Core Knowledge LOA Flashcards
Price elastic
Due to poor customer service a business’s products may become price elastic
Leading to customers being less loyal to the brand
Therefore, if price increases there will be a significant fall in demand
Leading to pressure to keep prices low
Leading to lower revenue
Reducing gross profit margin
Price Inelastic
Through R&D (say how in context)
This would differentiate their products from rivals such as…
Therefore, customers are likely to stay loyal as they know they can’t get the same products from competitors
Making them more price inelastic so they can charge a higher price without demand falling significantly
Leading to increased revenue
Increased gross profit margin
Luxury goods
Business is vulnerable to changes in average incomes
If many people lose their jobs, there will be a fall in incomes
This will lead to a significant fall in demand for a business’s goods as consumers switch to cheaper alternatives
Leading to a fall in revenue resulting in a fall in gross profit
Could lead to them making an operating loss, putting them under pressure to reduce their expenses
Could involve selling non current assets such as stores and factories
Reducing scale
Normal goods
A business that sells normal goods is likely to have stable, predictable sales.
This is because when incomes change, demand does not change very much
They are unlikely to see a significant fall or rise in profits when incomes change
They are unlikely to make a loss and can therefore keep up with loan repayments
This could result in them getting low interest rates on loans, leading to lower expenses
The business is attractive to banks as it is a safe investment
Inferior goods
When unemployment is high, then incomes will be lower, and therefore, the demand of Inferior goods will increase
The business may then need to be flexible to be able to respond to an unexpected change in income so they can increase production of a good to meet the new demand
This will lead to an increase in gross profit
This flexibility will also help them reduce production when incomes rise again
This will help ensure that they can reduce operating expenses when demand falls therefore avoiding a loss
Spreading risk
If business sells a combination of normal,luxury, and Inferior goods
They will have a balanced product portfolio
They will be less vulnerable to changes in consumer incomes(e.g. rising rates of inflation, increases in unemployment…)
Therefore, if consumer incomes fall
Business will still experience a consistent demand, as consumers switch from luxury-inferior goods
Consistent cash inflows as sales have not dropped
Positive net cash flow
Able to play day to day bills
Purchasing economies of scale
If sales increase
There will be an increase in the amount of (use the case study) from suppliers
Leading to a potential discount from bulk buying
Leading to a lower average cost of sales
Increased gross profit margin
Marketing economies of scale
When business have increased sales
Increased sales volume
Meaning the costs of market research/R&D/advertising(choose one relevant to case study)
Can be spread over more units
Lower cost per unit
Making the above more affordable and can therefore do more of it
Link to the advantages of doing more of the above- improved product development,increased brand awareness,improved innovation
Financial economies of scale
Large businesses have significant non-current assets
Meaning they have more collateral for loans
Lower risk for banks
Lower interest rates
Lower fixed costs
Lower fixed costs per unit
Technical economies of scale
As business grows they begin to make better use of capital/machinery or have the resources to invest in more
Further/increased use of machinery will improve productivity and further increase output
Spreading fixed costs of production e.g. labour,rent utilities over more units
Lowering unit cost of producing a product
Allowing business to lower selling price/increase gross profit margin
Porters differentiation strategies
Pursuing Porters differentiation strategy
Business will develop products/services that are unique
Persuading customers to buy them over rivals
Products become less price elastic
Customers will be less sensitive to a change in price
Business can increase price without a significant fall in demand
Increasing sales revenue and gross profit
High liquidity
High liquidity(current ratio between 1.5-2 or acid test above 1)
High amount of cash reserves/working capital
Therefore, can keep up with payments to suppliers and banks
Unlikely be forced to sell non current assets to pay day to day bills
Therfore, likely to have uninterrupted business operations
Leading to reduced risk of failure and higher chance of success
Low liquidity
Low liquidity(current ratio below 1 and acid test ratio below 0.75)
Low level of cash reserves
Will struggle to pay suppliers and the bank
May be forced to sell non current assets to pay day to day bills
This may lead to disruption in business operations
Leading to a high risk of failure
