CIMA Cert BA 1- MICROeconomics

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An organisation	Social arrangement (working together) for the controlled performance (system and procedures) of collective goals (main objectives).
Why do we need organisations?	Enables people to: - Share skills and knowledge - Specialise - Pool resources
Profit Seeking Organisations	Companies & partnerships main objective as maximising wealth - to continue in existence - to maintain growth & development - to make a profit
Not for Profit Organisations (NFP)	Seeking to satisfy particular needs of their members or sectors of society that they have set up to benefit. Must stay in budget to survive. -Financials are not a primary objective INCLUDE govt departments schools hospitals charities clubs
Mutual Organisiations	Category of NFP Voluntary NFP associations formed for the purpose of raising funds by subscribers of members, out of which common services can be provided to those members.
Public Sector Organisations	That part of the economy that is concerned with providing basic government services and is thus controlled by government organisations. - Police - Military - Public roads/tranist - Primary education - Healthcare for the poor
Private Sector Organisations	Comprising of non-govt organisations, it is that part of a nation's economy that is not controlled by the govt. -Profit seeking and not-for-profit organisations -Businesses -Charities -Clubs
Co-Operatives	Autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly owned and democratically controlled enterprise. -REI
A queue of people standing at a bus stop is an example of an organisations if they all want to travel to the same place. True or False?	False
Which of the following best completes the statement: "Financial considerations are not a constant constraint in NFP organisations because..." A) They have no profits to reinvest B) They meet the needs of people who cannot afford to pay very much C) They do not have a flow of sales revenue D) Their prime objectives are not financial but they still need money to enable them to reach them	D
Which of the following is not a key stakeholder group for a charity? A) employee and volunteers B) shareholders C) donors D) beneficiaries	B. Do not have shareholders.
Which one of the following would not be a stakeholder for a mutual society? A) shareholders B) customers C) employees D) managers	A. Don't have shareholders as it is owned collectively by its customers
Some building societies have de-mutualized and become banks with shareholders. Comment on how this may have effected lenders and borrowers.	Mutual building societies exist for the benefit of their members reflected as: interest rates for borrowers as low as possible and interest rates for savers as high as possible. Once moved to shareholders, then must seek to maximise profit. Thus, increasing borrowers rates and reducing saving rates.
Which of the following are usually seen as the primary objectives of companies? (I) to maximise the wealth of shareholders (II) to protect the environment (III) to make profit A) I, II, & III B) I & II only C) II & III only D) I & III only	D. Companies exist primarily to maximise the return to their owners.
Many schools run fundraising events such as fêtes, where the intention is to make a profit. This makes them "profit-seeking". True or False?	False. Schools run fundraisers to raise money for extra books, to improve quality of education, not profit.
Attempts to measure and increase shareholder value have focused on incorporating 3 key issues:	1) Cash is preferable to profit - cash flows have a higher correlation with shareholder wealth than profits 2) Exceeding the cost of capital - the return, however measured, must be sufficient to cover not just the cost of debt but also the cost of equity (return required by shareholders) 3) Managing both long- & short- term perspectives - investors are increasingly looking at long-term value
Many variables will affect the value of shares. These fall into 2 groups:	External (onset of a recession) AND Internal (failure of a new product)
Stakeholders	Those persons and organisations that have an interest in the strategy of an organisation. Include: shareholders, customers, staff and local community. Catagorised into 3 groups: 1) internal (employees) 2) connected (shareholders) 3) external (government)
Stakeholder Interest	An interest or concern that a stakeholder has in an organisation's actions, objectives or policies
Stakeholder Influence	The level of involvement that a stakeholder has in the functions of an organisation and the ability to bring about a desired change.
Three main economic systems:	1) Market Economy 2) Command Economy 3) Mixed Economy
Market Economy	Interaction between supply and demand (market forces) determines what is made, in what quantity and who get the output. Patterns of economic activity are determined by the decisions made by individual consumers and producers.
Command Economy	Production decisions are controlled by the government
Mixed Economy	In reality most modern economies are a mix of free markets and government intervention.
free market	In a free market, the quantity and price of goods supplied in a market are determined by the interaction between supply and demand. A market will be set by the "invisible hand of the market" through the interaction of supply and demand.
Individual Demand	Shows how much of a good or service someone intends to buy at different prices. This demand needs to be backed by available money rather than just a general desire without the necessary financial backing.
When the demand for a good or service changes in responses to a change in price, the change is referred to as: 1) 2)	1) Expansion in demand- quantity demanded rises due to a fall in price 2) Contraction in demand- quantity demanded falls due to a rise in price.
Demand Curve	A diagram where the relationship between demand and price can be shown. (note: economic approach is plotting the quantity along the horizontal axis and price on vertical axis; usually show quantity on the vertical since it is dependent on price)
Market Demand	PRICE IS VARIABLE Show the total amount of effective demand from all the consumers in a market. Aggregate, like the supply curve for an industry. Usually shortened to demand. Slope is downwards from the right to left \
Conditions of Demand	PRICE IS HELD CONSTANT 1) Income Changes- i.e. lower direct taxes would raise disposable income (normal goods- increase in income= increase in demand inferior goods- rise in income= lower demand) 2) Tastes- i.e. ebb and flow of fashion/fads 3) Prices of Other Goods- i.e. tyre price change affects car prices 4) Population- increase in population creates larger markets which shift demand outwards Any change in one or more conditions of demand will create shifts in the demand curve itself
Reminder on INCREASES/DECREASES EXPANSION/CONTRACTION	If Price Change occurs, there will be Movement Along the Demand Curve and result will be an Expansion or Contraction in demand If the Conditions of Demand change, there will be a Shift in the Demand Curve and the result will be an Increase or Decrease in demand
A demand curve is drawn for JMD, a health supplement provider, assuming all but one of the following remains unchanged. Which item can vary? A) The price of the competitor's price B) The cost of labour to make the product C) The price of the product D) The level of growth in the economy	C) The price of the product When drawing a demand curve only the price is allowed to vary but all conditions of demand are kept constant
Which one of the following would lead to the demand curve for health supplements shifting to the right? A) Adverse publicity that suggests supplements to be harmful B) A fall in disposable income of consumers C) A fall in the price of supplements D) An increase in the size of the population due to people living longer	D) An increase in the size of the population due to people living longer A larger population would presumably want more supplements A & B would shift to the left. C would result in the movement along the curve but not a shift.
Which of the following would not lead to a shift in the demand curve for overseas holidays? A) An advertising campaign by holiday-tour operators. B) A fall in the disposable income of consumers C) A rise in the price of domestic holidays D) A rise in the exchange rate for the domestic currency	D) A rise in the exchange rate for the domestic currency Change in exchange rates effectively changes the price of foreign holidays and leads to a movement along the demand curve not a shift.
Two ways of calculating Price Elasticity of Demand (PED):	1) non-average arc method- uses from starting point 2) average arc method- uses average
Principals	legal owners of the organisation (shareholders)
Agents	those appointed by the principals to act on their behalf such as the board of directors and senior managers in a company
Principal-Agent Problem	This separation of ownership and control leads to a potential conflict of interest between directors (agents) and shareholders (principals). Principals have to figure out a way to ensure their agents act in their interests.
Corporate Governance	"The systems by which companies and other organisations are directed and controlled" with rules and aspects such as: keeping separate the roles of chairperson and chief executive, limited contracts, non-executive directors with no financial interest, etc
A company makes personalised gifts, which of the following is not a prime objective of corporate governance: A) to control directors' activites B) to improve the way the company is run C) to improve employee's working conditions D) to protect shareholder interest	C) to improve employee's working conditions While governance would ensure compliance with relevant legislation concerning employee working conditions, the primary focus is not employees per se.
Give 2 reasons why shareholders may lose control of the company they own.	- companies may become too big for shareholders to effectively control - companies may become too complex for shareholders to control - individual shareholders may lack the power, knowledge, interest or time to control the companies they own
Summary of price elasticity:	(Expect PED to be negative because price and quantity demanded are inversely related.) If the quantity purchased changes more than price change (say, 10%/5%), the product is termed elastic. (# between -1 & -∞) If the change in quantity purchased is the same as the price change (say, 10%/10% = 1), the product is said to have unit (or unitary) price elasticity. (-1 or 1) i.e. cameras, air travel If the quantity purchased changes less than the price (say, 5%/10%), then the product is termed inelastic. (# between 0 & 1) i.e. tea, salt
Price Elasticity of Demand	If the quantity demanded of a product exhibits a large change in response to its price change, it is termed "elastic,"; quantity stretched far from its prior point. If the quantity purchased has a small change in response to its price, it is termed "inelastic"; quantity didn't stretch much from its prior point. The more easily a shopper can substitute one product with a rising price for another, the more the price will fall – be "elastic."
Factors that influence PED	1) Proportion of income of consumers spent on the good (small price change will be unlikely to have much impact is a good constitutes a small portion. Demand for unimportant items=inelastic Demand for important items= elastic) 2) Substitutes (close and available substitutes and a price increase will likely cause a fall in quantity demanded since consumers can buy similar alts. Box of chocolates has competing brands= elastic Unique product= inelastic) 3) Necessities (vital goods= inelastic nonvital= elastic) 4) Habit (newspaper, cigs= inelastic) 5) Time (ignorant of alts, even if price changes, don't take the time to research and buy same product when price changes=inelastic until gather knowledge) 6) Definition of Market (
Using the factors that influence PED, consider if the demand for petrol to be elastic or inelastic.	1) Proportion to income Spent- high petrol prices = high expenditure to income= elastic 2) Substitutes- cannot sub different fuel for their type of car= inelastic 3) Necessity- many consider driving a necessity= inelastic 4) Habit- drivers are used to their cars and wouldn't consider public transport= inelastic 5) Time- if driver wanted to switch from petrol car to electric, selling it would take time= inelastic 6) Definition of Market- if petrol in general specified= inelastic if specify a particular petrol brand then there may be close subs= elastic
PED and total revenue	If total revenue increases following price cut, then demand is price elastic If total revenue increases following a price rise, then demand is price inelastic If total revenue falls after price cut, then demand is inelastic If total revenue falls after a price rise, then demand is elastic If total revenue remains unchanged, then demand is of unitary elasticity
If the demand for a good is price elastic, a fall in its price will lead to: (i) a rise in unit sales (ii) a fall in unit sales (iii) a rise in total sales revenue (iv) a fall in total sales revenue A) (i) & (iii) only B) (i) & (iv) only C) (ii) & (iii) only D) (ii) & (iv) only	A) (i) (iii) only If the demand for a good is price elastic, the demand for it will change more than proportionately to the change in price. Thus a price fall will raise unit sales and will increase total sales revenue.
Supply Curve (supply)	Shows how much producers would be willing to offer for sale, at different prices, over a given period of time. The supply curve of a firm is underpinned by the desire to make profit. It demonstrates what a firm will provide to the market at certain prices. Given that cost is one of the main determinants of supply an increase in price will usually result in greater supply. Thus supply curves are usually upward sloping. /
Market Supply Curve	Assuming that all the firms in an industry are identical , a market supply curve is composed of all the supply curves of the individual producers in the industry added together. This supply curve is aggregate, which shows what producers are willing to offer for sale at any given price /
Conditions of supply	All factors which influence supply except the price of the good. - if costs fall, the supply curve will shift outwards to the right -if costs rise, the supply curve will shift inwards toward the left (cost will include labor/capital/raw materials/other inputs/indirect taxes)
Summary Elasticity of Supply	If a change in price induces a larger proportionate change in quantity supplied= price elastic (< 1) If a change in price induces a smaller proportionate change in the quantity supplied = price inelastic (> 1) If a change in price induces an equally proportionate change in the quantity supplied = unit elasticity (1)
Price Elasticity of Supply	A high PES means that a given price change leads to a larger proportionate change in supply. Price rise = expansion in supply A low PES means that a given price change leads to a smaller proportionate change in supply. Price fall= contraction in supply
Factors that influence elasticity of Supply	1) Time- tends to be more elastic in the long run. Agriculture supply is fixed so inelastic 2) Factors of production- Supply can be changed (elastic) if there are available factors with which outputs can be raised 3) Stock levels- extensive stock of finished product, can be released onto the market (elastic). Stock levels tend to be higher when business people are optimistic and interest rates are low 4) # of firms in industry- if there are many firms in the industry (elastic)
Using the factors that influence elasticity of supply: Is the supply of fresh milk price elastic or inelastic?	1) Time- # of cows available and their milk output is difficult to increase (inelastic) 2) Factors of production- the fact that all the milk of existing cows will be being sold already, so farmers would have to buy new cows from a different market (inelastic) 3) Stock levels- fresh milk cannot be stored for long (inelastic) 4) # of firms in the industry- depends on the country and their system of quotas One would expect supply to be inelastic, at least in the short run.
What effect will higher wages have on the supply curve?	Higher wages will cause the supply curve to shift upwards and to the left, parallel to the original supply.
Equilibrium	If the demand of consumers and the supply plans of sellers correspond, then the market is deemed to be in equilibrium .
When the price of a good is held above the equilibrium price, the result will be: A) excess demand B) a shortage of the good C) a surplus of the good D) an increase in demand	C) a surplus of the good When the price of a good is held above the equilibrium price suppliers will be willing to supply more at this higher price. However, consumers will demand less. The combined effect of this is to create a surplus of the goods.
When the price of a good is reduced and held below the equilibrium price, the result will be all except one of the following: A) excess demand B) a shortage of the good C) a surplus of the good D) an expansion in demand	C) When the price of the good is held below the equilibrium price suppliers will be willing to supply less at this lower rate. However, consumers will demand more. The combined effect of this is to create an expansion in demand, a shortage of goods and excess demand.
Equilibrium Changes	-If the demand curve or the supply curve shifts, price and the quantity bought/sold will change -If supply shifts, the resulting change in price will depend on the price elasticity of demand -If demand shifts, the resulting change in price will depend on the price elasticity of supply E.g. A poor harvest for an agricultural good will shift the supply curve to the left, resulting in a price rise.
Much of the world's coffee is grown in South America. By use of supply and demand curves explain what would happen to the price of coffee if bad storms in South America damaged much of the coffee crop.	In the short term price would rise: the poor harvest with shift the supply curve to the left but the demand curve is unlikely to move. The equilibrium # will move up, giving a price rise. In the longer term the price will fall as supply moves back to the right.
Market Failure	The inability to allocate resources in a way that maximises utility. Government can then have a role to intervene to ensure that a market functions efficiently.
Public goods	Without government intervention some goods would not be provided at all by a market economy.
Public goods: non-excludability	a person can benefit from the good without having to pay for it. Provision of the good for one member of society automatically allows the rest of society also to benefit
Public goods: non-rivalry	consumption of the good by one person does not reduce the amount available for consumption by others
Pure public goods are goods: A) which are produced by the government B) whose production involves no externalities C) whose consumption by one person implies less consumption by others D) where individuals cannot be excluded from consuming them	D) where individuals cannot be excluded from consuming them pure public goods are those which must be provided communally , e.g. defence or public transport
Economies of Scale	(increasing returns to scale) the cost savings resulting from any activity or process which is made possible by increasing the scale of output. This could lower costs and the industry would strive for technical efficiency. E.g. a larger firm may be able to gain greater discounts when purchasing raw material
Externalities	Social costs or benefits that are not automatically included in the supply and demand curves for a product or service. Social costs arising from production and consumption of a good or service are described as negative externalities (environmental damage, healthcare for smokers) and social benefits as positive externalities. Supply and demand curves only take into account private costs and benefits, i.e. the costs that accrue directly to the supplier or the benefits that accrue directly to the consume
One way of reducing negative externalities:	such as pollution: would be to tax the supplier concerned, thus adding to their costs. This would shift the supply curve to the left (S1 to S2), resulting in an equilibrium with higher prices (P to P2) and lower quantity (Q to Q2) Image: Graph (binary/octet-stream)
True or False? The cost of packaging for cigarettes is a negative externality.	False- The cost of packaging is paid for by the supplier and is therefore included in the supply curve
True or False? The benefits to society from education are a positive externality.	True- Not only does the individual benefit from the education but so does society as a whole through a more productive workforce
True or False? The fine incurred for polluting a watercourse is a negative externality.	False- The cost of the fine is met by the company and not by society as a whole. For something to be an externality it has to be shared by society
True or False? Damage to pine forests from pollution is a negative externality.	True- Society as a whole bears the cost of the pollution, in terms of replanting forests, the lost utility of their enjoyment and the negative impact it has on the environment.
Merit Goods	Are ones that is generally agreed should be available to all, irrespective of the ability to pay. Characterised by external social benefits (positive externalities) in consumption or by lack of knowledge of the private benefits in consumption.
Demerit Goods	a good or service which is considered unhealthy, degrading, or otherwise socially undesirable due to the perceived negative effects on the consumers themselves. The concern is that a free market results in excessive consumption of the goods. (ex. tobacco, alcohol, drugs, gambling, junk food.)
Which of the following are examples of merit goods? A) street lighting True or False? B) education True or False? C) healthcare True or False? D) defence True or False?	A) False B) True C) True D) False B/C result in positive externalities but can be provided by the private sector often purchased by individuals- merit goods. A/D would not be provided effectively by the private sector due to the problems of charging for them; non-rivalry, non-exclusivity, free rider problem- public goods rather than merit goods.
Competition Policy	As markets have become more heavily concentrated among fewer firms more controls have been applied to restrictive trade practices and pricing. Justifications: -Collusion by suppliers & the operation of cartels usually lead to higher prices &/or monopoly profits & possibly lower output -In turn reduce consumer welfare -They are a reduction in allocative efficiency.
Scope of Regulation (competition policy): Mergers and Acquisitions	Role is taken by the Competition & Markets Authority (formerly the Competition Commission) and a 25% market share or above is seen as a possible indicator of a substantial lessening of competition that may warrant further investigation (excessive market power). (US- antitrust laws = enforced by the Federal Trade Commission's Bureau of Competition)
Scope of Regulation (competition policy): Restrictive Trade Practices	Activities such as collusion over price fixing reduce competition within a market & undermine consumer power (UK- Competition & Markets Authority=investigates anti-competitive behavior in markets US- Federal Trade Commission= protects consumers & maintains competition)
Scope of Regulation (competition policy): State created regional monopolies	Where the process of privatisation converting state owned organisations into private companies. (regional monopolies) For example, water and other utilities. To control such monopolies, govt set up industry regulators that will negotiate with firms over key issues of pricing & required investment to leave an appropriate level of return for shareholders.
Which of the following is not a valid economic reason for producing a good or service in the public sector? A) The good is a basic commodity consumed by everyone B) It is a public good C) There is a natural monopoly in the production of the good D) It is a merit good	A) The good is a basic commodity consumed by everyone. -Because a commodity is consumed by everyone (food), it doesn't follow that it has any special features such that it can't be produced efficiently in a competitive market in the private sector. All other responses are valid reasons why a good or service should be produced wholly, or partly, in the public sector.
Government sets minimum prices	Supply > Demand -to fight poverty -creates excess supply -waste/misallocation of resources -protect suppliers/producers
Government sets maximum prices	Demand > Supply -Shortages of supply -misallocation of resources -to protect consumers/control inflation benefits consumers on low income, so they can afford the good.
A government introduces a minimum price below free market price. Which one of the following describes the consequences of this? A) There will be no effect on market price or producer incomes B) Suppliers will withdraw from the market due to falling incomes C) Unsold surpluses of the product will build up D) Demand for the product will contract	A) There will be no effect on market price or producer incomes -The free market price will not change. B confused a maximum price with minimum price C/D refer to a minimum price set above free market price
Diseconomies of Scale	(decreasing/diminishing returns to scale) increases in unit average costs caused by increasing the scale of production in the long run. E.g. a firm grows very large. Reflecting the difficulty of communicating within a large organisation, together with a decline of production in the long run.
Internal Economies of scale	When the advantage of expanding the scale of operation accrue to just one firm. They can be obtained in one plant, belonging to a firm or across the whole company. Main economies: 1) technical 2) financial 3) trading 4) managerial
(internal economies of scale) technical economies	these relate to the scale of the production and are usually obtained in one plant. Large-scale operations may make greater use of advanced machinery
(internal economies of scale) financial economies	Usually easier for large firms with household names to borrow money from commercial banks and raise fund.
(internal economies of scale) trading economies	large firms may be able to secure advantages both when buying inputs and selling their outputs. Employ specialist buyers and through quantity of purchases, gain significant discounts
(internal economies of scale) managerial economies	the many administrative gains which can be achieved when the scale of production grows. The need for management and supervision doesn't increase at the same rate as output. Specialist can be employed and their talents can be fully utilised in personnel, production, selling, accountancy, etc. Such organisational benefits may lower the indirect costs of production and lead to efficient use of labour resources.
External Economies of Scale	imply that as the size of an industry grows larger or more clustered, the average costs of doing business within the industry fall. This may occur due to increased specialization or training of workers, faster innovation or shared supplier relationships. (industry wide level as opposed to firm level-internal)
Technical Diseconomies of scale	The optimum technical size of plant may create large administrative overheads in its operation, thereby raising the average total cost (ATC), even though the production cost is lowered
Trading diseconomies of scale	With large scale production, products may become standardised. Lack of individualism may reduce consumer choice and lead to lower sales. May be difficult to quickly adapt mass-produced goods to changing market trends.
Managerial diseconomies of scale	as the chain of command becomes longer in an expanding hierarchy (when productive capacity grows), senior management may become too remote and lose control. The may lead to complacency in middle management and shop floor hostility.
In a company such as ESD, a calculator manufacturer, which of the following is not a source of economies of scale? A) The introduction of specialist capital equipment B) Bulk-buying C) The employment of specialist managers D) Cost savings resulting from new production techniques	D) Cost savings resulting from new production techniques Economies of scale are the cost savings resulting from any activity or process which is made possible by increasing the scale of output. A/B/C-since these are made possible as the size of business increases=economies of scale D-refers to technical change and this would reduce cost for all producers, large and small
A good has a price inelastic demand. If the supply curve shifts to the left the result will be a rise in price and: A) a decrease in demand and a fall in total expenditure on the good B) a decrease in demand and a rise in total expenditure on the good C) a contraction in demand and a fall in total expenditure on the good D) a contraction in demand and a rise in total expenditure on the good	D) a contraction in demand and a rise in total expenditure on the good

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CIMA Cert BA 1- MICROeconomics

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