F1 Micro economic factors

1. The micro-environment Definition The micro environment refers to the immediate operational environment including suppliers, competitors, customers, stakeholders and intermediaries.

1. The micro-environment Elements of micro-environment Suppliers, competitors, customers, stakeholders (interest groups) and intermediaries. The micro environment contains both the actual and potential groups related to the company, the competitive environment should be include.

2.Micro and Macro environment Macro environments We can use PEST to analyze the macro environments Micro environments Inputs Organization Outputs Competition Inputs: materials, money, men, machines, management Organization: people, objectives, structure and management

3. The concept of a market Definition A market is a situation in which potential buyers and sellers of a good or a service come together for the purpose of exchange. Price theory and the market Price theory is concerned with how market price for goods are arrived at through the interaction of demand and supply.

4. The demand Schedule Definition Demand for a good or service is the quantity of that good or service that potential purchasers would be willing and able to buy, or attempt to buy, at any possible price. The demand curve Demand falls as price increases. Demand rises as price falls.

4. The demand Schedule Factors determining demand for a good a. The price of the good b. The size of income c. The price of substitute goods d. Tastes and fashion e. Expectation of future price changes f. The distribution of income

4. The demand Schedule Substitutes and complements Substitutes goods are goods that are alternatives to each other. Complements are goods that tend to be bought and used together.

4. The demand Schedule The price elasticity of demand Price elasticity explains the relationship between change in quantity demanded and changes in price. Price elasticity of demand (PED) = Percentage change in demand/ percentage change in price. PED>1, elastic ; PED<1, inelastic

4. The demand Schedule Income elasticity of demand Income elasticity of demand (IED) =Percentage change in demand/ percentage change in income. IED<0---- Inferior goods 0<IED<1, inelastic----Necessities IED>1, elastic----Luxury goods

4. The demand Schedule Cross elasticity of demand Cross elasticity of demand=% change in demand of good A/% change in the price of good B Cross elasticityComment Perfect complements -veComplements 0Unrelated VeSubstitutes 1Perfect substitutes

4. The demand Schedule Example question The income elasticity of demand for a product is high. This means that: A. Sales will increase sharply if the price is reduce B. Sales will fall only slightly when income falls C. Sales will rise sharply when income rises D. All of the above

4. The demand Schedule Shifts of the demand curve The factors that may cause the shifts to the right: a. A rise in income b. A rise in the price of substitutes c. A fall in the price of complements d. A change in tastes towards this product e. An expected rise in the price of the product f. Increase in population

4. The demand Schedule Example question The demand curve for a product will shift to the left when there is : A. A rise in household income B. An increasing desirability from the fashion point of view C. A fall in the price of a substitute D. A fall in the price of a complement

5. The supply schedule Definition Supply refers to the quantity of a good that existing suppliers or would-be suppliers would want to produce for the market at a given price. The supply curve Supply rises as price increases. Supply falls as price falls.

5.The supply schedule Factors that affect the supply quantity a. The costs of making the good b. The prices of other goods c. Expectations of price changes d. Changes in technology e. Other factors such as weather

5.The supply schedule Shift of the market supply curve An expansion of market supply may be caused by: a. A fall in the cost of factors of production b. A fall in the price of other goods c. Technological progress In the short run, both supply and demand are relatively unresponsive to changes in price, as compared to the long run.

5.The supply schedule Example question All of the following are likely to lead an outward shift in the supply curve for a curve, except: A. The introduction of cost-reducing technology B. An increase in the price of the good C. A decrease in the price of a resource used to make the good D. A decrease in taxes on producers

6. The equilibrium price The price mechanism and the equilibrium price The equilibrium price is where the market supply equals the market demand. a. The equilibrium price will prevail and remain stable if there is no change. b. The supply and demand will push prices towards equilibrium price if the market is in disequilibrium. c. There will only be one equilibrium position. d. Shifts in the supply curve will change the equilibirum price.

6. The equilibrium price Consumer surplus The situation where the market price is lower than the price the consumer was prepared to pay. Producer surplus The situation where the market price is higher than the price the consumer was prepared to pay.

7. Maximum and minimum prices Maximum price Price Minimum price Maximum price Supply curve Demand curve Quantity 0

7. Maximum and minimum prices Example question A price ceiling set above the equilibrium market price will result in: A. Market failure B. Excess supply over demand C. Market equilibrium D. Excess demand over supply

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