Money

Money is anything that is generally acceptable as a means of exchange.

Anything could be used as money providing there was a general acceptance that it could be used to acquire the things we need.

At this moment in time we use bits of paper and metal (notes and coins).

We all accept that if you are offered a £10 pound note for an object you are willing to sell (assuming it is the right value) then it would be acceptable because you know you could then use that very same note to buy the things you wanted from someone else.

This is why, in the past, all manner of items have been used as money - cigarettes, shells, etc.

However, this does not mean that every system of money is a good system. To be a 'good' money system, it has to have a number of characteristics.

The closer the system is to all these characteristics the better the system. The important point with any money system is to remember that we are interested in what the money can actually buy rather than the means by which we acquire goods and services.

In modern society, the use of notes and coins as the means of exchange is decreasing as we find other methods of acquiring what we need. Notably 'plastic' in the form of credit and debit cards.

Does this mean they are a form of money? Look at the characteristics below to decide for yourself whether they meet the definition of 'money'.

The answer to the question in the title is of course simple - we all do! But why do we need it? What do we need it for?

These are more important questions than you may think, because we need to know the answers if we are to have 'sound money'.

We therefore need to know the functions of money, in other words the things we need money to be able to do.

Functions of Money

1. A medium of exchange - probably the most obvious function of money, we need money to be able to spend. We need something that is generally acceptable as a means of payment for goods and services.
2. A store of value - we also want to be able to use money to store our wealth. We want to be able to keep money and spend it in the future as well as the present. If money is to fulfil this function, there must be price stability (low inflation), or money will lose its value over time. In other words we want to be certain (or as certain as possible) that the £10 in our pocket today will buy the same amount of goods and services as £10 in three weeks time, or three months time or even three years time!
3. A unit of account - money has to act as a way for people to measure values of goods and services. We all have different views about the value of things. The ring given to us by a loved one may be very valuable to us personally and may be regarded as 'priceless' This can be overcome to some extent by a common unit of account - we all have some idea of what £10 is worth to us.
4. A standard of deferred payment - money has to be valid for future claims as well as present ones. Firms will want to set the level of wages for the future; they want to be able to pay bills after a period of credit has expired and so on. Money has to act as a way of setting these future payments. I want to know what that the monthly wage I am going to earn will be in six months time - it gives me a standard to measure future payments made and received.

These functions alone don't tell us what would make a good type of money. As mentioned above, various things have been used as money.

So why do we not still use these? What attributes do we need money to have, if it is to be a 'good' form of money?

Characteristics of Good Money

• Acceptability - if money is to be an effective medium of exchange, it has to be universally acceptable (or at least acceptable within the country or origin).
• Divisibility - money has to be able to be conveniently split into multiple units for convenient payment. (Cows might be a useful source of money but they would certainly lose their value if cut up to pay for small items!)
• Portability / convenience - money has to be convenient to carry around. (Ever tried slipping a cow into your back pocket?)
• Difficult to counterfeit - a lot of effort goes into ensuring that people cannot easily copy money.
• Durability - money has to last well if it is to act as a store of value and standard of deferred payment. Your money won't fulfill these functions very well if you end up smoking it or losing it in a card game! There is a real issue with this even with notes and coins - Five pound notes have a short life span because they are used too regularly - how long before we get a five pound coin?
• Uniformity - money has to be of a uniform quality to ensure that it remains universally acceptable.
• Limited in supply - if it is to maintain its value, the supply of money has to stay limited. Using leaves as money, for example, would create a money supply problem in the autumn! This last point is the reason why cigarettes have been used as currency in the past - it is because they were limited in supply relative to the demand and therefore had some value!

Banks

• A Bank is an institution (or in fancy terms a 'financial intermediary) which receives funds from the public and gives loans and advances to those who need them.

Central Banks

• Central Banks are charged with regulating the size of a nation’s money supply, the availability and cost of credit, and the foreign-exchange value of its currency.
  • Regulation of the availability and cost of credit may be designed to influence the distribution of credit among competing uses.
  • The principal objectives of a modern central bank in carrying out these functions are to maintain monetary and credit conditions conducive to a high level of employment and production, a reasonably stable level of domestic prices, and an adequate level of international reserves.
    

Function of a Central Bank

• A central bank usually carries out the following responsibilities:
  1. Implementation of monetary policy.
  2. Controls the nation's entire money supply.
  3. The Government's banker and the bankers' bank ("Lender of Last Resort").
  4. Manages the country's foreign exchange and gold reserves and the Government's stock register;
  5. Regulation and supervision of the banking industry
  6. Setting the official interest rates- used to manage both inflation and the country's exchange rate - and ensuring that this rate takes effect via a variety of policy mechanisms
• Functions of Commercial Banks:
  • PRIMARY FUNCTIONS: There are TWO types of primary function of Commercial Banks:
1. Accepting Deposits:  Commercial Banks accepts deposits from their customers in different forms of Accounts, Like Savings A/C, Current A/C, Recurring A/C etc.
2. Granting Loans: Commercial Banks grants loan to individuals, business, firms etc for different purpose. Like they provides Industrial Loan, Housing Loan, Personal Loan, Education Loan, Car Loan etc.
• SECONDARY FUNCTIONS: They perform following secondary functions:
  1. Exchange of foreign currency.
  2. Provides safe deposit lockers.
  3. Provide insurance policies.
  4. Pay different types of bills for customers.
  5. They provide credit and debit card facility.
  6. They provide on-line banking and transfer of money.
  7. Provides financial advice to the customers.
  8. Buying and selling of shares.

Types of Deposits

• Savings bank deposit :- These deposits are made by those whose main purpose is to save. The commercial bank pays interest to the depositor against his savings deposit. Banks impose restrictions on the number and amounts of withdrawals during a period of time but may relax these rules depending upon other factors.
  • Current account deposits or demand deposits :- These are deposits which can be withdrawn by the depositors at any time that they want. The bank does not pay interest on demand deposits and cheques are used against these deposits. Such type of deposits are kept by businessmen and industrialists who receive and make large payments through banks.
  • Fixed deposits :- The deposits that can be withdrawn after a specified period and carry a higher rate of interest are known as fixed deposits. These deposits are also known as Time deposits and are popular among depositors both for their safety and their interest income.
  • Cumulative deposits :- A person deposits a given amount every month for a period of 25 months or more and the amount accumulates along with the interest. It is a good and profitable form of saving.

Difference between Central Bank and Commercial bank

• Markets for Money :-
  1. Savers and borrowers :- Banks and other financial institutions such as building societies, insurance companies and pension funds collect savings from households and firms. These savings are lent to borrowers. Households borrow in order to purchase houses, cars, furniture and so on. Firms borrow to buy machines, transport equipment, materials and so on.
     
     Banks and other financial institutions are able to attract savings because they offer savers a variety of services such as facilities for withdrawing cash when it is needed, opportunity to earn income in the form of interest etc.
2. London Money Market :- This is the market for loans whose periods range from a few hours to several months. A variety of banks trade in the London money market, including the bank of England, the discount houses, the merchant banks, the commercial banks and branches of foreign banks.
3. A bill of exchange : This is an important document which enables traders in both home and overseas markets to obtain credit that is to borrow money.
4. Treasury bills : These are a type of bill of exchange issued by the British Government and have a life of 91 days and are the means of which the government borrows for a 3month period. They are issued in the denominations ranging from 5000 pounds to 1000,000pounds and are sold to the highest bidders in weekly transactions. Discount houses and other financial institutions buy these bills.
• Banking Services
  1. Receiving deposits : Banks accept deposits which is a safe and convenient way of holding money.
  2. Making payments :-
     1. The cheque system : Each day more than eight million cheques are handled by banks in England and wales. In order to make cheques more acceptable to sellers of  goods and services, the banks provide cheque, guarantee cards or bankers’ cards.
     2. Standing orders : These enable depositors to instruct their banks to make regular payments of fixed amounts. They are very useful for paying such items as rent, rates, insurance premiums, mortgage payments and so on.
     3. Direct debits : Some bills are payable at regular intervals, but the amounts are variable. Examples quarterly bills for electricity, gas and telephone services. Direct debits are instructions to a banker to pay these bills, whatever their amounts when they fall due.
     4. Bank giro credits : This system enables depositors to use only one cheque to pay several bills. A form is filled in to show the names and bank account numbers of all the persons to be paid, and the amounts due to each of them. The bill from the gas, electricity, telephone and water companies and other large enterprises usually have bank giro slips attached to them. These bills can be paid at any bank, either by cash or by cheque.
     5. Credit cards : These plastic cards are now widely used by bank depositors. They enable cardholders to buy goods and services from those shops, restaurants, garages etc. which have joined the scheme, without paying in cash or cheque. Each cardholder is given a limit to his or her total spending, and receives a monthly statement of accounts.
     6. Travellers’ cheques and foreign currency :- For people traveling abroad, and for households and firms making payments to other countries, the banks provide travellers’ cheques and foreign currencies.
     7. Cash dispensers : These machines are set into the outside walls of certain banks and provide bank customers with a 24 hour service for the supply of banknotes. Each bank customer is given a secret code number and a card. By keying in the card and code no. the customer can obtain cash up to some agreed limit.
  3. Making loans :
     1. Bank loans : Banks provide short term loans and also make loans for longer periods of time and for which interest is charged.
     2. Bank overdrafts : This type of lending allows a customer to over draw his or her account by some agreed limit. If a firm is granted an overdraft of $5000, the bank will honor its cheque until its account is $5000 ‘in the red’, that is overdrawn. Interest is only charged on the amount overdrawn.
     3. Bank loans and security : A bank will probably ask a borrower to provide with some kind of security, as evidence of his or her ability to repay the loan. A borrower may be asked to deposit some kind of asset with the bank so that, should he or she fail to repay the loan, the bank may recover its money by selling the asset.
     4. Other bank services : Banks will supply help and advice with the investment of money eg. The purchase of government securities and company shares. They will also act as executors of wills.

A comparison between Central and Commercial Banks

What is Specialisation?

Through years, production has developed into a complicated process and thus broken down into a series of highly specialised task. Each task is then performed by a worker. This is known as Division of Labour.

Advantages of Division of Labour

Practise makes perfect: Worker specialises in a particular task and gives in the best, thus producing goods faster and less wastage of material. (FASTER)

• Use of machinery: Specialised machinery can be used which is further increase the productivity.
• Increased Output: with improvement in efficiency and use of machinery output is increased.
• Saves time: There is no time wasted in switching of jobs and thus the momentum of production can be maintained which leads to less wastage of time.

Disadvantages of Division of Labour

• Boredom: Performing the same task over and over again may lead to boredom for the workers.
• Lack of variety: Though the number of goods produced increases but they are identical or standardized.
• Low motivation for worker: Repeatedly performing the same task may lead to low motivation level for the worker. The worker might not have the sense of fulfilling a complete task as he is performing only a part of the job.

Lack of mobility: Due to specialisation workers might find it difficult to switch between occupations.

Q. What is a Trade Union?

A trade union or labour union is an organization of workers who have banded together to achieve common goals in key areas such as wages, hours, and working conditions.

The trade union, through its leadership, bargains with the employer on behalf of union members and negotiates labour contracts with employers.

This may include the negotiation of wages, work rules, complaint procedures, rules governing hiring, firing and promotion of workers, benefits, workplace safety and policies.

Q. Why do workers join trade unions?

Workers might join a trade union because

• They believe that there is strength in number and they will be listened to when they in a group.
• To negotiate a better pay, more holidays and less hours of work.
• To pressurise the employer to provide them with a healthier and safer working environment.
• Improved benefits for retrenched workers
• To get the benefits of advice, financial support and welfare activities carried out by Trade Unions.
• Many workers may also join a trade union because there is a closed shop policy.
• Sometimes they provide legal assistance to their members if required
• They provide some social welfare for their members like free edu. for their children, social and cultural programmes to distress the workers, etc…
• They protest against unfair partiality.

Q. Explain the functions of Trade Union?

A trade union is an organization which represents the interest of its workers in negotiations about improving working conditions with employers and government.

This includes negotiation of wages, work rules, complaint procedures, rules governing hiring, firing and promotion of workers, benefits, workplace safety and policies.

The agreements negotiated by the union leaders are binding on the rank and file members and the employer and in some cases on other non-member workers.
objectives and activities of trade unions

• Provision of benefits to members:    Trade unions  often provided a range of benefits to insure members against unemployment ill health, old age and funeral expenses. In many developed countries, these functions have been assumed by the state; however, the provision of professional training, legal advice and representation for members is still an important benefit of trade union membership.
• Collective bargaining: Where trade unions are able to operate openly and are recognized by employers, they may negotiate with employers over wages and working conditions.
• Industrial action: Trade unions may organize strikes or resistance to lockouts in furtherance of particular goals.
• Political activity: Trade unions may promote legislation favorable to the interests of their members or workers as a whole. To this end they may pursue campaigns, undertake lobbying, or financially support individual candidates or parties (such as the labour party in Britain) for public office.

Q. Explain various industrial actions taken by trade union.

Industrial action

The majority of worker-to-manager and therefore union-to-employer problems are worked out peacefully through negotiation. However occasionally an issues arises where no agreement or solution can be reached. This is when a trade union may conduct some form of industrial action in order to force the employer to back down.
There are several different types of industrial action that could be taken:

• Strike – Workers select a day(s) on which they will not come into work.
• Work to rule – Workers apply the firm’s rules and procedures to the ‘letter’ with the objective of slowing down production. For example a machine worker may be told to ensure his machine is clean and safe before starting work and so he will be deliberately nit-picking and spend hours doing exactly this.
• Go slow – Employees carry on working but at the minimum pace possible in order to slow down production but avoid disciplinary action.
• Picketing – Workers may stand at the entrance to the employer’s factory or place of work and demonstrate with banners or slogans.
• Overtime ban – Workers simply refuse to work overtime as they are not obliged to. This can prevent a firm being able to produce quickly enough to meet demand and they may lose orders.

Factors determining choice of occupation

a. Wages or pay scale:

• If an individual gets more pay scale /salary/wages in one occupation than another then he might choose to work there. This is because pay scale is the most important factors for the choice of occupation. This is the only WAGE FACTOR.

b. Fringe benefits:

• If an individual gets more fringe benefits like free accommodation, free transportation, free medical facilities, free education facility for children, subsidized food etc  in one occupation than another then he might choose to work there. This is because all these factors decides the real wage of a worker.

c. Number of hours:

• If an individual gets an occupation where wage rate is same as another occupation but working hour is less than the previous job then he might choose to work there. This is because he will have more leisure time that he can spend with his family.  

d. Location of his working area:

• This factors plays an important role in choosing a worker’s choice of occupation. If the work area is nearby with less pay scales too, some workers may be ready to work as they do not have to travel a long distance.

e. Opportunities for promotions / Career prospects:

• If a person has more opportunities of being promoted in one company than another, he might choose to work there. This is because of better future job prospect.

f.  Job security:

• If an individual gets more secured jobs / permanent job than he might prefer to join even if the pay scale is comparatively less than the other one.

h. Working condition:

• If the working condition is good, safe and secure, hygienic etc then a person might be ready to work for that job then the other job where all these are not available.

i. Goodwill of the organisation:

• Size of company along with goodwill also matters as an individual might prefer to work in a large organisation with a good reputation as they can be benefited in different ways & of course it  good  & prestigious  matter of being a part of such organisation.

Q: Why work for low Wages?

There may be times when a worker would be prepared to work for very low wages?

The reasons might be

• The worker might not be able to get another job and has to contend with low wages till he finds a better paying job.
• Low skilled jobs usually have low wages. The worker might not be trained to do skilled job and thus get low wages.
• The worker might choose to work part-time and does not mind low pay. For example, a student working doing a part time job to earn his pocket money may not negotiate too much for higher wages.
• In the same way, a worker might view the job as a temporary measure until a better job is available and may not negotiate for better wages.
• Lack of information is also an important factor. Workers who do not know of alternative jobs usually land up getting lower wages.
• Age may be a factor which limits the worker to get higher wages.

There are many times when a worker decides to move to another job at the same rate of pay

Q. Why workers change jobs at same wages?

The reasons might be:

• Sometimes workers move from one job to another at the same rate of pay because their working conditions are not good or acceptable to them and they prefer to change job even though they are not paid more.
• There may be times when the worker may find problems due to extreme weather conditions or geographical factors.
• Workers also change jobs in expectation of better prospects of promotion or professional development, though they are not getting higher wages.
• Many workers might find the journey to work very tiring and would prefer to work close to their homes.
• Some workers might relocate to a location which they personally like even though they might get the same wages.
• Working in large company is considered as a status symbol by many workers and they might change job to work in a large company.
• Many businesses don’t pay high wages but care for their employees by providing Fringe benefits such as subsidised meals, health scheme, leisure activities. This may also influence a worker to move to these businesses.

Q. Why workers in the same occupation paid differently?

Workers doing the same job within the same industry are paid differently because:

• Different pay agreements across the country-overtime, bonus.
• Demand & Supply of labour:
• Informal economy, where there is no fixed wage policy. ( most important point )
• Shortage of workers
• Differences in the amount of experience, training, hard work & productivity. ( most important point )
• Demand for final product or service( most important point )
• Likely revenue from sale of good or service.
• Workers in cities are paid more to meet the higher cost of living.
• In spite of equal-opportunities women tend to earn less because their careers are interrupted by family commitments, or they suffer from sex discrimination.
• Older workers tend to earn more because of seniority & experience.

Sole Trader

Meaning of Sole Trading: A sole trader is a business that is owned by one person. It may have one or more employees. It is the most common form of ownership in the UK.

The main advantages of setting up as a sole trader are:

• Total control of the business by the owner.
• Cheap and easy to start up – few forms to fill in and to start trading the sole trader does not need to employ any specialist services, other than setting up a bank account and informing the tax offices.
• Keep all the profit – as the owner, all the profit belongs to the sole trader.
• Business affairs are private – competitors cannot see what you are earning, so will know less about how the business works and how it succeeds.

The reasons why sole traders are often successful are:

• Can offer specialist services to customers – e.g. appliance repair specialists.
• Can be sensitive to the needs of customers – since they are closer to the customer and will react more quickly, because they are the decision makers too.
• Can cater for the needs of local people – a small business in a local area can build up a following in the community due to trust – if people can see the owner they feel more comfortable than if the owner is in some far off town, not able to hear the views of the local community.

The main disadvantages of being a sole trader are:

• Unlimited liability – see below.
• Can be difficult to raise finance, because they are small, banks will not lend them large sums and they will not be able to use any other form of long-term finance unless they change their ownership status.
• Can be difficult to enjoy economies of scale, i.e. lower costs per unit due to higher levels of production. A sole trader, for instance, may not be able to buy in bulk and enjoy the same discounts as larger businesses.
• There is a problem of continuity if the sole trader retires or dies – what happens to the business next?

Partnership Firm

Meaning of Partnerships
A partnership is a business where there are two or more owners of the enterprise. Most partnerships are between two and twenty members though there are examples like John Lewis and some of the major world accountancy firms where there are hundreds of partners.

A partner is normally set up using a Deed of Partnership. This contains:

• Amount of capital each partner should provide (i.e. starting cash).
• How profits or losses should be divided.
• How many votes each partner has (usually based on proportion of capital provided).
• Rules on how to take on new partners.
• How the partnership is brought to an end, or how a partner leaves.

The advantages of a sole trader becoming a partnership are:

• Spreads the risk across more people, so if the business gets into difficulty then there are more people to share the burden of debt
• Partner may bring money and resources to the business (e.g. better premises to work from)
• Partner may bring other skills and ideas to the business, complementing the work already done by the original partner
• Increased credibility with potential customers and suppliers – who may see dealing with the business as less risky than trading with just a sole trader

For example, a builder, working originally as a sole trader, may team up with an architect or carpenter to form a partnership. Either would bring added expertise, but also might bring added capital and/or contacts. Of course the builder could team up with another builder as well – sharing the risk, and potentially the workload.

The main disadvantages of becoming a partnership are:

• Have to share the profits.
• Less control of the business for the individual.
• Disputes over workload.

Problems if partners disagree over of direction of business. 

Partnership Deed

Before starting a partnership business, all the partners have to draw up a legal document called a Partnership Deed of Agreement.
It usually contains the following information:

• Names of included parties - includes all names of people participating in this contract
• Commencement of partnership- includes when the partnership should begin. The date of the contract is assumed as this date, if none is given.
• Duration of partnership - includes how long the partnership should last. It is automatically assumed that the death of one of the contracting parties breaks the contract, unless otherwise stated.
• Business to be done - includes exactly what will be done in this partnership. This section should be very particular to avoid confusion and loopholes.
• Name of firm - includes the name of the business entity.
• Initial investments - includes how much each partner will invest immediately or by installments.
• Division of profits and losses - includes what percentages of profits and losses each partner will receive. If it is not a limited partnership, then there is unlimited liability (each partner is responsible for all partners' debts, including their own).
• Ending of the business - includes what happens when the business winds down. Usually this includes three parts: 1) All assets are turned into cash and divided among the members in a certain proportion; 2) one partner may purchase the others' shares at their value; 3) all property is divided among the members in their proper proportions.
• Date of writing - includes simply the date that the contract was written.

Business organization – Limited Companies

Meaning of Limited company:

A limited company is a business that is owned by its shareholders, run by directors and most importantly whose liability is limited.

Limited liability means that the investors can only lose the money they have invested and no more. This encourages people to finance the company, and/or set up such a business, knowing that they can only lose what they put in, if the company fails.

For people or businesses who have a claim against the company, “limited liability” means that they can only recover money from the existing assets of the business. They cannot claim the personal assets of the shareholders to recover amounts owed by the company.

To set up as a limited company, a company has to register with Companies House and is issued with a Certificate of Incorporation. It also needs to have a Memorandum of Association which sets out what the company has been formed to do, and Articles of Association which are internal rules over includingwhat the directors can do and voting rights of the shareholders.

Limited companies can either be private limited companies or public limited companies.

The difference between the two are:

Shares in a public limited company (plc) can be traded on the Stock Exchange and can be
bought by members of the general public. Shares in a private limited company are not available to the general public;

The issued share capital of a plc (the initial value of the shares put on sale) must be greater than £50,000 in a plc. A private limited company may have a smaller share capital.

A private limited company might want to become a “plc” because:
Shares in a private limited company cannot be offered for sale to the general public, so
restricting availability of finance, especially if the business wants to expand. Therefore, it is attractive to change status.

It is also easier to raise money through other sources of finance e.g. from banks
[Note: becoming a “plc” does not necessarily mean that the company is quoted on the Stock Exchange.

The disadvantages of a being a public limited company (plc) are:

• Costly and complicated to set up as a plc – need to employee specialist bankers and lawyers to help organise the converting to the plc.
• Certain financial information must be made available for everyone, competitors and customers included (would you want them to know how much profit you are making?)
• Shareholders in public companies expect a steady stream of income from dividends, which might mean that the business has to concentrate on short term objectives of creating a profit, whereas it might be better to work on longer term objectives, such as growth and investment.
• Threat of takeover, because another company can buy up a large number of shares because they are traded publicly (can be sold to anyone). If they buy enough, they can then persuade other shareholders to join with them to vote in a new management team.

A comparison between public and private companies

What are Multinational Businesses?

Businesses which have their operations, factories and assembly plants in more than one country are known as Multinational Business. They are also known as Transnational businesses.

Advantages of being a Multinational

• Multinational can set up their business operations in countries where the labour and raw material is cheaper, which can give them cost advantage in the international market.
• Multinational have access to many markets which spreads the risk of failure. If any product may not be successful in a particular market, it might be successful in another.
• MNCs produce in large quantities thus achieving greater economies of scales.
• A multinational business is less vulnerable to trade barriers. MNCs set up their local operations in countries where there is potential market for them and get away with import duties and restrictions.
• MNCs can locate their operations near the potential market which results in lower transportation cost.

Advantages of Multinational to the host country

The disadvantages of multinational company are as follows:-
(1) High Profit Low Risk Investment: The multinational company prefer to invest in areas of low risk and high profitability. Issue like social welfare, national priority etc. have less priority on their agenda. Mostly they invest in consumer goods industry.

(2) Interference in Political Matters:The multinational company from developed countries interfere in the political affairs of developing nations. There are many cases where multinational company has bribed political leadership for their own economic gains.

(3) Create Artificial Demand: These companies create artificial and unwarranted demand by making extensive use of advertising and ales and promotion techniques.

(4) Exploitation: These companies are financially very strong and adopt aggressive marketing strategies to sale their products, adopt all means to eliminate competition and create monopoly.

(5) Technological Problem: Technology they use is capital intensive so sometimes that technology does not fully fit in the needs of developing countries. Also, multinational company is criticized for transferring outdated technology to developing countries.

(6) Foreign Exchange go outside the Country: The working of multinational company is a burden on the limited resources of developing countries. They charge high price in the form of commission and royalty paid by local business subsidiary to its parent company. This leads to outflow of foreign exchange.

(7) National Threat: Sometimes outdated technology is used by domestic industries which hamper the quality and price of their products so they cannot compete with those multinational company. Hence, there is a threat of nationwide opposition to multinational company. Arrival of these companies creates an atmosphere of uncertainly to the domestic industries.

(8) Impose their Culture: Multinational company impose their culture on developing countries. Along with the products they also indirectly impose the culture of developed nations. These companies have imposed the culture of fast food and soft drinks onto the developing nations. For examples:- burger and coke.

(9) Work for Self Interest: Multinational company work toward their own self interest rather than working for the economic development of host country. They are more interested in marketing of profits at any cost.

What is a Co-operative?

A cooperative is defined as an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise.

A co-operative is a form of business organisation that is owned and democratically controlled by its shareholders / members.

The organisation is run for the mutual benefit of its shareholders / members, being the people who purchase goods or use services of the organisation, rather than being established for the purpose of earning profits for investors.

There are a number of forms of co-operative or mutual organisations, including friendly societies, credit unions and building societies as well as co-operative companies and industrial & provident societies.

The key feature of all those businesses is that their main purpose is mutual support for members or the promotion of a specific purpose or social benefit.

A cooperative may also be defined as a business owned and controlled equally by the people who use its services or who work at it.

Features of a Co-Operative

• Every members contributes equal amount of capital.
• Every members get equal share of profit.
• Every members has a single voting right.
• Every members has equal control & benefit.
• The business will trade for a social purpose not for  profit.
• Co-operatives are based around the concepts of self-help, self-responsibility and self-organization.
• It is their objective to first and foremost serve members’ interests, rather than that of capital invested.

There are different types of co-operatives:

Housing cooperative

A housing cooperative is a legal mechanism for ownership of housing where residents either own shares reflecting their equity in the co-operative's real estate, or have membership and occupancy rights in a not-for-profit co-operative and they underwrite their housing through paying subscriptions or rent.

Building cooperative

Members of a building cooperative (in Britain known as a self-build housing co-operative) pool resources to build housing, normally using a high proportion of their own labour.

When the building is finished, each member is the sole owner of a homestead, and the cooperative may be dissolved.

Retailers' cooperative

A retailers' cooperative (known as a secondary or marketing co-operative in some countries) is an organization which employs economies of scale on behalf of its members to get discounts from manufacturers and to pool marketing.

It is common for locally-owned grocery stores, hardware stores and pharmacies. In this case the members of the cooperative are businesses rather than individuals.

Utility cooperative

A utility cooperative is a public utility that is owned by its customers. It is a type of consumers' cooperative. In the US, many such cooperatives were formed to provide rural electrical and telephone service.

Worker cooperative

A worker cooperative or producer cooperative is a cooperative that is owned and democratically controlled by its "worker-owners".

There are no outside owners in a "pure" workers' cooperative, only the workers own shares of the business, though hybrid forms in which consumers, community members or capitalist investors also own some shares are not uncommon.

Membership is not compulsory for employees, but generally only employees can become members.

However, in India there is a form of workers' cooperative which insists on compulsory membership for all employees and compulsory employment for all members.

That is the form of the Indian Coffee Houses. This system was advocated by the Indian communist leader A. K. Gopalan.

Consumers' cooperative

A consumers' cooperative is a business owned by its customers. Employees can also generally become members. Members vote on major decisions, and elect the board of directors from amongst their own number. A well known example in the United States is the REI (Recreational Equipment Incorporated) co-op, and in Canada: Mountain Equipment Co-op.
The world's largest consumers' cooperative is the Co-operative Group in the United Kingdom, which offers a variety of retail and financial services. The UK also has a number of autonomous consumers' cooperative societies, such as the East of England Co-operative Society and Midcounties Co-operative.
Migros is the largest supermarket chain in Switzerland and keeps the cooperative society as its form of organization.
Coop is another Swiss cooperative which operates the second largest supermarket chain in Switzerland after Migros.

Agricultural cooperative

Agricultural cooperatives are widespread in rural areas.
In the United States, there are both marketing and supply cooperatives. Agricultural marketing cooperatives, some of which are government-sponsored, promote and may actually distribute specific comodities. There are also agricultural supply cooperatives, which provide inputs into the agricultural process.
In Europe, there are strong agricultural / agribusiness cooperatives, and agricultural cooperative banks. Most emerging countries are developing agricultural cooperatives.

Advantages of a Co-operative Business
• They are usually more stable, caring and responsible employers

• They can give greater job satisfaction and variety, and encourage a strong work commitment

• They are more responsible to the customer and the community in which they operate

• If incorporated as a company or IPS will provide limited liability for individuals involved

• Co-operatives can be highly innovative and very competitive businesses -a fact that is now being recognised by the mainstream business world. .

What is franchising?

The term "franchising" can describe some very different business arrangements. It is important to understand exactly what you're being offered.

Franchise occurs when the owner of a business (the franchisor) grants a licence to another person or business (the franchisee) to use their business idea - often in a specific geographical area.

The franchisee sells the franchisor's product or services, trades under the franchisor's trade mark or trade name and benefits from the franchisor's help and support.

In return, the franchisee usually pays an initial fee to the franchisor and then a percentage of the sales revenue.

The franchisee owns the outlet they run. But the franchisor keeps control over how products are marketed and sold and how their business idea is used.

Well-known businesses that offer franchises of this kind include Prontaprint, Dyno-Rod, McDonald's and Coffee Republic.

Advantages and disadvantages of franchising

Buying a franchise can be a quick way to set up your own business without starting from scratch. But there are also a number of drawbacks.

Advantages

• Your business is based on a proven idea. You can check how successful other franchises are before committing yourself.
• You can use a recognised brand name and trade marks. You benefit from any advertising or promotion by the owner of the franchise - the "franchisor".
• The franchisor gives you support - usually including training, help setting up the business, a manual telling you how to run the business and ongoing advice.
• You usually have exclusive rights in your territory. The franchisor won't sell any other franchises in the same region.
• Financing the business may be easier. Banks are sometimes more likely to lend money to buy a franchise with a good reputation.
• Risk is reduced and is shared by the franchisor.
• If you have an existing customer base you will not have to invest time looking to set one up.
• Relationships with suppliers have already been established. 

Disadvantages

Costs may be higher than you expect. As well as the initial costs of buying the franchise, you pay continuing royalties and you may have to agree to buy products from the franchisor.

The franchise agreement usually includes restrictions on how you run the business.

You might not be able to make changes to suit your local market.

The franchisor might go out of business, or change the way they do things.

Other franchisees could give the brand a bad reputation.

You may find it difficult to sell your franchise - you can only sell it to someone approved by the franchisor.

Reduced risk means you might not generate large profits.

5. Perfect Competition & Monopoly (Advantages & Disadvantages)

Perfect Competition 

A situation where there are many firms competing in the market, there is lot of competition and the firm producing the best quality goods and services at lowest price will be successful.

Characteristics of Perfect Competition

Many sellers in the market : There are many sellers in the market. There is no dominating firm.

Homogeneous products :All firms produce the identical products.

Many buyers in the market :Though there are many seller in the market they cannot control the prices. They are price takers. The prices are set through the price mechanism.

Substitutes: A large variety of goods and services are available in the market, consumer has greater choice.

Perfect information : All buyers and sellers have perfect knowledge about the prices in the market.

Knowledge : Consumers has perfect knowledge about the market situation, so seller can’t exploit consumer.

Normal Profit: A perfect competitor always earn normal profit. Abnormal profit would be a temporary (short run) phenomenon, if so, it will act as a signaling function to encourage new firm to enter in to the market.

Freedom of entry and exit:

There are no barriers to entry and exit for firm:  Firms are free to enter or exit the market at their discretion. If a firm is making profit other firms may enter the market tempted by the profits.

No preferential treatment(Single price policy):

There is no preference given to any firm by government or anybody. All firms are equally treated.

Merits of Perfect Competition

• There is optimal allocation of resources in the long run.
• Maximum economic efficiency as no single firm can control prices. There is no wasteful excess capacity.
• Advertising and promotional expenses are eliminated because product is homogeneous and there is perfect knowledge among the consumers.
  

Demerits of Perfect Competition

• No Research and Development undertaken as the products are homogeneous.
• Prices in perfect competition are controlled by the price mechanism. It may lead to instable income and prices due to frequent change in equilibrium prices

Monopoly

Monopoly means a market where there is only one seller of a particular good or service.

Characteristics of a Monopoly

• Only one single seller in the market. There is no competition.
• There are many buyers in the market.
• The firm enjoys abnormal profits.
• The seller controls the prices in that particular product or service and is the price maker.
• Consumers don’t have perfect information.
• There are barriers to entry. These barriers many be natural or artificial.
• The product does not have close substitutes.
• Price discrimination (different price can be charged from different consumer for same product). 

Advantages of monopoly

• Monopoly avoids duplication and hence wastage of resources.
• A monopoly enjoys economics of scale as it is the only supplier of product or service in the market. The benefits can be passed on to the consumers.
• Due to the fact that monopolies make lot of profits, it can be used for research and development and to maintain their status as a monopoly.
• Monopolies may use price discrimination which benefits the economically weaker sections of the society. For example, Indian railways provide discounts to students travelling through its network.
• Monopolies can afford to invest in latest technology and machinery in order to be efficient and to avoid competition. 

Disadvantages of monopoly

• Poor level of service.
• No consumer sovereignty.
• Consumers may be charged high prices for low quality of goods and services.

Lack of competition may lead to low quality and out dated goods and services. 

Price Discrimination

Price discrimination arises if a firm is able to charge different price to different groups of people and gain their consumer surplus. There are three conditions that have to be met in order to achieve price discrimination:

1. The firm must be a price maker in the market - price discrimination can only take place under monopoly or monopolistic competition.
2. The firm must be able to identify different groups of customers and know their different elasticities of demand.
3. There can be no resale in the market between consumers. This is known as arbitrage.

Effects of price discrimination

• Buyers lose their consumer surplus to the monopolist
• Profits rise for the monopolist
• Some consumers gain a good or service that they might otherwise not have been able to have

First degree price discrimination

Also known as perfect price discrimination.

The firm separates the whole market into each individual consumer and charges them the price they are willing to pay. The firm extracts all the consumer surplus and turns it into revenue. The firm will sell up to the point where AR = MC. Beyond this point the price consumers are willing to pay is less than it costs the firm to make.
Examples: haggling, bartering.

Second degree price discrimination

Occurs in markets where there is a fixed capacity so it is in the firms interest to "fill every seat", and the firm is prepared to sell at cost to achieve this. Tends to occur where there are high fixed costs. For example, it costs much the same to fly a Boeing 747 whether there is 1 passenger on it or hundreds.
The firm begins by selling at the profit maximising point (MC=MR). However this leads to spare capacity. The firm then reduces the price to P1 to sell the remainder.
Examples: theatre tickets, plane tickets (last minute tickets cost less), football tickets in lower divisions ("kid for a quid" - adds to revenue but adds little to costs).

Third degree price discrimination

This is charging different prices to groups with different elasticities. The monopolist charges a lower price to a group of people who have more elastic demand.

Examples: telephone charges (more elastic demand in evenings), rail tickets (young persons railcard - students are more price sensitive), gender pricing in nightclubs. 

Oligopoly Market with Features

Meaning:

Oligopoly is a form of market where there is domination of a limited number of suppliers and sellers called Oligopolists.

In reality, it is the Oligopoly market which exists, having a high degree of market concentration.

This indicates that a huge percentage of the Oligopoly market is occupied by the leading commercial firms of a country.

These firms require strategic planning to consider the reactions of other participants existing in the market.

This is precisely why an oligopolistic market is subject to greater risk of connivances.

Different theories about Oligopoly Pricing:

4 main theories involved with oligopoly pricing are as follows:

• The prices and profits associated with the concept of Oligopoly is impossible to determine, owing to problems arising in modeling mutual prices and output decisions
• The oligopolistic business houses join hands in charging the monopoly prices and incur monopoly profits
• Oligopoly prices and profits exist between the monopoly and competitive endpoints of the scale
• Commercial oligopoly firms compete on the prices in an effort to equalize both the factors like in the competitive industrial sectors.

Distinct features of an oligopolistic market:

• An oligopolistic market comprises a handful of firms, engaged in selling analogous products
• All oligopolistic markets increase mutual dependence among the firms involved in similar competition. It also prepares businessmen to accept the outcomes arising from rivalries with respect to alterations in the production and prices of goods.
• In near future, an oligopolistic market is likely to impose restrictions on admission, in an attempt to incur abnormal profits.
• Each of the business houses involved with this market produces branded goods

 
Relevance of the competition between prices and non-prices:
Price Competition deals with offering discounts on the prices of a particular product or a series of products, in an attempt to generate more market demand of those products. On the other hand, Non-price Competition concentrates on several other strategies to boost up the market shares.

Price leadership: Oligopolistic market
The dominance of one firm in the oligopolistic market results in price leadership. Firms having less market shares only follow the prices fixed by leaders.

Oligopolistic competition: Effects

• Oligopolistic competition in most cases leads to collaboration of the business firms on issues like raising the prices of various goods and subdue production process.
• Under other given market conditions, the competition between the sellers acquires a violent form, on the grounds of lowering the prices and increasing the production.

Collaboration of various firms also brings about stabilization in the unsteady markets.

Organizing Productions

Q. What are the factors that determine the size of a firm?

Business Measurement

In the world around us there are some businesses which are small and some are big. But how do we categorize these businesses as big or small. We can consider the following factors:

The number of employees:

Normally large firms have more no. of employees then small firms.  But business which use more machinery and technology i.e. capital intensive may have few employees but they still might be big. Example Microsoft has less employees but still it the biggest business on earth.

The amount of capital invested:

Basically large firms have more level of capital investment then small firms. But a business which might not use a lot of investment in machinery but and involves less investment may still be big. Take the example of software companies and consultancy firms like McKenzie & Co.

The sales turnover: 

The sales turnover of a large firm is normally more than the sales turnover of a small firm. But it is not always necessary, like a business may be going through a bad phase and may not have huge sales for the time being, it may not make the business small yet.

Market share:

The market share of a large firm is normally more than the market share of a small firm. A business may not be a market leader but still may be huge whereas if the market is itself very small, a major market share always won’t make a business big.

Q.  Why some industries prefer to remain small. OR Why there are small firms available in the economy?

Solution:

• Lack of finance: Due to lack of finance and monetary strength some firms remain small. So, they cannot prefer to adopt capital intensive technology, Modern equipment, specialization, etc. Thus some industry holds very negligible market share. So, they remain small.
• Personal services: Some firms like to maintain personal relation with the costumer, like to offer personalized services they prefer to remain small. For eg. Doctor, lawyer, accountant, etc.
• Local market: some firms provide services to a local market only maybe because of geographical restrictions, Local demand, act’s they remain small. For eg. A general store providing necessities.\
• Profit sharing:  some firms don’t want to share their profit with anyone else thus they like to enjoy small firm’s size.
• Legal formalities: Some firm doesn’t want to follow so any government’s rules and regulations, restrictions, etc. Thus they prefer to remain small.
• New into the market: Maybe the firm is very new to the market thus cannot face tough competition with large companies so they remain small.
• Burden of tax: Some firms doesn’t want to pay more tax to the government so they remain small to avoid paying high taxes out of taxes
• Government benefits
• Personal choice
• Provide services to large firms
• Local monopolies

Why Small Firms are Successful

In spite of all the advantages that economies of scale brings to large firms, small firms continue to be very important

(a)Where personal services are provided
              Small firms provide many personal services. Many builders, decorators and plumbers for example are sole proprietors

(b) Where goods and services are provided for a local area
              Goods and services for just one small area may be provided by small firms. A hairdresser has to be near his customers for convenience. Small local shops are convenient for extra items needed in a hurry

(c) Where luxury goods and services are provided
               Luxury or ‘top of the market” goods are often provided by small firms. Jewellery and leather handbags  etc.

(d) Where specialised engineering goods are provided
                Engineering goods are often wanted on a one-off basis. A car firm for example may go to a small engineering firm to be provided with a special drill that will never be asked for again

(e) Where small firms group together
                Small independent shops sometimes join together in groups to buy from one supplier. The supplier can buy goods in bulk, sell cheaply to the shops in the group, and allow the shops to compete with large supermarkets. By grouping together small firms can achieve external economies of scale  

Q. Explain how does a firm grow?

There are two main ways in which a business can grow - internal growth and external growth.

Internal growth

Internal Growth or also known as organic growth where the business expands by opening more outlets/factories/offices gradually, investing in its existing product range, or by developing new products. This will normally be financed through the use of retained profits, bank loans or, if the business is a PLC, through the issue of shares. This is a slower and safer method of expansion than external growth.

External growth

External growth involves buying out other business and making them a part of your business. Examples are takeovers and mergers. This Involves much greater sums of money and takes place through the use of mergers and takeovers (often known as growth through amalgamation, or simply integration).

Mergers and Take-Overs

A merger occurs where two firms combine, with the consent of both groups of shareholders and Directors.
A takeover (also known as an acquisition) refers to a situation where over 50% of the shares in another company have been purchased - therefore giving the predator full control of the newly acquired company. Both mergers and takeovers are referred to as growth through amalgamation, or simply as integration.

There are several different classifications of integration:

• Horizontal Integration: when one firm merges with another firm or takes over another one in the same industry and at the same stage of production. Example Vodafone and Hutch, OR the Nestle takeover of Rowntree
• Vertical Integration: one firm merges or take over another firm in the same industry but at a different stage of production. There are TWO types of vertical integration:
  • Vertical Integration Backward
• A firm takes over of merges with its suppliers.
  Example: a firm making chocolate takes over a cocoa plantation. 
  Reason: there is a greater degree of control over quality of supplies & regularity of delivery.
  • Vertical Integration Forward
• A firm takes over market outlets.
  Example: a manufacturer takes over a chain of retail shops, an oil company takes over petrol stations.
  Reason: producers wish to improve quality of premises in which goods are sold and raise standard of service in these premises.
  • Conglomerate. This occurs where two firms merge which are in different industries and produce different goods - in other words, it is pure diversification. The major advantage to the new, larger firm is that it has diversified its product range and spread its risks.
•  
• Mind Mapping :
  E.g.:1
• E.g.:2
•  
• These can be classified into five categories:
• Purchasing economies:
  When business buys in large quantities, they are able to get discounts and special prices because of buying in bulk. This reduces the unit cost of raw materials and a firm gets an advantage over other smaller firms.
• Marketing economies:
  The cost of advertising and distribution rises at a lower rate than rises in output and sales. In proportion to sales, large firms can advertise more cheaply and more effectively than their smaller rivals.
• Financial economies:
  A larger company tends to present a more secure investment; they find it easier to raise finance. Banks and other lending institutions treat large firms more favorably and these firms are in a position to negotiate loans with preferential interest rates. Further, large companies can issue shares and raise additional capital.
• Managerial economies:
  A large company benefits from the services of specialist functional managers. These firms can employ a number of highly specialized members on its management team, such as accountants, marketing managers which results in better decision being taken and reduction in overall unit costs.
• Technical economies:
  In large scale plants there are advantages in terms of the availability and use of specialist, indivisible equipment which are not available to small firms. Large manufacturing firms often use flow production methods and apply the principle of the division of labour. This use of flow production and the latest equipment will reduce the average costs of the large manufacturing businesses.
• These are the drawbacks of being a big business. In other words, all the factors those lead to an increase in average costs as a business grows.
  Diseconomies include the following:
• It is difficult to organize large number of employees. The business might find itself spending too much on communication. There might be long chains of command and instructions will take a long to reach the desired destination. Moreover there might be distortion in the message. There will be less personal contact between decision makers and staff, which can lead to low level of morale, lack of motivation and ultimately industrial relations problems.
• There could be coordination problems. With a larger hierarchy, both the quality of information reaching from the management to the workers and vice versa could lead to poor decision making. There would be considerable paperwork and many meetings.
• Recently, consumers have become more conscious of the activities carried out by big firms. Therefore, big firms have to spend a lot of money on environmental issues and social responsibility act. These ultimately lead to higher average cost per unit.

Reasons for integration

Internal economies of scale: When firms are involved in mergers or takeovers, they create a much larger business which can enjoy economies of scale.

Rationalisation: A successful firm may buy up a less successful frim because its share is low. And then close down the inefficient parts of the business and concentrate on the efficient parts.This is called rationalisation

Increasing market power: When a firm takes over one of its competitors it increases its power in the market by reducing competition.It may also raise prices while spending less on improving its services to the customer..This leads to increased profits.

Control of supplies and the sale of goods
A takeover may allow a producer to take control of its raw material supplies or supplies of machinery and equipment it uses. The firm can then be more sure of its supplies and it may be able to keep supplies from its competitors.

Financial reasons
A larger firm will have more assets that can be used as security for loans or sold off to provide more funds.

Diversification
Integration may increase the number of goods and services sold by a firm. This is called diversification and it means that a firm will be in less trouble if there happens to be a fall in demand for one of its products.

1. Training workers to improve their existing skills & learn new skills.
2. Rewarding increased productivity with performance related pay & bonus payments.
3. Encouraging employees to buy shares in their organization. Improved productivity will help to raise profit & pay higher dividend on shares.
4. Improving satisfaction-for example, by improving working environment, making job more interesting, involving workers in business decision making etc.
5. Replacing old plant & machinery with new, more efficient machines and tools for workers.
6. Introducing new production processes and working practices designed to continually reduce waste, increase speed, improve quality and raise output in all areas of a firm. This is often known as lean manufacturing but its principles can equally apply to the production of service.
• There are some disadvantages and limitations of the drive to exploit economies of scale.
  • Standardization of products: Mass production might lead to a standardization of products – limiting the amount of effective consumer choice in the market.
• Lack of market demand: Market demand may be insufficient for economies of scale to be fully exploited. Some businesses may be left with a substantial amount of excess capacity if they over-invest in new capital.
• Developing monopoly power: Businesses may use economies of scale to build up monopoly power in their own industry and this might lead to a reduction in consumer welfare and higher prices in the long run – leading to a loss of allocative inefficiency
• Protecting monopoly power: Economies of scale might be used as a form of barrier to entry – whereby existing firms have sufficient spare capacity to force prices down in the short run if there is a threat of the entry of new suppliers
• Large organisations are not necessarily better organisations.
  A large organisation enjoys economies of scale. It keeps its average cost low through technical economies,marketing economies, financial economies and risk bearing economies.
  It uses specialised machinery and modern techniques to increase production and productivity, which cannot be done by a small organisation. A large firm buys raw materials in bulk. Therefore it gets them at relatively lower prices .It increases its sale by salesmanship, propaganda attractive packing. It produces quality products. It increases its productivity efficiently. It gets finance easily and even at lower rates of interest because it has large assets and properties.So it can be a better organisation.
• A large firm undertakes welfare measures to the workers and their efficiency .It introduces division of labour and specialisation to a greater extent. Labour is used to the optimum level. Better organisation of labour force and increased specialisation, increase the efficiency of labour, increase labour productivity and reduce the costs of production.
• A large firm utilises the by-products. It reduces the costs and increases the profits .A large firm is fully secured with large market size It has large wide markets .it increases its revenue and profits by supplying widely. Therefore it can be concluded that large organisations are better organisations.

Alternative Aims of Firms

1. Profit Satisficing.
· In many firms there is separation of ownership and control. Those who own the company (shareholders) often do not get involved in the day to day running of the company.

· This is a problem because although the owners may want to maximise profits. The managers have much less incentive to max profits because they do not get the same rewards (share dividends)

· Therefore managers may create a minimum level of profit to keep the shareholders happy but then max other objectives such as enjoying work, getting on with other workers (not sacking them)Problem of separation between ownership and manager.

· This can be overcome, to some extent, by giving mangers share options and performance related pay although in some industries it is difficult to measure performance

2. Sales Maximisation.
Firms often seek to increase their market share even if it means less profit this could occur for various reasons:
a) Increased market share increases monopoly power and may enable to put up prices and make more profit in the long run.

b) Managers prefer to work for bigger companies as it leads to greater prestige and higher salaries

c) Increasing market share may force rivals out of business. E.g. supermarkets have lead to the demise of many local shops. Some firms may actually engage in predatory pricing which involves making a loss to force a rival out of business

3. Growth Maximisation.
This is similar to sales maximisation and may involve mergers and takeovers.

4. Long Run Profit Maximisation

5. Social/ Environmental concerns.
A firms may incur extra expense to choose products which don’t harm the environment or products not tested on animals.
· Many companies who have adopted such strategies have been very successful. This has encouraged more firms to consider these over objectives, but a cynic may argue they see it as another opportunity to increase profits

Factors that affect the profitability of firms

The essence of profitability is a firms Revenue – Costs with revenue depending upon price and quantity of the good sold.

1. The degree of competition a firm faces is important. If a firm has monopoly power then it has little competition, therefore demand will be more inelastic. This enables the firm to increase profits by increasing the price. However govt regulation may prevent monopolies abusing their power e.g. the OFT can stop firms colluding (to increase price)Regulators like OFGEM can limit the prices of Gas and Electricity firm

2. If the market is very competitive then profit will be low. This is because consumers would only buy from the cheapest firms. Also important is the idea of contestability. Market contestability is how easy it is for new firms to enter the market. If entry is easy then firms will always face threat of competition, even if it is just “hit and run competition” This will reduce profits.

3. The strength of demand is very important. For example demand will be high if the product is fashionable, e.g. mobile phone companies have been very profitable. However in recent months profits for mobile phone companies have fallen because the high profit encouraged over supply. Products which have falling demand like Spam (tinned meat) will lead to low profit for the company

4. The State of the economy. If there is economic growth then there will be increased demand for most products especially luxury products with a high YED. For example manufacturers of luxury sports cars will benefit from economic growth but will suffer in times of recession.

5. A successful advertising campaign can increase demand and make the product more inelastic, however the increased revenue will need to cover the costs of the advertising. Sometimes the best methods are word of mouth. For example it was not necessary for YouTube to do much advertising.

6. Substitutes, if there are many substitutes or substitutes are expensive then demand for the product will be higher. Similarly complementary goods will be important for the profits of a company.

7. The other aspect of profitability is the degree of costs. An increase in costs will decrease profits, this could include labour costs, raw material costs and cost of rent. For example a devaluation of the exchange rate would increase cost of imports therefore companies who imported raw materials would face an increase in costs. Alternatively if the firm is able to increase productivity by improving technology then profits should increase. If a firm imports raw materials the exchange rate will be important. An depreciation making imports more expensive. However depreciation of the exchange rate is good for exporters who will become more competitive.

8. A firm with high fixed costs will need to produce a lot to benefit from economies of scale and produce on the minimum efficient scale, otherwise average costs will be too high. For example in the steel industry we have seen a lot of rationalisation where medium sized firms have lost their competitiveness and had to merger with others.

9. If a firm is not dynamically efficient then over time costs will increase. For example state monopolies often had little incentive to cut costs, e.g. get rid of surplus labour. Therefore before privatisation they made little profit, however with the workings of the market they became more efficient.

10. If the firm can price discriminate it will be more efficient. This involves charging different prices for the same good, so the firm can charge higher prices to those with inelastic demand. This is important for airline firms.

Quiz Time

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