies that there are low start up costs, no sunk costs and no exit costs. – Independent decision making. – Market Power - firms have some degree of market power (firm has control over the terms and conditions of exchange). – Buyers and Sellers do not have perfect information (Imperfect Information).
1.5: C. Micro-economic factors – market competition• Monopsony: – There is only one buyer of a good.• Oligopsony: – There are few buyers of a good.
1.5: C. Micro-economic factors – market competition• Pure monopoly: – A market in which only one firm has total control over the entire market for a product due to some sort of barrier to entry for other firms, often a patent held by the controlling firm.
1.6 Social and demographic factors Social structure Demography Impact on organisation Government measures1.7 Technological factors Business strategy Competitive advantage Organisational structure1.8 Environmental factors1.9 Competitive factors Porter’s five forces model Generic strategies Porter’s value chain