Fundamentals of business economics Flashcards

Question 1

Q

State the skill level and the definition of the following objective knowledge verb:

Outline

Answer

A

Level 1;

Give a summary of…

Question 2

Q

State the skill level and the definition of the following objective knowledge verb:

Define

Answer

A

Level 1;

Give the exact meaning of…

Question 3

Q

State the skill level and the definition of the following objective knowledge verb:

State

Answer

A

Level 1;

Express, fully and clearly, the details/facts of…

Question 4

Q

State the skill level and the definition of the following objective knowledge verb:

List

Answer

A

Level 1;

Make a list of…

Question 5

Q

State the skill level and the definition of the following objective knowledge verb:

Illustrate

Answer

A

Level 2;

Use an example to describe or explain something.

Question 6

Q

State the skill level and the definition of the following objective knowledge verb:

Identify

Answer

A

Level 2;

Recognise, establish or select after consideration.

Question 7

Q

State the skill level and the definition of the following objective knowledge verb:

Explain

Answer

A

Level 2;

Make clear or intelligible/state the meaning or purpose of…

Question 8

Q

State the skill level and the definition of the following objective knowledge verb:

Distinguish

Answer

A

Level 2;

Highlight the differences between…

Question 9

Q

State the skill level and the definition of the following objective knowledge verb:

Describe

Answer

A

Level 2;

Communicate the key features of…

Question 10

Q

State the skill level and the definition of the following objective knowledge verb:

Reconcile

Answer

A

Level 3;

Make or prove consistent/compatible.

Question 11

Q

State the skill level and the definition of the following objective knowledge verb:

Prepare

Answer

A

Level 3;

Make or get ready for use.

Question 12

Q

State the skill level and the definition of the following objective knowledge verb:

Demonstrate

Answer

A

Level 3;

Prove with certainty or exhibit by practical means.

Question 13

Q

State the skill level and the definition of the following objective knowledge verb:

Conduct

Answer

A

Level 3;

Organise and carry out.

Question 14

Q

State the skill level and the definition of the following objective knowledge verb:

Calculate

Answer

A

Level 3;

Ascertain or reckon mathematically.

Question 15

Q

State the skill level and the definition of the following objective knowledge verb:

Apply

Answer

A

Level 3;

Put to practical use.

Question 16

Q

What’s the Buchanan and Huczynski definition of a business organisation?

Answer

A

Social arrangements for the controlled
performance of collective goals.

Question 17

Q

In terms of Buchanan and Huczynski’s definition of a business, what does ‘Social arrangements’ mean?

Answer

A

Someone working on their own does not constitute
an organisation.

Question 18

Q

In terms of Buchanan and Huczynski’s definition of a business, what does ‘Controlled performance’ mean?

Answer

A

Organisations have systems and procedures to
ensure that goals are achieved. These could vary from ad-hoc informal
reviews to complex weekly targets and performance reviews.

Question 19

Q

What are the two broad business definitions of the word “organisation”?

Answer

A

A group or institution arranged for efficient work.
A process, i.e. structuring and
arranging the activities of the enterprise or institution to achieve the
stated objectives.

Question 20

Q

List the 8 major types of organisation?

Answer

A

Companies
Clubs
Schools
Hospitals
Charities
Political parties
Governments
Armed forces

Question 21

Q

What do organisations enable people to do?

What is the result of this facility?

Answer

A

share skills and knowledge
specialise
pool resources.

As a result, organisations are able to achieve more than the individuals
could on their own.

Question 22

Q

What types of business are possible if you classify them by profit orientation?

Answer

A

Profit-seeking organization
Not-for-profit organisations

Question 23

Q

What is the main objective of a Profit-seeking organisation?

Answer

A

Maximising the wealth of their owners.

Question 24

Q

What 3 primary objectives is the objective of wealth maximisation usually expanded into?

Answer

A

To continue in existence (survival)
To maintain growth and development
To make a profit.

Question 25

Q

What are the main 7 Not-for-profit organisation (NFPs/NPOs) types?

Answer

A

museums
World Bank Group
Schools
government funded hospitals (e.g. NHS hospitals)
charities (e.g. Oxfam, Red Cross, Red Crescent, Caritas)
clubs
councils

Question 26

Q

What is the most probable and frequent source of crisis within a NFP?

Answer

A

They must stay within their budget to survive but that may conflict with its objectives.

Question 27

Q

Which of the following best completes the statement ‘Financial
considerations are a constraint in not-for-profit organisations because…’

A they have no profits to reinvest
B they meet the needs of people who cannot afford to pay very much
C they do not have a flow of sales revenue
D their prime objectives are not financial but they still need money to enable them to reach them.

Question 28

Q

What is a mutual fund?

Answer

A

Voluntary not-for-profit associations formed for the purpose of raising funds
by subscriptions/deposits of members, out of which common services can be
provided to those members.

Question 29

Q

Give 5 examples of mutual funds.

Answer

A

building societies
co-operatives
credit unions
trade unions and
some social clubs.

Question 30

Q

Which one of the following would not be a stakeholder for a mutual
society?

A shareholders
B customers
C employees
D managers

Question 31

Q

Some building societies have demutualised and become banks with shareholders. Comment on how this may have affected lenders and borrowers.

Answer

A

Mutual building societies exist for the benefit of their members. This is
reflected in setting:

interest rates for borrowers as low as possible
interest rates for savers as high as possible.

The aim is not to make a profit so the borrowing and saving rates are moved as close as possible to each other with a small margin sufficient to cover costs.
Once it becomes a bank the building society must then seek to maximise shareholder wealth and become profit seeking. This is done by increasing borrowing rates and reducing saving rates. Members will thus find that the terms offered by the building society become less attractive.
However, when demutualising most building societies give their members windfalls of shares so members become shareholders, thus benefiting from dividends and share price increases.

Question 32

Q

What types of business are possible if you classify them by ownership/control?

Answer

A

Public sector organisations
Private sector organisations

Question 33

Q

What is the public sector?

Answer

A

The public sector is that part of the economy that is concerned with providing basic government services and is thus controlled by government organisations.

Question 34

Q

What are the 6 major public sector services?

Answer

A

police
military
public roads
public transit
primary education and
healthcare.

Question 35

Q

What is the private sector?

Answer

A

The private sector, comprising non-government organisations, is that part of a nation’s economy that is not controlled by the government.

Question 36

Q

What is the “third sector”?

Answer

A

Ccharities, clubs and community groups, can be classified as being in the ‘third sector’. Organisations in this sector are set up to make a difference to society while still belonging to the private sector.

Question 37

Q

What is a company?

Answer

A

A company is an organisation where the owners (shareholders) have a limited liability in relation to debts of the company.

Question 38

Q

How is limited liability achieved in relation to company formation? How is it different from sole traders or partnerships?

Answer

A

Through the process of incorporation, with the company becoming a legal entity in itself, separate from its owners.

This distinguishes it from sole traders and simple partnerships, where the owners and the organisation are considered the same from a legal standpoint.

Question 39

Q

How do people become owners of a company? What liability do they have once they do that?

Answer

A

They buy shares in the company, gaining ownership of the company proportional to their shareholding. The liability of the shareholders in relation to the company is limited to what they have already invested. They cannot be held personally responsible for the company’s debts.

Question 40

Q

What are private and public companies?

Answer

A

Private (the shares cannot be traded on a stock
market)

Public (shares are traded on a stock market)

Question 41

Q

What is the definition of a cooperative?

Answer

A

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.

Question 42

Q

What are the 2 key characteristics of cooperatives?

Answer

A

They are owned and democratically controlled by their members – the people who buy their goods or use their services. They are not owned by investors.
Co-operatives are organised solely to meet the needs of the member-owners, not to accumulate capital for investors.

Question 43

Q

What is the main difference between co-operatives and mutual organisations?

Answer

A

Co-operatives are similar to mutual organisations in the sense that the organisations are also owned by the members/clients that they exist for. However, they tend to deal primarily in tangible goods and services such as agricultural commodities or utilities rather than intangible products such as financial services. However, such co-operatives as the Co-Op in the UK have diversified into insurance and legal services.

Question 44

Q

What are building societies?

Answer

A

Mutual organisations that offer financial services similar to banks. Many demutualised in the 1980s and 1990s to become plcs. For instance, Abbey National converted to a plc, Abbey, and then was taken over and incorporated into Santander.

Question 45

Q

What are credit unions?

Answer

A

Member-owned financial cooperatives, which offer
finance to their members at competitive rates. Members tend to have a ‘common bond’, such as living in the same area or working in the same industry.

Question 46

Q

Which one of the following is not a key stakeholder group for a charity
that is not a company (such as the Red Cross and Red Crescent)?

A employees and volunteers
B shareholders
C donors
D beneficiaries

Answer

A

B

Charities, unlike companies, do not have shareholders. Charities could not operate without the work of employees and volunteers, or without donations from their donors, so these are both important stakeholder groups. The objective of a charity is to provide help or support for its beneficiaries. So beneficiaries are also an important stakeholder group

Question 47

Q

Which of the following are usually seen as the primary objectives of profit oriented companies?
(i) To maximise the wealth of shareholders

(ii) To protect the environment
(iii) To make a profit

A (i), (ii) and (iii)
B (i) and (ii) only
C (ii) and (iii) only
D (i) and (iii) only

Answer

A

D

While protecting the environment is to be encouraged and is reinforced within statute to some degree, it is not a primary objective of the company. Companies exist primarily to maximise the return to their owners.

Question 48

Q

Many schools run fund-raising events such as fêtes, where the intention is to make a profit. This makes them ‘profit-seeking’.

True or False?

Answer

A

False.

Schools run fund-raising activities to help pay for extra books, e.g. to improve the quality of education given to pupils. The primary objective is educational, not profit. The money made at the fête is thus a means not an end.

Question 49

Q

What are the two major outcomes of a company’s achievement of its primary objective?

Answer

A

higher share prices
higher dividend payments

Question 50

Q

What type of wealth is generated when share prices increase?

Answer

A

Notional; and it can only be crystalised if the shares are sold at that price.

Question 51

Q

What is the the aim of company managers?

Answer

A

The consistent rise of the company’s share price over time.

Question 52

Q

What are dividends?

Answer

A

Distributions of the profit of the company. Company profits can be reinvested to help the company grow or paid out to the shareholders as a reward for share ownership.

Question 53

Q

What is the aim company managers with regards to dividends?

Answer

A

Managers will aim to have a policy that
allows for growth of the company whilst managing shareholder expectations of income.

Question 54

Q

What are the 3 issues that heretofor attempts to measure and increase shareholder value have focused on incorporating?

Answer

A

Cash is preferable to profit.
Exceeding the cost of capital
Managing both long- and short-term perspectives

Question 55

Q

Explain “Cash is preferable to profit”.

Answer

A

Cash flows have a higher correlation with shareholder wealth than profits.

Question 56

Q

Explain “Exceeding the cost of capital”.

Answer

A

The cost of capital represents the cost to the company of providing appropriate returns to the investors. For instance if an equity shareholder requires a 15% return in order to be encouraged to buy shares, the company therefore has a 15% cost of securing equity finance and providing that return (in the form of dividends and growth in share price).

Profits should exceed this cost.

Question 57

Q

Explain “Managing both long- and short-term perspectives”.

Answer

A

Investors are increasingly looking at long-term value. When valuing a company’s shares, the stock market places a value on the company’s future potential, not only its current profit levels.

Question 58

Q

What is profit?

What are net cash flows?

Answer

A

Sales minus expenses.

Cash receipts minus cash payments.

Question 59

Q

Are profits the same as net cash flows the same?

Explain in an example.

Answer

A

For instance, if sales of $1,000 are made on credit and only 75% of these have been paid so far then the cash flow in relation to the sales is only $750. Cash is more important to investors than profits.

Their returns are received either in the form of dividends (cash received by the investor from a distribution made by the company) or in the form of a capital gain from a rise in share price (and therefore the potential to earn more cash from sale of the shares). Share prices themselves are determined by investors’ perceptions of how well the company will generate cash in the future.

Question 60

Q

Visualise a basic P&L statement.

Question 61

Q

By what other names can PBIT be called?

Answer

A

Operating profit or net profit.

Question 62

Q

In the P&L statement, what are “ordinary dividends” with relation to “earnings”? What remains after “ordinary dividends” have been distributed?

Answer

A

They are distributions of profit rather than a deduction from them.

“Retained earnings” are left after this distribution.

Question 63

Q

What is the usual relationship between PAT and “earnings”?

Answer

A

Since “preference share dividends” are rare the two will often be the same amount.

Question 64

Q

What are two often-used standard measures of a company’s short-term performance?

Answer

A

Return on capital employed (ROCE)
Earnings per share (EPS)

Answer 62

A

The funds that have been invested into the business by
shareholders and lenders.

Answer 63

A

An indication as to how well a business uses its capital (or the
assets purchased with the capital) to generate profits.

Answer 64

A

It produces a percentage.

Answer 65

A

They are very similar as net asset values are often used as an approximation to the capital figure.

Answer 66

A

The higher the figure is, the more profitable the company is.

Answer 67

A

It only gives the earnings per share that each owner of ordinary shares might expect to receive. It is up to the Directors (who manage the company) to decide whether/how much to pay out as a dividend.

Answer 68

A

They do not correlate directly to the goal of maximising shareholder wealth.

Answer 69

A

establishing the cost of capital to finance the investment project
estimating the flow of income derived from the capital investment over the whole life of the investment
valuing that flow of income.

To solve these problems we calculate the present value of future cash flows by a process of discounting.

Answer 70

A

The sum of the discounted future cash
flows minus the capital cost of the project.

Answer 71

A

Any information that reaches the market that suggests that future cash flows will be higher than previously forecast should result in a share price rise.
If bad news reaches the market then as well as revising forecast cash flows downwards, investors may reassess the investment as having higher risk. This will result in a higher cost of capital and thus future receipts will be less valuable than previously estimated. The result is a fall in the share price.

Answer 72

A

Factors external to the business which may affect a wide range of shares: the onset of a recession would tend to depress share values in general, as would a rise in interest rates.
actors internal to the business that might affect the future flow of profits such as the failure of a new product, an expected decline in sales or a significant rise in costs.

Answer 73

A

Future cash flows

Assuming the markets believe, and have confidence in, the directors’ claims, then they should revise their estimates of the company’s future cash flows upwards.

Cost of capital/discount rate

The new venture is likely to be seen as increasing the company’s risk and hence investors will want a higher return to compensate. This will be reflected in a higher discount rate being used to discount the (revised) future cash flows.

Share price

The impact on the share price will depend on the net effect of the above factors. If the shareholders are optimistic about the future growth plans without being overly concerned about the extra risk, then the share price should increase. A fall in share price would indicate more serious
concerns over the risks and/or a lack of belief that the high growth in cash flows will materialise.

Answer 74

A

Those persons and organisations that have an interest
in the strategy of an organisation.

These are usually customers, shareholders, staff and the local community.

Answer 75

A

An interest or concern that a stakeholder has in an organisation’s actions, objectives or policies.

Answer 76

A

The level of involvement that a stakeholder has in the functions of an organisation and the ability to bring about a desired change.

Answer 77

A

Internal (e.g. employees), connected (e.g. shareholders) and external (e.g. government).

Answer 78

A

Solving such conflicts will often involve a mixture of compromise and prioritisation.

Answer 79

A

Unlike firms, NFPs (not-for-profit organisations) may not have one dominant stakeholder group. Consequently, the NFP seeks to satisfy several different groups at once, without having the touchstone of one primary objective, such as profit, to adhere to. For example, a council may express its mission as ‘caring for the community’. Suppose it is considering building a new car park in the city centre where there is currently a small green park. This would affect the community as follows:

Local businesses would see more trade.
More jobs would be created for local residents. Better parking for shoppers.
More traffic, congestion and pollution for local residents.
Loss of a park, thus reducing the quality of life for locals.
The receipts from the car park could be used to reduce council tax bills and/or fund additional services for the community.

This type of decision is particularly difficult as:

How do you decide which stakeholder group should take preference?
Most of the factors being considered are very difficult to quantify (e.g. quality of life) and
How do you offset different issues measured in different ways (e.g. how many extra jobs justify the extra congestion and pollution?)

Some public sector organisations try to quantify all of the issues financially to see if the benefits outweigh the costs (‘cost-benefit analysis’). For example, congestion will delay people, thus adding to journey times. The value of people’s time can be estimated by looking at the premium they will pay for quicker methods of transport such as train versus coach.

Answer 80

A

The legal owners of the organisation – the shareholders.

Answer 81

A

Those appointed by the principals to act on their behalf such
as the board of directors and senior managers in a company.

Answer 82

A

How can the principal ensure that the agent will behave in such a way as to achieve the aims and intentions of the principal?

Answer 83

A

Management will have to balance the interests of different stakeholders in the company. Since these stakeholders have a variety of objectives, profit is unlikely to be the sole aim of management.
Management may have objectives of its own. These may include salaries, non-salary benefits (‘perks’), power, status and prestige, safety and security and a ‘quiet life’. The problem with these is that they may conflict with the objectives of profitability. For example, many of the management’s objectives, such as salary, power and prestige, may be related more strongly to the size of the company (sales, market share, number of employees) than to the underlying profitability of the company (return on capital employed).
Focus on short-term objectives at the expense of long-term ones: Common short term objectives include

– sales maximization – this is often simpler than profitmaximisation as it excludes costs. Focusing on sales may mean sacrificing profitability, e.g. offering discounts to generate more sales. Proponents would argue that highersales usually results in greater profit

– growth maximisation – in the longer term a larger company is likely to be more profitable due to increased revenue and cost economies of scale. But if growth is at the expense of profitability, shareholder wealth can suffer

– “satisfying” – for example trying to achieve sales growth
subject to a minimum increase in profit of 5%. Such targets are often seen as more practical than “maximise profits”, which is seen as unachievable. Managers may want to do ‘just enough’ to achieve their targets (and perhaps their bonuses) in a particular year, rather than strive for maximising shareholder wealth, so that next year’s targets will also be achievable.

Answer 84

A

‘Fat cat’ salaries and benefits
Mergers and acquisitions - research suggests that the majority of acquisitions erode shareholder value rather than create it.
Poor control of the business
Short-termism

Answer 85

A

Corporate governance (see below) tries to improve ways companies are run through a mixture of principles and regulation.
A review of the remuneration and bonus schemes given to directors; Offers of shares to managers.

Answer 86

A

To resolve the principal-agent problem. The system used to direct, manage and monitor an organisation and enable it to relate to its external environment.

to control the managers/directors by increasing the amount of reporting and disclosure
to increase level of confidence and transparency in company activities for all investors (existing and potential) and thus promote growth in the company
to increase disclosure to all stakeholders
to ensure that the company is run in a legal and ethical manner
to build in control at the top that will ‘cascade’ down the organisation.

Answer 87

A

the board of directors should meet on a regular basis and that active responsibilities at board level should be spread over the board and not concentrated in a few hands; in particular, the roles of chairperson and chief executive should be kept separate
directors should have limited contracts (e.g. 3 years) and all director reward and payments should be publicly disclosed
there should be three sub-committees of the board: an auditcommittee, a nominations (to the board) committee and aremunerations (of board members) committee
greater use should be made of non-executive directors with no direct financial interest in the company in order to provide some independence within the board, especially on the board’s sub committees
the annual accounts should contain a statement, approved by the auditors, that the business is financially sound and is a going concern
the annual accounts should contain a statement, approved by the auditors, that the business is financially sound and is a going concern.

Answer 88

A

C
While governance would ensure compliance with relevant legislation concerning employee working conditions, the primary focus is not employees per se.

Answer 89

A

A “best practices” model in corporate governance.

Answer 90

A

separation of powers especially in relation to roles of the chairman and the chief executive
board membership to include an appropriate balance especially in relation to executive and non-executive directors
the adoption of the principles of transparency, openness and fairness
to adopt an approach which reflects the interests of all stakeholders
to ensure that the board of directors are fully accountable
detailed disclosure and reporting requirements
remuneration committees to determine the pay of directors
nomination committees to oversee appointments to the board
arrangements for organising the Annual General Meeting (AGM).

Answer 91

A

There may be a divorce of ownership from control because:

– companies may become too big for shareholders to effectively control
– companies may become too complex for shareholders to control
– individual shareholders may lack the power, knowledge, interest or time to control the companies they own.

Answer 92

A

The term corporate governance refers to the systems by which
companies and other organisations are directed and controlled. For public companies this means the role of the Board of Directors and its relationship to the shareholders.

Answer 93

A

QUasi Autonomous NGO.

A semi-public administrative body outside the civil service but receiving financial support from the government, which makes senior appointments to it. (derogatory)

Answer 94

A

Not-for-profit organisations include state-owned (public sector) activities, mutual societies, charities, private clubs, QUANGOs and voluntary organisations.

Answer 95

A

In-house or outsourcing.

Answer 96

A

Transaction costs will occur when dealing with an external party.

Search and information costs – to find the supplier
Bargaining and decision costs – to determine contractual obligations
Policing and enforcement costs – to monitor quality

Answer 97

A

It is in the interests of management to internalise
transactions as much as possible, to remove the costs and the resulting risks and uncertainties about prices and quality that comes with outsourcing (transaction costs).

Answer 98

A

Frequency: how often such a transaction is made. The more frequent, the higher the bargaining and decision costs.
Uncertainty: long-term relationships are more uncertain (due to, for example, changes in the economic environment), lack of trust leads to uncertainty. A higher degree of uncertainty means more needs to be spent on transaction costs to ensure that the supplier will be trustworthy and able to fulfil its contracted obligations.
Asset specificity: how unique the component is for the business needs. Unique products / services will lead to a greater ‘tie-in’ between the outsourcer and the supplier. The outsourcer becomes more reliant on the supplier and will spend more on transaction costs to ensure that they are the right supplier for the work.

Answer 99

A

Small businesses in particular may choose to outsource despite high transaction costs, because they may not have the expertise to perform functions in-house, or because the work is intermittent and does not need a full time member of staff dedicated to it.

Answer 100

A

Comparing production costs with transaction costs.

The lower the production costs, the less likely outsourcing will be.

Answer 101

A

A shared service centre (SSC) is a business unit that performs business functions on behalf of the other business units.

The staff in the SSC are able to consolidate work from across the business in order to perform it more efficiently and at cheaper cost. Because their work is effectively independent from the business’s operations, SSC’s are often outsourced to specialist firms.

There will be significant transaction costs in relation to SSCs as the business will be entirely reliant on the services provided by the SSC and must ensure that the right supplier is chosen. The business will monitor the SSC regularly to
ensure compliance with service level agreements. If these costs rise, the business may consider insourcing the function.

Answer 102

A

A network organisation, rather than having departments that all report up to board level, has autonomous units that co-ordinate with each other. These units can be departments, divisions or even separate companies. In this kind of organisation, outsourcing is common due to the separable nature of each unit.

Answer 103

A

Flexible staffing is a convenient way for employers to fill staff vacancies and can involve taking on contracted staff rather than permanent employees. The roles are effectively outsourced. If the costs of outsourcing increase, the employer
may consider a move back to permanent staff.

Examples: Uber Eats or Deliveroo.

Answer 104

A

What goods and services should be produced?
In what quantities?
Who should make them?
Who gets the output?

Answer 105

A

A market economy
A command economy
A mixed economy

Answer 106

A

Interaction between supply and demand (market
forces) determines what is made, in what quantity and who gets the output. Patterns of economic activity are determined by the decisions made by individual consumers and producers.

Answer 107

A

Production decisions are controlled by the government.

Answer 108

A

In reality most modern economies are a mix of free markets and government intervention.

Answer 109

A

The independent variable goes in the y-axis.

Answer 110

A

Individual demand curve

It presuposes that ceteris paribus and that the individual actually has available money to spend in the market and is willing to do it.

Answer 111

A

Is the total amount of effective demand from all the consumers in a market, aggregated together. Market demand is usually shortened to demand and represented by a straight-line curve on a graph. The
demand curve for most normal goods is negatively inclined sloping downwards from left to right.

Answer 112

A

That the price is constant.

Answer 113

A

It is important to distinguish between:

increases and decreases in demand that result from a shift in the demand curve as a whole
expansions and contractions in demand that result from price changes leading to movements along the demand curve itself.

Answer 114

A

income
tastes
the price of goods
population

Answer 115

A

Changes in income often affect demand.
For example, lower direct taxes would raise disposable incomes and, other things being equal, make consumers better off and so they spend more on discretionary expenditure. For normal goods, an increase in income leads to an increase in demand. Examples could include cars, jewellery, fashion clothing and music streaming services.
For inferior goods, however, a rise in income leads to a lower demand for the product as consumers, now being richer, substitute better quality and preferred goods and services for the original (‘inferior’) good or service. An
example of this is public transport. Here, as incomes rise, the demand for public transport falls as consumers substitute more expensive, private transport such as cars.

Answer 116

A

Tastes, in particular fashions, change frequently and it may make the demand for certain goods volatile. A good example of this was the rapid rise in demand for fidget spinners seen in 2017 followed by a decline as people’s attention moved elsewhere. Tastes, of course, can be manipulated by advertising and producers to try to ‘create’ markets, particularly for ostentatious goods, for example, air purifiers, which our ancestors survived perfectly well without. Some goods are in seasonal demand (e.g. cooked meat) even though they are available all year round, because tastes change (e.g. more salads are consumed in the summer).

Answer 117

A

Goods may be unrelated, or they may be complements or substitutes. The former have no effect (a price change in one doesn’t affect demand for the other), but the latter two are significant. If goods are in joint demand (i.e. complements such as burgers and burger buns), a change in the price of one will also affect the other. Therefore, if the price of burgers falls, there is likely to be an increase in demand for burger buns. Where goods are substitutes (e.g. Coke and Pepsi, or McDonald’s and Burger King), a rise in the price of one will cause an increase in demand for the other (and thus the demand curve for the other will shift to the right). Sometimes, technological breakthroughs mean that new products come into the market. For instance, the introduction of affordable streaming services for music and films has reduced the demand for CDs and DVDs (the latter leading to the closure of the Blockbuster chain).

Answer 118

A

An increase in population creates a larger market for most goods, thereby shifting demand outwards. For instance, an influx of seasonal workers from other countries will raise the demand for most essential goods during the season in which they are working. Changes in population distribution will also affect demand patterns. If the proportion of old people relative to young people increases, then the demand for products such as false teeth, wheelchairs and old people’s homes will increase relative to that of gripe water, nappies and cots.

Answer 119

A

C
When drawing a demand curve only the price is allowed to vary but all conditions of demand are kept constant.

Answer 120

A

D
A larger population would presumably want more supplements, especially if they are older and more health conscious.

A and B would shift the curve to the left. C would result in movement along the curve but not a shift in the curve itself.

Answer 121

A

D
Correct answer is D since a change in exchange rates effectively changes the price of foreign holidays and leads to a movement along the demand curve, not a shift in the curve itself.

Answer 122

A

Elasticity, generally, refers to the relationship between two variables and measures the responsiveness of one (dependent) variable to a change in another (independent) variable: There are several types of elasticity that are useful to economists and accountants. Management accountants are particularly interested in knowing price elasticity of demand as this can give a good indication of the optimal price for a good or service.

Answer 123

A

A concept that explains the responsiveness of demand to changes in price.

Answer 124

A

The formula can be applied either at one point on the demand curve or over part (arc) of it. It is critical that percentage or proportional changes are used rather than absolute ones.