Introduction to Economic Understanding

1. Topic 5.2 Introduction to Economic Understanding

2. Topic 5.2 Chapter 5: How Can Success Be Measured? Introduction to Economic Understanding

3. Which Business Is More Successful? • South West Water Iceland (the supermarket!)

4. Stakeholders Which objectives do you think: • Shareholders • Directors & managers • Employees • Customers • Greenpeace would have for a business like Iceland? These groups are called stakeholders

5. Some Information • Which business is bigger in terms of: • a. Sales? b. Number of workers? c. Value of the business? • Which business is more labour-intensive? Why? • Which business is more capital-intensive? Why?

6. HOW CAN YOU MEASURE BUSINESS SUCCESS? Market Share (sales of the business /sales of the industry) Copy into your book SOCIAL (CSR) FINANCIAL Number of employees (Job creation) Ethical behaviour Considers all stakeholders Environmental Awareness Turnover (sales revenue) Profit Profit margin (profit as a % of turnover) Value of the business

7. How Do Businesses Get A Competitive Advantage? • Why do people choose to buy from some businesses instead of their competitors? • Lower prices (this can only be achieved by lower costs) • Better customer service • Better location • Reputation/Brand image • Higher quality products • Better understanding of customer needs • Owning intellectual property rights • What else…?

8. How Do These Businesses Build a Competitive Advantage…? • Amazon.co.uk • Sky TV • Starbucks • Nintendo • Lush • Cadbury’s

9. Topic 5.2 Chapter 6: What Causes Business Failures? Introduction to Economic Understanding

10. Management of the business • Lack of competitive advantage • Lack of innovation • Insolvency – poor cash-flow management • (You can be a profitable business and yet run out of cash!) • ‘Overtrading’ – see case study of ‘Boreas’ ice cream page 33 Reasons For Business Failure (1)

11. Market Conditions • Changes in demand caused by: • Falling income levels (recession) • Changing tastes and preferences • Successful advertising by a competitor • Competition Reasons For Business Failure (2)

12. Marketing • Sometimes, marketing activities can backfire • Product out of step with customer requirements • Place: customers can’t access the product easily and conveniently • Price: too high (or even too low) • Promotion: • Ineffective promotion • Celebrity association fails (Tiger Woods (Nike); Wayne Rooney (Coke Zero); Kerry Katona (Iceland)) Reasons For Business Failure (3)

13. Low productivity • Productivity = output per person per year • Workers not as efficient as in competitors (especially from overseas) • High productivity  average costs low  low prices (a competitive advantage) • Low productivity  average costs high Reasons For Business Failure (4)

14. When a business gets to a stage where it cannot carry on trading they have a no of options they can chose: • They can close the business and cease trading. People who are owed money may/may not get that money Lehman Bros tips over the brink (Sunday, September 14, 2008 ) At 5-44am this morning UK time, Lehman bros filed for chapter 121 bankruptcy - the 4th largest investment bank in the world has gone bust. It is going to be one hell of a garage sale as the remaining assets are sold off frantically to anyone who wants a piece of the action. • “Lehman Brothers Holdings Inc. (“LBHI”) announced today that it intends to file a petition under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York.” What Is Business Failure?

15. They may be taken over and as a consequence changes will occur to improve its operations eg HBOS and Lloyds 3. A business calls in others that can help such as Accountants called Administrators or Receivers. These co’s specialise in trying to find a way of solving a problem. The administrators may asset strip, or find a firm to buy it out. eg Lehman Bros What Is Business Failure?

16. Topic 5.2 Chapter 7: What Problems Does the Economy Face? Introduction to Economic Understanding

17. BMW (read case study on p. 36) • Why was BMW experiencing falling demand at the end of 2008? • Do you think this might have resulted in business failure if BMW had not acted? Why? • What steps did BMW take? • What were the potential positives and negatives of this action?

18. Causes of Economic Demand • The Level of Economic Activity • Boom or slump? • Interest rates • Affects likelihood of borrowing • Affects monthly outgoings of those with mortgages • Consumer confidence • Do people think the economy is going to get better or worse? • Demand from overseas customers • Affected by • their level of economic activity • Exchange rates

19. Inflation • The change in the average level of prices • Over time, prices tend to increase • A typical shopping basket of goods that cost £100 in 2005 would cost £121.49 by the end of 2010 because of rising prices (source: http://www.statistics.gov.uk/statbase/tsdataset.asp?vlnk=229&More=N&All=Y) • In 1971, Mr Ryan’s school dinner money for an entire week amounted to just 60p! Video: What is inflation?

20. CPI - The Consumer Price Index • Measures changes in the cost of living of a typical household. • The CPI is a weighted price index. It is compiled using a representative selection of more than 600 separate goods and services for which price movements are regularly measured in 146 areas throughout the UK

21. Price Changes Since 1987

22. The Consumer Price Index How would you describe the overall change in the CPI over the 75 years? So how much cheaper were prices in 1935 compared to 1987? So how much more expensive were prices in 2005 compared to 1987? What’s important about this?

23. Inflation is not very desirable because… • Price rises create uncertainty • Businesses find it hard to plan ahead • Reduces business confidence • Businesses invest less • Makes UK firms less competitive to international competitors Video: Why does inflation matter?

24. Families Struggle With Inflationary Pressures

25. Zimbabwe Hyperinflation at 14,841% % in September 2007. Zimbabwe Government has stopped issueing official stats late in 2007 but unofficial stats say that presently its facing an inflation around 11200000% (as on may 2008)

26. Hyperinflation With hyperinflation - inflation goes out of control • Huge amounts of money has to be printed to meet people’s demand for cash • Money effectively becomes worthless • The effect is nearly always to lead to a collapse in business and consumer confidence and a recession • In most cases a new monetary system may have to be created • Several countries are experiencing high rates of inflation today eg

27. Negative inflation • If high inflation is bad, you might think negative inflation would be good… • … but in fact, it’s probably just as bad. • Negative inflation is rare but it means that prices are generally falling • Because people expect prices to fall, they decide to wait before making an purchases • … which creates even less economic activity, and unemployment • Japan has struggled with the effects of negative inflation for the last decade

28. What Causes Inflation ? • A rise in the cost of production due to: • Cost of raw materials (especially energy) • Wages • Cost of imported goods • A rise in the level of demand in the economy • Rising wage levels • High consumer confidence • High employment • Weak ability of businesses in the economy to expand supply Video: What causes inflation?

29. Shocks Write the definitions of internal and external shocks into your note books.

30. Activity - Shocks In groups: Research examples of internal and external shocks to the UK. Make notes on how they affected the UK. Could there have been any prevention strategies implemented? Feedback to the class.

31. Unemployment : What Is It? • When people who want to work can’t find any work • Two ways of measuring: • Claimant Count – count of those seeking benefits • Labour Force Survey • Often results when economic activity in an economy falls

32. Activity - Unemployment In groups: We have discovered that a consequence of a fall in D is unemployment. In your groups examine the implications of unemployment on the economy. Draw up a poster demonstrating these implications. Make sure you cover the costs to society. Use tables on page 39 to help you

33. Topic 5.2 Chapter 8: How Important Are Exchange Rates? Introduction to Economic Understanding

34. Wheat spike 2010What are the causes?

35. Wheat spike 2010What are the causes?

36. Explaining the wheat spike • GRAIN growers can now expect a bigger wheat cheque from next harvest after AWB moved yesterday to ensure it had stock to service markets abandoned by Russia. • Growers were yesterday offered a price rise of $43 a tonne and told that they could expect the pool price to reach $333 a tonne for the 2010-11 harvest. • On Friday wheat sold into the ASX futures market reached $320 a tonne, rising 10.9 per cent after Russian president Vladimir Putin banned exports to preserve the nation's drought-hit stockpile. • Meanwhile, some exporters yesterday were offering growers $390 a tonne delivered for export in Melbourne. • The price of Australian wheat has rocketed since May, rising 39 per cent since AWB issued its first forecast for next season's crop. • Source HearldSun.com.au

37. Key terms Import = Good or service bought from other countries which lead to money going out of the UK - OUT Export = Good or service which is sold to other countries and which leads to payments to the UK – IN Visible = A Good Invisible = A Service

38. Imports and Exports In this country we import approximately 60% of our food. What does this mean? Currently our exports are less than our imports. What affect could this have on our economy? In the case of wheat prices, what affect will it have on UK households?

39. Exchange Rates • Most countries in the world have a currency, the UK has the £, the US the $ and the Eurozone, the Euro. • The Exchange Rate means the quantity of foreign currency that can be brought with one unit of the domestic supply. • Movements in the exchange rate can dramatically affect the profitability of goods both for exports and imports. • The £ rate of exchange against the dollar is determined by S & D on the international currency markets. Exchange rates affects firms in different ways. http://videos.howstuffworks.com/hsw/23135-economics-money-video.htm http://uk.reuters.com/business/currencies?WT.mc_id=ext_SEM_Google_currencies&WT.srch=1

40. Exchange Rates: SPICE up your life! • Great news for: • UK tourists abroad • UK companies which import raw materials from overseas • Bad News for: • People thinking of holidaying in the UK • UK companies which export overseas • What do you think WPIDEC might stand for? • Strong • Pound • Imports • Cheaper • Exports • Dearer

41. How Has the £ Changed Against the US Dollar?

42. What about the £ against the euro?

43. Topic 5.2 Chapter 9: Can the Government Solve Economic and Social Problems? Introduction to Economic Understanding

44. Interest rates What is the interest rate? Is the annual % charge made for borrowing money. Eg A bank loans a business £5000 for a 3 year period @ 10%. The business will have to pay back ?? Per year in interest as well as the original £5000. So over three years how much would they need to pay back?

45. Problems? When too much money is borrowed: Normally during start-up. The owners can put in £80000 and borrow £60000 but the £6000 a year interest is too much for the business and after two years the business folds. When the interest rate rises: In early 2004 the rate of interest in USA was as low as 1%. It then climbed steadily to 4% in 2006. A business that borrowed a lot of money in 2004 may struggle to pay four times as much interested as expected 2 years later.

46. What makes interest rates rise or fall? Bank profits come from lending money at a higher interest rate than they pay to get hold of money. Best for the banks is when you put money in a bank account and get 0% on it and they lend this money out for 9%. But banks can’t get all the money they want from their customers so they sometimes need to borrow from other banks eg the Bank of England. Then they have to pay the bank rate which is se every month by the Monetary Policy committee (MPC). If the rate goes up then the high street banks put their rate up etc. Video: How does the Bank manage inflation?

47. What happens when the rate goes up? • Over half of British families have mortgages, so this would increase their payments and they would need to cut back on their spending. • Firms would have higher fixed overhead costs which would affect their profits. • Both factors may force firms to cut back on investment spending or staffing – what are the consequences here?

48. What are the effects of lower interest rates? • Mortgage repayments would reduce leaving households with more disposable income, so spending on leisure goods especially would go up. This could eventually lead to higher profits for firms and possibly more jobs being created. • Lower interest rate charges on firm’s borrowings. As most small firms are financed through overdrafts there would be an important reduction in fixed overhead costs.

49. Fiscal Policy Definition of Fiscal Policy. Fiscal policy involves the Government changing the levels of taxation and Govt Spending in order to influence Demand and therefore the level of economic activity.

50. Government Expenditure What strategies can the govt use to help reduce economic problems? • Training for the unemployed • Advice on interview technique, preparing CVs and completing application forms • Access to unemployed of jobs available • Business start up advice • Advice on expansion and moving into international markets (via the DTI) • Alteration of taxes and incentives • Government expenditure which is 40% of all spending in the economy http://images.google.co.uk/imgres?imgurl=http://upload.wikimedia.org/wikipedia/commons/thumb/6/65/UKExpenditure.svg/400px-UKExpenditure.svg.png&imgrefurl=http://en.wikipedia.org/wiki/United_Kingdom_budget&usg=__fwh_FJQKgNmG8apN0633I_Wusa4=&h=301&w=400&sz=35&hl=en&start=1&tbnid=4OmIC7QFFxPK9M:&tbnh=93&tbnw=124&prev=/images%3Fq%3Duk%2Bgovernment%2Bexpenditure%26gbv%3D2%26hl%3Den