BUSINESS A LEVEL PAPER 3, Exams of Advanced Education

Download BUSINESS A LEVEL PAPER 3 and more Exams Advanced Education in PDF only on Docsity!

BUSINESS A LEVEL PAPER 3

Define pricing - the choice of pricing strategy that a business makes when setting prices for their products or services. What affects consumer sensitivity to price? - - quality (higher the quality, the more they will pay)

• desire for the product (if product is in demand, prices will be higher)
• customer income (customers buy within their income range) What are the pricing strategies and define them? - - Cost-plus - The total cost of the products are worked out then a fixed percentage of profit is added on top.
• Price skimming - The price is set high to start when launching a new product. This can be used to encourage early adopters of e.g. technology products.
• Price penetration - setting prices low to start to gain a foothold in a market.
• Competitive pricing - pricing goods in line with competitors so customers will judge purchasing on other aspects - e.g.quality, speed of service, etc.
• Predatory pricing - setting prices very low to force competitors out of the market (e.g. used by monopolies or oligopolies)
• Psychological pricing - pricing, e.g. £1.99 so psychological barrier of £2.00 isn't broken. Factors affecting pricing strategy - - number of USP's/amount of differentiation
• price elasticity of demand
• level of competition in the business environment
• strength of brand
• stage in product life cycle
• costs and the need to make a profit At what phase in the product life cycle would a business use what pricing strategy? - development > launch = skimming growth > maturity = competitive pricing maturity > decline = priced lower to clear stocks

What changes in price occur to reflect social trends? - - online sales: websites offer low prices because they don't have overheads, rent and cost of running stores. customers often look at goods in store and purchase online. Online retailers use dynamic pricing

• price comparison sites: customers can use sites to compare price, which is far more convenient and cheaper than older methods. Define recruitment - the process of finding people to work for (can be a company or a new member of an organisation) Internal recruitment - advantages and disadvantages - adv:
• quicker and cheaper
• promotion opportunities motivate staff
• staff know company culture
• company knows staff strength and weaknesses dis:
• existing workers may not have relevant skills
• no fresh ideas to bring to company
• it creates external vacancies External recruitment - advantages and disadvantages - adv:
• wider range of candidates
• candidates may have skills to save training costs dis:
• can be expensive and time consuming to find staff
• it may de-motivate existing staff seeking a promotion

How to improve capacity utilisation? - - increase demand

• cut capacity What is an economic influence? - - when a business is affected in any way by economic factors, eg. inflation or exchange rates What is GDP vs Real GDP? - GDP: the value of all of a country's goods and services produced in a time period (usually a year). Real GDP: excludes inflation from the measurement. This is to account for the fact growth may appear to be happening, but it may just be due to price rises and not more production. What is a business cycle? - The pattern of a boom and bust in a countries economy Define: boom, recession, slump, recovery - Boom - period when an economy is growing strongly Recession - when a countries economy has 2 consecutive quarters of negative growth Slump - a period when there is a deep and long fall in output Recovery - when demand for goods and services starts to improve Define: inflation, interest, exchange rate, taxation - inflation - a general sustained rise in prices interest - the cost of borrowing money exchange rate - the price of one currency in exchange for another taxation - a government levy on salaries and goods/services How do interest rates impact businesses? - LOWER INTEREST RATES:
• consumers may borrow money to buy - so sales will rise.

• the cost of lending falls which may lead to an increase in profits (costs less to borrow so less to pay back). HIGHER INTEREST RATES:
• consumers will not borrow and so will save instead of spending - so sales will fall.
• the cost of borrowing will rise and this will mean that the cost of supplies for a business may increase. SO: the HIGHER interest rate = the less companies may invest in the business. There's an opportunity cost if they do of losing out on interest for keeping the money in the bank. How does inflation impact businesses? - - Inflation erodes the value of money, so company loans seem easier to pay as money today is worth less than previously.
• Inflation damages profitability as cost of raw materials rises. So companies need to make decisions on whether to raise prices.
• If inflation rises faster in the UK than elsewhere then UK companies will find it hard to compete with international rivals. What is inflation, what does it show and how is it measured? - The annual rate of inflation shows how much higher or lower prices are compared with the same month a year earlier. It indicates changes to our cost of living. measured using CPI (consumer price index) Uses a basket of goods which is representative of staple goods What are exchange rates and why do they change? - The price of one currency in exchange for another. Currencies can change in value and this is due to the demand and supply of a currency. What is appreciation vs depreciation? - Appreciation means that there is a rise in the £ against other currencies. Depreciation means that there is a fall in the £ against other currencies.

Define competition - Rivalry amongst sellers Define a competitive market - - A highly competitive market has lots of rivalry and many sellers. It depends on how much market share a firm has. In a low profit margin market, firms seek to reduce competition by - e.g.:

• Predatory pricing.
• Having a unique selling point (USP). What are the 3 main types of market structure? - Monopoly: when one firm dominates a market with 25% or more of market share. Oligopoly: when a few firms dominate the market Monopolistic: when there are several businesses all offering similar products at similar prices Ways to reduce competition? - - price-cutting: gains customers, but isn't a long term strategy
• increase product differentiation - e.g. through new designs or product features What is the trade-off with chain store vs independent stores? - It is a trade off between whether customers want the best prices or to keep using their local shopkeepers What is investment appraisal and why is it done? - The process of assessing whether a project is worthwhile investing in or not. There are 3 methods of appraisal. The three methods of appraisal:
• payback
• average rate of return (ARR)

• net present value (NPV) How to calculate payback? - 1. Add up the net cash flows until you exceed the initial cost.

2. Depending on when this occurred gives you the number of whole years you have taken to payback the initial cost - e.g. if it is in year 2 you have taken 1 whole year, if it is in year 3, you have taken 2 whole years.
3. Take the remainder owing after the whole year and divide this by the next years cash flow, multiply by 12 to get the amount of months What is payback? - It shows how long it takes to pay back the initial investment What is the average rate of return? - It shows the annual percentage rate of return on each investment. How do you calculate ARR? - 1. Calculate the average annual profit by adding up the net cash flows and subtracting the initial cost.
4. Divide the result by the number of years to calculate the average annual profit (AAP).
5. Divide the AAP by the initial cost and multiply by 100 to calculate the percentage return. What is NPV? - This takes into account that money falls in value over time. Net Present Value Advantages and disadvantages of investment appraisal - Investment appraisal is good because it can give a clear picture of whether money should be invested and where. However, it does not take into account any qualitative factors so should not be used in isolation. What is a shareholder vs a stakeholder? - A shareholders is a part owner of a business A stakeholder is anyone who has an interest in a business Name 3 examples of internal and external stakeholders - INTERNAL:

What are the advantages and disadvantages of tariffs and quotas? - adv:

• Domestic firms are more competitive as their goods are likely to be cheaper and more available. -Job security is better as demand grows for domestic goods.
• With tariffs, the tax revenue raised can be spent on e.g.infrastructure. dis:
• Customers may still buy, more expensive foreign goods - especially if they are unusual.
• It can be difficult to measure the effectiveness of protection measures.
• Inefficient firms may not improve if they can sell their goods because tariffs/quotas are imposed on imports. What is government legislation? - Another form of law used to restrict imports to protect a country, e.g. stricter safety standards.
• they may also give subsidies (payments) to domestic producers to help them compete with foreign producers advantages and disadvantages of using government legislation and subsidies - adv:
• laws can ensure goods are not fake and comply with safety standards
• subsidies encourage businesses to increase production so more tax is repaid
• helps domestic businesses gain EOS from extra production dis:
• countries affected by the laws can retaliate with their own legislation
• countries can give their own producers subsidies to negate impact
• subsidies need to be paid for so can rise taxation Which factors should be considered when considering using another country as a production location? -
• cost of production
• skills and availability of labour force
• infrastructure

• location in trading bloc
• government incentives
• political stability
• ease of doing business
• natural resources
• likely return on investment