Demand and Supply

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Demand and Supply : 

Demand and Supply One of the most fundamental concepts of economics. Backbone of economy. Demand refers to how much (quantity) of a product or service is desired by buyers. Supply represents how much the market can offer.

The Law of Demand : 

The Law of Demand Higher the price of a good, the less people will demand that good. P↑ D↓ Higher the price, the lower the quantity demanded. The amount of a good that buyers purchase at a higher price is less because as the price of a good goes up, so does the opportunity cost of buying that good. Demand chart shows that the curve is a downward slope.

The Law of Supply : 

The Law of Supply Law of supply demonstrates the quantities that will be sold at a certain price.  But unlike the law of demand, the supply relationship shows an upward slope. This means that the higher the price, the higher the quantity supplied. P↑ S↑ Producers supply more at a higher price because selling a higher quantity at a higher price increases revenue.

Demand and Supply ScheduleA relationship that shows different levels of demand and supply at different price levels. : 

Demand and Supply ScheduleA relationship that shows different levels of demand and supply at different price levels. DEMAND CURVE A graph that shows how many units of a product will be demanded at different prices. SUPPLY CURVE A graph that shows how many units of a product will be supplied at different prices.

Market Price/Equilibrium PriceThe price at which the quantity of goods demanded and the quantity of goods supplied are equal. : 

Market Price/Equilibrium PriceThe price at which the quantity of goods demanded and the quantity of goods supplied are equal. SURPLUS Quantity supplied exceeds the quantity demanded. SHORTAGE Quantity demanded exceeds the quantity supplied.

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When supply and demand are equal the economy is said to be at equilibrium. At this point, the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded. Everyone (individuals, firms, or countries) is satisfied with the current economic condition. At the given price, suppliers are selling all the goods that they have produced and consumers are getting all the goods that they are demanding.

Market Price/Equilibrium Price : 

Market Price/Equilibrium Price

Competition : 

Competition Profit motivates individuals to start a business – competition motivates them to operate a business efficiently. “The effort of two or more parties acting independently to secure the business of a third party by offering the most favorable terms"

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Competition occurs when two or more businesses compete for the same resources/customers. Gives incentives for self-improvement. The larger the competition, the larger the effect. “Competition is not only the basis of protection to the consumer, but is the incentive to progress.”

Degrees of Competition : 

Degrees of Competition Economists have identified four degrees of competition within a private business system. Pure competition Monopolistic competition Oligopoly Monopoly

Pure Competition : 

Pure Competition Numerous small firms producing an identical product. Standardization of products. Size of firms is small. Number of firms is large. No single firm is powerful enough to influence the price of its G/S.

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Both buyers and sellers know the prices that others are paying and receiving. Prices are set by supply and demand and acceptable by both sellers and buyers. Sellers are price “taker” and not a price “maker”.  EXAMPLE: Homogenous products

Monopolistic Competition : 

Monopolistic Competition Numerous buyers and numerous sellers trying to differentiate their products from those of their competitors. Each seller's goods have some unique properties. Which gives seller some monopoly power. Product differentiation can be done through different brand names, design or styling and advertising.

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Product differentiation gives sellers control over the price. Sellers have total control over the market price. Few barriers to entry and exit. Firms have some market power. Not the price takers. EXAMPLE: heterogeneous products.

Oligopoly : 

Oligopoly Intermediate market structure between the extremes of perfect competition and monopoly. Small number of sellers. Power to influence the price of their products. Price makers. Rigid prices. Size of the firm is large. Firms sell both homogenous & heterogeneous products.

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Reaction functions. Diverse industries. Substantial market control. Interdependence. Entry of a new competitor is difficult. Large capital investment is required. EXAMPLE: automobile, airline and steel industries.

Monopoly : 

Monopoly Mono: single/alone poly: to sell Market has only one producer. Exclusive control. Lack of competition. Lack of substitutes. The sole supplier enjoys complete control over the price. The only constraint is fall of consumer demand in response to increased price.

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Government granted monopoly. Government monopoly (gov. reserves right) No price pressures. Prices are usually high. Governments attempt to prevent monopolies from arising through laws. EXAMPLE: electric company (WAPDA).

Evaluating an Economic System : 

Evaluating an Economic System An economic system is evaluated on the basis of the following three broad goals. Stability Full employment Growth

1.Stability : 

1.Stability Condition in which the money available in an economy and the goods produced in that economy grow at the same rate. There are enough products to satisfy consumer demand. Consumers have enough money to buy what they need and want.

Threats to Stability : 

Threats to Stability Inflation : Period of price increase throughout an economic system. Recession : Period characterized by a decrease in employment, income and production. Depression : Severe and long-lasting depression.

2. Full Employment : 

2. Full Employment Everyone who wants to work has an opportunity to do so. Unemployment is the level of joblessness among people seeking work. High unemployment suggests that the economy is performing poorly and a low unemployment suggests that the economy is stable.

3. Growth : 

3. Growth Increase in the amount of goods and services produced by a nation. It is an increase in the total output.

Assessing economic performance : 

Assessing economic performance To judge the success of an economic system, whether its meeting its goals or not, 5 economic measures are used. They are: Gross National Product (GNP) Gross Domestic Product (GDP) Productivity Balance of trade National debt

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GNP Total value of G/S produced by an economic system in one year. GDP Total value of all G/S produced within a nation in one year by its citizens regardless of their location (income earned by citizens including income of those located abroad minus income of non residents located in that country) Productivity Compares what a system produces relative to the resources needed to produce it.

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BOT Difference between a country’s exports and imports. +ve BOT is favorable because new money flows in from the sales of exports. – ve BOT means that money is flowing out. National Debt Amount of money that a nation owes to its creditors. Budget deficit is a situation in which the country spends more money than it takes in (the govt. takes in “revenues” in the form of taxes and has “expenses” in the form of military spending and social programmes etc.

Types of Business Organizations : 

Types of Business Organizations Sole Proprietorship Partnership Corporation

1. Sole Proprietorship : 

1. Sole Proprietorship Most basic legal form. Owned and operated by a single person. The owner is responsible for all of its debts.

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ADVANTAGES Freedom Not answerable Privacy No reporting Simple to form Easy to dissolve Alone enjoys the success/suffers failure Easy legal setup Low startup cost Low legal fees Flexible tax laws

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DISADVANTAGES Unlimited liability (sole proprietor is personally liable for all debts) Lack of continuity Depends on resources of single individual Hard to borrow money

2. Partnership : 

2. Partnership Second form of legal organization Frequently used by professionals Most common type is General Partnership GP – Business with two or more owners who share operation of the firm and financial responsibilities for its debts No legal limit to the no. of parties who may form a GP Partnership is often an extension of sole prop. Owner may want to expand The business may have grown too big for one person to handle

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ADVANTAGES Addition of new talent and money Greater ability to grow Easy to borrow money Access to resources of more than one individual Few legal requirements

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DISADVANTAGES Unlimited liability Each partner is liable Lack of continuity Difficulty in transferring ownership Internal conflicts Consent of the other partner Disagreements

3. Corporation : 

3. Corporation Business that is legally considered an entity separate from its owners Owners are liable for its own debts Liability extends to the limits of investment made by the owner

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ADVANTAGES Limited liability (investor is liable for the debts only to the limit of its personal investment) Continuity Not dependent on owners Can raise money by selling more stocks Can expand number of investors Lenders willing to grant loans Ease of transferring ownership

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DISADVANTAGES High startup cost Double taxation(the corporation pays tax on its profits + the shareholders pay taxes on their income) Tender offer (offer by a buyer to the shareholders of a corporation to buy its shares) Shareholders make individual decisions about whether to sell or not.

Types of Corporation : 

Types of Corporation Private Corporation Public Corporation Professional Corporation Multinational Corporation

1. Private Corporation : 

1. Private Corporation Also known as Closely Held Corp. Stock held by few people Not available for sale to general public As the corp. grows it may issue shares for sale to investors Most new corps start out as pvt. corporations

2. Public Corporation : 

2. Public Corporation Also known as publicly held corp. Shares are publicly issued Shares are widely held Available for sale to general public

3. Professional Corporation : 

3. Professional Corporation Professionals take advantage of corporate benefits Organized like a partnership Professionals make firms Corps. are most likely comprised of doctors, lawyers, accountants, engineers, etc.

4. Multinational Corporation : 

4. Multinational Corporation Also known as Trans-national Corp. Grows beyond national boundaries Stocks are traded with several countries Managers are from several different countries Corp. headquarters are in the individual home country Participants in the Global economy

Managing a Corporation : 

Managing a Corporation Creating a corporation of any type can be complicated To manage a corp. managers must understand the principles of corporate governance The roles of shareholders, directors and other managers responsible for corporate decision making Corporate governance involves three distinct bodies

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Shareholder/Stockholder Investors who buy shares of ownership of a corp. Stock Share of ownership in a corporation IPO First offer to sell shares to investors

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BOD Group of people elected by shareholders to oversee management of corp. They are the governing body of the corp. They report to their shareholders Communicate with shareholders and other potential investors through annual reports CEO Top manager hired by the BOD to run Corp. Responsible for firms’ overall performance

Trends in Corporate Ownership : 

Trends in Corporate Ownership Strategic Alliance two or more organizations collaborate on a project for mutual gain Joint Venture Strategic alliance in which partners share ownership of a new venture

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Merger Two corps unite to form a new corp. Acquisition One firm buys another. When the acquired company welcomes the merger it is called a “friendly takeover” When there is resistance to takeover it is called a “hostile takeover”

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Divestiture Firm sells one or more of its business units Firm needs to focus on its core business or sell off unrelated or underperforming businesses Spin-off To sell part of a business to raise capital Or to set up new independent business units

Understanding the Global Context : 

Understanding the Global Context As the business activities grow, they become international business e-commerce Global environment is important for all businesses as more and more firms engage in IB, the world economy is becoming a complex system

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Globalization organize/establish worldwide world economy becomes a single interdependent system as a result of G, consumers take for grtanted the G/S available Import to bring in from outside products made abroad but sold domestically

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export to send outside the country products made domestically but sold abroad/internationally Per capita income average income per person in a country three groups high income group middle income group low income group

Forms of Competitive Advantage : 

Forms of Competitive Advantage Import ↑ → Export ↑ → IB ↑ Because no country can produce all the G/S its people need Countries export products they produce better and less expensive Types absolute advantage comparative advantage national competitive advantage

Absolute Advantage : 

Absolute Advantage Exists when country can produce cheaper plus high quality products than any other country e.g. OIL- Saudi Arabia, COFFEE- Brazil

Comparative Advantage : 

Comparative Advantage Ability of a country to produce some products more efficiently than other products of the same country Eg. Computers are made better in the United States, hence US has comparative advantage over other products Cars are made better in Japan and Germany therefore these two nations have CA in automobile industry

National Competitive Advantage : 

National Competitive Advantage The theory of NCA tells why nations engage in IB Four conditions 1. Factor (FOP) 2. Demand (consumer demand for innovative products) 3. Related and supporting industries (local/regional suppliers) 4. Strategies, structures, rivalries (among local firms of a country, e.g.. Cost reduction, quality or high production) When all these conditions exist – a nation will engage in IB eg. Japan- Toyota, Honda, Nissan, Mitsubishi, etc.

Import- Export Balance : 

Import- Export Balance Although IB has many advantages Can create problems as well When countries’ imports and exports don’t reach a balance Two measures are used to evaluate BOT (Balance of Trade) BOP (Balance of Payments)

BOT : 

BOT Total economic value of all products that a country imports minus the total economic value of all the products that it exports V of products imp. – V of products exp. Two conditions of BOT 1. Trade Deficit 2. Trade Surplus

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Trade deficit 1. imports exceed exports 2. – ve BOT 3. Country suffers trade deficit 4. More money going out than coming in Trade Surplus 1. exports exceed imports 2. More money coming in 3. +ve BOT

BOP : 

BOP Flow of money in and outside a country Money that a country pays for imports (goes out) + receives for exports (comes in) + Its BOT + all the financial exchanges

Exchange Rate : 

Exchange Rate The rate at which currency of one country can be exchanged for currency of another country Balance of Imp. & Exp. Between two countries is affected by the rate of exchange between their currencies E.g. $1 US = 78 PKR 1 Riyal = 17 PKR

International Business Mgmt. : 

International Business Mgmt. Wherever a firm is located – success depends on its mgmt. IB is challenging because of its management responsibilities (P.O.D.C) As the business operates in several markets around the globe Three decisions are to be made for G 1. To go international or not? 2. Countries’ level of int’l involvement 3. Organizational structure

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International Business? Product to fit Foreign Mkt?. Foreign Business? Skills and Knowledge GO INTERNATIONAL STAY DOMESTIC yes yes yes No No No No

2. Level of Involvement : 

2. Level of Involvement After deciding to go international, business must decide on the level on inv. Different levels on international inv are: Exporter & Importer Firm International Firm Multinational Firm

Exporter & Importer : 

Exporter & Importer Basic level Exporter firm makes products in one country but sells in other Importer firm buys products & then import them for resale in its home country Both Imp/Exp conduct most of business in home country Both have lowest level on involvement in IB Both learn points for global business at this stage May large firms begin as Exporter Firm Exp. IBM, Coca Cola

International Firm : 

International Firm As a firm gains experience & success as Imp/Exp, it moves to the next level I.F conducts most business abroad Maintain manufacturing facilities overseas as well I.F is a firm that conducts most part of its business in a foreign country

Multinational Firm : 

Multinational Firm Firm does production & marketing in many nations/countries HQ location is irrelevant Economic importance Generate revenues, owner gets profits. Own large assets, greater chances of employment Buy materials, parts & equipment from many other firms of that country Pay million of taxes Their products affect hundreds of consumers & investors

3. Organizational Structure : 

3. Organizational Structure Each different level on inv. needs different kinds of structure for its organization A structure for one level would b inadequate for another Different OS are: Independent Agent Licensing Agreement Branch Office Strategic Alliance FDI

Independent Agent : 

Independent Agent Can b a foreign individual or an organization Agrees to represent an Exporter Often acts as a sales representative Sells Exporter’s products Collects payments Makes sure that customers are satisfied Often represents several firms at once

Licensing Agreement : 

Licensing Agreement Companies interested in having more involvement in IB go for licensing agreement One firm gives right to manufacture or market its product, either to an individual or to a company Doing this the Exporter or the License Holder gets a payment for the right to market the Licenser’s product. This called “ROYALTY” “FRANCHISING” is another form of licensing

Branch Office : 

Branch Office Instead on Licensing or acquiring Agents Firm sends its own Managers to overseas branch offices B.O is a foreign office set up by an international/ Multinational firm Company has more direct control over its own branch managers as compared to agents or license holders Visible public presence Customers feel more secure

Strategic Alliance : 

Strategic Alliance Strategic Alliance or Joint Venture (JV with a local partner) Company finds a local partner from the country it wants to conduct business in Contributes half of the resources needed to establish + operate a new business Each party invests resources + capital for the new business This new business is owned by partners They divide profits In some countries’ laws alliance is the only way to do IB there Firm gets greater control Firm benefits from the knowledge of the other partner

Foreign Direct Investment : 

Foreign Direct Investment Buying or establishing tangible assets in another country Building assembly plants, factories in other countries

Barriers to I.B : 

Barriers to I.B Several factors affect a business operating internationally Success of an international business depends how it responds to these barriers Barriers are: Social Economic Political

Social Barriers : 

Social Barriers Social/ Cultural differences btw the host & the home country Language differences in packaging Signs/ logos Adjusting the menus, ingredients, or timings according to the host country’s culture Value differences

Economic Barriers : 

Economic Barriers Economic differences Social differences are not as obvious as economic differences are Gov. involvement in related indiustry Gov. stability/ changes

Political Barriers : 

Political Barriers Political & legal differences Gov. affect I.B in many ways Can set conditions for doing business within its country Can prohibit doing business in its country Taxation to either encourage or discourage Can confiscate property of any foreign business

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Most common legal issues in I.B are: Quota, Tariff, Subsidy Local Laws Business Practice Laws

Quota : 

Quota Both Quota & Tariff affect price & quantity of foreign made products Quota restricts number of products that can be imported into a country

Embargo : 

Embargo Gov. bans exp & imp of particular products from particular country For example, controlling diseases

Tariff : 

Tariff Tax on imported items Directly affect prices Consumers not only pay for product but also the tariff fee

Subsidy : 

Subsidy Gov. pays to help domestic business compete with foreign business Indirect tariffs Lower prices of domestic goods rather than increasing prices of foreign goods

Local Laws : 

Local Laws Products sold in a particular country should be at least partly made there Profits from doing business in foreign country stays there rather than going out to an other nation

Business Practice Laws : 

Business Practice Laws Laws for running business in a particular country A legal business practice can be illegal in another CARTEL Association of producers who control supply & price DUMPING Practice of selling a product abroad for less than the cost of production

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