Download Business Environment - Colbourne College

BUSINESS ENVIRONMENT
Lecturer: Judith Robb-Walters
Lesson 8
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Business Environment
LO 3: Understand the behaviour of
organisations in their market environment
September – November 2014
THE BASIC SYLLABUS
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Understand the organisational purposes of
businesses.
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- Understand the nature of the national
environment in which business operates.
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Understand the behaviour of organisations in
their market environment.
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-Be able to assess the significance of the global
factors that shape national business activities.
LEARNING OBJECTIVES
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At the end of the class, students should be able
to:
illustrate the way in which market forces shape
organisational responses using a range of
examples
OVERVIEW
 “The
effect of aggregate supply and
demand in a market environment on
the prices of goods and services.
Market forces will cause prices to
increase when supply decreases or
demand increases, whereas prices
will fall when demand decreases or
supply increases.”
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www.investorwords.com
SUPPLY AND DEMAND
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Supply and demand is considered a basic economic
concept, as well as a vital part of a free market
economy. Supply is the amount of something, such as
a product or service that a market has available.
Demand is the amount of the product or service that
buyers want to purchase. The relationship between
supply and demand has a good deal of influence on
the price of goods and services.
Understanding the law of demand is an important
part of deciphering the relationship between supply
and demand. According to the law of demand, price
has a significant effect on demand. Essentially,
higher prices translate into less demand for a product
or service.
SUPPLY AND DEMAND
When the price of an item or service is high, an
individual must consider that buying the item
may prevent him from being able to afford the
purchase of another, more valuable item. As
such, the opportunity cost of that item is too high
and demand for it may be low.
 The law of supply is also vital to understanding
the relationship between supply and demand.
According to the law of supply, higher quantities
of a product or service are supplied at a higher
price. Those who produce goods and offer services
are willing to supply more at higher prices
because selling their wares at higher prices
provides increased revenues.

SUPPLY AND DEMAND GRAPH
ELASTICITY OF DEMAND
Price elasticity of demand measures the effect of price
changes on quantity demanded.
Sometimes a price increase causes quantity bought to
decrease significantly, other times not so much.
High airfares for an overseas vacation may cause you to
vacation locally. High coffee prices for people who think
of coffee as a necessity may not change quantity
demanded very much.
The more quantity changes because of a price change,
the more elastic is demand. Relative change will be
measured as a one dollar change at higher prices is not
as significant as at lower prices. An easy way to
measure relative change is to use percent change.
Elasticity of demand is important because it predicts
what may happen to total revenue received when a
company changes the price of a product.
ELASTICITY OF DEMAND

The formula for the Price Elasticity of Demand
(PEoD) is:
 % Change in unit demand
 % Change in price
Price inelastic – a change in price causes a
smaller % change in demand.
 Price elastic – a change in price causes a bigger
% change in demand.
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EXAMPLES OF PRICE INELASTIC DEMAND

We say a good is price inelastic, when an increase
in price causes a smaller % fall in demand, e.g. if
price of petrol falls 30%, but demand for petrol
only increases 10% the PED = - 0.33
EXAMPLES OF PRICE ELASTIC DEMAND

We say a good is price elastic when an increase in
prices causes a bigger % fall in demand. e.g. if
price falls 20% and demand increases 80%, the
PED = -4.0
PRICE ELASTIC DEMAND

If PEoD > 1 then Demand is Price Elastic
(Demand is sensitive to price changes)
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
If PEoD = 1 then Demand is Unit Elastic
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If PEoD < 1 then Demand is Price Inelastic
(Demand is not sensitive to price changes)
PRICE ELASTICTY OF DEMAND
COMPUTATION
Using the information below the price elasticity
of demand can be calculated: Price(OLD)=9 ; Price(NEW)=10
 QDemand(OLD)=150 ; QDemand(NEW)=110
 The formula used to calculate the percentage
change in quantity demanded is:
 [QDemand(NEW) - QDemand(OLD)]
QDemand(OLD)
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[110 - 150] / 150 = (-40/150) = -0.2667
PRICE ELASTICITY OF DEMAND
COMPUTATION
[Price(NEW) - Price(OLD)]

Price(OLD)
 By filling in the values :
 [10 - 9] / 9 = (1/9) = 0.1111
 Therefore the price elasticity of demand is:
PEoD = (-0.2667)

(0.1111) = -2.4005
 Conclusion:- So our good is price elastic and thus
demand is very sensitive to price changes.

ELASTICITY OF SUPPLY

Elasticity of supply is the amount a price changes
based on changes in supply. An elastic good's
price will change as the price changes. If the good
is inelastic, as the supply of the product changes,
the price does not change. Inelastic curves are
very straight up and down. Elastic curves are
straight horizontally. Elasticity of supply is an
important factor for business managers. Business
managers want to know how the price they offer
for their product will change based on how much
they produce.
ELASTICITY OF SUPPLY
ELASTICITY OF SUPPLY
PRICE ELASTICITY OF SUPPLY
We calculate the Price Elasticity of Supply by the
formula:

Percentage Change in Quantity Supplied

Percentage Change in Price
 Let's look at an example. Assume when pizza
prices rise 40%, the quantity of pizzas supplied
rises by 26%. Using the formula above, we can
calculate the elasticity of supply.
 Elasticity of Supply = (26%) / (40%) = 0.65
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WHAT FACTORS AFFECT THE
ELASTICITY OF SUPPLY?
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
Spare production capacity: If there is plenty of spare
capacity then a business can increase output without
a rise in costs and supply will be elastic in response to
a change in demand. The supply of goods and services
is most elastic during a recession, when there is
plenty of spare labour and capital resources.
Stocks of finished products and components: If stocks
of raw materials and finished products are at a high
level then a firm is able to respond to a change in
demand - supply will be elastic. Conversely when
stocks are low, dwindling supplies force prices higher
because of scarcity in the market.
WHAT FACTORS AFFECT THE
ELASTICITY OF SUPPLY?
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
The ease and cost of factor substitution: If both
capital and labour are occupationally mobile then the
elasticity of supply for a product is higher than if
capital and labour cannot easily be switched. A good
example might be a printing press which can switch
easily between printing magazines and greetings
cards.
Time period and production speed: Supply is more
price elastic the longer the time period that a firm is
allowed to adjust its production levels. In some
agricultural markets the momentary supply is fixed
and is determined mainly by planting decisions made
months before, and also climatic conditions, which
affect the production yield. In contrast the supply of
milk is price elastic because of a short time span from
cows producing milk and products reaching the
market place.
CUSTOMERS PERCEPTIONS AND ACTIONS

In today’s globalising economy competition is
getting more and more fierce. That means it
becomes more difficult for products and
services to differentiate themselves from other
offerings than ever before. Not only is the
number of competitive offerings rising due to
globalisation of production, sourcing, logistics
and access to information. Many products and
services face new competition from substitutes
and from completely new offerings or bundles
from industry outsiders. Since product
differences are closed at an increasing speed
and many companies try to win the battle for
customers by price reductions, products and
services tend to become commodities.
CUSTOMERS PERCEPTIONS AND ACTIONS
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On the other hand, customer behaviour becomes more
hybrid. On one hand, customers are increasingly price
sensitive – searching for bargains at marketplaces
like ebay or buying their groceries at discount
markets. On the other hand they enjoy branded and
luxury goods. One and the same person may plan a
weekend trip with a no-frills airline and a stay at a
five-star-hotel.
In the result, customers have a wider choice of often
less distinguishable products and they are much
better informed. For many offerings the balance of
power shifts towards the customer. Customers are
widely aware of their greater power, which raises
their expectations on how companies should care for
them.
CUSTOMERS PERCEPTIONS AND ACTIONS
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
Bringing it all together, it becomes ever more difficult
to differentiate a product or service by traditional
categories like price, quality, functionality etc.
In this situation the development of a strong
relationship between customers and a company could
likely prove to be a significant opportunity for
competitive advantage. This relationship is not longer
based on features like price and quality alone. Today
it is more the perceived experience a customer makes
in his various interactions with a company (e.g. how
fast, easy, efficient and reliable the process is) that
can make or break the relationship. Problems during
a single transaction can damage a so far favourable
customer attitude.
PRICING DECISIONS

Having a pricing objective isn’t enough. A firm
also has to look at a myriad of other factors
before setting its prices. Those factors include the
offering’s costs, the demand, the customers whose
needs it is designed to meet, the external
environment—such as the competition, the
economy, and government regulations—and
other aspects of the marketing mix, such as the
nature of the offering, the current stage of its
product life cycle, and its promotion and
distribution.
PRICING DECISIONS
If a company plans to sell its products or services
in international markets, research on the factors
for each market must be analyzed before setting
prices. Organizations must understand buyers,
competitors, the economic conditions, and
political regulations in other markets before they
can compete successfully.
 For a company to be profitable, revenues must
exceed total costs.
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COST AND OUTPUT DECISIONS
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Costs are related to the choice of input used for
production. The short-run, by definition, is made
up of two kinds of cost¾fixed costs and variable
costs. A fixed cost is a cost that does not change
with the amount of output produced. For
instance, if a firm is paying monthly rent for
office space, that monthly rent does not change if
the firm is making one unit or 1,000 units. A
variable cost, on the other hand, is a cost that
does change with amount produced. For many
firms, labor is a variable cost. Generally
speaking, the more you produce, the more labor
you use.
COST AND OUTPUT DECISIONS

Output Decisions: Revenues, Costs, and Profit
Maximization The profit-maximizing output level
for all firms is the output level where MR = MC.
The profit-maximizing perfectly competitive firm
will produce up to the point where the price of its
output is just equal to short-run marginal cost—
the level of output at which P* = MC. As long as
marginal revenue is greater than marginal cost,
even though the difference between the two is
getting smaller, added output means added
profit.
COST AND OUTPUT DECISIONS

Whenever marginal revenue exceeds marginal
cost, the revenue gained by increasing output by
1 unit per period exceeds the cost incurred by
doing so. The Profit-Maximizing Level of Output
Comparing Costs and Revenues to Maximize
Profit Output Decisions: Revenues, Costs, and
Profit Maximization At any market price,a the
marginal cost curve shows the output level that
maximizes profit. Thus, the marginal cost curve
of a perfectly competitive profit-maximizing firm
is the firm’s short-run supply curve
ECONOMIES OF SCALE
 Economies
of scale is an economics term
that means large entities, whether
businesses, non-profits or governments,
can reduce costs simply because of their
size. This gives them a competitive
advantage over smaller companies. For
example, they can produce things more
cheaply per unit because they make so
many.
TYPES OF ECONOMIES OF SCALE
 There
are two main types of economies of
scale: internal and external.
-
Internal economies are, as the name
implies, internal to the company itself and
is controllable by management.
 - External economies are supported by
external actors, such as the industry,
geographic location or government
THE SHORT RUN

In terms of the macroeconomic analysis of the
aggregate market, a period of time in which some
prices, especially wages, are rigid, inflexible, or
otherwise in the process of adjusting. Short-run
wage and price rigidity prevents some markets,
especially resources markets and most notably
labor markets, from achieving equilibrium. In
terms of the microeconomic analysis of production
and supply, a period of time in which at least one
input in the production process is variable and one
is fixed. In the microeconomic analysis, the short
run is primarily used to analyze production
decisions for a firm.
THE LONG RUN
 In
terms of the macroeconomic analysis
of the aggregate market, a period of
time in which all prices, especially
wages, are flexible, and have achieved
their equilibrium levels. In terms of the
microeconomic analysis of production
and supply, a period of time in which
all inputs in the production process are
variable.
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MULTI – NATIONAL CORPORATIONS
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A multinational corporation is an enterprise that
has operations in one or more countries other
than the home country where it's headquartered
or managed. Companies opt to expand into the
global arena for several reasons, including
increased market share and the resulting
economies of scale -- cost reductions due to
expanded output levels and a consolidation of
management. Despite their benefits and
advantages, multinational corporations have
disadvantages and have often been criticized for
exploiting their host countries for their resources.
ADVANTAGES AND DISADVANTAGES OF
MULTI-NATIONAL CORPORATIONS
Advantages
 -Enhanced Investment in Host Country
multinational corporations can be an invaluable
dynamic force for employment as well as the
wider distribution of capital and technology.
 -Tax Revenue for Home Country :Your
multinational corporation's profits are subject to
federal and state taxes, boosting revenues for the
home government.
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DIS-ADVANTAGES AND DISADVANTAGES
OF MULTI-NATIONAL CORPORATIONS
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Preferential Treatment Over Local Industry: By
virtue of your economic importance, the foreign
government may accord your corporation
disproportionate leeway in your operations.
Loss of Jobs at Home: Although expanding into
the global markets can create some jobs for U.S.
nationals, this can be insignificant if the bulk of
your corporation's operations are shifted overseas
to leverage cheaper labor.
TRANSATIONAL CORPORATIONS
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Transnational corporations are corporations that have
their headquarters in one country, and have companies in
more than one foreign countries. The first transnational
opened in the early 20th century. There are three types of
transnational corporations:
Horizontally integrated: factories in different countries
making the same product. A transnational corporation that
is horizontally integrated is McDonald.
Vertically integrated: factories in certain countries making
products that act as the input to the goods that are made in
factories in other countries. A transnational corporation
that is vertically integrated is Addis.
Diversified: factories in different countries making
products that are not horizontally nor vertically integrated.
A transnational corporation that is diversified is Microsoft.
TRANSATIONAL CORPORATIONS

One way that the transnational corporation reduce
their cost and make huge profits is outsourcing which
means that they set up factories to produce those
goods in developing countries where labour is cheap.
Once a transnational corporation opens a company in
a country, it provides jobs for the people. Countries
like South Korea and India reduced their poverty
rate. So governments of varies countries are lowering
their trade barriers to attract those corporation and
causes those corporation to be even more powerful
than the government. Lower trade barriers mean that
the wages are lowered, cut the cost of education and
health care in order to provide money to help the
transnational corporation to set-up, and lead to issues
like child labour, and environmental issues.
REVIEW QUESTIONS
1.The price of apples was $7 and demand was for
200. Then the price increase due to shortage to
 $8 the quantity decreased to 180. Calculate the
price elasticity of demand.
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
2.The price of particular new car model rose from
$20,000 to $25,000, resulting in demand falling
from 10,000 to 5,000 new car sales. Calculate the
elasticity of demand.
REVIEW QUESTIONS

3.Calculate the price elasticity of supply
using the mid-point formula when the price
changes from $5 to $6 and the quantity
supplied changes from 20 units per supplier
per week to 30 units per supplier per week.
REVIEW QUESTIONS
4.If
the price of iPods increases,
and as a consequence the
demand for MP3s increases,
then iPods and MP3s are
A. independent products.
 b.ceteris paribus products.
 c. substitute products.
 d.complementary products.
REVIEW QUESTIONS
 5.The
short run is a time frame in
which
 A) the quantities of some resources
are fixed and the quantities of other
resources can be varied.
 B) the quantities of all resources are
fixed.
 C) the quantities of all resources can
be varied.
 D) all costs are sunk costs
REVIEW QUESTIONS

6. ) The
long run is a time frame in
which
 A) the quantities of all resources are
fixed.
 B) the quantities of all resources can
be varied.
 C) the quantities of some resources
are fixed and the quantities of other
resources can be varied.
 D) all costs are sunk costs.
FURTHER READING
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http://www.investorwords.com/
What is Supply and Demand?Written By: N. Madison
Elasticity from Samuel L. Baker, Ph.D. of the University of
South Carolina
http://www.accountingtools.com/
Examples of Elasticity by Tejvan Pettinger
http://www.umacs-business-solutions.com/
Price Elasticity of Demand -A Primer on the Price
Elasticity of Demand By Mike Moffatt
How to Calculate Elasticity of Supply - By Carter McBride
FURTHER READING
Price Elasticity of Supply -Author: Geoff Riley
 http://www.investinganswers.com/
 Price Elasticity of Supply - by Irfanullah Jan
 Understanding and Managing Customer
Perception By Dagmar Recklies
 http://www.web-books.com/eLibrary
 Cost/Output Decisions by Rage Callao
 Economies of Scale By Kimberly Amadeo
 http://glossary.econguru.com/
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FURTHER READING
Advantages & Disadvantages of Multinational
Corporations - By Jack Gordon
 The Disadvantages of Transnational
Corporations - By Jagg Xaxx
 Price Elasticity of Demand - A Primer on the
Price Elasticity of Demand By Mike Moffatt
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