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Homework answers / question archive / Business Decision Making Unit 1 Organisations: identity, stakeholders and responsibilities Introduction • Individuals make decisions every day e

Business Decision Making Unit 1 Organisations: identity, stakeholders and responsibilities Introduction • Individuals make decisions every day e

Business

Business Decision Making Unit 1 Organisations: identity, stakeholders and responsibilities Introduction • Individuals make decisions every day e.g. what to wear, what to eat, what to study and/or where to live? • Management in organisations also make decisions e.g. what price to set, who to employ, what type of business to start, when to expand, how to cope in a crisis? Approaches to decision making • Holistic approach to making decisions • Stakeholders (those that have an interest in the decision making process and the potential outcome/s) and include: - Consumers Employees Investors Community groups Flora & fauna (natural environment) • Microeconomics - Market places, efficiency (benefit vs cost) • Legal - Establish laws, rules and regulations Decision making Who? How? Why? When? Organisations or people? • Organisations are not people, each has its own own identity and people act on its behalf • Organisational identity involves cognitive (thinking) and social process • Decision made by people within organisations have consequences for people also within and beyond the organisation Management objectives • Managers of organisations typically have three overarching objectives: - “being responsible for addressing the needs of various stakeholders and the entities (e.g. the planet) that they represent” (the corporate responsibility objective of the organisation) - the production and distribution of goods and services (the economic objective of the organisation) - the formation and management of a legal entity (the legal objective of the organisation) Stakeholder approach • Stakeholders are a large community that is composed of various interrelated groups of human and non-human entities and are typically represented below: managers employees shareholders/owners Stakeholders government banks customers community suppliers Stakeholders Managers • Ethical and legal decision making across the business Employees • Motivated workers that are treated in accordance to workplace laws Stakeholders Customers • Desire products that meet requirements as established under relevant consumer laws and that satisfy their needs and wants Community • Environmental considerations such as waste management and other aspects of corporate social responsibility including corporate fraud are often prominent concerns Stakeholders Suppliers • Businesses that provide the raw materials and/or finished goods for sale Shareholders/owners • Seek profits and investment returns in accordance with the regulatory framework Stakeholders Banks • Are often the source of funds used to start and/or assist the business financially Government • Provide the legal framework for the business’s operation Stakeholders • Occasionally the stakeholders in a business will experience conflict • Whilst most business managers attempt to balance the interests of its stakeholders it is apparent that different groups will pursue different priorities Stakeholders • A recent example of conflict could be the desire by some business managers to maximise financial return for owners through costs minimisation • This act may require working with using suppliers to provide the business cheaper goods • To achieve this however may cause conflict as the supplier may achieve this by compromising worker safety and/or paying less than minimum wages • The best managers will be able to reconcile (bring together) the interests of stakeholders Case Study – Rana Plaza • In 2013 a garment factory building collapsed in Bangladesh, killing 1000 workers • The building’s owners were wrongly granted construction approval • Business owners encouraged workers to return to work despite indication were that the building was unsafe • Businesses located within the building produced top brands through low production costs, unsafe building codes and low wages for workers • https://www.abc.net.au/news/2013-04-30/bangladesh-buildingcollapse-fashion-industry/4661162?nw=0 Corporate social responsibility (CSR) in business • CSR is the process whereby the business’s management is expected to comply with accepted business practices in all functional areas – operations, marketing, finance and human resources • Reporting usually addresses social, financial and environmental compliance and programs Corporate social responsibility (CSR) in business • Rise of CSR apparent all aspects of business operation but especially in the operations process • Business management increasingly appreciative of the need to ensure that business conduct complies with ethical expectations of a range of stakeholders • Those businesses that adopt more ethical behaviour are looked upon favourably by customers Corporate social responsibility (CSR) in business • Can be linked to business success should the business ensure its actions accord with appropriate financial management, have minimal impact on the environment and have an otherwise positive impact on society including stakeholders through its behaviour Corporate social responsibility (CSR) in business “A socially responsible firm is one whose managerial staff balances a multiplicity of interests. Instead of striving only for larger profits for its shareholders, a responsible enterprise also takes into account employees, suppliers, dealers, local communities, and the nation.” Source: Harold Johnson Business in Contemporary Society: Framework and Issues Corporate social responsibility (CSR) in business Source: www.bbc.com Corporate social responsibility (CSR) in business • Australian companies often report CSR through economic, social and environmental performance in annual reports, separate sustainability reports, environmental and/or social reports or a triple bottom line report • The triple bottom line, TBL or 3BL is an accounting framework that that expands upon the traditional reporting of profit or loss for a business the so-called “bottom line” that appears at the end of an income statement Corporate social responsibility (CSR) in business • In Australia CSR is reported in the annual reports of larger businesses but smaller businesses are also addressing it as well • An example of CSR reporting by an Australian global mining business https://www.bhp.com Corporate social responsibility (CSR) in business Governance • Climate change • Business transparency • Integrity People • Safe workplaces • Healthy workers • Remuneration Environment • Water management • Biodiversity and land management • Greenhouse gas emissions Society • Positive contributions • Acknowledge human rights • Engaging with community Corporate social responsibility (CSR) in business - Kathmandu • Kathmandu seeks to make its biggest statement through corporate social responsibility. This includes protecting worker’s rights, better understanding its supply chain and minimising its waste to lower its environmental impact • Management recognises the challenges it faces in this area and identifies three key focus areas in its Community Investment Strategy Corporate social responsibility (CSR) Kathmandu Source: https://www.kathmandu.com.au/our-footprint Corporate social responsibility (CSR) Kathmandu • The business effects seek to empower customers, supporting community-based projects and, in particular, contributing to social change in Nepal (the region that it claims inspires its brand) • More specifically this involves: partnerships — the development of programs in educational and financial aid, animal and heritage conservation, disaster and poverty relief Corporate social responsibility (CSR) Kathmandu • Clothing recycling — the ability of customers to donate used clothing through the Red Cross, which is then sold via one of the charity’s shops to raise money for local and international humanitarian work • https://www.youtube.com/watch?time_continue=23&v=fojIvwe 8Enc Corporate social responsibility (CSR) in business • Environmental sustainability is an important feature of operations • Effective CSR in this area ensures that finite natural resources are used in such a way that preserves them for future generations • Any business production process e.g. waste disposal will have minimal environmental impact Corporate social responsibility (CSR) in business • Businesses have been criticised for clearing extensive areas of rainforest, over-fishing oceans, polluting waterways with mining and manufacturing waste, excessive use of fossil fuels with little consideration of the ecological footprint • Where self-regulation has not been effective many governments are now legislating for greater environmental sustainability Corporate social responsibility (CSR) in business • Socially responsible businesses are becoming more common and recognised formally as good ‘corporate citizens’ through more community minded behaviour • Evidence in this behaviour through encouraging indigenous Australians and providing traineeships and employment opportunities for sections of the community Ethics in business • A business’s ethics relate to the standards, behaviour, principles and values that influence the actions of the individuals within the business • Ethics lie beyond government control - that is the place of the law Business management’s legal framework • The legal environment within which the business operates and it provides the rules and laws that guides management decision making • Laws also direct the business’s legal status e.g. government agency, private company or charitable organisation Business management’s economic framework • A market pace with buyers, sellers, competitors and government • The economic goal is directed by the concept of efficiency – maximising the use of scarce resources Organisational goals and objectives • Goals are objectives aligned with determined outcomes and values relating to: - Profit maximisation - Longevity - Reputation - Impact Organisational goals and objectives • The identity of the organisation informs the organisation’s goals and objectives, which, in turn, influence the decisions organisations make • The goals and objectives of the organisation are mostly associated with the outcomes that the organisation values • Understanding the organisation’s goals and objectives provides a critical reference point for understanding we make decisions are made by helping understand how each decision outcome contributes to our overall objectives, which helps to reinforce the organisation’s identity Organisational goals and objectives • The guiding principle for determining the organisation’s goals and objectives is responsibility for satisfying the demands of all its stakeholders • All organisations, regardless of whether they are a for-profit or non-for-profit entity, must consider every stakeholder in its goals and objectives • The guiding principle for determining the economic organisation’s goals and objectives is maximising efficiency in producing goods or services Organisational goals and objectives • Maintaining compliance with the laws is the major principle behind the goals and objectives of the organisation. This includes compliance in the contractual obligations with other entities, including its employees, buyers, and suppliers • Potential goals and objectives that can be complementary, whereas there are goals and objectives that can be contradictory Business Decision Making Unit 2 Nature of organisations Textbook reference Dobrescu, L.I., Motta, A., French, S., Manwaring, K., Taylor, J., 2020. The Economic and Legal Principles of Business Decision Making, 1st edition (pp 21-29) Australia’s legal system • Law and justice - Law and justice are not the same thing • Law, morality and society - Morality and law may coincide • The legal system - The legal system is a framework that enables business decision making, and involves many people that: - make and change the law (parliament – the legislature that is statutes/acts) - interpret and apply the law (judges/courts – the judiciary that is common law) - administer/enforce the laws (elected government - the executive) - advise on the law (legal advisors) - research, write about and teach the law Australia’s legal system Australia’s legal system Australia’s Constitution defines the boundaries of law making powers between the commonwealth and the states/territories Public and private law • Public law – the organisation of government and its relationship with the people including administrative, constitutional, criminal and taxation laws • Private law – deals with disputes between individuals or organisations and include contract, commercial, torts (civil wrong), property and business entities How do organisations begin? • Legal considerations - name of the business - is the business legal - will someone else’s property (land or ideas) be used • Contractual requirements - employment conditions - supply contracts - funds required - taxation - profit sharing • What happens when the business expands? Do these considerations change? Organisational duties and responsibilities • Organisations have relationships that confer power e.g. employees, shareholders, banks, suppliers and this ‘power’ carries a degree of responsibility • In the Australian legal system the relationships where courts impose the strictest duties are called ‘fiduciary relationships’ • A fiduciary duty exists where a person or company is required to put another person's interests before their own e.g. doctors and patients, company directors and the business Business structures • Starting a business - which business structure to adopt? Partnership Sole trader Company Legal structures for business Trust 8 Choice of business structure Unincorporated Incorporated Limited company Unlimited company No liability company Sole trader Partnership Private (Proprietary Limited - Pty Ltd) Public (Limited - Ltd) 9 Sole trader • A person carrying on a business as an individual • Easy to establish and run • Risk of personal liability – unlimited liability that is in the event that the business owner incurs debts during the operation of the business and can’t repay creditors then personal assets may be sold • Owns and has full control of the business – business and owner as ‘one’ • Access to limited resources/finance • No formal public disclosure requirements 10 Partnership • Exists between persons carrying on a business in common with a view to profit • Each partner is an agent for the other partners, called “mutual agency” by entering into contracts within the scope of the business then it will be binding on all partners • Partners agree to share profits or losses in specified proportions • Partners jointly liable for debts and “wrongs” e.g. damages or injuries • Not a separate legal entity – unlimited liability • Easy to establish • Risk of personal/joint liability • Control/decisions divided between partners • No public disclosure requirements 11 Companies and other bodies corporate • A company (corporation) is an association of persons who satisfy the Federal Corporations Act 2001 (Cth) for registration (incorporation) • Some bodies can be created under the State Associations Incorporations Act or Acts of Parliament e.g. UNSW • Created through the process of registration • Separate legal entity – owner and business not as ‘one’ as such and liability is limited to the amount of unpaid capital • Members of a limited company have limited liability • Management can be separated from ownership eg. public company • Taxed at a flat rate - Australia (30%) 12 Proprietary and public companies Private/proprietary company (Pty Ltd) • Maximum 50 shareholders • Most suitable for use by a small business • Financial secrecy for small proprietary companies • Restricted fundraising ability • Less regulatory burdens than public companies Public company (Ltd) • May be listed on Australian Securities Exchange (ASX) • Raise funds from the public • Subject to financial disclosure and more regulation Non for profit (NFP) organisations • Organisations limited by guarantee • Do not issue shares • Raise funds from donations, subscriptions, social activities and borrowing • If organisation liquidated, members are called upon to pay debts up to amount guaranteed when they joined the company Trusts • Involves a person (this can be a human being or can be a legal person such as a company) holding property for the benefit of other persons or for specified purposes • Developed from English case law • The person holding the property is called the trustee • The property is called the trust property Trusts • The person for whose benefit the property is held is the beneficiary • The courts will very strictly enforce the nature of the trustee’s obligations to the beneficiaries so that, while the trustee is the legal owner of the relevant property, the property must be used only for the benefit of the beneficiaries • Trustees have what is known as a fiduciary duty towards beneficiaries and the courts will always enforce this duty rigorously Types of trusts • Discretionary trusts where the trustee determines the beneficiaries and the amounts they will receive each year • Discretionary trusts are flexible in that the trustee can take into consideration the personal circumstances and taxation position of the various beneficiaries from year to year • The trustee can only distribute to beneficiaries as set out in the terms of the trust deed Types of trusts • A fixed trust - the trustee holds the trust property for identified persons (the beneficiaries) that have a ‘beneficial interest’ (the right to require the trustee to carry out the requirements of the trust) • A unit trust is a type of fixed trust where the beneficial interest in the trust is divided into ‘units’ which can be purchased and sold as is the case with a company share • Unit trusts can be listed on the securities exchange and are often used to aggregate investors funds and to spread risk Director’s duties and the interests of stakeholders • Directors and executive management of a company owe fiduciary duties to the company • One of these is a duty to act honestly in the best interests of the company - duty of care and diligence • Directors consider the best interests of shareholders and creditors when making decisions Case study - James Hardie • Australian Securities and Investments Commission (ASIC) successfully brought proceedings against the directors and officers of the then parent company of the James Hardie group for breach of the duty of care and diligence that related to misleading statements • The High Court of Australia ruled that seven former James Hardie non-executive directors breached corporate law by making a misleading statement about the company's asbestos compensation fund Business contracts • A contract is a legally binding agreement between at least two parties that defines and governs the rights and duties of the parties to an agreement • It is legally enforceable because it meets the requirements and approval of the law • Examples of contracts - the purchaser of goods and services, a borrower of money, a rental agreement and/or a franchise agreement - a supplier of goods and services – retailer, wholesaler and/or independent contractor - partnering agreement with other businesses – partnerships, joint ventures, consortium (group of businesses) - employing people Business contracts • Contracts represent a voluntary exchange of promises between people with equal bargaining power • It is an agreement made between two or more parties with the intention of certain legal rights and obligations which the law will enforce • The essential elements of a contract are Agreement (offer and acceptance) Consideration Intention to create legal relations Contract Business contracts • In the event that parties fail to perform their contractual obligations they are said to be breach of their contract • Breach of a term of a contract (conditions - essential) and/or (warranties - not essential) might give rise to a claim for remedies in the form of damages and/or the right to terminate the contract Business contracts • The remedies for breach of contact are rescission, damages, specific performance and injunction • Rescission – terminate/unmaking of the contract between parties and is the process of unwinding the transaction as far back as possible to the position the parties were in before they entered into the contract • Damages – designed to put the plaintiff (person bringing the action) in the position they would have been in had the contract been performed properly Business contracts • Equitable remedies – specific performance and injunction • Specific performance is an order from the court that requests the party to perform an obligation that they undertook to do but has failed, refused or not carried out, for example, a seller of a unique artwork refuses to deliver it to the buyer who is then unable to easily find an identical replacement elsewhere. This may require an order of specific performance • Injunction is a court order that has the power to restrain (prohibit) a person from doing an act such as breach of contract Business contracts • In practice not all parties to a contract have equal power e.g. borrowing money from a bank • This imbalance of power is redressed to a degree by the “unconscionable conduct” provisions in Australian Consumer Law (ACL) • ACL prohibits a person, in trade or commerce, from engaging in unconscionable conduct in supplying or acquiring goods or services • Unconscionable conduct is behaviour that is particularly harsh, unfair or oppressive and against conscience as judged against the norms of society • Penalties for unconscionable conduct may include damages or injunctions Business Decision Making Unit 3 Economic possibilities and the true cost of doing business Textbook reference Dobrescu, L.I., Motta, A., French, S., Manwaring, K., Taylor, J., 2020. The Economic and Legal Principles of Business Decision Making, 1st edition (pp 33 - 49) What is economics? • You cannot have everything you want • How do you calculate your costs and benefits • Choices between competing wants (those things that make life more enjoyable) is necessary • When you make a choice: - What is the benefit? - What do you give up (sacrifice)? Definition of economics • Economics - the study of choice in a world of unlimited wants and scarce resources • Scarcity - a fundamental fact of life and the role of decisions about trade-offs 3 What are the characteristics of a good model? • A simplification of the real world • A lesson can be drawn about how the world operates • The model can be tested and modified How are economic models used? • The model is used to make predictions and then these can be tested Question • Which statement best describes the study of economics? a. Production possibility curves and other economic models b. How scarce resources are used to satisfy unlimited wants c. Money and its various uses d. How governments raise taxation revenue to finance spending Answer • Which statement best describes the study of economics? a. Production possibility curves and other economic models b. How scarce resources are used to satisfy unlimited wants c. Money and its various uses d. How governments raise taxation revenue to finance spending Question • The economic problem involves which of the following? a. The satisfaction of individual and collective wants b. Should production focus on consumer or capital goods c. The issue of scarcity and making the choice of how to best use resources d. Introducing new technology to produce goods Answer • The economic problem involves which of the following? a. The satisfaction of individual and collective wants b. Should production focus on consumer or capital goods c. The issue of scarcity and making the choice of how to best use resources d. Introducing new technology to produce goods Question • Which statement best describes the economic problem of ‘scarcity’? a. Limited needs and wants and unlimited resources b. Scarcity of supply for all goods and services c. Limited resources and unlimited wants d. Limited supply of resources means that poverty will never be eliminated Answer • Which statement best describes the economic problem of ‘scarcity’? a. Limited needs and wants and unlimited resources b. Scarcity of supply for all goods and services c. Limited resources and unlimited wants d. Limited supply of resources means that poverty will never be eliminated The first model Question: Why are markets necessary? Assumptions: • There are 2 possible activities • There are 2 individuals • When trading, there are - no transaction costs (negotiation/transportation costs) - no other barriers to trade (import quotas, tariffs) One-agent economy Constraint: • Resources are scarce • Time is limited - 24 hours per day (8 hours per day of sleep) so 16 hours available One-agent economy • Two productive activities (assumption 1) - collecting bananas and catching rabbits • Performing an activity involves use of resources - 1kg bananas takes 1 hour to collect - 1kg rabbits takes 2 hours to catch • The amount of resources used to perform a productive activity determines productivity One-agent economy • Step 1: Extreme scenarios - 16 hours collecting bananas - 16kg bananas (16h x 1kg/1h) - 0kg rabbits or - 16 hours catching rabbits - 0kg bananas - 8kg rabbits (16h x 1kg/0.5h) One-agent economy • Step 2: Intermediary scenarios - 16 hours collecting bananas AND rabbits - 8h x (1kg/1h) = 8kg bananas - 8h x (1kg/0.5h) = 4kg rabbits - 4h x (1kg/1h) = 4kg bananas - 12h x (1kg/0.5h) = 6kg rabbits - 1h x (1kg/1h) = 1kg bananas - 15h x (1kg/0.5h) = 7.5kg rabbits One-agent economy The production possibility curve/frontier (PPC) The cost-benefit principle • Economists choose among competing interests by using a cost-benefit analysis which is based upon the cost-benefit principle • The cost-benefit principle can be applied when an individual (or a firm or a society) should take an action if, and only if, the extra benefits from taking the action are at least as great as the extra costs • Cost-benefit principle is one of the core principles of economics 18 Economic surplus • Economic surplus • The goal of economic decision makers is to maximise their economic surplus • The benefit of taking any action minus its cost that is how much does an economy like rabbits and bananas 19 One-agent economy Definition An efficient production point represents a combination of goods or services for which currently available resources do not allow an increase in the production of one good/service without a reduction in the production of the other All the points on the PPC are efficient One-agent economy Definition An inefficient production point represents a combination of goods or services for which currently available resources allow an increase in the production of one good/service without a reduction in the production of the other All the points inside the PPC are inefficient One-agent economy Definition An attainable production point represents any combination of goods or services that can be produced with currently available resources All the points on or inside of the PPC are attainable One-agent economy Definition An unattainable production point represents any combination of goods that cannot be produced with the currently available resources All the points outside of the PPC are unattainable One-agent economy Question • Which of the following is not an assumption in the production possibilities curve model? a. Resources are fixed b. Resources are fully utilised c. There is technological change d. There is no technological change Answer • Which of the following is not an assumption in the production possibilities curve model? a. Resources are fixed b. Resources are fully utilised c. There is technological change d. There is no technological change Question • Consider a production possibilities curve for an economy. If the economy moves from being economically inefficient to economically efficient, how would this be best represented? a. Movement along the curve b. Movement from a point inside the curve to a point outside the curve c. Movement from a point inside the curve to a point on the curve d. A change in the slope of the curve Answer • Consider a production possibilities curve for an economy. If the economy moves from being economically inefficient to economically efficient, how would this be best represented? a. Movement along the curve b. Movement from a point inside the curve to a point outside the curve c. Movement from a point inside the curve to a point on the curve d. A change in the slope of the curve Question • Along a production possibilities frontier (curve) an increase in the production of a good can only occur if which of the following occurs? a. Decreasing the production of another good b. Increasing the production of another good c. A smaller decrease in the production of the other good d. A larger decrease in the production of the other good Answer • Along a production possibilities frontier (curve) an increase in the production of a good can only occur if which of the following occurs? a. Decreasing the production of another good b. Increasing the production of another good c. A smaller decrease in the production of the other good d. A larger decrease in the production of the other good Question • If referring to the production possibilities curve how is unemployment represented? a. On the middle of the curve b. At the bottom of the curve c. At the top of the curve d. Inside the curve Answer • If referring to the production possibilities curve how is unemployment represented? a. In the middle of the curve b. At the bottom of the curve c. At the top of the curve d. Inside the curve Question • Which of the following statements is not correct in respect to an economy’s production possibilities curve? a. The production possibilities curve shows the maximum combinations of two outputs that an economy can produce given its available resources and technology b. All the points along the production possibilities curve show maximum output and the most efficient outcome for an economy c. It is possible for an economy to operate beyond its production possibilities curve d. Scarcity limits an economy to positions below its production possibilities curve Answer • Which of the following statements is not correct with respect to an economy’s production possibilities curve? a. The production possibilities curve shows the maximum combinations of two outputs that an economy can produce given its available resources and technology b. All the points along the production possibilities curve show maximum output and the most efficient outcome for an economy c. It is possible for an economy to operate beyond its production possibilities curve d. Scarcity limits an economy to positions on or inside its production possibilities curve Two-agent economy • Two productive activities (Assumption 1) - collecting bananas and catching rabbits • Performing an activity involves use of resources - 1kg bananas takes 4 hours to collect - 1kg rabbits takes 4 hours to catch • Time constraint – productive for 16 hours per day Two-agent economy Equation for Alberto’s PPC : Q rabbits = 8 – (0.5 x Q bananas) or Q bananas = 16 – (2 x Q rabbits) Note: 7 bananas = unattainable (Leo) Equation for Leo’s PPC : Q rabbits = 4 – (1 x Q bananas) or Q bananas = 4 – (1 x Q rabbits) Two-agent economy • Leo’s extreme scenarios - 16 hours collecting bananas - 4kg bananas (16h x 1kg/4 hours) - 0kg rabbits - 16 hours catching rabbits - 0kg bananas - 4kg rabbits (16 hours x 1kg/4h) • Consumption needs are 7kg bananas which is clearly unattainable Two-agent economy Definition An agent has an absolute advantage in a productive activity when he/she can carry out the activity with fewer resources than another agent Two-agent economy Definition The opportunity cost of a given action is the value of the next best alternative to that particular action Two-agent economy Opportunity cost made (super) easy OC bananas = (loss in rabbits/gain in bananas) OC rabbits = (loss in bananas/gain in rabbits) Two-agent economy Alberto’s opportunity cost of collecting 1kg of bananas is lower than Leo’s. On the other hand, Leo’s opportunity cost of catching 1kg of rabbits is lower than Alberto’s. Based on these opportunity costs, we conclude that Alberto has a comparative advantage at picking bananas, and Leo a comparative advantage at catching rabbits Based on these opportunity costs, who should produce what? The agent with the lowest (opportunity) cost at producing something should go on and produce it. If we follow this rule, Alberto should collect bananas (as his cost of 1kg of bananas is 0.5kg of rabbit, which is lower than 1kg for Leo), while Leo should catch rabbits (as his cost of 1kg of rabbit is 1kg of bananas, compared to 2kg for Alberto) Two-agent economy Definition An agent has a comparative advantage in a productive activity when he/she has a lower opportunity cost of carrying out the activity than another agent Two-agent economy Principle of comparative advantage Everyone is better off if each agent specialises in the activities for which they have a comparative advantage The gains from specialisation are larger the greater is the difference in opportunity costs Specialisation As an additional example, consider instead the case where Alberto and Leo would each spend 4 hours catching rabbits and the rest of the time (12 hours) picking bananas. The number of goods produced in this case are presented in the table (left) under the no specialization section. The quantities in the first two columns are smaller than what Alberto’s and Leo’s economy would produce if they were to each specialize. The extra (16-15 = 1kg of bananas) and (4-3 = 1kg of rabbits) are the gains from specialization. The fact that specialization leads to everyone being better off is the Principle of Comparative Advantage. Two-agent economy Question: Why are markets necessary? • Can both agents do better than producing for themselves - Specialise in what each is good at and then sell it (supplier) - Buy the things that each is not as good at (from someone who is – demander) - Everyone is a demander and/or supplier • There is a collective gain if each specialises according to comparative advantage and trade Two-agent economy Principle of increasing opportunity cost (low hanging fruit) In the process of increasing the production of any good, first employ those resources with the lowest opportunity cost and only once these are exhausted turn to resources with higher cost The shape of the production possibility curve • Opportunity cost tends to increase as the production of an output expands • For example, you want to spend today collecting apples however you could also study economics V • What is the opportunity cost of picking apples • Answer – studying economics • However does each basket of apples cost the same time in study The shape of the production possibility curve – an example Baskets of apples Time to study (hrs) Opportunity cost (hrs) A 0 15 B 1 14 The 1st basket = 1 hr C 2 12 The 2nd basket = 2 hrs D 3 9 The 3rd basket = 3 hrs E 4 5 The 4th basket = 4 hrs F 5 0 The 5th basket = 5 hrs The shape of the production possibility curve – an example The shape of the curve indicates that the opportunity cost of apple output is increasing a 15 b Increasing opportunity cost of apples c 10 d Study (hours) e 5 f 0 1 2 3 4 5 Apples (baskets) Economy wide production possibility curve in a many agent economy Curve bowing out from origin slope Trading between economies • The principle of comparative advantage applies to countries as well as to individuals • A country’s economic welfare depends on what it consumes, not what it produces • Consumption possibility curve (CPC) Trading between economies Definition The consumption possibility curve represents all possible combinations of two goods that the economy can feasibly consume Question • How is opportunity best described? a. The market price of the good b. The price paid for the resources used to produce the good c. The other goods a consumer has given up in order to purchase the good d. The other goods that could be produced with the same resources Answer • How is opportunity best described? a. The market price of the good b. The price paid for the resources used to produce the good c. The other goods a consumer has given up in order to purchase the good d. The other goods that could be produced with the same resources Question • Opportunity cost is? a. The cost that occurs when buying resources b. Total revenue less total costs c. Present and future costs d. The value of the next best alternative Answer • Opportunity cost is? a. The cost that occurs when buying resources b. Total revenue less total costs c. Present and future costs d. The value of the next best alternative Question • There is no opportunity cost if you decide to attend an economics presentation where you get a free cup of coffee? True/False Answer False Opportunity cost refers to the best alternative sacrificed for a chosen alternative. By attending the economics presentation, you are giving up time that could have otherwise been spent studying or being with friends or family. Question A country will have a comparative advantage in the production of a good when which of the following occurs? a. Produce the good more cheaply than another country b. Produce the good at a lower cost in terms of other goods (a lower opportunity cost) c. Use fewer resources to produce the good than another country d. Produce the good more efficiently than another country Answer A country will have a comparative advantage in the production of a good when which of the following occurs? a. Produce the good more cheaply than another country b. Produce the good at a lower cost in terms of other goods (a lower opportunity cost) c. Use fewer resources to produce the good than another country d. Produce the good more efficiently than another country Question • One of the major benefits of trading with other nations is that it allows the country to consume a range of goods beyond its production possibility curve? True/False? Answer True A major advantage of international trade is that it allows a country to consume a combination of goods that lies outside its PPC. Question • Consider the following statements. Which one does not apply to free trade? a. Free trade enables scarce resources to be used in more efficient forms of production b. Free trade will only be beneficial if all countries remove their trade barriers c. Global production of goods and services would rise if free trade were practised more widely d. Free trade can lead to more jobs Answer • Consider the following statements. Which one does not apply to free trade? a. Free trade enables scarce resources to be used in more efficient forms of production b. Free trade will only be beneficial if all countries remove their trade barriers c. Global production of goods and services would rise if free trade were practised more widely d. Free trade can lead to more jobs Question • Country A can produce 150 watches or 75 computers. Country B can produce 140 watches or 40 computers. Both countries have the same amount of resources. Use the law of comparative advantage to determine what country B should do? a. Export watches b. Export computers c. Import both watches and computers d. Not trade with country A Answer • Country A can produce 150 watches or 75 computers. Country B can produce 140 watches or 40 computers. Both countries have the same amount of resources. Use the law of comparative advantage to determine what country B should do? a. Export watches b. Export computers c. Import both watches and computers d. Not trade with country A Question Tomatoes and corn output (tonnes per hour? Country Tomatoes Corn Australia 2 3 New Zealand 3 2 Refer to the table above. New Zealand has the comparative advantage in the production of tomatoes? True/False? Answer True In seeking to produce one tonne more of tomato production, it needs to give up 2/3 of a tonne of corn production. Question Tomatoes and corn output (tonnes per hour? Country Tomatoes Corn Australia 2 3 New Zealand 3 2 The opportunity cost of 1 tonne of corn is? a. b. c. d. 1.5 tonnes of tomatoes in Australia and 0.66 tonnes of tomatoes in New Zealand 0.66 tonnes of tomatoes in Australia and 1.5 tonnes of tomatoes in New Zealand 1 tonne of tomatoes in Australia and 1 tonne of tomatoes in New Zealand 2 tonnes of tomatoes in Australia and 3 tonnes of tomatoes in New Zealand Answer Tomatoes and corn output (tonnes per hour? Country Tomatoes Corn Australia 2 3 New Zealand 3 2 The opportunity cost of 1 tonne of corn is? a. b. c. d. 1.5 tonnes of tomatoes in Australia and 0.66 tonnes of tomatoes in New Zealand 0.66 tonnes of tomatoes in Australia and 1.5 tonnes of tomatoes in New Zealand 1 tonne of tomatoes in Australia and 1 tonne of tomatoes in New Zealand 2 tonnes of tomatoes in Australia and 3 tonnes of tomatoes in New Zealand Question Tomatoes and corn output (tonnes per hour? Country Tomatoes Corn Australia 2 3 New Zealand 3 2 The opportunity cost of 1 tonne of tomatoes is? a. b. c. d. 3 tonnes of corn in Australia and 2 tonnes of corn in New Zealand 0.66 tonnes of corn in Australia and 1.5 tonnes of corn in New Zealand 1.5 tonnes of corn in Australia and 0.66 tonnes of corn in New Zealand 1 tonne of corn in Australia and 1 tonne of corn in New Zealand Answer Tomatoes and corn output (tonnes per hour? Country Tomatoes Corn Australia 2 3 New Zealand 3 2 The opportunity cost of 1 tonne of tomatoes is? a. b. c. d. 3 tonnes of corn in Australia and 2 tonnes of corn in New Zealand 0.66 tonnes of corn in Australia and 1.5 tonnes of corn in New Zealand 1.5 tonnes of corn in Australia and 0.66 tonnes of corn in New Zealand 1 tonne of corn in Australia and 1 tonne of corn in New Zealand Question Tomatoes and corn output (tonnes per hour? Country Tomatoes Corn Australia 2 3 New Zealand 3 2 If the countries were to follow the principle of comparative advantage New Zealand should undertake which of the following? a. Buy all of its tomatoes from Australia? b. Specialise in tomato production and purchase any corn it needs from Australia c. Produce both tomatoes and corn and not trade with Australia d. Buy all of its tomatoes and corn from Australia Answer Tomatoes and corn output (tonnes per hour? Country Tomatoes Corn Australia 2 3 New Zealand 3 2 If the countries were to follow the principle of comparative advantage New Zealand should undertake which of the following? a. Buy all of its tomatoes from Australia? b. Specialise in tomato production and purchase any corn it needs from Australia c. Produce both tomatoes and corn and not trade with Australia d. Buy all of its tomatoes and corn from Australia Question • A nation decides that it will no longer engage in global trade. Which statement best describes the likely outcome of this decision? a. It will have lower levels of output b. Not be able to move beyond its current production possibilities curve c. Be unable to take the opportunities that arise due to comparative advantage d. All of these statements are possible outcomes Answer • A nation decides that it will no longer engage in global trade. Which statement best describes the likely outcome of this decision? a. It will have lower levels of output b. Not be able to move beyond its current production possibilities curve c. Be unable to take the opportunities that arise due to comparative advantage d. All of these statements are possible outcomes Question • The law of increasing opportunity cost as identified on the production possibilities curve implies what is occurring? a. As a result in the improvement in technology the opportunity cost is the loss of the older technology b. The production possibility curve is represented as a straight line c. The opportunity cost increases as the production of one of the goods expands d. Each of these situations can occur Answer • The law of increasing opportunity cost as identified on the production possibilities curve implies what is occurring? a. As a result in the improvement in technology the opportunity cost is the loss of the older technology b. The production possibility curve is represented as a straight line c. The opportunity cost increases as the production of one of the goods expands d. Each of these situations can occur Question • What is the cause of the bowed-out shape of the production possibilities curve? a. The law of diminishing returns b. The law of increasing opportunity costs c. The law of demand d. The law of supply Answer • What is the cause of the bowed-out shape of the production possibilities curve? a. The law of diminishing returns b. The law of increasing opportunity costs c. The law of demand d. The law of supply The economy wide production possibility curve What could cause the economy-wide production possibility curve to shift? • Changes in capital or infrastructure - roads, factories, equipment • Changes in population - labor force • Changes is knowledge and technology - education, Research & Development (R&D), information/communications technology Classic critiques of the model • It is assumed that: - no psychological cost of performing the same activity all day and that the boredom doesn’t kill you! - no transaction costs connected with trading such as negotiation costs, transportation costs - no import quotas or tariffs that are similar to transaction costs - no change in preferences after trading and no accounting for social norms that might prevent trading Question • Which of the following may cause the production possibilities curve to shift inwards? a. Fewer resources used in production b. Greater efficiency from the use of existing resources c. Reducing the production of one good and more of another good d. The level of technology improves Answer • Which of the following may cause the production possibility curve to shift inwards? a. Fewer resources used in production b. Greater efficiency from the use of existing resources c. Reducing the production of one good and more of another good d. The level of technology improves Question • What is the likely effect on the production possibilities curve of a growing economy? a. The production possibilities curve shifts in b. The production possibilities curve shifts out c. Points along the production possibilities curve increase d. Points along the production possibilities curve decrease Answer • What is the likely effect on the production possibilities curve of a growing economy? a. The production possibilities curve shifts in b. The production possibilities curve shifts out c. Points along the production possibilities curve increase d. Points along the production possibilities curve decrease Question • What is the likely outcome of an increase in capital investment today on the production possibilities curve? a. It immediately shifts the production possibilities curve outwards b. It will immediately shifts in the production possibilities curve inwards c. It shifts the production possibilities curve out at a time in the future d. It shifts the production possibilities curve in at a time in the future Answer • What is the likely outcome of an increase in capital investment today on the production possibilities curve? a. It immediately shifts the production possibilities curve outwards b. It immediately shifts the production possibilities curve inwards c. It shifts the production possibilities curve out at a time in the future d. It shifts the production possibilities curve in at a time in the future Business Decision Making Unit 4 The cost of supply in a perfectly competitive market Textbook reference Dobrescu, L.I., Motta, A., French, S., Manwaring, K., Taylor, J., 2020. The Economic and Legal Principles of Business Decision Making, 1st edition (pp 49 - 73) Making decisions What determines the price of a good? – Cost/s of production – Scarcity – Value to society/individual – Preferences – All of the above What is a market? Definition The market for a given good or service is the set of all the consumers and suppliers who are willing to buy and sell that good or service at a given price Perfectly competitive market Characteristics (assumptions) • Firms are price-takers (cannot influence the market price) • Many buyers and sellers • Homogeneous (identical) goods • No externalities because the benefits/costs do not spill over to third parties What are externalities? • An externality is a cost or benefit imposed on third parties (that is those people other than the buyers and sellers of the good) • Externalities can be negative (harmful spillovers) and/or positive (beneficial spillovers) Perfectly competitive markets Characteristics (assumptions) • Goods are excludable (purchasing the good enables ownership and benefits) and rival (consumption reduces the availability of others) • Full (perfect) information • Freedom of entry and exit Classification of goods • Private goods Exclusive (consumers that purchase these goods gain exclusive rights of ownership and benefits that flow) Rivalry (use diminishes the stock available to others) e.g. food, clothing • Public goods Not exclusive (difficult to prevent others from access – free riders) Non rivalry (use does not diminish the stock available) e.g. defence, street lights, lighthouse Market equilibrium Definition Market equilibrium occurs when the price and the quantity sold of a given good is stable The equilibrium price is such that the quantity that consumers want today is the same as the quantity that suppliers want to sell Marginal benefit Definition The marginal benefit of producing a unit of a given good is the extra benefit accrued by producing that unit Marginal cost Definition The marginal cost of producing a unit of a given good is the extra cost of producing that unit Economic surplus Definition The economic surplus of a certain action is the difference between the marginal benefit and the marginal cost of taking that action Supply curve for an individual • Two productive activities (assumption 1): - collecting apples and catching fish • Productivity - 1st bushel of apples takes 1 hour to harvest 2nd bushel of apples takes 1.5 hours 3rd bushel of apples takes 2 hours… 1 fish takes 0.5 hour to catch (constant) • Price: Pfish= $0.50 and Papples= $1.90 What is the number of bushels and fish that maximises revenue? Supply curve for an individual (Marginal cost = 2 x 0.50) Price: Pfish=$0.50 and Papples=$1.90 (Marginal benefit = 1 x $1.90) Supply curve for an individual • What is the opportunity cost of that bushel? In the hour that a person could have caught 2 fish, earning $1 the opportunity cost of the first bushel is $1. This is the marginal cost of producing the first bushel. • Should a person harvest the first bushel of apples? • There is a need to compare the marginal benefit with the marginal cost. • If the marginal benefit is greater than the marginal cost, then the person should take the action. • This is the previously identified cost-benefit principle. Supply curve for an individual • In this case the cost-benefit principle suggests that a person should collect the first bushel, the surplus being the difference between the marginal benefit and the marginal cost: $1.90 - $1 = $0.90. • The same applies to the second bushel, but not to the third one (that is the 2nd bushel brings $1.90 and costs (in terms of opportunity cost) 3 fish for a total of $1.50; the 3rd bushel also brings $1.90 and costs 4 fish for a total of $2. • Hence, a person should optimally harvest two bushels and then spend all of the remaining time fishing. • In economics, the daily quantity supplied of apples is 2 bushels. Supply curve for an individual Law of supply The tendency for a producer to offer more of a certain good or service when the price of that good or service increases and occurs due to the assumption of increasing marginal costs (diminishing marginal returns) Law of diminishing returns • As additional variable inputs are added to a fixed input the marginal product (MP) may at first increase but will eventually decline • Occurs in the short run where some inputs are fixed • The fixed input, for example capital and/or land has limited potential output • After a time with the addition of variable inputs it makes less and less difference to total output Cost structure and supply curve for a firm Short run time too short to change fixed factors (but at least one fixed factor) Long run enough time to change all inputs enough time to change some variable factors no fixed factors firm can use existing fixed factors more intensely all factors are variable Variable and fixed factors Variable factors Fixed factors ↑ or ↓ as output changes cannot be changed in the short run can be changed in the short run required even if output is zero e.g. labour and raw materials e.g. building and machinery Question • Which of the following statements best reflects the law of supply? a. More of a good or service is supplied at a lower price b. There is a positive relationship between the price of a good or service and the quantity that buyers are willing to buy c. There is a positive relationship between the price of a good or service and the quantity offered for sale by suppliers d. There is a negative relationship between the price of a good and the quantity offered for sale by suppliers Answer • Which of the following statements best reflects the law of supply? a. More of a good or service is supplied at a lower price b. There is a positive relationship between the price of a good or service and the quantity that buyers are willing to buy c. There is a positive relationship between the price of a good or service and the quantity offered for sale by suppliers d. There is a negative relationship between the price of a good and the quantity offered for sale by suppliers Question • Which of the following features can be used to identify a perfectly competitive markets? a. Many small buyers and sellers b. High barriers to entry and exit c. Many small producers and few large consumers d. Highly diiferentiated products Answer • Which of the following features can be used to identify a perfectly competitive markets? a. Many small buyers and sellers b. High barriers to entry and exit c. Many small producers and few large consumers d. Highly diiferentiated products Question • Which of the following characteristics best reflect a perfectly competitive market? a. Produce a highly differentiated product b. Can enter easily but exit is difficult c. Engage in advertising to attract more buyers d. Produce a homogeneous product Answer • Which of the following characteristics best reflect a perfectly competitive market? a. Produce a highly differentiated product b. Can enter easily but exit is difficult c. Engage in advertising to attract more buyers d. Produce a homogeneous product Question • Supply is best described as? a. The number of goods available b. The cost of available resources c. The relationship between the quantity of goods available and demand d. the relationship between a range of prices and quantities a firm is willing to supply Answer • Supply is best described as? a. The number of goods available b. The cost of available resources c. The relationship between the quantity of goods available and demand d. the relationship between a range of prices and quantities a firm is willing to supply Question • Which of the following statements best describes an externality? a. Always provides a benefit to the recipient b. Always imposes a cost to the recipient c. Is an activity that occurs in a business for which management is never responsible d. An unintended benefit or cost imposed on third parties as a result of economic activity Answer • Which of the following statements best describes an externality? a. Always provides a benefit to the recipient b. Always imposes a cost to the recipient c. Is an activity that occurs in a business for which management is never responsible d. An unintended benefit or cost imposed on third parties as a result of economic activity Question • The government could use a tax on production to fix the problem of which of the following? a. Internal benefits of production b. External benefits of production c. External costs of production d. External benefits of consumption Answer • The government could use a tax on production to fix the problem of which of the following? a. Internal benefits of production b. External benefits of production c. External costs of production d. External benefits of consumption Question • Why would individual residents usually not hire a contractor to replace lights on their street? a. It is too expensive b. The value to the other residents exceeds the cost of repair c. Others who use the street will be free riders d. The street lights are a positive externality Answer • Why would individual residents usually not hire a contractor to replace lights on their street? a. It is too expensive b. The value to the other residents exceeds the cost of repair c. Others who use the street will be free riders d. The street lights are a positive externality Question • One season could be considered as being the “short run” if which of the following occurs? a. Production occurs within one short season b. A firm’s plant size is changed c. A firm uses at least one fixed input d. Production occurs within one season Answer • One season could be considered as being the “short run” if which of the following occurs? a. Production occurs within one short season b. A firm’s plant size is changed c. A firm uses at least one fixed input d. Production occurs within one season Question Why will total physical output will increase from points A to C? a. Workers will receive higher wages b. Technological progress across firms c. The law of diminishing marginal returns d. Specialisation and therefore the increasing returns Answer Why will total physical output will increase from points A to C? a. Workers will receive higher wages b. Technological progress across firms c. The law of diminishing marginal returns d. Specialisation and therefore the increasing returns Question • In the long run, all costs are considered variable? True/False? Answer • In the long run, all costs are considered variable? True Supply curve for a firm Definition A factor of production is fixed if its cost does not vary with the quantity produced Supply curve for a firm Definition A factor of production is variable if its cost varies with the quantity produced Supply curve for an individual Definition The quantity supplied (of a good or service) maximises the profit for the supplier at a given price Supply curve for an individual Definition The supply curve represents the relationship between the price of a good or service and the quantity supplied of that good or service Supply curve for an individual firm The two ways to interpret the supply curve: • Horizontally - begin from a certain price, and use the supply curve to find the quantity supplied at that price • Vertically - begin from a given quantity, and use the supply curve to find the producer’s reservation price for that quantity Supply curve for a firm • Firms combine the factors of production (capital, labour, materials) to produce a good or service and pay a sunk cost (once paid, cannot be recovered) such as machinery or the lease to start production Supply curve for a firm Table – Production costs The cost curves Supply curve for a firm Should the entrepreneur hire the 1st worker? Quantity produced (1st worker): 40 cans ($1.20 per can) Fixed cost: $100 (loan) Variable cost: $12 (wage of 1st worker) Marginal cost (MC): Δ Total cost / Δ Quantity = 12 / 40 = 0.30 ($/unit) Marginal benefit (MB): Price = 1.20 ($/unit) Supply curve for a firm Quantity produced (4 workers): 130 cans ($1.20 per can) Fixed cost: $100 (loan) Variable cost: $48 (wages for 4 workers) Total revenue (4 workers): Price x Quantity = 130 x $1.20 = $156 Total cost: fixed cost + variable cost = $100 + $48 = $148 Πproduction = TR – TC = $8 Supply curve for a firm Definition Profit is the difference between the total revenue (TR) and total costs (TC) Π = ???? − ???? Accounting v economic profit • Accounting profit only takes into consideration a firm’s explicit costs eg. rent, wages, cost of raw materials Total revenue Total explicit costs Accounting profit • Economic profit includes a firm’s explicit and implicit costs eg. interest and/or wages foregone Total revenue Total costs (explicit + implicit costs) Economic profit A firm’s accounting and economic profit Supply curve for a firm Should a firm always continue to operate? Shut down position (short run) In the short run, a firm should shut down production if ?????????????????????? < −????, otherwise it should continue producing the profit-maximising level of output The cost curves Shut down - Short run where price is below minimum (AVC) - Long run where price is below minimum (ATC) Shutdown position • If price (P) is less than average variable cost (AVC), the firm will generate greater losses by continuing to produce where marginal equals marginal cost (MR = MC) than if it is producing zero output • By producing at any level of output, revenue fails to cover all the firm’s fixed costs (FC) and only some of the variable costs (VC) • If the firm produces zero output (shuts down), it only has to pay the FC Supply curve for a firm Shut down conditions (long run) In the long run, a firm should exit the industry if ?????????????????????? < ?? • All factors are variable • Firms have enough time to: – alter plant size – leave the industry – enter the industry • No barriers to entry or exit • It should continue producing the profit-maximising level of output Short run supply curve for the firm • Is the portion of the firm’s MC curve that lies above the AVC curve • As P changes, the firm alters output to produce where MR = MC • This means that the firm produces at different points along the MC curve • It does not produce below AVC because this is the shut down position Question • Which of the following will cause a downward movement along a supply curve? a. A decrease in material costs b. A decrease in wage costs c. A decrease in the cost of equipment d. A decrease in the market price of a good Answer • Which of the following will cause a downward movement along a supply curve? a. A decrease in material costs b. A decrease in wage costs c. A decrease in the cost of equipment d. A decrease in the market price of a good Question • If the total variable cost of producing five units of output is $10 and the total variable cost of producing six units is $15, the marginal cost of producing the sixth unit is $5? True/False? Answer • If the total variable cost of producing five units of output is $10 and the total variable cost of producing six units is $15, the marginal cost of producing the sixth unit is $5? True Question • Which of the following determines the value of marginal costs of production? a. Change in total cost divided by change in quantity b. Change in total fixed cost divided by change in quantity c. Change in average variable cost divided by change in quantity d. Change in average fixed cost divided by change in quantity Answer • Which of the following determines the value of marginal costs of production? a. Change in total cost divided by change in quantity b. Change in total fixed cost divided by change in quantity c. Change in average variable cost divided by change in quantity d. Change in average fixed cost divided by change in quantity Question • Which statement describes the change in marginal cost? a. Average variable cost as the quantity changes by two units b. Total cost as the quantity changes by several units c. Total variable cost as the quantity changes by one unit d. Total fixed cost as the quantity changes by one unit Answer • Which statement describes the change in marginal cost? a. Average variable cost as the quantity changes by two units b. Total cost as the quantity changes by several units c. Total variable cost as the quantity changes by one unit d. Total fixed cost as the quantity changes by one unit Question • Which of the following applies if the total variable cost curve is increasing? a. Average fixed cost is increasing b. Marginal cost is decreasing c. Marginal cost is increasing d. Average fixed cost is constant Answer • Which of the following applies if the total variable cost curve is increasing? a. Average fixed cost is increasing b. Marginal cost is decreasing c. Marginal cost is increasing d. Average fixed cost is constant Question • Implicit costs are best described as? a. Variable costs b. Marginal costs c. Accounting costs d. Opportunity costs Answer • Implicit costs are best described as? a. Variable costs b. Marginal costs c. Accounting costs d. Opportunity costs Question • John has decided to open an art gallery. In order to do so he will need to quit his job which pays him $20 000 per year, and will locate in a shop that he owns and currently rents to his sister for $6000 a year. His expenses at the art gallery will be $50 000 for artworks and $2000 for gas and electricity. Calculate his explicit costs? a. $26 000 b. $66 000 c. $78 000 d. $52 000 Answer • John has decided to open an art gallery. In order to do so he will need to quit his job which pays him $20 000 per year, and will locate in a shop that he owns and currently rents to his sister for $6000 a year. His expenses at the art gallery will be $50 000 for artworks and $2000 for gas and electricity. Calculate his explicit costs? a. $26 000 b. $66 000 c. $78 000 d. $52 000 Question • A firm has revenue of $200 million, explicit costs of $190 million and implicit costs of $10 million, calculate its economic profit. a. $200 million b. $70 million c. $10 million d. 0 Answer • A firm has revenue of $200 million, explicit costs of $190 million and implicit costs of $10 million, calculate its economic profit. a. $200 million b. $70 million c. $10 million d. 0 Shifting the supply curve Input prices Taxes and subsidies Price expectations Technology Number of sellers Changes in supply (non-price) Prices of other goods/services Shifting the supply curve • • • Number of sellers - Natural hazards such a drought or floods will directly decrease the supply of many agricultural goods. The supply curve shifts to the left due to such effects Technology - The rise of new and more efficient production techniques results in more goods produced at any possible selling price. For example, the development of more powerful computers reduces production costs and increases the supply of a range of goods and services Input prices - An increase in the price of resources such as labour will result in a shift of the supply curve to the left Shifting the supply curve • • • Taxes and subsidies - Certain taxes such as those imposed on company profits will have a similar effect on supply as an increase in input prices. The tax will increase production costs and consequently the supply curve shifts upwards to the left. A subsidy will however have the same effect as a decrease in resource prices and the supply curve shifts downwards to the right. Producer expectations - If farmers expect a price increase for their produce later rather than sooner then they might restrict current supply in order to have more to sell later when the price rises. The current supply curve shifts to the left. Prices of other goods the firm could produce - A rise in the price of one good/service may result in a firm shifting its resources from producing one good/service to another as this decision may generate more profit. Changes in supply The S curve shifts to the right from S1 to S2. Producers are now willing to sell more of the good at the same price (Q1 to Q2). The S curve will shift to the left from S1 to S2. Producers are willing to sell less of the good at the same price (Q1 to Q2). The supply of COVID-19 vaccines • Covax (the COVID-19 Vaccines Global Access Facility), is a global collaboration for speeding up the development, manufacture and equitable distribution of new vaccines. • Countries that sign on to COVAX will get access to a broad portfolio of new vaccine candidates to combat the SARS-CoV-2 virus that causes COVID-19. Gavi draws on the skills of a variety of partners (stakeholders), combining the technical expertise of the development community with the business know-how of the private sector https://www.who.int/initiatives/act-accelerator/covax The supply of the COVID-19 vaccine • COVAX supports research and development of new vaccines by investing in them and negotiating prices with pharmaceutical companies. • The goal of COVAX is to have 2 billion doses to distribute by the end of 2021, which should be enough to help countries vaccinate 20% of their population and end the worst phase of the pandemic. • COVAX benefits from collective buying power by getting vaccine manufacturers to produce the vaccines at scale and encourage them to make the risky early investments in manufacturing capacity. By pooling resources, COVAX will ensure rapid access to new vaccines as they are developed. • https://theconversation.com/what-is-covax-and-why-does-it-matter-forgetting-vaccines-to-developing-nations-146284 The supply of COVID-19 vaccine Price elasticity of supply Definition The price elasticity of supply is the percentage change in the quantity supplied due to a very small percentage change in price (it measures the responsiveness of supply to changes in price) Price elasticity of supply Price elasticity of supply Elastic Unit elastic Inelastic • Es > 1 • Perfectly elastic when Es = infinity • Es = 1 • Es < 1 • Perfectly inelastic when Es = 0 Price elasticity of supply • Depends on the ease with which producers can alter the quantity they offer for sale and or supply to be elastic the producer must be able to respond quickly and easily to price changes Ability to hold stocks Excess capacity Time Expectations Factors affecting elasticity of supply Mobility of resources Price elasticity of supply Price elasticity of supply • Inventories/excess capacity Producer expectations • - Occurs when current output falls short of potential - If they believe price rise is permanent there will be output – resources are not fully employed and a firm can investment in new plant (supply is elastic) respond to any price change by using existing facilities more - If they believe price change is only temporary there intensively (supply is elastic) e.g. 250 seat lecture with 100 will not be an adjustment (supply is inelastic) students - If at full capacity - time needed for new plant, machinery (supply is inelastic) e.g. 250 seat lecture theatre with 250 students • Ability to hold stocks - Some producers can store goods • Factor mobility - If resources can be moved easily into production then output can change (supply is elastic) - If resources are not available then output can’t change (supply is inelastic) (supply is elastic) e.g. canned food however if goods are perishable (supply is inelastic) e.g. fresh fish • Availability of raw materials - The greater the availability of raw materials, the greater the elasticity of supply (the opposite is also true) Question • What is a decrease in supply? a. Demand increases by the same amount b. Quantity demanded also increases c. A movement down and to the left along the supply curve d. The quantity supplied at every price decreases Answer • What is a decrease in supply? a. Demand increases by the same amount b. Quantity demanded also increases c. A movement down and to the left along the supply curve d. The quantity supplied at every price decreases Question A shift in the supply curve from S1 to S2 occurs due to which of the following? a. A payment to reduce the price paid to consumers b. Higher business taxes imposed on producers c. Changes in consumer preferences d. Technological innovation Question A shift in the supply curve from S1 to S2 occurs due to which of the following? a. A payment to reduce the price paid to consumers b. Higher business taxes imposed on producers c. Changes in consumer preferences d. Technological innovation Question Which of the following will cause the shift in the supply curve from S1 to S2? a. Increase in demand b. Decrease in demand c. Decrease in the number of suppliers d. Increase in the number of sellers Answer Which of the following will cause the shift in the supply curve from S1 to S2? a. Increase in demand b. Decrease in demand c. Decrease in the number of suppliers d. Increase in the number of sellers Question • Which of the following could cause the supply of apples to decrease? a. Consumer incomes decrease b. A technological advance in apple production c. Fertiliser costs increase d. The number of farmers growing apples increases Answer • Which of the following could cause the supply of apples to decrease? a. Consumer incomes decrease b. A technological advance in apple production c. Fertiliser costs increase d. The number of farmers growing apples increases Question • What is the likely effect of a technological improvement in the production of wireless headphones? a. Increase in demand b. Increase in supply c. Decrease in demand d. Decrease in supply Answer • What is the likely effect of a technological improvement in the production of wireless headphones? a. Increase in demand b. Increase in supply c. Decrease in demand d. Decrease in supply Question • An increase in the quantity supplied usually requires which of the following? a. A change to the supply determinants b. A shift of the supply curve c. A price increase d. A price decrease Answer • An increase in the quantity supplied usually requires which of the following? a. A change to the supply determinants b. A shift of the supply curve c. A price increase d. A price decrease Question • If a price increase of 10% results in an increase in the quantity supplied of 15%, the elasticity of supply is? a. 5 b. 2.5 c. 1.5 d. 0.66 Answer • If a price increase of 10% results in an increase in the quantity supplied of 15%, the elasticity of supply is? a. 5 b. 2.5 c. 1.5 d. 0.66 Question • In the market period which statement reflects price elasticity of supply? a. Price elasticity of supply in very elastic b. Price elasticity of demand in very elastic c. Cross elasticity of demand in very elastic d. Price elasticity of supply is very inelastic Answer • In the market period which statement reflects price elasticity of supply? a. Price elasticity of supply in very elastic b. Price elasticity of demand in very elastic c. Cross elasticity of demand in very elastic d. Price elasticity of supply is very inelastic Question • If supply is perfectly inelastic which of the following applies? a. The elasticity of supply is infinity b. An increase in price will not change the quantity supplied c. The supply curve is horizontal d. Producers will be willing to supply as consumers demand at the market price Answer • If supply is perfectly inelastic which of the following applies? a. The elasticity of supply is infinity b. An increase in price will not change the quantity supplied c. The supply curve is horizontal d. Producers will be willing to supply as consumers demand at the market price Cost of doing business • Costs include: – Raw materials – Labour – Finance – Intellectual property (IP) Debt finance • Personal loan - a loan to an individual who promises to repay the loan (and interest) at a future date and is often unsecured and a carries a higher interest rate and thus increasing the cost to the business • Secured loan - the borrower gives security over their own asset e.g. a mortgage, and is secure (lender can sell asset if loan or interest not repaid) and has lower interest as it poses less risk for the lender Equity finance • Using the owner/s’ money within the business with the aim of getting a return based on its profit • Partnerships may provide funds called equity contributions • A company contributions are made by subscribing for shares. The holders of shares have rights like voting, a proportion of profits is called a dividend Intellectual property (IP) “Creations of the mind: inventions, literary and artistic works, and symbols, names, images, and designs used in commerce”. – World Intellectual Property Organisation (WIPO, a United Nations Agency) Intellectual property (IP) • Australian government agency • Administers IP rights and legislation relating to patents, trade marks, designs and copyright Intellectual property (IP) Copyright • The Australian Football League (AFL) did not display the Aboriginal flag on its grounds during its Indigenous Round of matches in 2020 • In a copyright dispute, the flag is owned by a company, not as many had thought, by indigenous Australians • Clothing company WAM bought an exclusive copyright license to the flag image two years ago, from its original designer and in doing so has exclusive rights to its use https://www.abc.net.au/news/2020-08-18/aboriginal-flag-to-be-absent-for-afl-indigenous-round Design • Crocs have successfully prosecuted cases against 11 other companies copying their designs https://jellypods.wordpress.com/category/trademarks/ Patent • Kambrook developed the electrical power-board in 1972 • Not patented • Share market with other manufacturers http://www.kambrook.com.au/ Trade mark • Apple mounted a legal challenge to prevent Woolworths from using its new logo • It argued the Woolworths’ logo is too similar to its own logo • Apple unsuccessful http://www.smh.com.au/technology/biz-tech/apple-claims-woolies-is-getting-fresh-with-new-logo-20091004-ghxe.html Question • Which of the following would be the reason why a business would protect its intellectual property? a. Encourage competition to infringe its intellectual property rights b. Determine the amount of damages to be paid to the plaintiff c. Enable competitors to develop a competitive advantage d. Develop or sustain its own competitive advantage Answer • Which of the following would be the reason why a business would protect its intellectual property? a. Encourage competition to infringe its intellectual property rights b. Determine the amount of damages to be paid to the plaintiff c. Enable competitors to develop a competitive advantage d. Develop or sustain its own competitive advantage Question • Which of the following statements best describes the advantage of registering a design? a. Provide designers protection over the functions of a good b. Provide designers with the exclusive right to exploit their designs for a limited time c. Protects the manner of manufacturing that is new, useful, and innovative d. Enables the owner to be more capable of distinguishing goods or services Answer • Which of the following statements best describes the advantage of registering a design? a. Provide designers protection over the functions of a good b. Provide designers with the exclusive right to exploit their designs for a limited time c. Protects the manner of manufacturing that is new, useful, and innovative d. Enables the owner to be more capable of distinguishing goods or services Question • Protection under the Trade Marks Act 1995 (Cth) if registered by a business is for a period of what duration? a. 20 years b. 10 years c. 8 years d. 5 years Question • Protection under the Trade Marks Act 1995 (Cth) if registered by a business is for a period of what duration? a. 20 years b. 10 years c. 5 years d. 8 years Question • Which of the following statements does not apply to the patent as a type of intellectual property? a. It allows the inventor to keep their invention secret b. It is a temporary monopoly that allows the inventor to have exclusive use of and the right to sell its new invention c. It grants the inventor an exclusive right to exploit the invention d. A standard patent receives a 20 year protection from the date of patent Answer • Which of the following statements does not apply to the patent as a type of intellectual property? a. It allows the inventor to keep their invention secret b. It is a temporary monopoly that allows the inventor to have exclusive use of and the right to sell its new invention c. It grants the inventor an exclusive right to exploit the invention d. A standard patent receives a 20 year protection from the date of patent Question • What is the duration of the protection for the owners of copyright over a literary, artistic, dramatic or musical work? a. 70 years from the death of the creator or from first publication b. As long as the copyright registration is renewed c. 70 years from the date of registration d. 70 years from the date the work is created Answer • What is the duration of the protection for the owners of copyright over a literary, artistic, dramatic or musical work? a. 70 years from the death of the creator or from the work’s first publication b. As long as the copyright registration is renewed c. 70 years from the date of registration d. 70 years from the date the work is created Business Decision Making Unit 5 Consumer demand Textbook reference Dobrescu, L.I., Motta, A., French, S., Manwaring, K., Taylor, J., 2020. The Economic and Legal Principles of Business Decision Making, 1st edition (pp 75 - 89) Demand curve for an individual Marginal and total utility as a function of the number of goods consumed Demand curve for an individual • 2 consumption options: • - soda (Pcan = $2) and other goods (Pother goods= $1) - total budget of $4 Should an extra can of soda be purchased? Demand curve for an individual Cost-benefit principle The cost-benefit principle states that an action should be taken if the marginal benefit is greater than the Think at the margin! marginal cost Demand curve for an individual Definition The consumer reservation price is the maximum price the consumer is willing to pay for a certain good or service Demand curve for an individual • Calculating consumer reservation price • The consumer is willing to buy a soda as long as the marginal utility (????)????????/$ > MUother products/$ Demand curve for an individual Definition Utility represents the satisfaction that an individual derives from consuming a good or taking a certain action and is measured in utils per unit of time Demand curve for an individual http://demandware.edgesuite.net/aakg_prd/on/demandware.static/-/Sites-godivamaster-catalog-us/default/dw156f7e77/large/2015Fall/editTruffles12_78339_01.jpg • The marginal utility (MU) of the second chocolate will be less than that of the first, and the MU of the third will be less again • The MU of the tenth chocolate would likely be negative (and likely to make you ill!) Demand curve for an individual Definition Decreasing marginal utility is the assumption that the utility from consuming an extra unit of a given good decreases with the number of units that have been previously consumed Marginal utility and demand • Marginal utility falls as the quantity consumed rises (marginal utility will rise as the quantity consumed falls) • To get you to buy another good, the price on this good will have to be lower, so the demand curve for a good or service is downward sloping Marginal utility and demand • While ever the marginal utility of products is different, consumers could increase their overall utility by switching from one product (low MU/$) to another (higher MU/$) • Utility will be maximised when the MU/$ of all products is the same • At this point there is no point in switching between products Demand curve for an individual Important features of a consumer’s demand curve: • Demand curve is the consumer’s marginal benefit curve. The willingness to pay reflects the benefit derived from each unit. A consumer is willing to pay $2 for an ice cream however the marginal benefit declines with each ice cream consumed • A consumer's marginal benefit is lower at higher quantities consumed than it is at lower quantities consumed • Price changes cause a movement along the demand curve • Changes in preferences, income, or prices of other goods shift the entire demand curve Demand curve for an individual Marginal and total utility as a function of the number of goods consumed Demand curve for an individual Definition The quantity demanded by a consumer represents the amount of a given good or service that maximises the utility experienced by the individual consuming it Demand curve for an individual Definition The demand curve represents the relationship between the price of a good or service and the quantity demanded of that good or service Demand curve for an individual Law of demand The law of demand represents an inverse (opposite) relationship between the price of a good and the quantity that buyers are willing to purchase in a defined time period Demand curve for an individual Demand curve for an individual The two ways to interpret the demand curve: • Horizontally - begin from a certain price, and use the demand curve to find the quantity demanded at that price • Vertically - begin from a given quantity, and use the demand curve to find the consumer’s reservation price for that quantity Demand curve for an individual Demand curve for an individual • Prices of related goods - Substitute goods that can be used to replace another good eg. tea or coffee - Complementary goods can be used in conjunction (go together) with other goods eg. cars and petrol Demand curve for an individual Definition The substitution effect captures the change in the quantity demanded of a given good following a change in its relative price Demand curve for an individual Substitution effect • Increase in price of one causes a increase in quantity demanded of another Demand curve for an individual Definition Two goods are considered to be complements when a decrease in the price of one causes an increase in the quantity demanded of another Demand curve for an individual Complementary goods A decrease in the price of potato chips, shifts the demand curve for soda to the right because they complement (go together with) each other Demand curve for an individual Definition The income effect captures the changes in the quantity demanded of a given good following a change in the consumer’s purchasing power Demand curve for an individual Income effect • For a normal good (eg. expensive wine) an increase in income causes an increase in quantity demanded • For an inferior good (eg. fast food) an increase in income causes a decrease quantity consumed Demand curve for an individual Income effect • Fall in purchasing power (product becomes more expensive in relation to a consumer’s income) and causes a decrease in quantity demanded Demand curve for an individual Definition A Giffen good is a good for which an increase in price increases the quantity demanded and is often associated with low income, non-luxury goods eg. rice, bread Demand curve for an individual • With Giffen goods, the demand curve is upward sloping which shows greater demand at higher prices • Since there are few substitutes for Giffen goods, consumers continue to remain willing to buy them when the price rises • Giffen goods are usually essential items which then incorporates both the income effect and a higher price substitution effect • Since Giffen goods are essential, consumers are willing to pay more for them but this also limits disposable income which makes buying slightly higher options even more out of reach and consumers buy even more of the Giffen good Demand curve for an individual Definition A Veblen good is a good for which an increase in price increases the quantity demanded and is often associated with luxury goods eg. celebrity endorsed perfumes or fine wines Demand curve for an individual • Veblen goods are often associated with luxury goods and their price is associated with a high social status symbol • High-income consumers find these goods more desirable at a higher price • The income effect has little impact on these goods because income is not a factor • The substitution effect is also a minimal factor because the goods are generally purchased as status symbols Question • Demand for goods and services reflects which of the following? a. There is a direct relationship between the price and the quantity b. The government’s choices of taxes c. The freedom of consumers to make their own choices about which goods and services to buy for a given price d. The uncertainty of the need for a good as the price of the good increases Answer • Demand for goods and services reflects which of the following? a. There is a direct relationship between the price and the quantity b. The government’s choices of taxes c. The freedom of consumers to make their own choices about which goods and services to buy for a given price d. The uncertainty of the need for a good as the price of the good increases Question • A demand curve for basketball tickets would show which of the following? a. The number of tickets the box office is willing to sell at various prices b. The number of people who need tickets c. The quality of people who want to buy these concert tickets d. The number of tickets that will be purchased at various prices Answer • A demand curve for basketball tickets would show which of the following? a. The number of tickets the box office is willing to sell at various prices b. The number of people who need tickets c. The quality of people who want to buy these concert tickets d. The number of tickets that will be purchased at various prices Question • Which of the following best explains the law of demand? a. As the price of a good increases, fewer units are demanded and everything else remains the same b. As the price of a good increases, the same number of units is demanded c. As the price of a good falls, less units are demanded d. The price of a good does has no effect on the quantity demanded Answer • Which of the following best explains the law of demand? a. As the price of a good increases, fewer units are demanded b. As the price of a good increases, the same number of units is demanded c. As the price of a good falls, less units are demanded d. The price of a good does has no effect on the quantity demanded Question Refer to the individual demand curves for each of the consumers of corn above. Calculate the total amount of corn demanded at the market price of $5. a. 3 b. 25 c. 17 d. 8 Answer Refer to the individual demand curves for each of the consumers of corn above. Calculate the total amount of corn demanded at the market price of $5. a. 3 b. 25 c. 17 d. 8 Question • The cost-benefit principle states that an action should be taken if the marginal benefit is greater than the marginal cost? True/False? Answer True The cost-benefit principle states that an action should be taken if the marginal benefit is greater than the marginal cost. Question • The consumer reservation price is the minimum price the consumer is willing to pay for a certain good or service? True/False? Answer False The consumer reservation price is the maximum price the consumer is willing to pay for a certain good or service. Question • Decreasing marginal utility is the assumption that the utility from consuming an extra unit of a given good increases with the number of units that have been previously consumed? True/False? Answer False Decreasing marginal utility is the assumption that the utility from consuming an extra unit of a given good decreases with the number of units that have been previously consumed. Question • X and Y are substitute goods. What is the effect of an increase in the price of good X? a. The demand curve for good X will shift to the left b. There is an upward movement along the demand curve for good Y c. The demand curve for good Y will shift to the right d. There will be a downward movement along the demand curve for good Y Answer • X and Y are substitute goods. What is the effect of an increase in the price of good X? a. The demand curve for good X will shift to the left b. There is an upward movement along the demand curve for good Y c. The demand curve for good Y will shift to the right d. There will be a downward movement along the demand curve for good Y Question • What is the likely effect of an increase in the price of corn chips on the demand for salsa dip? a. No change, only the quantity demanded will change b. Increase, because the goods are substitutes c. Decrease, because the goods are substitutes d. Decrease, because the goods are complements Answer • What is the likely effect of an increase in the price of corn chips on the demand for salsa dip? a. No change, only the quantity demanded will change b. Increase, because the goods are substitutes c. Decrease, because the goods are substitutes d. Decrease, because the goods are complements Question • A computer is considered as a normal good. What would be the effect of an increase in consumer income? a. An upward movement along the demand curve for computers b. A downward movement along the demand curve for computers c. Shift the demand curve for computers to the left d. Shift the demand curve for computers to the right Answer • A computer is considered as a normal good. What would be the effect of an increase in consumer income? a. An upward movement along the demand curve for computers b. A downward movement along the demand curve for computers c. Shift the demand curve for computers to the left d. Shift the demand curve for computers to the right Question • Canned corn is an inferior good. What is the likely effect of a decrease in consumer income? a. Shift the demand curve for canned corn to the right b. Shift the demand curve for canned corn to the left c. Shift the supply curve for canned corn to the right d. Shift the supply curve for canned corn to the left Answer • Canned corn is an inferior good. What is the likely effect of a decrease in consumer income? a. Shift the demand curve for canned corn to the right b. Shift the demand curve for canned corn to the left c. Shift the supply curve for canned corn to the right d. Shift the supply curve for canned corn to the left Changes in demand Increase in demand (shifts to the right) at P1, Q1 is demanded and an increase in demand causes the demand curve D1 to shift to the right to D2 Now at P1, the quantity Q2 is demanded Decrease in demand (shifts to the left) at P1, Q1 is demanded and an decrease in demand causes the demand curve D1 to shift to the left to D2 Now at P1, the quantity Q2 is demanded Changes in demand • If non-price factors change, then this is described as change in demand and the whole demand curve shifts Consumer expectations Population change Income Price of related goods/services Changes in demand (nonprice) Consumer preferences and tastes Non-price factors causing changes in demand 1. Prices of related goods/services • A change in the price of substitutes will cause a shift in the demand curve, for example if the price of tea rises then its consumers will switch to coffee and its demand increases. • The price of complements will also result in a shift in the demand curve, for example if the price of a game consoles falls, consumers will purchase more games and the demand for games increases. 2. Income • When income increases, consumers buy more of most goods (normal goods) and the demand curve shifts rightward, for example new cars. • As income increases consumers will buy fewer of some goods (inferior goods) and the demand curve shifts to the left, for example used cars. Non-price factors causing changes in demand 3. Consumer expectations • If consumers anticipate that the price of a good/service will rise in the future then demand increases now to avoid the higher future price 4. Population change • A growth in population tends to increase the number of buyers which shifts the demand curve to the right whereas a population decrease will shift the demand curve to the left 5. Consumer preferences and tastes • Factors such as changing fashion, advertising or the availability of new products will impact demand. A new, popular type of health food will increase its demand however when people tire of this food demand will decrease and it will probably be replaced by a another new type of food Price elasticity of demand Definition The price elasticity of demand is the percentage change in the quantity demanded due to a small percentage change in price and measures the responsiveness of demand to changes in price Price elasticity of demand What is the Ed if a cinema complex raises ticket prices from $25 to $30, and the number of seats sold falls from 20 000 to 10 000 (ceteris paribus)? • When price rises by 1%, the quantity demanded falls by 2.5% Price elasticity of demand What is the Ed if a cinema complex lowers ticket prices from $30 to $25, and the number of seats sold rises from 10 000 to 20 000 (ceteris paribus)? • When price falls by 1%, the quantity demanded rises by 5.9% Price elasticity of demand co-efficient • Elasticity of demand (Ed) > 1 (elastic and responsive to a price change) and the percentage change in the quantity demanded (Qd) is greater than the percentage change in price, the good or service has elastic demand • Ed < 1 (inelastic and unresponsive to a price change) and the percentage change in Qd is smaller than the percentage change in price, the good/service has inelastic demand • Ed = 1 unit elastic and the percentage change in Qd is equal to than the percentage c...
 

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