F1 Course notesSTN Rear a ol CHAPTER 1 THE BUSINESS ORGANISATION, ITS STAKEHOLDERS AND THE EXTERNAL ENVIRONMENT 1.4 ACCASYLLABUS GUIDE OUTCOME 1 THE PURPOSE AND TYPES OF BUSINESS ORGANISATIONS Organisations are defined as: “social arrangements for the controlled performance of collective goals" (Buchanan and Huczynski) There are different types of organisations, all of which, whether they are profit or nor-profit must concentrate on coordinating the above 3 points (Social Arrangement, Collective Goals and Control of Performance). The organisation is formed to have a good social arrangement made up of people who are capable of working together, all of, them-willing to work around a set of objectives or goals. The social arrangement should have a sound control Organisations can achieve results that cannot be produced by individuals on their ‘own. This is because organisations enable people to: Share skills and knowledge Specialise and Pool resources 1.1.1 How does management formulate objectives? ‘A company goal can only become possible if it is SMART. This is a mnemonic which stands for: S— Specific M - Measurable A-Attainable R - Realistic T-Time basedfue ely iClaite) 1.2. ACCASYLLABUS GUIDE OUTCOME 2 DESCRIBE THE COMMON FEATURES OF BUSINESS ORGANISATIONS ‘The common features of a business organisation: ‘+ made up by a group of people who work together for the achievement of set goals different people do different things or specialise in one activity have business strategies to achieve goals/objectives have a vision and a mission have a cuiture which is formed by the organisational values have structures (such as department, teams and divisions) and a sound system i.e, systems and procedures have inputs which are processed and provide an output have customers besides other stakeholders 1.3. ACCA SYLLABUS GUIDE OUTCOME 3 OUTLINE HOW BUSINESS ORGANISATIONS DIFFER + Size of the organisation (number of employees) + Number of organisational levels (tall or flat organisation) + Span of control (this--refers to number of people directly under the responsibility of one manager) + Centralisation versus decentralization (this refers to the extent to which decision making power is delegated down the organisational hierarchy) + Criteria for departmentation (might include examples such as geography, by product, by function etc) + Profit or non-profit making «Ownership —some organisations are owned by private owners or shareholders These are private sector organisations. Public sector organisations are ‘owned by the government + Technology - for example, computer firms will have high use of technology but a comer shop has very low use. 14.4 ACCASYLLABUS GUIDE OUTCOME 4 LIST THE INDUSTRIAL AND COMMERCIAL SECTORS IN WHICH BUSINES ORGANISATIONS OPERATE Industrial sector includes companies that manufacture parts as well as those that assemble them into finished products. A number of specific industries fall under the industrial umbrella, including automotive, aeronautics (aircraft building), textiles, pharmaceutics, bioengineering and metal casting. Food refineries and packagers generally fall under the industrial category because of the types of facilities necessary for production.fue ely ‘Commercial private sector industries are additionally subdivided in two ways. The first is how they sell their product. Commercial industries who sell goods to the general public are called retailers. This includes traditional outlets such as grocery stores, specialty shops, department stores and drug stores, but also includes online outlets such as online clothing stores or online book sellers Some commercial private sector industries buy from manufacturers and sell to retailers. These corporations are called wholesalers. Not all commercial industries involve wholesalers. In some cases, the retailer can buy directly from the manufacturer. Industries that commonly use wholesalers include manufactured office supplies and home goods hn summary, the main industries in which organisations operate are: agriculture, manufacturing, extractive raw materials, energy, retailing/distribution, intellectual production and service industries. 1.5 ACCASYLLABUS GUIDE OUTCOME 5 IDENTIFY THE DIFFERENT TYPES OF BUSINESS ORGANISATION 1.5.1 Commercial organisations A very important difference within, the structure of organisations is the difference between profit otientated= (Commercial) and non-profit orientated organisations. There is also a distinction ‘between their primary and secondary goals. The secondary goals exist to support the primary goal. The primary goal of a profit making company is to maximise shareholders’ wealth. Business organisations come in all different shapes and sizes including sole traders, partnerships and LTD. A Limited company has a separate legal personality from its ‘owners (shareholders). The latter cannot normally be sued for the debts of the business unless they have given some personal guarantee. Their risk is generally restricted to the amount that they have invested in the company when buying the shares (limited liability) The owners of a limited company are shareholders. They provide capital and receive Tetum. Directors are appointed by shareholders to run the company. Executive directors participate in the daily operations of the organisation and non-executive directors are invited to join in an advisory capacity to exercise overall guidance 1.5.2 Not-for-profit organisations ‘A non-profit organisation (NFP) works with a prime intention (primary goal) of providing a good or a service to different sectors of society for which they are set up to provide a benefit. For example, a school is set up to provide education. Charities, such as, the Red Cross is set up to provide a medical service1.5.3 Public Sector Public Sector organisations are owned or run by the government. They are funded by and accountable to the government. A major challenge that any government faces is that of balancing their limited resources with a huge demand for public services. Examples of a public sector orgarisation are: 1.54 Hospitals Armed Forces Centrally funded agencies Most schools & Universities Government Departments Non-governmental organisations (NGO's) ‘A non-governmental organisation is an independent voluntary association of people acting together for some commen purposes. These organisations often support such things as: conservation issues, environmental change etc. 155 Co-operatives. ‘A co-operative is defined as an’autonomous association of persons united voluntarily to meet their common economic, social and cultural needs through a jointly-owned and controlled enterprise. A cooperative may also be defined as a business owned and controlled equally by the people who use its services or who work at it 15.6 Mutual Associations A mutual association or organisation is owned by the member/clents that such organisation exists for. Generally mutual organisations deal with intangible products such as financial services, example, ACCA Refer to technical articles “Non Profit organisation part 1 and part 2” at the back of the notes aCOWtancyKEY POINTSfue ely 1. Objectives or goals must be identified by top managers in a SMART way. S— specific M - measurable A- attainable R - realistic T- time based 2. Profit oriented organisations are after maximising shareholders’ wealth whilst the prime goal of non-profit organisations is the provision of goods and services from which different sectors of the society will benefit. 3. The Public Sector is owned and run by government. ‘The Private Sector is composed of Limited Companies (LTD), partnerships and sole tradersQUESTION BANK Question 1fue ely ‘The primary goal in non-profit organisations is the ‘A. maximisation of profits B. reward to its employees C. shareholders’ wealth D. provision of goods/services Question 2 Which of the following is an example of a mutual organisation? A. Bank B. Hospital C. ACCA D. Government Department Question 3 What is the most appropriate goal of the firm? A. Shareholder wealth maximisation B. Profit maximisation C. Stakeholder maximisation Question 4 Which of the following statements is true? A. Partnerships offer the same benefits as imited companies B. Sole traders have no personal liability for business debts C. Limited Companies are classed as a separate legal entity, therefore, the shareholders are not personally liable for any debts of the business D. Apartnership can be made up of no more than 20 partners Question 5 QuESHON 6. following are owners of a limited company? A, Non-executive directors B? Stakeholders C. ShareholdersSTN Rear a ol ANSWER BANK u acOWiancy© C —A bank is a commercial organisation, government departments fall under public sector and a hospital can either be private or public. A = Profit maximization is important but ultimately it is the take home shareholders’ wealth that has the most importance. C — There is no limit in the number of partners. Sole-traders have a personal liability for business debts. C — Shareholders could be anyone who has an interest in the organisation and non-executive directors are mostly in an advisory role. c E C — Any organisation irrelevant of the size, technology and ownership have an input which is processed to provide an output D — A public sector organisation is owned or run by, central or local government. 12STN Rear a ol STAKEHOLDERS IN BUSINESS ORGANISATIONS 2.1 ACCASYLLABUS GUIDE OUTCOME 1 DEFINE STAKEHOLDERS AND EXPLAIN THE AGENCY RELATIONSHIP IN BUSINESS AND HOW IT MAY VARY IN DIFFERENT TYPES OF BUSINESS ORGANISATION A stakeholder is a group or individual who has an interest in what the organisation does, or an expectation of the organisation. It is important that an organisation understands the needs of the different stakeholders. The diagram hereunder lists some of the most important stakeholders of an organisation. Stakeholders may be categorized as follows: © Internal stakeholders © External stakeholders © Connected stakeholders 1BiClaite) a ay 2.2 ACCASYLLABUS GUIDE OUTCOME 2 AND 3 DEFINE INTERNAL, CONNECTED AND EXTERNAL STAKEHOLDERS AND EXPLAIN THEIR IMPACT ON THE ORGANISATION IDENTIFY THE MAIN STAKEHOLDER GROUPS AND THE OBJECTIVES OF EACH GROUP 2.2.1 Internal Stakeholders, Internal stakeholders are intimately associated to the organisation and their objectives are likely to have a strong influence on how it is run. The main two examples of internal stakeholders are: * Employees © Management Their interests to defend are jobs / careers, money, promotion prospects and benefits. 2.2.2 Connected Stakeholders Connected stakeholders can be viewed as having a contractual relationship with the organisation. The objective of satisfying the shareholders needs to be fulfilled, however, customers and finance objectives must be met if the company is to succeed. Some examples ‘of connected stakeholders’ may include: ‘* Shareholders — interested in shareholders’ wealth measured by profitability ‘* Customers — interested in the company’s products ‘* Suppliers — interested in building long term relationship, on time payment of goods and profitable sales ‘* Finance providers - like banks interested in loan security 2.2.3 External Stakeholders External stakeholders have quite diverse objectives and have varying ability to ensure that the organisation meets its objectives. Some examples of extemal stakeholders may include: Community at large Environmental pressure groups — pollution etc Government — interested in tax and employment opportunities Trade unions — interested in protecting their members. 4Remove Watermark Now 2.3 ACCASYLLABUS GUIDE OUTCOME 4 EXPLAIN HOW THE DIFFERENT STAKEHOLDERS GROUPS INTERACT AND HOW THEIR OBJECTIVES MAY CONFLICT WITH ONE ANOTHER The needs/expectations of the different stakeholders may conflict. Some of the typical conflicts are shown below: 2.4 ACCASYLLABUS GUIDE OUTCOME 5 COMPARE THE POWER AND INFLUENCE*OF VARIOUS STAKEHOLDER GROUPS)AND..HOW THEIR NEEDS /SHOUBD“BE ACCOUNTED FOR, SUCH AS UNDER THE MENDELOW FRAMEWORK 2.4.1 Mendelow's power-interest matrix By plotting each stakeholder according to the power they have over the organisation and the interest they have in a particular decision, the dominant stakeholder(s), ie. the key players can be identified. The needs of the key players must be considered during the formulation and evaluation of new strategies. Although the other stakeholders, besides the key players, may be fairly passive, the managers must be aware that stakeholder groups can emerge and move from quadrant to quadrant as a result of specific events, so changing their position in the matrix. 45fue ely LEVEL OF INTEREST Low High A B Low Minimal Reep effort informed POWER c D Keep Key satisfied High players Potential examples Key players —a key customer. Keep satisfied — large institutional shareholders Keep informed — community representatives and charities. Power within organisations can be derived in.a vatiety of ways, any of which may provide an avenue whereby the expectations of an individual or group may influence company strategies. The following are the normally recognised sources of power: 1. Hierarchy 2. Influence 3. Control of the environment 4. Exercising discretion (power in being involved in decision making) 16STN Rear a ol KEY NOTES 1. A stakeholder is a group or individual who has an interest in what the 7organisation does, or an expectation of the organisation There are three types of stakeholders: - a. Internal b. External cc. Connected Internal Stakeholders Internal stakeholders are intimately associated to the organisation and their objectives are likely to have a strong influence on how it is run. Examples may include employees and management. Connected Stakeholders Connected stakeholders can be viewed as having a contractual relationship with the organisation. E.g. shareholders, customers, suppliers and finance providers. External Stakeholders Extemal stakeholders have quite diverse objectives and have varying ability to ensure that the organisation meets its objectives. E.g. community at large, environmental pressure groups, government and trade unions. Mendelows power-interest matrix LEVEL OF INTEREST Low High A B Low Minimal Keep effort informed POWER c D Keep Key satisfied Hie players 18, mark NiQUESTION BANKfue ely Which of the following would not be described as a connected stakeholder? A. shareholders. B. customers C. suppliers D. managers Question 2 Stakeholders can move from quadrant to quadrant within Mendelow's matrix. A. true B. false Question 3 lta stakeholder has low interest but high power, then according to Mendelow's matrix the strategy management should follow in relation to that stakeholder is: ‘A. minimal effort B. keep satisfied C. keep informed D. fully consider the Stakeholder, l.e. a key player Question 4 Which of the following would be described as an external stakeholder? customer supplier trade union competitor com> 20STN Rear a ol ANSWER BANK 1. D—Managers are intemal stakeholdersiClaite) a ay 2. A—This can happen asa resuit of specific events / outcomes. 3.8 4. CA, Band D are connected stakeholders. CHAPTER 3 22POLITICAL AND LEGAL FACTORS AFFECTING BUSINESS 3.1 ACCASYLLABUS GUIDE OUTCOME 1 EXPLAIN HOW THE POLITICAL SYSTEM AND GOVERNMENT POLICY AFFECT THE ORGANISATION The main components that an organisation should study in order to carry out an external analysis (PEST analysis) are: Political environment’ Legal environment ‘¢ Economical environment’ Demographics * Social environment / Environmental environment * Technological environment The environment is a soltce of uncertainty. Decision makers do™ not have sufficient information about. the environments (PEST) therefore itis very important to assess the overall degree>of uncertainty by using the following two ‘measures: 4. Simplicity vs Complexity 2. Stability vs Dynamism 3.141 Political Environment Organisational decisions are strongly affected by developments in the political environment. The political environment has its own system or framework. It Teguiates society therefore it regulates the system. A political environment will have the following changes affecting a business: © Policies and Laws (for example laws regarding housing, education, defense, healthcare, energy and environment) Taxation Local Councils Authorities Overall conduct of its economic policy Management must be on the lookout for changes in government policies and legislation which can change due to a change in goverment. Changes in 23government and policies will affect a society as a whole and will definitely influence the operations of a market. Businesses are able to influence government policies in a number of ways. 1. Employ lobbyists to put their case to individual ministers or civil servants 2. Give MP's non-executive directorships in the hope that the MP will take an interest in all legislation that affects them. 3. They can try to influence public opinion and hence the legislative agenda by advertising. 3.1.2 Legal Environment Laws come from a number of sources. Common law, parliamentary and government regulations are derived from it. The legal environment affects all companies, for ‘example: 3.2 ACCASYLLABUS GUIDE OUTCOME 2 DESCRIBE THE SOURCES OF LEGAL AUTHORITY, INCLUDING SUPRA- NATIONAL AND REGIONAL GOVERNMENTS 3.2.1 Sources of legal authority include the following: ‘SUPRA- NATIONAL ‘* United Nations resolutions (can be either substantive or procedural) International Court of Justice ¢ Other international agreements that apply to signatories (e.g. The World Trade Organisation sets rules on trade between member states) European Parliament European Courts NATIONAL National Governments through Acts of Parliament 24iClaite) a ay * Senior Courts (e.g. House of Lords in UK, The Supreme Court in the USA) ¢ Other major courts through the principles of case law and the setting of precedents REGIONAL ‘¢ RegionalFederal Goverment (e.g. Welsh assembly in the UK, State Government inthe USA) * Local councils can issue by-laws in many countries (a law that is less important than a general law or constitutional provision) 3.3 ACCA SYLLABUS GUIDE OUTCOMES 3 EXPLAIN HOW THE LAW PROTECTS THE EMPLOYEE AND IMPLICATIONS OF EMPLOYMENT LEGISLATION FOR THE MANAGER AND THE ORGANISATION 3.3.1 Retirement In the UK, many employees are taking early retirement perhaps as a result of corporate downsizing but many people still search for work at an older age and there are pressure groups seeking to ban ageism. 3.3.2. Resignation People resign for many reasons, personal-and occupational. Employees who are particulary valuable shoud be encouraged to stay. Particular problems the employee has been experiencing (example salary) may be solvable, though not always in the short term. In any case, an exit interview, when the leaver explains the decision to go, is a valuable source of information 3.3.3 Dismissal ‘There are 3 forms of dismissal, by employer, by the employee and a fixed contract without renewal. The statutory minimum period of notice to be given is determined by the employee's length of continuous service in the employer's service. Wrongful dismissal is dismissal that breaches the contract of employment. Unfair dismissal is dismissal without a good reason for which the legal concept protects the employee.iClaite) mark N 3.4 ACCA SYLLABUS GUIDE OUTCOMES 4 DENTIFY THE PRINCIPLES OF DATA PROTECTION AND SECURITY Why is privacy an important issue? There has been a growing concem that the ever-increasing amount of information about individuals held by organisations could be misused. The fear was that by the existence of computerised data about an individual, whether correct or incorrect, could be transferred to unauthorised third parties at high speed and litte cost. In the UK, the current legislation covering that area is the DATA PROTECTION ACT 1998 The Act has two main aims: (1) to protect individual privacy (and not that of organizations) (2) to harmonise date protection legisiation 3.4.1 The Principles of the Data Protection Act 1998 Schedule 1 of the act contains the data protection principles. 1. Personal data shall be processed fairly and lawfully and, in particular, shall not be. processed unless: ) At least one of the conditions in Schedule 2 is met b) in the case’of sensitive personal data, at least one of the conditions in Schedule 3 is also met 2. Personal data shall be ‘obtained only for one or more specified and lawful purpose and shall not be further processed in any manner incompatible with that purpose or those purposes. 3. Personal data shall be adequate, relevant and not excessive in relation to the purpose( s) for which they are processed. 4. Personal data shall be accurate and, where necessary, kept up to date. 5. Personal data processed for any purpose or purposes shall not be kept for longer than is necessary for that purpose or those purposes. 6. Personal data shall be processed in accordance with the rights of data subjects under this act. 7. Appropriate technical and organisational measures shall be taken against unauthorised or unlawful processing of personal data and against accidental loss or destruction of, or damage to, personal data. 8.Personal data shall not be transferred to a country or territory outside the European Economic Area unless that country or territory ensures an adequate level of protection for the rights and freedoms of data subjects in relation to the processing of personal data. myfue ely There are several possible risks to data at the place of work. These include: Human error Technical error Catastrophic error Malicious damage dishonesty AawNa 3.5 ACCA SYLLABUS GUIDE OUTCOME 5 EXPLAIN HOW THE LAW PROMOTES AND PROTECTS HEALTH AND SAFETY IN THE WORKPLACE 3.5.1. The importance of maintaining health and safety at work ‘There are three important elements to health and safety at work: ‘¢ Anemployer has legal obligations under UK & EU law The accidents and illness cost the employer money The company's image in the marketplace and society may suffer 3.5.2 Employers Duties All work practices must be safe. The work environment must be safe and healthy. All plant and equipment must be maintained to the necessary standard, Information, instruction, training and supervision should encourage safe working practices. Employers must provide training and information to all staff. 5. The safety policy should be clearly communicated to all staff. 6. Employers must carry out a risk assessment , generally in writing , of all work hazards. Assessments should be continuous. They must assess the risks to anyone else affected by their work activities. 7. They must share hazard and risk information with other employers, including those on adjoining premises , other site occupiers and all subcontractors coming onto the premise. 8. They must introduce controls to reduce risks. 9. They should revise safety policies in the light of the above, or initiate safety policies if none were in place previously. 10.They must identify employees who are especially at risk 11.They must employ competent safety and health advisers BONSiClaite) fue ely 3.6 ACCASYLLABUS GUIDE OUTCOME 6 RECOGNISE THE RESPONSIBILITY OF THE INDIVIDUAL AND ORGANISATION FOR COMPLAINCE WITH LAWS ON DATA PROTECTION, SECURITY AND HEALTH & SAFETY People should be able to be confident that they will not be exposed to excessive risk when they are at work. This means that risk and danger must be actively managed This is the main reason why security has become so important in today's world. Data is protected by secured information technology apart from being secured by law. The employee also has responsibilities when it comes to health and safety at work. * To take reasonable care of their own health and safety. © To take reasonable care not to put other people - fellow employees and members of the public - at risk by what they do or dont do in the course of their work. ‘© To co-operate with the employer, making sure they get proper training and understand and follow the company’s health and safety policies. ‘* Not to interfere with or misuse anything that is been provided for their health, safety or welfare ¢ To report any injuries, strains or illnesses you suffer‘as\a result of doing their job. * To tell the employer if'something happens that might affect their ability to work 3.7 ACCASYLLABUS GUIDE OUTCOME 7 OUTLINE PRINCIPLES OF CONSUMER PROTECTION SUCH AS SALE OF GOODS AND SIMPLE CONTRACT Consumer protection laws are designed to ensure fair trade competition and the free flow of truthful information in the marketplace. The laws are designed to prevent businesses that engage in fraud or specified unfair practices from gaining an advantage over competitors and may provide additional protection for the weak and those unable to take care of themselves. Consumer Protection laws are a form of government regulation which aim to protect the rights of consumers. 3.7.1 Unfair Contract Terms Unfair Contract Terms Act 1977 is an act of Parliament of the United Kingdom which regulates contracts by restricting the operation and legality of some contract terms. They are intended to provide broad protection for consumers, and business practices which are likely to distort consumers’ decisions regarding their purchases generally fall within this act. Certain kinds of unfair term can have that distorting effect, for instance through misleading consumers about their rights.fue ely iClaite) Under contract law, the money you give in exchange for the goods is referred to as the “consideration”. For a contract to take place there must be agreement between the parties. This requires an offer made by one party and acceptance by the other party. ‘An important point about contracts is that they do not have to be written. They do not even have to be spoken. A customer picking up something in a supermarket and walking to the checkout is making an offer to the shop, and that offer is implied by his behaviour. When one party to a contract fails to carry out his part of the agreement, the other party can take legal action against him for breach of contract. So if a business has customer who is failing to pay, they can take him to court. When one party makes a misrepresentation to the other, the contract is void 3.7.2 The Sale of Goods Act 1979 The Sale of Goods Act 1979 is an act of the Parliament of the United Kingdom which regulates English contract law and UK commercial law in fespect of goods that are sold and bought. The Sale of Goods Act performs several functions. The Act lays down a small number of compulsory legal.rules, but these restrictions are minimal: the bulk of the Act issconcered with an artay of presumptions and implied terms, which aim to reflect the commercial expectations in the most commonly agreed sales contracts. In the absence of contrary agreement these terms will govern a contract within the Acts remit, The Act applies to contracts where ownership of goods is transferred or agreed to be transferred for a monetary. Imagine you are about to enter into a contract for the purchase of some goods. ‘What might you be concerned about? = You may want the goods delivered for a particular occasion or date * Are the goods stolen, i.e. does the seller have a right to sell the goods? You would expect the goods to be the same type and quality as the description or any sample The goods should be reasonable quality and suitable for their purposeKEY POINTSfue ely mMO\ 1. An external analysis or PEST analysis includes: P olitical E conomical Social T echnological 2. Some laws generated from the Political environment and that may affect an organisation includes: 3. Criminal Law Company Law Employment Law Health & Safety Law Data Protection Law Laws regarding the Environment Tax Law Privacy is the right of the individual to control the use of information about him or her, including information on financial status; health and lifestyle (ie prevent unauthorised disclosure) 4. The Data Protection Act 1998 The (UK) data protection act 1998 protects individuals about who data is held. Both manual and computerised information must comply with the act. Under contract law, the money you give in exchange for the goods is referred to as the “consideration”. For a contract to take place, there must be agreement between the parties. This requires an offer made by one party and acceptance by the other party. ‘An important point about contracts is that they need do not have to be written, They do not even have to be spoken When one party to a contract fails to carry out his part of the agreement, the other party can take legal action against him for breach of contract. When one party makes a misrepresentation to the other, the contract is void. 3140.When someone is about to buy something there are things to consider and so does the law; date, does the seller have a right to sell the goods, quality as the description, reasonable quality and suitable for their purpose 32QUESTION BANKfue ely Question 1 Which of the following types of new legislation would provide greater employment ‘opportunities in large companies? ‘A. New laws on health and safety B. New laws to prevent discrimination in the workplace C. New laws making it more difficult to dismiss employees unfairly D. New laws on higher compensation for employer breaches of employment contracts Question 2 Which set of environmental factors does a lobby group intend to directly influence? A. Political B. Technological C. Demographic D. Economic Question 3 When examining the external environment organisations might use PEST analysis. What does PEST stand for? A. Political, Environmental, Social and Technical B. Physical, Environmental, Social and Technical C. Physical, Emergent, Strategic and Turbuient D. Political, Economic, Social and Technical Question 4 Which of the following best describes PEST analysis? A. Internal. analysis B. Micro analysis C. External analysis D. Macro analysis 34Question 5 Governments can influence firms through legislation and policy decisions in all sections of the economy including Law and Order, Schoois, Construction, Defense, Town Planning, Oil, Gas, Coal and Nuclear Power, Agriculture, Planning Permission and Foreign Policy 's this statement true or false? A. True B. False Question 6 When an organisation carries out an environmental scan, it analyses which of the following? A. strengths, weaknesses, opportunities and threats B. political, economic, social and technological factors C. strategic options and choice D. inbound and outbound logistics Question 7 Peter Wong was dancing on his desk One lunch time and tripped, injuring himset. Who is responsible for the accident? A. Peter B. Peter's employer C. Both Peter and his employer Question 8 Which type of organisation would have the retail prices it charges to personal consumers subject to close scrutiny by a regulator? ‘A. Amutinational corporation B. A multi-divisional conglomerate (a large corporation that has acquired several other firms engaged in different industries) C. Anational utilities company (national or local monopolies) D. Afinancial services provider 35fue ely Question 9 Employing lobbyists to put the organisation's case to ministers or civil servants is a legitimate method of influencing governmental policy in the interests of a business. ls this statement true or false? A. True B. False Question 10 Which of the following is data protection legislation primarily designed to protect? A. All private individuals and corporate entities on whom only regulated data is held B. All private individuals on whom only regulated data is held C. All private individuals on whom any data is held D. All private individuals and corporate entities on whom any data is held Question 11 ‘The current legislation covering the data protection in the UK is: A. The Data Protection Act of 2001 B. The Data Protection Act of 1998 C. The Data Protection Act of 2003 Question 12 Personal data shall be accurate and, where necessary, kept up to date. Does this ‘statement comply with Data Protection Act (UK)? A. Yes B. No Question 13 The process of backing up data and keeping copies off-site in a fire-proof box is an example of data protection? A. True B. False 36fue ely Question 14 ‘An employee does not have an obligation to comply with the health & safety act - it is only the obligation of the employer. \s this statement true or false? A. True B. False Question 15 Jack started a new job today. He is 16 years of age and has no intention to continue fis studies. This is his first job with a building contractor. At 7am sharp he was at the plant hoping to have some explanation regarding this job. None of the sort happened, he found himself at a construction site with some other older colleagues in less than half an hour. At around 3.30pm his boss arrived on site and started shouting at him since he was not wearing neither a safety shoes nor a helmet. To make it worse, none of the other employees were wearing such equipment though they had been instructed by the company in various occasions, Section A:_As regards\to Jack's case — who isthe one'to be blamed? A. Jack B. The other employees C. The employer Section B: As regards to the other employees’ case — who is the one to be blamed? A. Jack B. The other employees C. The employer Question 16 Peter buys an electronic keyboard from his local catalogue store. He pays €199 for it. He retums to the store the next day complaining that, although the main keys work, none of the pre-set rhythm bottoms seem to function. He demands an immediate refund. The sales assistant refuses to give him a refund or take back the goods, and instead gives him a card with the name and address of the manufacturer, suggesting that Peter contacts them to obtain a refund or a repiacement. (a) Was the sales assistant legally justified in refusing to give a refund (Y/N) (b) Give briefly a reason for your answer 37Question 17 Environmental analysis is relevant when undertaking the strategy making process. Is it true or false? A. True B. False Question 18 An individual who is the subject of personal data is a data ‘A. Mining B. Subject C. Figure Question 19 Under which component of PEST analysis would an organisation analyse the media through which segments’of the youth market access new digital music products? A. Political B. Economic C. Social D. Technological Question 20 Health and safety regulations cover a range of workplace health and safety issues. Which of the following is covered by regulations? Handling of chemicals Computers Pregnancy Allof the above pom> 38ANSWER BANKfue ely 1.8 2. A= lobby groups are a legitimate way of influencing governmental bodies Noe w o> >o A each and every employee is responsible for his/her health and safety ac 9A 10.B — legislation can never protect something which is not regulated 1B 12.4 13.B 14.B 15 Section A- C / Section B - B 16.Section A — No / Section B — Contracts of sale are between the buyer and seller, not between the buyer and the manufacturer 17.A - the environment is everything that surrounds an organisation and so understanding itis one of the key inputs to the strategy-making process. 18.B 19.C — the developments in digital music products may be analysed under technological factors, BUT media consumption and buying patterns are socio- cultural factors. 20.D 40fue ely mMO\ CHAPTER 4 MACRO-ECONOMIC FACTORS 41. ACCASYLLABUS GUIDE OUTCOME 1 DEFINE MACRO-ECONOMIC POLICY 4.1.1 Macro-economic policy / macroeconomics is concemed with the total (aggregate) scenario of economic issues that determine a person's economic well- being as well as that of one's family and everyone s/he knows. These issues involve the overall economic performance of the nation, rather than that of particular individuals. 1. Docitizens find it easy or difficult to find jobs? (Unemployment rate) 2. On average ate prices rising rapidly, slowly, or not at all? (Concept of inflation) 3. How much total income is the nation producing,.and how rapidly is total income growing year after year? (Produetivity) 4. Is interest rate charged to borrow money high or low? 5. Is the Government) spending more than it collects in tax revenue? (Government budget) 6. Is the ‘nation as a whole accumulating assets in other countries or is it becoming more indebted to them? (Foreign trade deficit) Each of the above questions involve a central macroeconomic concept that affect the factors of production — land, labour, capital and entrepreneurship. The basic task of macroeconomics is to study the behaviour of the policy objectives, namely economic growth, inflation, unemployment and balance of payments and why each matter to individuals and what the government can do (if anything) to improve macroeconomic performance. Thus, one can say that the study of economics can be divided into two — macroeconomics and microeconomics. Macroeconomics considers aggregate behaviour, and the study of the sum of individual economic decisions. Microeconomics is the study of the economic behaviour of individual consumers, firms and industries. 4LiClaite) a ay 4.2 ACCASYLLABUS GUIDE OUTCOME 2 EXPLAIN THE MAIN DETERMINANTS OF THE LEVEL OF BUSINESS ACTIVITY IN THE ECONOMY AND HOW VARIATIONS IN THE LEVEL OF BUSINESS ACTIVITY AFFECT INDIVIDUALS, HOUSEHOLDS AND BUSINESSES The economy is rarely in a stable state because of the various changing factors which influence it An interesting factor is the multiplier. A multiplier is basically a factor of proportionality that measures how much an X variable changes in response to a change in some Y variable. 42.41 Determinants of the level of Business Activity 4, Confidence When consumers are confident, they tend to demand more whilst higher business confidence resuits in higher investment. Confidence is generally put at a threat when there is political instability, disasters, unemployment and high inflation 2. Aggregate Demand AD =C+h+G+X—M AD — Aggregate Demand C— Consumer Spending |< Investment by firms G Government Spending X—Demand for exports M — Imports Balance of Payments Under the current method of presentation of the UK balance of payments statistics, current account transactions are sub-divided into four parts. Trade in goods Trade in services Income Transfers. ‘When journalists on economists speak of the balance of payments they are usually referring to the deficit or surplus on the current account. The government of a country with a balance of payments deficit will usually be expected to take measures to reduce or eliminate the deficit by one or more of the following measures: 42a) Adepreciation of the currency known as devaluation b) Direct measures to restrict imports, such as tariffs or import quotas or exchange contro! regulations c) Domestic defiation to reduce aggregate demand in the domestic economy The first two are expenditure switching policies which transfer resources and expenditure away from imports and towards domestic products while the last is an expenditure reducing policy. 3. Capital - if firms raise their finance it will resuit in higher levels of investment. Lower interest rates will make capital cheaper. 4. Use of Resources - Advancements in technology results in efficient work practices and can improve productivity. A well-educated work force can also result in better and more productive work. 5. Government Policy - Goverment can affect aggregate demand through fiscal policy (the blend of government spending and taxation). Goverment spending increases then the overall aggregate demand will increase 6. Exchange Rate Movements - A strengthening currency will make exports of a particular country more expensive and in that. case\imports will result to be cheaper. What are the impacts of having an appreciating (strengthening) currency? 1. Exports are hurt, Most developing countries have economies based largely on eports that are competitive in global markets because of low prices. A case in point nowadays is China. When those countries’ currency gains in value, they are no longer able to offer exports to the global market at the same low prices that they planned to. This may cause importers (of other countries) to look elsewhere, to countries with lower valued currency resulting in better prices. lt may also be the case that the importers will start ordering less from the said country having an appreciating currency. 2. Repatriated profits from a country's international economic activity are hurt Currency appreciation at home means that money made elsewhere won't stretch as far in supporting the domestic economy 4Bfue ely 4.3 ACCASYLLABUS GUIDE OUTCOME 3 EXPLAIN THE IMPACT OF ECONOMIC ISSUES ON THE INDIVIDUAL, THE HOUSEHOLD AND THE BUSINESS 43.1 Inflation The inflation rate is the percentage rate of increase in the economy's average level of prices. A high inflation rate means that prices on average are rising rapidly, while a low inflation rate means that prices on average are rising slowly. in inflationary periods, retired people or those about to retire are those of the biggest losers since their hard-eamed savings will buy less and less as prices go up. While a high inflation rate harms those who have saved in the past, it helps those who have borrowed. tis this capricious aspect of infiation, taking from some and giving to others, that makes people dislike inflation. People want their lives to be predictable, but inflation throws a monkey wrench into individual decision making, creating pervasive uncertainty. An inflationary gap exists in an economy when aggregate demand (total demand in an economy) is greater than the full employment level of income. One important measure of the general rate of inflation in"the UK used over many years has been, the Retail Price Index (RPI); The RPI measures the percentage changes month by monthin the average level of prices of the commodities and services, including housing costs, purchased. by the great majority of households in the UK. The items of expenditure within the RPI are intended to be a representative list of items, current prices for which are collected at regular intervals. 43.2 Causes of inflation © Demand pull inflation Demand pull inflation arises from excess demand over productive capacity of the economy. tt is a situation when demand exceeds supply and prices rise. Demand pull inflation only exists when unemployment is low.fue ely Considering the case scenario in the graph above, P14, that is price 1 was the original price when national income was Y1. When demand pull takes place, the curve AD1 shifts to AD2 since demand increases (too much money chasing too few goods). As a result, P1 increases to P2 reflecting inflation and Y1 increases to Y2 reflecting an increase in national income When P1 decreases to P3, that means that demand decreased, shifting AD1 to ADS resulting in a decrease in national income from Y1 to Y3. Ina situation when inflation is rising, demand side policy which is controlled by the government would focus on reducing aggregate demand through tax rise, cuts in government spending and higher interest rates. This is done in an effort to reguiarise inflation to control it from continuing to rise. © Cost-push inflation This is a result of increases in the costs of production thus short-run aggregate supply (SRAS) shifts from SRAS1 to SRAS2. Its effect leaves an increase in price from P1 to P2. Thus, this increase in price is in fact inflation. Cost-push inflation arises whether or not there is a demand for supply, for example, an increase in the cost of wages. ‘© Imported inflation Cost of import rises regardless of whether there is a high demand for supply, for example, an increase in oil prices. The same explanation sticks from point no. 2 case scenario. Monetary inflation Monetary inflation means an increase in the supply of money. There is a debate whether an increase in money supply is a cause of inflation or whether an increase 45iClaite) a ay in the money supply is a symptom of inflation. What happens is that the more supply in money, the more people will buy thus demand will increase. As a result, if this increase in demand occurs faster than the expansion in the supply of goods and services, then, inflation will take place. Monetarists (supply side view) argue that a good tool to fight such inflation is to decrease the supply of money and increase interest rates. « Expectations effect ‘Once inflation has started to rise, there may be “expectational infation’, that is, people will start expecting inflation to rise even higher. A general held view of future inflation therefore, sets for example, wages accordingly. This is known as the wage- price spiral. 433 Unemployment Unemployment rate is the number of jobless individuals who are actively looking for work divided by the total of those employed and unemployed The higher the overall unemployment rate, the harder it is for each individual who wants to find work. Everyone fears a high unemployment since it raises the chances that they will be laid off from their present work, will be unable to pay their bills etc. Agovernment can try several options to Create jobs or reduce unemployment. Spending more money directly on jobs Encouraging growth Encouraging training in job skills Offering grant assistance to employers Encouraging labour mobility pao 43.4 ‘Types of unemployment Category ‘Comments Real wage ‘Caused when the supply of labour exceeds demand but real wages unemployment | do not fall. Caused by strong trade unions which resist a fall in wages. Abolishing (put an end to) closed shop agreements and minimum wage regulations are policies which may be directed at reducing real wage to market clearing levels Frictional Difficulty in matching quickly workers with jobs. Possibly caused by lack of knowledge of job opportunities. Usually temporary ‘Seasonal Especially in certain trades as farming etc Structural ‘Occurs during long-term change in conditions. For example, a long- term change in a community that relies on one particular industry Technological | A orm of structural that occurs then new technology arises. Cyclical or Matches economic climate trends such as boom, decline, recession demand- and recovery. Demand for labour fluctuates as demand rises and falls deficient 46fue ely 43.5 Stagnation or Stagflation This is a combination of unacceptably high levels of unemployment and unacceptably high levels of inflation. During the 1970 in the UK a major rise in the price of crude oil took place. This meant that the cost of energy rose and therefore rendered some products unprofitable. National income fell and both prices and unemployment rose. Any long term major increase in costs could have this effect. 43.6 International payments Disequilibrium A “fundamental disequilibrium” exists when outward payments have a continuing tendency not to balance inward payments. Disequilibrium may occur for various reasons. Some may be grouped under the head of structural change (resulting from changes in tastes, habits, institutions, technology, etc). A fundamental imbalance may occur if wages and other costs rise faster in relation to productivity in one country than they do in others. Imbalance may also resutt when aggregate demand uns above the supply potential of a country, forcing prices up of raising imports. For example, a war may have a profoundly disturbing effect on a country's economy 44 ACCASYLLABUS GUIDE OUTCOMES 4 and 5 47A iClaite) DESCRIBE THE MAIN TYPES OF ECONOMIC POLICY THAT MAY BE IMPLEMENTED BY GOVERNMENT AND SUPRA-NATIONAL BODIES TO MAXIMISE ECONOMIC WELFARE RECOGNISE THE IMPACT OF FISCAL AND MONETARY POLICY MEASURES ON THE INDIVIDUAL, THE HOUSEHOLD AND BUSINESSES macro-economic policy relates to economic growth, inflation, unemployment and the balance of payments. Economic policy objectives: 4 Achieve economic growth 2. Control price inflation 3. Achieve full employment 4. Achieve balance between import and export 4.4.1 Fiscal policy (Keynesian view} Fiscal policy (Keynesian view) has to do with the government's decisions about spending and taxes. This provides a method of managing aggregated demand in the economy. There are several elements to the fiscal policy and that of the budget: * Expenditure ‘The government spends money both nationally and regionally on such things as health services, educational, roads, policing. It also provides commercial incentives to the private sector through grants. © Revenues To spend the money on public services the government needs an income. The majority of the income comes from taxes although some come from direct charges like National Health Service charges. A regressive tax takes a higher proportion of a poor person's salary than a rich person's. Example - road tax. A proportional tax takes the same proportion of income in tax from all levels of income. A progressive tax takes a higher proportion of income in tax as income rises. Example — Income tax. © Borrowing Should a governments’ spending exceed its income then it_must borrow. The amount it must borrow is known as the PUBLIC SECTOR NET CASH REQUIREMENT (PSNCR). This has a profound effect of the fiscal policy as a whole. 4.4.2 Budget Surplus and Budget Deficit 48 fue elyShould the goverment use its fiscal policy to influence demand in the economy then it needs to choose either expenditure changes or tax changes, as its policy instruments, or a combination of both. The government could: Increase demand by directly spending more itself, for example, future investment and spending on the health service or employing more people. if the government was to influence demand by spending more, this would have to be financed either through increasing taxes or borrowing. However, by increasing taxes, organisations, households and individuals would have less to spend. Increase demand indirectly by reducing taxation - Tax cuts are often followed by cuts in government spending. Therefore, total demand will not be stimulated within the economy. Again, tax cuts could also be funded by an increase in government borrowing. Should the government decide to lower tax then organisations, households and individuals would have more money after tax thus have the ability to spend more. When the goverment is running a budget deficit it means that total public expenditure exceeds revenue. As a result, the government has to borrow through the issue of government debt. If the government sector is taking in more revenue than it is spending, there is a budget surplus allowing the government to. repay some of the accumulated debt, of perhaps cut the burden of tax or raise government expenditure. 4.4.3 Monetary Policy, Monetary Policy looks at the supply of money, the monetary system, interest rates, exchange rates and the availability of credit. All of which are highly important to organisations, households and individuals. Businesses can be affected by governments’ taxation policies outlined within the fiscal policy AND equally affected by high interest rates set out within the monetary policy. In the UK, the ultimate objective of monetary policy in recent years has been principally to reduce the rate of inflation to a sustainable low level. The intermediate objectives of monetary policy have related to the level of interest fates, growth in the money supply, the exchange rate of sterling, the expansion of credit and the growth of national income 4.4.4 Money Supply within the Monetary Policy (Moneterists view) This is an intermediate target and should be seen as a medium term target ‘The argument is that by increasing money supply this will raise prices and incomes and this will increase the demand for money to spend. ‘There are however three short-term unpredictable effects: 49© May cause erratic (sudden) interest rates © Time lag. It takes time to cut government spending! Time lag before control over money supply alters expectations 4.4.5 Interest Rates within the Monetary Policy There are suggestions that there is a direct relationship between interest rates and the levels of expenditure in the economy or put simply, between interest rates and inflation. A rise in interest rates will raise the price of borrowing. This could lead to a reduction in investments through the economy should organisations perceive the high rate to be relatively permanent. Profits would fall due to higher borrowing rates and organisations may have to consider a reduction in inventory levels. For individuals, there is less likelihood of borrowing for house purchases. A sttong reason for pursuing an interest rate policy is that it can be implemented rapidly compared to other target policies. 4.4.6 The Exchange Rate within the Monetary Policy There are few reasons why the exchange rate plays an important part of the monetary policy * If exchange) rates fall, exports become cheaper to overseas buyers and so more” competitive in éxport markets. However, imports will become more expensive. Therefore, a fall in exchange rates might be good for a domestic: economy, by giving a stimulus to exports and reducing demand for imports. * An increase in exchange rates will have the opposite effect, with dearer exports and cheaper imports. f this happens, there should be a reduction in the rate of domestic inflation. However, the opposite would happen with a fall in exchange rates therefore, adding to the rate of domestic inflation Rates of domestic infiation need to be controlled prior to introducing @ robust target for the exchange rates due to some country's being heavily dependent on overseas trade 504.4.7 Monetary & Fiscal Policy Monetary policy can act as a subsidiary to fiscal policy. As a budget is usually a once a year event, the government may need to use non-fiscal measures to controi the economy. These are typically: © Low interest rates or lack of credit control to stimulate bank lending © High interest rates to stop bank lending ® Strict credit control to reduce lending and reduce demand on the economy Supply-side economic policies are mainly designed to improve the supply- side potential for an economy, make markets and industries operate more efficiently and thereby contribute a faster rate of growth of real national output. There are two broad approaches to the supply-side. Firstly policies focused on product markets where goods and services are produced and sold to consumers and secondly the labour market is bought and sold 51 fue elyKEY POINTS1. Macroeconomics considers aggregate behaviour, and the study of the sum of individual economic decisions. 2. The main economic variables in the study of macroeconomics are: ‘© unemployment rate ¢ inflation rate ‘© productivity interest rate © government budget foreign trade deficit 3. The above economic variables tend to have an effect on the factors of production: © land labour © capital © entrepreneurship 3. Microeconomics is the study of the economic behaviour of individual consumers, firms and industries 4. Factors that influence the level of business activity are; * Aggregate Demand (AD= C+ 1G +X-M) © Capital (+Capital = +Investment / interest rates = -value of capital) © Use of resources (+technology = +productivity / +echnology = -costs of producing) © Government policy (+government spending = +aggregate demand) 5. Exchange rate movements (Strong currency = exports more expensivelimports cheaper) 6. Inflation is the % rate of increase in the economy's average level of price. 7. An inflationary gap exists in an economy when aggregate demand (total demand in an economy) is greater than the full employment level of income. 8. Those who lend are the ones that tend to loose when inflation takes place (considering no interest is charged). Thus, those who borrow are the ones that benefit from inflation cause the purchasing power today is greater than when the money is returned to the lender. 53 fue ely9. Causes of inflation: demand pull ‘cost push imported monetary expectational 10. Unemployment is measured by: Number of unemployed x 100% Total workforce 11. Types of unemployment: Frictional ‘Structural Real Wage Cyclical Seasonal 12. Stagnation’stagfiation is a combination of unacceptably “high levels of unemployment and inflation. 13. Intemational payments-disequillbrium’ iS\a state where the imports of a particular country exceed the exports, Thus, outward payments will surpass inward payments: 54QUESTION BANKfue ely Which of the following is not an objective of macroeconomic policy? ‘A. Economic growth B. Control of inflation C. Lower levels of taxation D. Abalanced balance of payments Question 2 The factors of production are . labour, capital and entrepreneurship A. Area B. Machinery C. Fixed assets D. Land Question 3 Which of the following is not one of the four macroeconomic policy objectives of governments? ‘A. economic growth B. inflation C. unemployment D. balance of trade Question 4 The total level of demand in the economy is made up of consumption, government expenditure, and net gains from international trade. Which of the following correctly completes the sentence above. A. Savings B. Taxation C. Investment Question 5 If citizens are confident they tend to demand more for goods. ls this statement true or false? A. True B. False 56fue ely Question 6 Which one of the following would cause a fall in the level of aggregate demand in an economy? A. a decrease in the level of imports B. afall in the propensity to save C. a decrease in government spending D. a decrease in the level of income tax Question 7 You are the Finance Director for ADC Co. Lid., which is the Maltese agent for BMW cars. In the last 6 months the mother company has experienced substantial increases in the prices. As a result the cost per car to ADC Ltd., has increased drastically. What will you do in this case? ‘A. Stop importing B. increase prices C. Keep the prices constant D. Decrease prices Question 8 Eventually the Finance Director had to-increase prices accordingly (refer to question 7). To which type of inflation is this case contributing? ‘A, Demand pull factors, B. Cost push factors C. Import costs factors D. Expectations and inflation E. Money supply growth 37Question 9 Martin is an experienced and fully trained shipbuilder, based in the western European city. Due to significant economic change in supply and demand conditions for shipbuilding in Martin's own country, the shipyard he worked for has closed and he was made redundant. There was no other local demand for his skills within his own region and he would have to move to another country to obtain a similar employment, and could only find similar work localy through undertaking at least a year’s retraining in a related engineering field. Which of the following describes the type of unemployment that Martin has been affected by? A. Structural B. Cyclical C. Frictional D. Marginal Question 10 In an economic environment of high price inflation, those who owe money wil gain and those whovare owed money will lose. Is this statement true or false? A. True B. False Question 11 Cyclical unemployment refers to unemployment: ‘A. which occurs because of the seasonal nature of some industries B. resulting from the long-term deciine of an industry C. which occurs at particuiar times of the year D. which occurs during recessions Question 12 An inflationary gap exists in an economy when: A. the government has a budget deficit B. aggregate demand is greater than the full employment level of income C. the money supply rising faster than national income D. the government increases its level of expenditure 58Question 13 Structural unempioyment is caused by: ‘A. long-term decline in demand for an industry's products B. falling levels of aggregate demand C. high level of inflation D. a downturn in national economic activity Question 14 Which of the following is an example of cyclical unemployment? A. lay-offs amongst ski instructors in the summer months B. automation of ticket sales at train stations resulting in the redundancy of ticket officers C. recession in the building industry D. the restriction of employmentin the canindustry due to powerful trade union keeping Wages high Question 15, Inflation has a number of causes and solutions. Which of the following scenarios describes cost-push infiation? ‘A. the underlying cost of factors of production (raw material and labour) increases and this is reflected in an increase in output prices as firms seeks to maintain their profit margins B. the national currency weakens increasing the cost of imports in a country where imports are significant to the economy C. demand for goods and services in the economy grows faster than the ability of the economy to supply these goods and services (le. too much money is chasing too few goods) D. the money supply in the economy is increased boosting demand for goods and services. The expansion in demand is however occurring faster than the expansion in the supply of goods and services, 59Question 16 Northland, Southland, Eastland and Westland are four countries of Asia. The following economic statistics have been produced for the year 2007. (Country Northland [Southland [Eastland [Westland (Change in GDP (%) -0.30 42.51 055 [42.12 Balance of payments current account (Sm) [+5550.83 |-35047 |-150.90 _|+220.39 (Change in consumer prices (%) 32750 [+1537 [+225 [42.15 (Change in working population employed (%) __|-4.76 43.78 +176 (-8.76 Which country experienced stagflation in the relevant period? Northland Southland Eastland Westland vop> Question 17 Which type of, unemployment arises from a permanent reduction in demand for the products» supplied by a single industry.or group of industries with traditionally large workforces? Frictional Structural Cyclical Seasonal gOp> Question 18 Which of the following would cause a fall in the level of aggregate demand in an economy? A. a decrease in the level of imports B. a fall in the propensity to save C. a decrease in government expenditure D. adecrease in the level of income tax 60fue ely Question 19 Which one of the following is consistent with a government's policy objective to expand the level of economic activity A. an increase in taxation B. an increase in interest rates C. an increase in personal savings D. an increase in public expenditure Question 20 Which of the following would be part of a supply-side policy to reduce unemployment in an economy? ‘A. Reducing the supply of imports by raising trade barriers B. Increasing labour retraining schemes C. Supplying government subsidies to declining industries D. Areduotion in the level of public expenditure Question 21 A eduction in interest rate will reduce consumption. A. Tue B. False Question 22 Which of the following are the likely consequences of a fall in interest rates? A. ise in the demand for consumer credit B. fall in investment C. fall in borrowing D. rise in the demand for housing A. (a) and (b) only B. (a), (b) and (c ) only C. (a) and (d) only D. (b), (¢ ) and (d) only Question 23, A eduction in the interest rates will increase investment. A. True B. False 61fue ely Question 24 lf a government increased its expenditure and reduced levels of taxation the effect would be to (a) demand in the economy and to (b) the size of the Public Sector Net Cash Requirement (PSNCR) Which words correctly complete this statement? A. (a) reduce, (b) reduce B. (a) stimulate, (b) reduce C. (a) stimulate, (b) increase D. (a) reduce, (b) increase Question 25 Which of the following is one of the four typical governmental macroeconomic policy objectives? ‘A. maximising taxation revenues whilst sustaining economic growth B. reducing the gap between the highest and the lowest paid C. control of inflation D. ensuring that every citizen has access to a minimum level_of state benefits Question 26 Which of the following is one of the important generic (mainly economic) factors that influence the level of business activity in an economy? A. levels of immigration B. rising stock markets C. exchange rate movements D. levels of unempioyment Question 27 Fiscal policy refers to the level of public expenditure and to the raising of that expenditure via taxation; it is usually understood with the context of which of the following: A. supply side policies B. classical policies (do nothing) C. monetary policies D. demand side policies 62fue ely Question 28 Which of the following policies for correcting a balance of payments deficit is an expenditure-reducing policy? cutting the level of public expenditure devaluation of the currency the imposition of an import tax the use of import quotas vop> Question 29 Which of the following would not correct a Balance of Payments Deficit? re-valuing the currency raising domestic interest rates deflating the economy imposing import controls com> Question 30 A tax which takes a higher proportion of a poor person's salary than a rich person's is: proportional tax Tegressive tax progressive tax indirect tax vom> Question 31 High rates of personal income tax are thought to have a disincentive effect This refers to the likelihood that the high rates of tax will: encourage illegal tax evasion by individuals lead to a reduction in the supply of labour lead to a reduction in savings by individuals discourage consumer spending and company investments. oom> 63fue ely Question 32 The government of Malta decides to introduce a new tax, which will involve a flat rate levy of €300 on every adult of the population. This new tax can be described as: A. regressive B. proportional C. progressive D. ad valoren Question 33 Which of the following will not be the immediate purpose of a tax measure by government? To discourage an activity regarded as socially undesirable To influence interest rates To protect a domestic industry from foreign competition To price certain products go as to take into account their social cost ooOm> Question 34 Other things femaining equal, an increase in the money supply will tend to reduce A. Interest rates B. The volume of bank overdrafts C. Liquidity preference D. Prices and incomes Question 35 Which of the following is not likely to result from a fall in the exchange rate? Astimulus to exports An increase in the costs of imports Reducing demand for imports Areduction in the rate of domestic inflation. oOp>ANSWER BANK° oN DOs 9 c- D D c A ce B c A 10.A 11.D 12.B 13.A 14.C 15.A 16.A 17.B 18.C 19.D 20.B 21.B 22.0 23.4 24.C — PSNCR is the shortfall between public sector revenues and taxation is.a tool not an object the government is the biggest spender in an economy expenditure 66 fue elyfue ely 25.C 26.C 27.D 28.4 29.A 30.B 31.B — the disincentive effect refers specifically to the disincentive of individuals to work 32.A- taking more from a poor person's salary 33.B — interest rates are controlled by monetary policy 34.4 35.D — a fall in exchange rate will make it more attractive for importers in another. country and more expensive’ to import locally. t will also reduce the rate of domestic infiation. 67mMO\ CHAPTER 5 MICRO ECONOMICS FACTORS 5.1 ACCASYLLABUS GUIDE OUTCOME 1 DEFINE THE CONCEPT OF DEMAND AND SUPPLY FOR GOODS AND SERVICES 5.1.1 Microeconomics Microeconomics looks into the individual people and firms within the economy. it tends to be more scientific in its approach than macro economics. Analyzing certain aspects of human behavior (including groups and organizations that have a two-way operation relationship with the business), microeconomics shows how individuals and firms respond to changes in price and why they demand what they do at particular price levels. ‘An organisation's micro environment consists of-itself and its current and potential customers, suppliers:and intermediaries. The competition also has a key influence on the micro environment. The 5 M's ‘fefer to inputs that an organisation requires in order to function. They are: + Materials Money Men (human resources) Machines Management Uiility is the word used to describe the satisfaction or benefit a person gets from the consumption of goods. Total utility is the total satisfaction that people derive from spending their income and consuming goods. Marginal utility is the satisfaction gained from consuming one additional unit of a good or the satisfaction forgone by consuming one unit less. 5.1.2 Demand for goods and services ive main variables influence the quantity of each product that is demanded by each individual consumer: 1. The price of the product — creates a movement in the demand curve 2. The prices of other products — creates a shift in the demand curve 3. The consumer's income and wealth - creates a shift in the demand curve 68 fue ely4. Various sociological factors — creates a shift in the demand curve 5. The consumer's tastes — creates a shift in the demand curve A basic economic hypothesis is that the lower the price of a product, the larger the quantity that will be demanded, other things being equal. This in fact refiects a downward sloping curve as in below diagram Q , Quantity A, B and C are points on the demand curve, Each point on the curve reflects a direct correlation between quantities demanded (Q) and price (P). So, at point A, the quantity demanded will be Q1 and the price will be P1, and so on, ‘The demand relationship curve illustrates the negative relationship between pice and quantity demanded. The higher the price of a good the lower the quantity demanded (A), and the lower the price, the more the good will be in demand (C). 5.1.3 Supply for goods and services Four major determinants of the quantity supplied in a particular market are: The price of the product — creates a movement in the supply curve The prices of factors of production — creates a shift in the supply curve ‘* The goals of producing firms — creates a shift in the supply curve ‘* The state of technology — creates a shift in the supply curve ‘The amount of a product that firms are able and wiling to offer for sale is called quantity supplied. Supply is a desired flow, how much firms are wiling to sell per period of time, not how much they actually sell. The quantity of any product that firms will produce and offer for sale is positively related to the product's own price, rising when price rises and falling when price falls. This in fact reflects an upward sloping curve as in below diagram 69 fue ely