Table of Contents

Chapter 1: The Purpose of Business Activity ................................................................................. 5

Lesson 1: The Economic Problem: Needs and Wants ................................................................ 7
Lesson 2: Limited Resources: Business and Decision Making ................................................. 9
Lesson 3: Why is Business Activity Needed? .......................................................................... 11
Lesson 4: Business Objectives .................................................................................................. 12
Lesson 5: Which Groups are involved in a Business Activity? ................................................ 16
Lesson 6: Levels of Economic Activity .................................................................................... 19
Chapter 2: Forms of Business Organizations................................................................................ 23
Lesson 1: Sole Proprietorship ................................................................................................... 25
Lesson 2: Partnership ................................................................................................................ 27
Lesson 3: Corporations ............................................................................................................. 29
Lesson 4: Technology and Business ......................................................................................... 31
Chapter 3: Market Research.......................................................................................................... 33
Lesson 1: Using Appropriate Methods of Market Research ..................................................... 35
Lesson 2: Primary Research...................................................................................................... 37
Lesson 3: Secondary Research.................................................................................................. 42
Lesson 4: Quantitative & Qualitative Information ................................................................... 44
Chapter 4: Introduction to Marketing ........................................................................................... 47
Lesson 1: What does Marketing Mean?.................................................................................... 49
Lesson 2: Market Segmentation................................................................................................ 53
Lesson 3: Bases for Segmenting Consumer Markets ............................................................... 54
Lesson 4: Marketing Mix - Product .......................................................................................... 60
Lesson 5: Marketing Mix - Place .............................................................................................. 65
Lesson 6: Marketing Mix - Price .............................................................................................. 70
Lesson 7: Marketing Mix - Promotion...................................................................................... 75
Chapter 5: Finance ........................................................................................................................ 81
Lesson 1: Finance ..................................................................................................................... 83
Lesson 2: Finance and Support for Small Businesses .............................................................. 85
Lesson 3: Financial Terms and Basic Financial Calculations .................................................. 89
Lesson 4: Cash Flow and Survival............................................................................................ 92
Chapter 6: Investigating Economics ............................................................................................. 97
Lesson 1: Microeconomics ....................................................................................................... 99
Lesson 2: Macroeconomics..................................................................................................... 105

3
4
 Chapter 1: The
Purpose of Business
Activity

5
6
Lesson 1: The Economic Problem: Needs
and Wants

Needs are really important items which are essential for human survival such as clean
water, clothing for warmth and protection, food and shelter. Wants include those items
that people would like to have but which are not essential for living such as a luxury
house.

Most people in the world cannot afford to buy everything they want. In many countries,
some people cannot afford to satisfy their needs and they are likely to be very poor.

So, is shortage of money the real economic problem? To understand how money is not
the real cause of the economic problem, we shall examine the following example.

The government of a small country is worried about the large numbers of people who
cannot afford enough of the basic needs of life. Even rich people are complaining that
the country is not producing enough luxuries that they want to purchase. The country
decides to print more money and to double the income of all the people in the country.

Has the government solved the economic problem through printing more money? Are
there now more products to satisfy all people’s needs and wants? Are there more
schools for their children? Are there more houses for them to live in? Will the well-
being of people increase?

Of course, the answer is “No”. Printing more money does not produce more goods and
services or satisfy more wants or needs, because prices will rise. What is the point of
having more money to spend, if prices of the product you want to buy have gone up by
the same amount?

7
The real cause of the economic problem in a country is not having too little money. It is
because of the few productive resources which cause shortage of goods and services.
Productive resources are also known as the factors of production.

There are four factors of production:

 Land: It includes all the natural resources provided by nature such as fields,
forests, oil, natural gas and other mineral resources.
 Labour: This refers to people who exert physical or intellectual efforts to make
products.
 Capital: It is the financial capital or money and capital goods such as machinery
and equipment needed to manufacture the goods.
 Enterprise: This is the skill and risk-taking ability of the person who brings the
other resources or factors of production together to produce a good or a service.
A business owner is one example. These people are called entrepreneurs.

However, these factors of production are limited in supply. One country could be rich of
petroleum oil while another country is rich of fertile soil. As there is never enough land,
labour, capital, or enterprise to produce all of the needs and unlimited wants of a whole
population, there is an economic problem of scarcity.

The real cause of the economic problem:

8
Lesson 2: Limited Resources: Business
and Decision Making

We make choices every day. We have to, as we have limited resources but so many
wants. We therefore have to decide which wants will we satisfy or not. All choices
involve giving something up, and this is called opportunity cost.

Should I take a bus to school or use the money for a new notebook? Do I buy a new
sweatshirt or spend the money on a new CD?

Examples of opportunity cost:

 Holiday or car?
The individual chooses to buy the holiday package, so a new car becomes the
opportunity cost.

 Machine A or Machine B?
The company decides to buy Machine A, so Machine B becomes the opportunity
cost.

 New road or new school?

The government chooses to build the road, so the school becomes an opportunity
cost.

We do not have the resources to satisfy all our wants, so the next best alternative that
we give up becomes our opportunity cost. This problem of "what to give up" exists not
only for consumers like us but for governments and businesses too. In making choices,
we need to carefully consider the opportunity cost to make sure it is not worth more to
us than the item we are buying.

9
Making the Best Use of Limited Resources: Specialization:

Factors of production - the resources we need to make goods and provide services - are
in limited supply. When we choose to use them in a particular way, that choice involves
a lost opportunity. It is therefore important to use these resources in the most efficient
ways possible. The ways in which these resources are used have changed greatly in the
last 200 years for 2 reasons.

 Machinery is now widely used, and this is often specialized to perform one task.
 Larger firms are now more common than they used to be, and these often employ
workers skilled in particular tasks.

Division of labor has advantages and disadvantages:

Advantages Disadvantages
Workers are trained in one task Workers can become bored
and specialize in this. This doing just one job. Efficiency
increases efficiency and output. might fall.
Less time is wasted moving If one worker is absent and no
from one workbench to another. one else can do the job,
production might be stopped.

10
Lesson 3: Why is Business Activity
Needed?

We have identified the following issues:

 People have unlimited wants.

 The four factors of production- the resources needed to make goods are in limited
supply.
 Scarcity results from limited resources and unlimited wants.
 Choice is necessary when resources are scarce. This leads to opportunity cost.
 Specialization improves the efficiency of resources use.

The aim of all businesses is to combine the factors of production to make products
which will satisfy people's wants. These products can either be goods – physical items
such as cars and shoes which we can touch and see- or they can be services, such as
insurance, tourism or banking.

Business activity therefore:

 Combines scarce factors of production in order to produce goods and services.

 Produces those goods and services which are used to satisfy the needs and wants
of the population.
 Employs people as workers and pay them wages to allow them to consume
products made by other people.

11
Lesson 4: Business Objectives
An objective is an aim or a target to work towards. All businesses have objectives. These
objectives are often different for different businesses. Businesses are started by people, and
sometimes by governments, for many different reasons. A business may have been formed
to provide employment for the owner or his/ her family. It could have been started to make
as big a profit as possible for the owner. On the other hand, the business may have a more
charitable aim in mind- many of the leading world charities are very large businesses.

The most common business objectives are:

 To make a profit
 To increase added value
 To expand the business
 To achieve business survival
 To provide a service to the community

1. Profit
When a business is owned by private individuals, rather than the government, it is
usually the case that the business is run to make profits.

Will a business try to make as much profit as possible? It is often assumed that this
will be the case. But there are dangers to this aim. Suppose a firm put up its prices to
raise profits. It may find that consumers stop buying their goods. Other people will
be encouraged to set up in competition, which will reduce profits in the long term for
the original business.

It is often said that the owners of a business will aim for a satisfactory level of profits
which will save them having to work too many hours or paying too much in tax to
the government. Profits are needed to pay a return to the owners of the business.
Without any profit at all, the owners are likely to close the business.

12
2. Value Added
Value added is not the same as profit. It is the difference between the selling price of
a finished good or service and the cost of the bought in materials and components.

Examples:
 The selling price of a newly built house is $200,000.
 The value of bricks, cement, wood and other materials was $50,000.
 The value added by the builder is $150,000, but this is not the builder’s profit
as so many other costs and expenses have to be taken into account, too.

Value is added to materials and components by working on them and turning them
into much more expensive finished products; therefore a leather company could
make leather jackets rather than just sell raw animal hides. A chocolate maker could
wrap chocolates in more expensive looking boxes in order to sell them at higher
price. In these two examples, the firm will have extra costs to pay, but they should be
able to increase prices by more than the costs. What is the point of increasing added
value? Higher value added means that the value of the firm's output rises, it sells
goods in a more expensive market, and it has the chance to earn higher profits - as
long as it increases prices by more than costs.

Selling price of product –materials bought in costs = Value added by this business

How can businesses increase value added?

 A retailer, such as a jeweler, could present items in attractive displays, create
a luxury feel to the shop, and offer gift-wrapping service. These could make
consumers more willing to pay higher prices. They might think that the
products are of a higher quality.
 A manufacturer could add features to the product. For example, a camera
maker could add a zoom lens and panoramic options. A higher price could
then be charged. Any change that adds more to price than the costs of
material will add value.

13
3. Growth
The owners and managers of a business may aim for growth in the size of the
business for a number of reasons:
 To make jobs more secure if the business is larger
 To increase the salaries and status of managers as the business expands
 To open up new possibilities and help to spread the risks of the business by
moving into new products and new markets
 To obtain a higher market share from growth in sales
Growth will only be achieved if the business's consumers are satisfied with
the products or services being achieved.

4. Survival
When a firm has recently set up, or when the economy is moving into recession, a
business could be more considered with survival than anything else. New
competitors can also make a firm less secure. The managers of a business threatened
in this way could decide to lower prices in order to survive, even though this would
lower the profit on each item sold.

5. Providing a Service
In some countries, important businesses are owned by the government. The main aim
of these businesses is to provide an essential service to the public, such as water or
electricity supply, rather than make as much profit as possible.

14
 Make profits

Growth Value added

Provide a
Survival service to the
community

Business
Objectives

15
Lesson 5: Which Groups are involved in a
Business Activity?
All businesses involve people. The following groups of people, called stakeholders, are
involved in business activity in one way or another or affected by it:
 Owners/ shareholders/ investors
 Workers/ employees
 Managers
 Consumers
 Government
 The community as a whole

1. Owners:
Owners put money into the business to set it up. Without this capital, no business
activity can begin. The owners will take a share of the profits if the business is
successful. They may have to pay for any losses made. All owners are risk takers.
Putting money into a business will not guarantee success.

2. Workers:
Workers are employed in the business. They are also called employees. They have to
follow instructions given to them by the owners or managers. They may have part-time
or full-time contracts. These are legal documents that give details of the hours of work
and other conditions of employment. Workers earn money for the work they do.

3. Managers:
Managers are employed by the business to control the work done by other workers.
They give instructions to other workers, organize the resources of the firm and take
important decisions. These decisions might include where to locate the business, what
to produce and what price to put to sell products. If these decisions are successful, the
business does well. If managers make poor decisions, the business could fail. Good and
successful managers often earn very large salaries.

16
4. Consumers:
Consumers are important to every business. They are the customers who buy the
product or service that a business makes. If consumers will not buy enough products, a
business will make losses and eventually fail and close. Businesses need to find out
what products consumers are prepared to buy. This is called market research.

5. Government:
The government decides on laws that will affect business activity. The government
wants businesses to be successful in its country. Successful businesses will employ
more workers and reduce the numbers unemployed. When successful businesses make
profits, a tax must be paid to the government. This money can be used to pay for the
services which government provides for the benefit of the population.

Governments also control business activities by passing laws that make certain
businesses illegal. Some products are so dangerous that it would be unwise for a society
to allow them to be made available to consumers. Guns, explosives and dangerous
drugs are illegal in any country. The production and sale of alcohol is also against the
law in some countries. The production and sale of these will then either be strictly
controlled or made illegal.

The government also protects consumers. Consumers can be easily misled. It is quite
easy to sell to many consumers goods which are either unsuitable for the purpose
intended or which fail to perform as the manufacturer claimed. Consumers need
protection against businesses that could take advantage of the consumers' lack of
knowledge and lack of accurate product information.

17
6. The Whole Community:
Business activity affects the whole community. Sometimes businesses produce goods
that can be dangerous and might harm members of the community - such as cigarettes
and cars. Factories can produce harmful pollution. Some products on the other hand are
very beneficial to the community, such as medicines or buses for public transport. In
addition, business activity provides jobs for workers and managers and incomes are
paid to these groups. This raises the community's standard of living. The whole
community can therefore be affected by business activity in both positive and negative
ways.

18
Lesson 6: Levels of Economic Activity
Business activity takes place at three stages of production:

1. Primary activity involves extracting the gifts of nature (e.g., drilling oil from the
ground).
2. Secondary activity involves manufacturing finished goods (e.g., refining oil and
gas).
3. Tertiary activity involves providing services, such as making finished goods and
services available to the end customer.

19
 Learning Activities:

1. Here are brief details of four businesses:

 A small firm of builders which has noticed new businesses being created in the
building industry
 A recently established business in the rapidly expanding computer industry, which
is owned by two young and ambitious entrepreneurs
 A large book publishers company which dominates the market in text books in
your country
 A government-owned postal company which delivers to all parts of the country.

a. Explain what is likely to be the main objective of the managers of each of these
businesses.
b. What decisions could be taken to help the businesses achieve these objectives?

2. Choose a business that you are familiar with (e.g. a retail or manufacturing outlet in
your area). Put the name of the business at the center of a chart, and then draw a series
of bubbles to represent different stakeholders’ groupings in the business. Explain the
interests of each of these stakeholders.

20
 Chapter 1: Revision Questions

1. From the following list, decide which items are human needs and which are wants:
Luxury car Public transportation
Shelter Villa
Pepsi-Cola Clean water
Designer jeans Clothing

2. Define what is meant by scarcity when referring to the economic problem.

3. Explain with an example what the term opportunity cost means to a consumer. Give two
other examples that would affect groups other than consumers.

4. Explain what is meant by division of labor. Why is a firm likely to increase output if it
adopts division of labor?

5. List four tasks in the making of cakes that could be given to different workers through
division of labor.

6. State three benefits to society of business activity.

7. Give three examples of the kind of objectives that a business owned by private
individuals could establish.

8. How might a retailer of clothes add value to their products? (Hint: Buying more
expensive clothes doesn't necessarily add value.)

9. Explain two reasons why business managers might set growth as a business objective.

21
22
Chapter 2: Forms of
Business
Organizations

23
24
Lesson 1: Sole Proprietorship
Most people dream of opening a business of their own. Usually, businesses can be organized
in a number of ways, and people have the opportunity to select the type of organization that
best suits their business needs.

The following are the three most common forms of business organizations: sole
proprietorships, partnerships, and corporations.

Sole Proprietorships:

In simple words, a business owned and controlled by one person is a sole proprietorship.
Sole proprietorships are the oldest, simplest, and most common of all types of businesses.
Usually, only a small capital is required to obtain sole proprietorship.

Examples of sole proprietorship could be carpenters, lumbers, small construction companies,

small grocery stores, florists, farms, etc.

Advantages of Sole Proprietorship:

1. Easy to form: Sole proprietorship is easy to form and requires few legal regulations.
2. Profit: Owners of sole proprietorships receive the entire profit from their business
activities.
3. Control: Sole proprietors, who have ownership and control of their business, can
make business decisions quickly. They can respond quickly to correct problems or to
take advantages of opportunities. They can also hire or fire workers without the
paper-work usually required by larger firms.

25
Disadvantages of Proprietorships:

1. Unlimited liability: Liability is the debt or the amount of money owned by the
business. From a legal point of view, sole proprietors are personally responsible for
all business debts. Sometimes, business losses are so great that sole proprietors
cannot pay their suppliers or repay their loans. To cover their debts, sole proprietors
then have to sell their own personal property as well as their businesses.

2. Responsibility: Proprietors must perform the roles of market analyst, chief

salesperson, accountant, and record keeper. With responsibilities like this,
proprietors need to be competent and efficient in many fields to be successful. In
addition, the frustration created by such varied demands may result in loss of
personal satisfaction and sense of accomplishment that is so important to sole
proprietors.

3. Limited growth: Proprietors usually start their businesses by borrowing small sums
of money and putting up collateral to guarantee repayment of the loans. Collateral is
anything of value that a borrower has that can be used to guarantee that a loan will
be repaid. A sole proprietor's collateral is usually limited. It may include such things
as the business itself, the inventory of unsold products, and even the proprietor's
house and other personal possessions. Creditors, however, are hesitant to offer loans
that exceed the value of collateral. Like other businesses, sole proprietorships needs
capital to grow and modernize, but unless the collateral of a sole proprietorship
increases, the sole proprietor lacks access to increased amounts of credit.

4. Short life span: The risk of failure is greater when the entire business depends on
one person’s health, commitment, and competence.

26
Lesson 2: Partnership
A partnership is a business that is owned and controlled by two or more people. A
partnership begins when two or more people agree to operate a business together.

Two forms of partnerships exist.

 General partnership: Partners share equal decision-making authority and have
unlimited liability.
 Limited partnership: Partners join as an investment. They do not take active role in
business decisions and their liability is limited to the amount of money they have
invested in the business. The personal property of limited partners, such as a house
or a car, cannot be touched by creditors in the case of business default.

Advantages of Partnership:

1. Easy to form: requires a small amount of money to start and operate

2. Specialization: Unlike the owner of a sole proprietorship, partners are better able to
specialize in those areas of the business in which their skills and talents can best be
used. A partner who is good in accounting could hold only the accounts of the
partnership.
3. Shared decision making: Partners take the time to consult with each other on
business matters and take proper decisions since two opinions are better than one.
4. Sharing of losses: The sharing of losses may enable a partnership to survive the
same type of situation that brings a sole proprietor to failure. Partnerships are in a
better situation than sole proprietorships to obtain capital needed to finance business
expansion and modernization. Creditors are more likely to extend larger loans to
partnerships than to sole proprietorships because the risk is shared among many
partners.
5. Self-satisfaction: As owners of businesses, partners feel the same pride, sense of
accomplishment, and personal satisfaction that sole proprietors feel.

27
Disadvantages of Partnership:

1. Unlimited liability under general partnership: Each partner in a general

partnership is personally responsible for all debts incurred by the business. General
partners may lose more than their original investments.

2. Conflicts: Conflicts may arise between partners because of different personalities

and different styles of management. These differences may lead to a break-up of the
partnership.

28
Lesson 3: Corporations
Corporations are business organizations that are treated by law as if they were individuals.
A corporation can do everything that a sole proprietorship or partnership can; however, a
corporation is owned by stockholders. Stockholders are individuals who invest in a
corporation by buying shares of the company in the form of stocks. Stocks are the
certificates of ownership in the corporation. Stockholders invest in a corporation in order to
make profit.

Types of Corporations:

1. Public: This is where anyone is allowed to purchase stocks and invest in a

corporation. Most of the corporations nowadays are publicly owned.

2. Closed: A closed corporation is owned by a limited number of stockholders. People

outside of this limited group are not allowed to buy shares in this corporation. Many
closed businesses at some point, shift to publicly owned corporations.

Corporate formation is a more complex process than starting a sole proprietorship or

partnership. Individuals wishing to establish a corporation generally need the assistance of a
lawyer because the process involves much paperwork and many legal restrictions.

Advantages of Corporations:

1. Limited liability: Stockholders have limited liability if the corporation fails. The
loss to stockholders is limited to the amount invested only without touching the
stockholder's personal assets and possessions.

29
 2. Separation of management: Unlike sole proprietorship and partnership, the
corporation can assign specialists to advise the management team, such as lawyers
and accountants, in separating management from ownership.

3. Ease of raising capital: Corporations, depending on their reputation, issue stocks to

raise capital to finance growth.

4. Unlimited life span: A corporation often continues in existence after the death of its
founder and original management. The death of a stockholder, the transfer of stock,
and changes in corporate personnel do not end the corporation.

Disadvantages of Corporations:

1. Slow decision making process: In large corporations, decision making usually

involves much study of the issues by specialists and discussion and debate among
managers. This will delay the carrying out of decisions.

2. Conflicts: Conflicts may arise between partners because of different personalities

and different styles of management. These differences may lead to a break-up of the
partnership.

30
Lesson 4: Technology and Business

Technology Influences Business

Technology refers to the tools and machines that people have invented to make life easier.
Inventions such as the radio and television entertain and inform us. The telegraph and the
telephone made it easier to communicate with one another. Trains, cars and airplanes made it
easier to travel. When computers were invented, they changed the way business was conducted.

Activities
1. Describe how technological inventions have an effect on business.
2. Give examples of how technology has changed jobs in business.
3. Explain why doing business on the internet has become a major factor in many industries.

Discussion Questions
1. Imagine your life without technology. What difference do you think you would notice in
your communications?
2. Devices for downloading and storing information and music have grown in popularity.
What other devices do you think may be developed in the future?

Write about it
1. Why do you think the smartphones had such an influence on business? Write two or more
paragraphs on the subject. Support your answers by providing real life examples.

31
32
Chapter 3: Market
Research

33
34
Lesson 1: Using Appropriate Methods of
Market Research
Business activities, by their very nature, are competitive. Within a dynamic business
environment producers may be constantly entering and leaving the market. At the same time,
changing consumer preferences may provide signals for them to develop new strategies with
different products and services. Whereas some organizations will succeed and achieve, others
will inevitably not perform as well.

Market research is that vital link in the chain between buyers and suppliers. It does this by
enabling those who provide goods and services to keep in touch with the needs and wants of
those who buy the goods and services.

The American Market Research Association defines market research as:

“The systematic gathering, recording, and analysis of data about problems related to the
marketing of goods and services.”

Systematic: using organized and clear method or system

Gathering: knowing what you are looking for and collecting appropriate information
Recording: keeping clear and organized records of what you find out
Analysing: ordering and making sense of your information in order to draw out relevant
trends and conclusions
Problems related to marketing: finding out the answers to questions which will help you to
understand better your customers and other details about the market place.

35
Purpose of Market Research:

All organizations require answers to key questions. Answers help decision makers understand
the nature of the decisions they have to make about the products they provide and the markets in
which they operate.

Questions may include:

What is our market? What are its features, such as the size and character? What is the nature of
competition?

What do customers require? At the heart of marketing should be the ongoing activities of
satisfying the needs and aspirations of customers.

What are the target groups and how do we reach them? The market is made up of different
groups and segments. Different distribution channels may be used to reach them.

What strategies are used by our competitors? It is important to know and understand how the
actions of competitors may influence the market.

How do we measure our performance? Market performance may be measured according to a

number of key criteria such as the value or volume of sales, as well as brand or market share.

Where is our competitive position? An important feature of marketing analysis is an ongoing

review of where the organization is within the market, its competitive advantages, and how
changes in its actions might influence market shape and market share.

In short, the purpose of market research is to make the process of business scientific, by cutting
out unsupported guess work and hunches.

36
Lesson 2: Primary Research
Any information that is original and is obtained outside an organization is referred to as primary
data. It is obtained by research conducted by or on behalf of the organization, is specific to its
needs, and will involve a range of methods, such as discussions, questionnaires and surveys and
testing through pilots and field trials.

1. Questionnaires
Many market research methods depend upon the use of questionnaires. A questionnaire is a
systematic list of questions designed to obtain information from people about:
 Specific events
 Their attitudes
 Their values
 Their beliefs

The starting point of a questionnaire would be to think about the focus of your questions. For
example, what information do you require and why do you need it? You would also need to
think about the target audience that you wish to examine. It would be important to question
all of the people who are likely to have relevant opinion or information.

A good questionnaire will:

 Ask questions that are directly related to information needs
 Not ask too many questions
 Not ask leading or intimate questions
 Fit questions into a logical sequence
 Use the language of the target group
 Not use questions that are confusing or ambiguous
 Avoid questions related to politics and religion unless they are relevant

37
 The questions in a questionnaire may be ‘open’ or ‘closed’. Open questions allow the person
answering to give an opinion and may encourage him or her to talk at length. Closed
questions require an answer picked from a range of options (which may be simply yes/no).
Most questionnaires use closed questions, so that they can be answered quickly and
efficiently, and the answers are easy to analyse.

2. Rank Order Scale Questions:

They ask the respondent to put a number beside various items in order to put them in some
sort of order of preference, as shown in the example below.

A rank order scale question example:

These are all considerations when choosing where to buy a new computer. Put them in rank
order with 1 by the most important, 2 by the second most important and so on down to 5
against the least important.

Wide choice ________

Helpful sales staff ________
Value for money ________
After-sales service ________
Quick delivery ________

38
3. An Intention-to-Buy:
It asks respondents to indicate by ticking a box showing how likely it is that they will put
some items in the future.

If a textbook was available covering this unit/module, I would:

Definitely buy 1

Probably buy 2

Not sure 3

Probably not buy 4

Definitely not buy 5

4. Lickert Scales:
They show how strongly the respondent agrees or disagrees with a statement.

Put a cross in the box that shows how strongly you agree or disagree with each of the
following statements:

Neither
Strongly Strongly
Agree Agree Nor Disagree
Agree Disagree
Disagree
This business course
has prepared me X
well for work.
The lectures at
college are well X
prepared.
The lectures at
college are X
interesting.
I was well prepared
X
for my assignments.

39
5. Semantic Differential Scales:
They use two words describing the opposite ends of a scale, with a series of points
highlighted between. The respondents are asked to indicate where on the scale their opinion
lies. Check the figure below and place a cross on the scale below to show what feelings you
have about Frosty’s Ice Creams:

Frosty’s Ice Creams are:

Good Value Poor Value

Tasty Tasteless

Well packaged poorly packaged

Satisfying Unsatisfying

40
Learning Activity 1:
Use the questionnaire below to discuss your feelings about one product which you regularly buy
(product A):
Total performance of product A (including product, sales, support, price, etc.):

Satisfied Unsatisfied

1 2 3 4 5 6 7 8 9 10

Compared to one year earlier, is product A’s total performance:

Better Worse Same

Why?

What one thing can _________ do to improve the performance of product A in meeting your
total needs?

Explain how the answers you have provided for this brief questionnaire might be used.
What information has it provided?
Comment upon the structure of the questions.
How easy would it be to analyse and interpret the information it provided?

41
Lesson 3: Secondary Research
Secondary marketing information is effectively anything that has previously been published. It
can be built from both internal and external sources.

1. Internal Sources of Secondary Data

Internal information is information already held within the organization, more often than
not held in databases. A database is a large amount of information stored in a way that it can
easily be found, processed and updated.
Information on existing customers will form the core of the data base, with sales invoices
probably being the most valued source of data. The invoice is created for financial purposes
but it contains a considerable amount of customer data that can be made immediately
available for others.

For example, it might contain information such as:

 Customer title: gender, job description, other forms of identification

 Customer surname: ethnic coding
 Customer address: geographic coding
 Date of sale: tracking purchase rates and repurchasing patterns
 Items ordered: product category interests
 Quantities ordered: heavy/ medium/ light users
 Price: value of items
 Terms and conditions: customer service needs

42
2. External Sources of Secondary Data
External data exist in the form of published materials collected by somebody else. It can
provide a broader dimension to data previously collected.
For example, external information can be used to enhance existing knowledge. Postcodes
may help to group customers geographically by identifying and labelling certain
characteristics of a customer, a company may be able to make assumptions about their needs.

Two examples of useful external sources are:

Domestic socio-economic data: Customers are classified to their house type, the assumption
being that a certain lifestyle is associated with the type of house.

Industrial classifications: Organizational customers can be classified according to the nature

of their activities. Certain types of organisations can then be expected to have predictable
demands for services.

3. Media and Other Sources

Another useful source of information is the media. The media may present a series of stories
about key market sectors or larger organisations. Sources include newspapers, magazines,
TV, radio and the internet.

Learning Activity 2:

Identify the resources available in your country which would help you research a certain product
market. Also, specify business directories available in the UAE and which provides information
about industries and markets.

43
Lesson 4: Quantitative & Qualitative
Information

The information gathered through market research may be described as being either qualitative
or quantitative in nature.

1. Qualitative Information
It informs the organization about the opinions and preferences of individuals and cannot
always be interpreted statistically.
For example, in response to a qualitative interview about cakes, one person might feel
that the cake is too moist and rich, while another might think that it has a rich taste.
Qualitative research is therefore about descriptions. This type of information is difficult
to categorize and measure because it is based upon personal views deemed to be
subjective.

2. Quantitative Information
It is a research that produces figures that can be examined statistically. For example, 15
out of 20 people might prefer one brand to another. As this is considered to be based
upon hard facts, it is considered to be objective.

Many research methods supply both qualitative and quantitative data, and the two are closely
linked.

44
Qualitative information

I think that...

I like... In my view...
because ...

Qualitative
Information
(Subjective)

Yes, but it does

Perhaps not...

Maybe it
would if ...

Quantitative Information

100 units

25% $23,600

Quantitative
Information
(Objective)

84 kph 98 kg

100,500
people

45
Practice Questions:
1. Give two advantages to a business using primary market research.
2. What sources of secondary data are available for a business to use if it wanted to sell a
new product overseas market?
3. If primary market research is carried out, explain what the business can do to improve the
chances of getting accurate information.

46
 Chapter 4:
Introduction to
Marketing

47
48
Lesson 1: What does Marketing Mean?
 Selling?
 Advertising?
 Advertising and Selling is only the tip of the Marketing Iceberg.

A Simple Marketing System

Marketing is an approach that seeks to uncover what the customer requires and to convert
this knowledge into products that are distributed and promoted in ways that will provide for
the satisfaction of all.

Marketing & Sales… Basic Difference

Marketing is the satisfaction of a need; it is also the creation of a need.

It is adapting the offer of the enterprise to satisfy the needs of the different public
(consumers, distributors, partners, etc.).

49
A good marketing job understands consumer needs, develops products that provides
superior value and prices, distributes and promotes them effectively so that these products
will be sold easily.

Selling is the act that follows the marketing functions. It is mainly the act of presenting and
highlighting the benefits and value of the product or service to the potential buyer.

Starting Point

Focus Means Ends

Existing Selling and Profits Through

Factory Sales Volume
Products Promotion

(a)The Selling Concept

Customer Integrated Profits Through

Market Customer
Needs Marketing

(b)The Marketing Concept

50
 Development of the Marketing Concept

Needs, Wants and

Products
Demands

Markets Value,
Satisfaction and
Quality

Exchange, Transactions
& Relationships

51
Exhibit 1.1: Definitions of Marketing

“Marketing is the management process that identifies, anticipates and satisfies customer
requirements profitability.”
-The Chartered Institute of Marketing

“The right product, in the right place, at the right time, and at the right price.”
-Adcock et al

“Marketing is the human activity directed and satisfying human needs and wants
through an exchange process.”
-Kotler, 1980

“Marketing is a social and managerial process by which individuals and groups obtain
what they want and need through creating, offering and exchanging products of value
with others.”
-Kotler, 1991

52
Lesson 2: Market Segmentation
Market: A market is made up of people and institutions, but they alone do not constitute a
market. It requires not only people or institutions and the willingness to buy, but also
purchasing power and the authority to buy.
It is to divide a market into distinct groups of buyers with different needs, characteristics or
behavior who might require different products or promotions or quality, etc.

Example:
Procter &Gamble has 11 brands of laundry detergent (Tide, Bold, Ariel etc.) and each brand
is offered in several sizes and formulas (large or small, liquid or powder) because different
people want different benefits from the product they want to buy. (www.pg.com)

Market Segmentation: is division of the total market into smaller, relatively homogeneous
groups.

Types of Target Markets:

 Consumer products are goods or services purchased by an ultimate consumer for
personal use.
 Business products are goods or services purchased for use either directly or
indirectly in the production of other goods and services for resale.

Strategies for Reaching Target Markets:

Undifferentiated Marketing: when a firm produces only one product or product line and
promotes it to all customers with a single marketing mix
 Sometimes called mass marketing
 Much more common in the past

Micromarketing: involves targeting potential customers at a very basic level, such as by

ZIP code, specific occupation, lifestyle, or individual household
 The Internet may allow marketers to make micromarketing even more effective.

53
Lesson 3: Bases for Segmenting Consumer
Markets

Marketing Mix or The 4P’s: PRODUCT, PLACE, PRICE, and PROMOTION

Marketing mix is a major tool for the marketer, who must be able to understand how to
combine its various elements or components in an intelligent and effective way.

Geographic Segmentation
Consumers in different geographic locations are subject to varying conditions in terms
of climate, language, environment, natural resources, taste, and population density.
Markets can be divided into regions because one or more of the geographical variables
causes differences to appear from one region to another. A company that sells products
in different countries, for example, needs to use different languages in labeling its
goods. City size can be an important segmentation variable as well.

54
Example: Major petroleum retailers, such as EPPCO and EMARAT, have traffic-
density barrier or limit below which they perceive a small market not to be possible. It
is therefore quite common, particularly in villages and small towns in rural areas, to see
local petroleum retailing dominated by independent garage owners and smaller
petroleum companies instead of EPPCO and EMARAT.

Demographic Segmentation
The most common approach to market segmentation is demographic segmentation,
the division of consumer groups according to demographic variables such as gender,
age, income, occupation, education, household size, and life style (some of these
variables are elaborated below).

Demographic variables are used in market segmentation for 2 reasons:

 They are easy to identify and measure.
 They are associated with the sale of many products and services.

Segmenting by Gender
Gender is a traditional variable for segmenting certain markets because many products,
famous magazines, and clothing are gender specific.

Example: Apple is targeting the female segment with the introduction of the rose gold
mobile phone.

Segmenting by Age
Many firms identify market segments on the basis of age, and some market their
products and services to specific age groups. A common division by age groups: under
6, 6-11, 12-19, 20-34, 35-49, 50-64, 65+.

55
Example: Johnson & Johnson targets children with the specially designed shampoo that
“causes no tears” if it gets into the child’s eyes.
www.jnj.com

Segmenting by Income and Expenditure Patterns

Earlier we defined markets as purchasing power. A common method of segmenting the
consumer market is on the basis of income.

Example: Fashionable specialty shops of designer clothing, such as Dolce &

Gabanna, make most of their sales to high-income shoppers. Debenhams aim to appeal
to middle income groups. Local shops in local places focus almost exclusively on low-
income shoppers.

Psychographic Segmentation

Segmenting by Life Style

This segmentation takes into consideration the way customers live and what they
believe in. Consumers' life styles are regarded as composites of their psychological
make-ups, their needs, motives, perceptions and attitudes. A lifestyle also refers to
many other influences, such as a consumer's reference groups, culture, social class and
family members

56
Example: The “Nissan Patrol Safari” targets adventurous people while the new target
of the “Mini cooper” is mainly the pop stylish kind of customers.
Also, services can target customers based on their lifestyle, for example the GPRS
technology allows mobile phone users to connect to internet on their mobile phones. It
was developed to satisfy a segment of mobile phones customers who are always on the
move, like business people or sales people.

The Market Segmentation Decision Process

Stage 1: Select Market Segmentation Bases
The process begins when a firm seeks bases on which to segment markets.
In other words, who are our clients?

Stage 2: Develop Relevant Profiles for Each Segment

Once segments have been identified, marketers should seek to understand the customers
in each segment. The task at this stage is therefore to develop profiles (information) of
the typical customer in each segment. Such profiles might include life style patterns,
attitudes towards product features and brands, brand preferences, product use-habits,
and geographic locations.
.
Stage 3: Forecast Market Potential
In this stage, market segmentation analysis continues in order to produce a forecast
(estimation) of market potential within each segment. Market potential sets the upper
limit on the demand that can be expected from a segment, and therefore determines
maximum sales potential.

Stage 4: Forecast Probable Market Share

This step requires a forecast of probable market share. Market share forecasts depend on
both an analysis of competitor's positions in target segments and the specific marketing
strategy and tactics designed to serve these segments.

57
Stage 5: Select Specific Market Segments
The information, analysis, and forecasts accumulated through the entire market
segmentation decision process allow management to evaluate the potential for achieving
company goals and to justify the selection of one or more segments. For example,
demand forecasts, when combined with projects’ cost, are used to determine the profit
and return on investment that can be expected for each segment.

Stage 6: Develop a Positioning for Each Target Segment

Quality and the price of the product compared to similar products in the market will
determine product positioning.

Stage 7: Develop Marketing Mix for Each Target Segment

Marketers will design the product, determine the place and price strategy and promote
the product in a way to reach target segment. Each target market must have a different
marketing mix which will satisfy its need and earns profit or the company.

Steps in Market Segmentation, Positioning & Targeting

7. Develop marketing mix for
each target segment.
Market Positioning
6. Develop a positioning for
each target segment.
5. Select the most attractive
target segments.
4. Forecast probable market Market Targeting
share.
3. Forecast market potential.
2. Develop profiles of those
segments.
Market Segmentation
1. Identify the bases for
segmenting the market.

58
 Chapter 1: Practice Questions

1. Give examples of companies which are using the sales concept and other companies
which are using the marketing concept. Explain why you chose them.

2. Explain how a car manufacturer applying marketing strategies differ from a car
manufacturer applying selling strategies.

3. Which elements constitute the marketing concept?

4. Choose two products: a good and a service. Describe the geographic and demographic
market of each.

5. What could a possible reference group in the choice of the following products be?

 Shampoo
 Restaurant
 Mobile phone
 Home furniture

59
Lesson 4: Marketing Mix - Product
What good or service should we try and sell? The ‘product decision’ does not end here
though. Even a small firm making just one product is likely to make a number of different
versions designed to appeal to different types of people make up the target market for each
product. Over time, some products will become out of date and will need to be updated or
replaces by products that are technologically more advanced.

I. Definition of a Product

A product is something that satisfies a consumer need or want. It can be a Sony

Playstation, a haircut, a music concert, a travel holiday, or a GMC truck… Consumers are
interested in what the product can provide for them. A product, therefore, is judged by its
benefits.

II. What product do small firms produce?

In most start up businesses, entrepreneurs will choose to supply a good service that:

They know quite a lot about

Ahmad is a computer expert and Ziad is a knowledgeable gardener (does not require a lot
of money).
Ali is very keen to help disadvantaged groups with his decorating skills. Mohamed could
start a dog-sitting service with practically no money at all, (does not require a large
building or expensive equipment).

III. Why do small firms adapt their products?

Just making one type of product or offering the same service to every customer is
unusual. Many small firms try to adapt their goods and services to the special needs of
customers. This approach is likely to:
 Increase sales
 Increase customer loyalty

60
Here are some examples:
 Ziad might start to offer a full garden-design service for customers who have
moved to a new house.
 Ahmad might offer a regular update service for websites designed by his
business that need to be updated frequently. For example, one of his customers
sells stamps over the internet, so his stock is constantly changing.
 A small beauty salon with a spare room might offer this to a hairdresser to style
customers’ hair.
 A Chinese restaurant located in an area where many Polish building workers are
employed might offer special Polish menus at lunchtime. This is a form of
product differentiation.

IV. Why is the product important?

Small firms produce goods or services that the owners know something about or that
reflects the skills or interests they have. The original choice of product sometimes has to
be adapted to meet the needs of different customers in order to increase sales. Small
businesses may also change their products to reflect competitors’ product decisions and
technological changes.

Key Terms
 Product range: the collective term given to all the products made or sold by a
business
 Product differentiation: attempting to make your products stand out from those
of your rivals through advertising, design, or different product features

Activity
Use examples of two local small businesses that you are aware of. For each business,
suggest one way it could change the product it offers to meet different customer needs.

61
 Did you know?
The product is the key decision taken by a small business. The other parts of the
marketing mix must be based around the product decision.

V. Branding

This is the way that a distinctive identity is created for a product or range of products.
McDonald's name is a familiar example. Companies spend millions on the design of
their logos, attempting to achieve a modernization of their image without losing their
distinctive appearance in the eyes of the public.

The purpose of branding is to attract customers who will become brand loyal, resisting
switching to other brands, and will undertake repeat purchases of the product. Brands
can consist of an organization by itself, such as McDonald's. This is known as an
umbrella brand.

An example of a branded product is the BIG MAC. Brand names rather than logos are
usually the way in which people come to be familiar with a company and its products.
Research shows that customers give preference to branded over non-branded goods.

Companies may spend more money on buying a well-known brand. (In taking over
Jaguar, Ford paid for the name more than the current product range).

A brand is a name, term, sign, symbol or design intended to identify the good or
services of one seller to differentiate him from those of competitors. A brand name must
be easy to remember, distinctive and easy to pronounce. A brand is a seller's promise to
deliver consistently a specific set of features, benefits, and services to buyers.

VI. Product Strategy

Product strategy is the part of marketing decision-making that involves developing the
right goods or services for the firm's customers. It includes not only deciding what

62
products the firm should offer to a group of consumers but also the package design,
brand names, warranties, product life cycles, positioning, and new product
development.

Figure 2.1 shows how a product can be seen to operate on three levels.
1. Core product: core benefits that consumers are really buying when they
purchase the product
2. Actual product: a product’s parts, features, brand, quality, design, and
packaging, and other attributes that combine to deliver core product benefits
3. Augmented product: includes installation, warranty, after-sales services,
delivery and credit facilities

An example for three levels of product:

• Core product: a washing machine washes clothes
• Actual product: A washing machine manufacturer therefore produces various
models that can offer different features, such as more efficient use of water, to
appeal to different customers
• Augmented product: The customer may be tempted to purchase one washing
machine in preference to another because that company offers installation at a
preferred day and time

63
VII. Product Development

By new products we mean:

1. original products
2. product improvements
3. product modification, and
4. new brands that the firm develops through its own research and development
efforts.

New product development is time consuming, risky, and expensive, but it is also
essential. It is very important to plan the development of new products as carefully as
possible.
o Ford lost $350 million on its Edsel automobile
o RCA lost $580 million on its Staggering Vision videodisc player
o Texas Instruments lost a staggering $660 million before withdrawing from the
home computer business

VIII. Four development strategies

They are identified as follows:

1. Product Improvement: It is the modification of the existing product, so that an

improved or repacked product may be re-launched.
Example: new ecological package concept for Mc Donald's burgers
2. Market Development: It concentrates on finding new markets for existing
products.
Example: franchising Mc Donald’s in the global market
3. Product Development: It is the introduction of new products into established
markets.
Example: the introduction of McDLT sandwich
4. Product Diversification :It is the development of new products for new markets
Example: the development of the chili burger for the chili market

64
Lesson 5: Marketing Mix - Place
I. Getting the Product to Customers

This section will focus mainly on physical goods rather than services, such as dry
cleaning and haircutting, which are usually provided directly to the consumer by the
business. For physical foods, there are more options of getting the product to the
consumer, which are known as channels of distribution. The methods are shown in
diagram A.

Producer

Wholesaler
Retailer Agent
Retailer

Consumer

(A)Traditional channels of distribution

You can see that the product may pass through other businesses on its route from
producer to consumer. These middlemen are known as ‘intermediaries.’ They each
make their own profit as they buy the product at a lower price than they sell for.
In return for this profit, they will each offer their own benefits:
 Wholesalers: The major benefit of wholesalers is that they buy large quantities of
a product from producers and break them down into more manageable batches
for retailers or consumers.
 Retailers: The key function provide by retailers is to offer consumers a
convenient and comfortable environment in which to buy products.

65
II. Online – The Growth of E-Commerce

An increasing number of small businesses are using the direct chain of distribution,
delivering directly to customers. A few will use their own delivery vehicles, but most
rely on distribution companies, such as DHL, FedEx or Royal Mail.
Large companies selling via catalogues will use this chain too, but, by far, the most
common use of the direct channel is e-commerce, where the consumer is buying from a
business or auctions website.
Small firms can use the internet to reach a huge target market. A tiny start-up business
can reach a global market by setting up a website.

Key Terms
 Channel of distribution: the method used to transfer goods or services from the
producer to the final consumer
 E-commerce: transactions between people and business carried out entirely via
the internet

Activities
1. Visit two or three small local retailers. Ask about how their products make their
way from the producer to the shop itself. Try to find some who use wholesalers
and some who buy direct from the producer.
2. Using diagram (A), select the most appropriate channel of distribution for each of
the following types of product made by small businesses. Explain why you feel it
is the most appropriate channel.
a. Personalized key rings
b. Specialist handmade chocolates
c. Large wooden bedroom wardrobes

66
III. Why Is Place Important?
 The right channel will balance the need to cut cost (and therefore the final price) by
using the most direct route possible with the need to get the product into as many
different “places” as possible so customers can access it when and where they want
it.
 Generally larger, bulkier items will use more direct channels, whilst smaller items,
which may be impulse buys (e.g., soft drinks), will pass through several
intermediaries to get the widest distribution possible

IV. How to Determine Distribution?

Three categories are identified:

1. Intensive Distribution: Producers use intensive distribution so that the purchaser
can buy the product with ease. Goods using this approach include sweets, soft
drinks, and cigarettes.
Examples: Coca-cola, Marlboro, Wasel prepaid recharge cards.

2. Selective Distribution: This is a market coverage strategy in which a firm chooses

a limited number of retailers in a market area to handle its product lines. By limiting
the number of retailers, the firm can reduce its total marketing costs. Durable goods,
such as computers, usually fall into this category.
Examples: Rock cosmetics are only distributed in pharmacies while Avon products
are distributed by door-to door estheticians

3. Exclusive Distribution: When producers grant exclusive rights to a wholesaler or

retailer to sell in a specific geographic location, they are practicing exclusive
distribution. Car dealerships are an example of this form of distribution.
Example: Al-Futtaim is the sole distributor of Toyota & Lexus in UAE.

67
Activities
1. Would you advise Bilal and Ahmed to set up the shop as soon as possible or
should they do market research first? Explain your answer.
2. What did Bilal mean by the term ‘product differentiation’?
3. Do you think they should set their prices either just below or just above those
charged by other similar shops in the area? Explain your answer.
4. Suggest two ways that Bilal and Ahmed could promote their shop once it is open.
Justify your choice.

Review Questions

1. Which of the following is a reason for doing market research?

a. Find out how much customers might be prepared to pay
b. Discover the cheapest way of making a product
c. Find out how much to pay workers

2. Which of the following statements is true?

a. E-commerce is usually more expensive than opening a retail shop.
b. Higher prices will always lead to higher demand.
c. Secondary market research is often quickly and cheaply available.

3. The sales of a product are most likely to increase when __________ .

a. a firm reduces its marketing budget
b. different styles are made to suit different consumers
c. competitors lower their prices

4. One advantage of using wholesaler is __________.

a. they break bulk and sell to retailers or consumers in small quantities
b. they offer their services free of charge
c. there is never a need for a producer to advertise when they use wholesalers

68
 5. One method of marker research is ____________ .
a. E-commerce
b. Making different products for different target markets.
c. focus groups

6. Which of the following statements is true?

a. ‘Place’ means how a product is transported from business to consumers.
b. Promotion is always free of charge.
c. Publicity is a form of free promotion.

69
Lesson 6: Marketing Mix - Price
Deciding how much to charge for a product or services is not a simple task. An
entrepreneur running a start-up business may not have any experience in price setting.
Several factors will affect the decision made by a small business, but perhaps the
primary consideration will be the effect that price has on the demand for the product.

I. Role of Price

Price is the measure of value involved in exchange, but the calculation undertaken by
the customer in deciding whether to purchase a given item at a certain price is affected
by a range of financial and other considerations. When purchasing a new car, price is a
consideration but so too are finance schemes, discounts for cash, and the availability of
extras for a given price (such as insurance, guarantee, and others). Obviously, price is
the one element of the marketing mix that is capable of generating income and
achieving profits. Price is heavily influenced by costs, which can lead to an inflexible
approach to the setting of price in the market place. The influences of costs lead to
rigidity in the setting of price since costs are not flexible.

II. Price and Demand

We often use the term demand as a quick way to express the total quantity of a product
that consumers want and can afford to buy. Thinking about demand in this way, it
should be easy to understand how demand for a product changes if the price changes.

70
 Activities
1. Assuming that you are typical of most people, fill in the second column in
the table below:

Price of an average Number per

download of a music month that you
track would buy
20p
40p
50p
£1

2. Now put your result on a graph with the y – axis labeled ‘Number of
downloads’ and x-axis labeled ‘Price’.

The graph you drew in the activity should show a line going downwards from
left to right. This is typical of almost every good or services available – the lower
the price, the more consumers will buy it.
The message for an entrepreneur is clear – to sell more, charge less for the
product you are selling or make your product so special that consumers will be
prepared to pay more than competitors’ products.

III. Why not decide on a really low price?

Selling a product at a very low price compared to similar products will lead to very high
demand; however, every small business needs to make a profit eventually. Price level
has a role to play in making sure the firm makes a profit.
A simple rule to remember is that the price the business decides to set must at least pay
for the cost making/buying in the good or providing the service. Failure to set a price
that covers costs will lead to a loss.

71
 A Balancing Act
Deciding price is something of a balancing act between covering costs and keeping the
price low to encourage people to buy.

Other factors that influence the pricing decision include:

 The prices charged by competitors – unless the entrepreneur’s product is very
different to that of rival firms, a similar price to these other businesses may have
to be set.
 Large businesses often have lower costs for making each product – smaller firms
may have to accept a lower profit on each item or offer such a great level of
personal customer service that buyers will pay more.
 A start up business may charge a very low price to attract new customers and
then raise prices later.

IV. Why Pricing Is Important

Price will have a great impact on demand. The price level also makes a product seem to
be of good value or of poor value.
Common sense is a vital part of any pricing decision, but these decisions will be
improved by considering the factors covered within this section: demand, competitors
and costs.

Activity
Check the price of 2 liter bottle of milk from three different supermarkets.
1. How much does the price vary?
2. Why do you think some supermarkets are able to sell this and other
product more cheaply?

Always consider the wider effects of any price change. Student answers that advise a
firm to cut its prices to sell more are in danger of ignoring the need to charge enough to
still cover costs and hopefully make a profit.

72
V. Basic Pricing Strategies

Pricing strategy is the element of marketing decision-making that deals with the setting
of profitable and justifiable exchange of values for goods and services. The pricing
strategy is one of the most difficult areas of marketing decision-making.
Basic pricing strategies provide a firm with several options on the question of price and
other factors.
1. Market Skimming Pricing
This technique or strategy is often seen with the introduction of a new product.
The aim is to price the product in such a way that the price attracts the customer
to the end of the chosen market. At a later stage, the price can be lowered to take
the product through the diffusion process.

2. Market Penetration Pricing

The firm adopting this approach would go for the opposite tactic to the one
reviewed earlier, with the price being set low to help achieve specific objectives.
The main objective would be to achieve an increase in sales volume, but this can
involve a major problem if existing competition is able to compete on price; a
price war will develop.

3. Neutral Pricing / Competitive Pricing

Neutral pricing is where customers require a price to be reasonable given the
economic or gainful value they derive from the product. Economic value is made
up of two parts: reference value and differential value.

4. Premium Pricing
Premium Pricing is when a company sets high prices for high end products that
never changes.

5. Psychological Pricing
Marketers are aware that setting prices has to take into account the competition,
costs, and the ability to achieve the organization's objectives. What is also

73
 important is what the impact price can have on the buying decision.
Psychological pricing uses the fact that a consumer can have an emotional
response to a product and its price. One example of this is to price just below the
full Dirham. Petrol prices could be expressed as 3.9 AED per gallon, not 4 AED.
Many items are priced this way, 99 instead of 100 for example. Pricing points
like this are able to persuade many to buy, whereas a price rise over 99 AED will
cause a psychological barrier.

6. Full-Cost Pricing
This is a simple method for setting prices. Under this method, the variable cost,
the fixed cost, and the profit per unit are added together to arrive at a selling
price. The problem here is that, although the system appears to be simple, it
suffers from some drawbacks:
It is not so easy to calculate costs as imagined. For example, the allocation of
fixed costs to individual products will depend on the level of production, but the
level of production will be determined by the demand for the product, and the
demand will be affected by the price. If output falls during a recession, the
amount of total cost will be spread over fewer units causing cost per unit to
increase and prices to go up.

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Lesson 7: Marketing Mix - Promotion
It is vital that new businesses find some way to spread their name and product details
amongst potential customers. ‘Promotion’ is used to describe the methods used to
communicate a message from the business to its customers or potential customers.
Promotion gives the consumer information about the rest of the marketing mix.

I. Know your budget limits.

Almost every method of promoting a business will cost money, whether it is the cost of
printing leaflets or the cost of making and showing a television advert. Given unlimited
money, any inexperienced manager could find a way to push a promotional message for
business. Marketing experts are those who manage to get the business’s message across
as cheaply as possible but without making the business or its products seem cheap.

II. How much should you spend on promotion?

In the case of a small business, this marketing budget could be very small, yet the
owner will still have to do something to make the business known. Deciding which types
of promotion to use and when and how often to use them is a vital part of the role of a
successful entrepreneur.

Activity
Look back at the entrepreneurs in the unit opener and think about how they might use
their marketing budget.

75
III. What is your promotion trying to achieve?
 Awareness – A new business needs to make people aware that it exists and where
it can be found.
 Information – Promotion will be used to give consumers specific information
about the products sold by the business.
 Brand and image building – Promotion is a key part in any business’s attempt to
make itself and its products stand out from their competitors.

Key Terms
 Marketing budget: the amount to be spent on marketing and promotion over a
certain period of time
 Advertising: communication to consumers and using television and other to
encourage them to buy a product
 Publicity: gaining press coverage for your business
 Word-of-mouth recommendation: getting customers to talk to their friends and
family about your product or service
 Direct mail: sending promotional material directly to consumers
 Personal selling: employing a person to visit potential customers to persuade
them to buy your goods or services
 Website: Many businesses now have their own website on the internet to
provide information about their business for consumers
 Banner: an internet advert shown on another firm’s website in the form of a
horizontal bar across the page
 Pop-up: an internet advert that ‘pops up’ in a new company’s website

IV. Who do you promote to?

As has been explained, a well – prepared entrepreneur will have a fairly clear idea of the
target market. It is this group of people that promotion will be aimed at. There is no
point wasting money trying to sell a conservatory to someone who lives at the top of a
block of flats. The more closely focused the promotion is on the target group of
consumers, the more cost-effective the promotion will be.

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 Promotion Methods for Small Businesses
Method of Advantages
promotion
Advertising in  Size can be adjusted
local newspapers to fit the budget.
 It should allow a
wide local audience
to be reached.
Free publicity  If the news story is
(e.g., special carried by the local
shop-opening paper and radio
ceremony with a stations this is free,
local celebrity) but a celebrity asked
to the ceremony
opening could cost a
lot though.
Customer word-  Free and trustworthy
of-mouth - most people believe
recommendation their friends’ advice.
Direct mail or  Once the
leaflets through letter/leaflet has been
letterboxes in printed, hand
local area delivery is quit
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Disadvantages
 May not be well
targeted
 Paying for a large
and well-designed
advert can be
expensive.
 The company does
not control the
content, so those
reporting on the event
may provide negative
publicity (e.g.,the
shop was too small to
hold all of the people
who attended.
 Impossible to
control-people may
not talk about you, or
they may spread a
negative message
about your business.
 It is often seen as
‘junk mail’ and not
read by consumers.
 Leaflet and ‘direct
 cheap; however, mail’ have quit a low
postal methods might success rate.
not be.
Promotion  It allows an  It may be seen as a
through personal individualized nuisance, and the
selling of the approach to selling need to employ sales
product to each customer. people makes this
method very
expensive.
Website  It provides basic  It needs regular
information to maintenance to stay
anyone searching for up to date and
a product or looking good.
business.  It needs to be easily
 It can also be used found through a
for e-commerce reliable search
when the product is engine.
sold online.
Banners and  They can target  It may be ignored
pop-ups on other people by interest or (banners), seen as a
websites hobby (e.g., a pet nuisance or even
grooming business blocked (pop-ups).
can use a banner
advert on a dog-
lovers’ website).

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Practice Questions

1. Give examples of companies which are using the sales concept and other companies
which are using the marketing concept. Explain why you chose them.
2. Explain how a car manufacturer applying marketing strategies differ from a car
manufacturer applying selling strategies.
3. Which elements constitute the marketing concept?
4. Choose two products: a good and a service. Describe the geographic and demographic
market of each.
5. What could be a possible reference group in the choice of the following products?
* Shampoo
* Restaurant
* Mobile phone
* Home furniture
6. What are the four product development strategies? Give examples on each.
7. What is place and what does a distribution strategy involve?
8. Which distribution channel is most suitable for each of the following products?
* Fire insurance
* Family residences
* Washing machine
* Luxury yacht
* Farm hay balers
9. What are the factors which influence the choice of a distribution channel? Illustrate your
answer with examples.
10. A new company is designing and making stylish, inexpensive yet very trendy women's
clothing. Should the company use selective or exclusive distribution strategy? Justify
your answer.
11. What is price and its role as an element of the marketing mix?

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12. For each of the following products, determine the pricing strategy the seller should
adopt. Support your choice.

* A dish-washing liquid that lasts twice as long as any competitive brand

* High-fashion clothes styled and made by Christian Dior
* New brand of chocolate bar that has a luxurious taste
13. How does demand elasticity affect pricing? Explain.
14. Full-cost pricing strategy has some drawbacks. List them.
15. What is promotion?

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Chapter 5: Finance

81
82
Lesson 1: Finance
An entrepreneur comes up with a new business idea he thinks will make him rich and
famous. They plan it well; do some market research and everything looks good. However,
the entrepreneur then faces the problem of raising the finance to start the business. All
startup businesses needs finance; this is because they normally need to buy equipment, pay
for builders to refurbish their premises, buy initial stock, and have money to cover the first
few weeks of trading before cash is received from customers. The length of the list will
depend on the type of business that is being started; however, getting the finance to start the
business is not that easy.

I. Difficulties in raising funds

The main reason new small businesses struggle to raise finance is that they are not yet
trusted. Banks and other lenders don’t know the owner very well and as the business is
new, the owner has no evidence to show he or she can pay back debts; therefore, banks
and other businesses may not be keen to lend to them.
If other businesses will not lend money to them then the entrepreneur may have to use
his own savings or borrow from friends or family; however, these options are not ideal.
The savings of the entrepreneur might not be enough. Do you have enough money in
your bank account to start a business? Borrowing from friends and families can lead to
arguments about interest rates and the timing of repayments.

II. Importance of finance

The rest of this chapter explains the importance of finance to a small business. It will
also investigate the different sources of finance and financial advice when setting up a
small business. Also, you will be introduced to some basic financial terms and simple
cash flow statements.

83
Naveed needs a new van
Naveed started his painting and decorating business with one of the cheapest and oldest
vans he could find. It has just broken down and is not worth repairing. To buy one that
will last him several years, he needs to raise £5,000.
He has £1,000 in savings from the last two years’ profits. His father has offered to lend
him another £2,000. Where will he get the rest if the finance from?

Activities
1. How much additional finance does Naveed need for the van?
2. Suggest two other source of finance for this money.

84
Lesson 2: Finance and Support for Small
Businesses
I. Source of finance

All businesses require finance at different stages of their life spans. This is simply a
source of extra money for the business. Source of finance are used for a whole range of
reasons from getting the business through hard times, such as a recession, and good
times when the business wants to expand.

A new business will need money to set up before they start trading. Cash is needed for
things such as:
 Equipment
 Advertising
 Rent/mortgage of building
 Stock

(A) Common Source of Finance and How to Obtain Them

Source of Key term Benefits Disadvantages Information and

Finance Evidence Needed
to Obtain It
Bank loan Finance provided  Large amounts  Interest has to be The bank is likely
by the bank that can be borrowed paid increasing costs. to want to see a
will be paid back that don’t have to  Repayment terms cash flow forecast
over a set period. be paid back all at must be met. and possibly a
once. business plan.
Loan from Finance provided  They will be  They might not be Family and friends
friend and by friends or family flexible about able to afford to lend will depend on
family where the interest when you have to the entrepreneur very their trust in the
rate and repayment pay it back and much. business owner,
periods are agreed might not charge but they may want
with them. interest. to see detail of the
business plans too.

85
Overdrafts An overdraft is a  Once it has been  Overdraft normally Cash flow
flexible set up, the have high interest forecasts will need
arrangement that business can use rates attached to them to be shown each
allows a business to its overdraft and the bank can ask time the overdraft
spend more money arrangement as for it to be paid back arrangement is
than it has in its many times as it in full at any time. rearranged –
bank account, as wants without perhaps every year.
and when it needs having to ask the
the finance. bank’s permission
every time.
Mortgage It is a flexible  It is often with a  It may have a The legal deeds of
arrangement that fixed rate of variable interest rate, the property must
allows a business to interest. which can become be shown to the
spend more money  It requires expensive if rates lender and may be
that it has in its repayments every rise. kept by the lender
bank account, as month.  The lender may insist until mortgage is
and when it needs on ‘security’. paid off.
the finance.
Trade Trade credit stands  ‘Free’ finance is  Discount for It requires
credit for suppliers who available for the immediate or quick reference from the
allow debts for period for the payment may be lost. bank and other
goods and services trade credit. suppliers and
to be paid one or possibly a cash
two months after flow forecast.
delivery.
Grants Grants are money  The money does  Many businesses do Many forms have
given to a business not have to be not qualify for them. to be filled out to
by a government paid back. prove the business
organization or is eligible for the
charity. grant.

86
II. When to use a different source?

Different sources of finance are more appropriate for different situations. Before
deciding which source of finance is best for them, a business should look to see if the
need for finance is best for them: a business should look to see if the need for finance is
a short-or long-term one. If a business has a short-term finance problem, then it should
use a short term solution, such as an overdraft or trade credit.
However, if the business needs a large amount of finance to pay back over a long period
of time it should use a loan or a mortgage.

III. Financial Support and Advice

New businesses have to be prepared when it comes to choosing their source of finance.
They can get expert help and advice. This advice can come from many different
sources, but the most frequently used are:
 High street bank: They all offer a business banking service and free advice to
new business owners. For example, Barclays offers entrepreneurs free
consultations with an account, lawyer and marketing expert.
 Government organizations such as the Regional Development Agencies (RDA):
These are committed to improving economic condition in all regions of the UK.
They have helped 56,000 new businesses since 2002. RDA experts will help
entrepreneurs with applying for grants and making contacts with other
businesses.
 Charitable organizations such as The Prince’s Trust: This focuses on helping 18-
30-year-old unemployed people set up their own businesses. Advice from
business experts is provided as well as grants, low interest rate loans, and long-
term contact with an experienced business manager or mentor.

87
Activities
1. Investigate the following sources of finance for a new business that plans to restore
buildings. Explain the benefits and drawback for each business.
a. Business grants
b. Bank loans
c. Overdraft

2. In groups, come up with a business idea and then decide:

a. Approximately how much finance you think will be needed
b. What sources of finance you will need
What information you will need to provide to obtain the finance

3. Look at the two links provided and investigate the support and advice they can give to
the new business you thought of above.

88
Lesson 3: Financial Terms and Basic
Financial Calculations
Running a small business can be stressful and can cause the owners to have a lot of sleepless
nights. Two big worries for entrepreneurs are:
 Am I making a profit or a loss? Owners worry about profit because, if the business
makes a profit, then it should improve their lifestyle; however, if it makes a loss, the
business may eventually close and the owner’s possessions might have to be sold to
pay off the business debts.
 Do I have enough cash to pay for my expenses? Owners worry about cash as this is
used to pay for the day to day running costs of the business. Without cash the
business will not be able to pay workers, suppliers or any other bills, and it will fail.

Cash flow and the difference between this and profit is covered in the next section.

I. Calculating Revenue

To work out revenue, multiply the amount of products sold, for example, 10,000
hotdogs a year, by the selling price, £2.50 a hotdog.
Revenue  10, 000  £2.50
The revenue for the hotdogs is shown below:
£25, 000  10, 000  £2.50
So, to increase revenue the hotdog stand owner has two choices:
 Increase the selling price and hope sales don’t go down
 Increase the amount sold, possibly through promotion such as advertising, which
of course will increase costs too

89
II. Calculating Costs

This is as obvious as it seems. Any business will have things they have to spend money
on, such as rent, wages, and the materials to make products. When all these costs are
added together they are called ‘total costs’. For example our hotdog stand might have
the following costs each year:
(A)
Rent of £2,000
site
Wages £12,000
Stock £6,000
Equipment £500
Fuel £1,000
Total £21,500
costs

Now that you have seen the different parts of the profit calculation you can put it all
together and work out profit for yourself. Practice this by completing Activity 1
opposite.

Key Terms
 Profit: what is left after costs have been deducted from revenue
 Profit  revenue – costs
 Loss: when revenue is less than costs
 Costs: the expenses a business pays for producing goods and services
 Revenue: the amount of money a business receives from selling goods or
services

Examiner’s Tip
People sometimes call revenue ‘turnover’, so don’t be confused if you see ‘turnover’ in
a case study instead of ‘revenue’.

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III. Calculating Profit (or Loss)

To calculate profit, you need two figures: revenue and total costs.
Profit  or loss   revenue – costs

Look at these two examples to see how it works.

Latifa’s nail bar has sales revenue of £40,000 for the year and total costs of £33,000.
We can see she makes a profit of £7,000.
Profit  or loss   revenue – costs

£40, 000  £33, 000  £7, 000  profit 

Jamil’s sales revenue from his pet shop was £35,000 last year, but his costs were
£33,000. We can see he makes a loss of £4,000.
Profit  or loss   revenue – costs

£35, 000  £39, 000  £4, 000  loss 

Activity
1. Calculate the profit or loss made by the hotdog stand.
2. The hotdog stall plans to increase its prices by 10 per cent next year, and the owner,
Mr. Ali only thinks that sales will fall by 5 per cent. Calculate the new profit or loss
for next year if Mr. Ali is right.

Business Name Selling Price Units Sold Per Year Revenue Total Profit
Costs
Hamdan Taylor £500 per suit 200 suits a year £ 70,000

Ahmad’s Barbers £ 10 a haircut 3,000 haircuts a year £ 19,000

Sameera’s Florist £ 15 on average a 2,500 bunches a year £ 40,000

bunch of flowers

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Lesson 4: Cash Flow and Survival
I. Difference between Cash and Profit

Cash and profit are not necessarily the same. This is very important in business. It
means that:
 A profitable business could run out of cash. Just because a company has made a
profit does not mean it will have large amount of cash sitting around. The profits
may have been reinvested into new stock, using up spare cash, or the profit might
have been created by selling on credit to customers. This means that although on
paper lots of revenue and profit is going to be made from these credit sales, unit
the customers pays at the end of the credit period the company has little cash.
 A business making loss could have plenty of cash. A retail business making a
large monthly loss might sell its delivery van for cash. It therefore has money in
the bank from the sale of the van, but the monthly costs of the shop are still
greater than monthly revenue.

II. Why Is Cash Important?

If a business is to survive, cash is absolutely vital. Trying to run a business without

enough cash is like trying to drive a car without fuel, the car simple does not work! If a
business does not have cash, it cannot buy stock to sell, pay workers to run the business
or even rent a property to operate from.
 Finance put into the business, such as the owner’s saving or a loan
 Sales paid for in cash
 Payments from customers who have been given extra time to pay rather than
paying straight away (credit sales)

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III. Cash Flow Forecast

Cash is so important to a business. Most sensible owners forecast the amount they will
be likely to receive and spend. The way they forecast cash is by producing a cash flow
forecast. This is a table that shows predated future cash in and out of the business and
very importantly the closing balance.
To be able to fully understand one and comment on it, you need to identify all of the
different parts that make up a cash flow forecast. Table A shows a cash flow forecast
with each section explained.
Receipts/income is the money the business is paid during the month. It may be form
cash sales or credit sales. To calculate, to you just add together all the money the
company receives that month.
Payments/expenditure is anything that the business spends that month, such as the
rent. To calculate it you just add together all the money the company spends that month.

(A) A Cash Forecast

Jan (£) Feb (£)

Receipt (cash in) 10,000 12,000
Payment (cash out) 12,000 11,000
Net cash flow (2,000) 1,000
Opening balance 3,000 1,000
Closing balance 1,000 2,000

Key Terms
 Cash: money that the business has available to it straight away, such as money in
its bank account
 Forecast: a technique where the business attempts to estimate future sales, cash
flow or other financial variables
 Cash flow forecast: a predication of a business’s future cash inflows and
outflows, showing the closing balance

93
  Net cash flow: the difference between the receipts and payments
 Net cash flow = receipts – payments
 Opening balance: the money the business has at the start of the month. It is the
closing balance from the previous month
 Closing balance: the money the company has at the end of the month
 Closing balance = net cash flow + opening balance

Table B shows a future example of a simple cash flow statement, for Naveed’s Sport
Shop. As we can see from the closing balance on the cash flow forecast, it predicts that
there will be big problems in January and February, but that there should be a lot of
spare cash available in June. Naveed can now use this to plan for the future finance
needs of the business.

(B) Cash forecast for Nana’s Sport Shop.

Jan. (£) Feb. (£) Mar. (£) Apr. (£) May (£) June (£)

Receipt
(cash in) 5,000 7,500 9,000 8,000 8,500 8,400

Payments
(cash out) 15,000 3,250 4,500 4,000 4,250 4,200

Net cash flow (10,000) 4,250 4,500 4,000 4,250 4,200

Opening balance 1,000 (9,000) (4,750) (250) 3,750 8,000

Closing balance (9,000) (4,750) (250) 3,750 8,000 12,200

94
IV. Why a Cash Flow Forecast Important

Forecasting cash flow in advance gives the business owners several benefits:
 It allows the owner to check if they will have enough cash available over the next
few months to keep the business going. If they don’t they can try and get a source
of finance to help, such as arranging an overdraft.
 It allows the owner to try to reduce future outflows of cash so that the business
can avoid running out of cash.
 It may help persuade the bank to lend business money or give it an overdraft.
This is because the owner can predict that it has enough spare cash each month to
make repayments.
 The forecasted numbers can be used as targets for the owner to aim at and check
if the business is meeting these targets.

Key Terms
 Net cash flow: difference between cash in and cash out of a business over a time
period
 Opening balance: the money the business has at the start of the month. It is the
closing balance from the previous month
 Closing balance: the amount of cash the business has at the end of each month

Activities
1. List all the payments that the owner of a chip shop is likely to make in a typical
week.
2. Explain why a farm selling Christmas trees might have problems with its cash
flow at certain times of the year.
3. Look back at the cash flow statements for Naveed’s Sport shop and suggest a
solution for the cash flow problems in January and February. Justify your
answer.

95
96
 Chapter 6:
Investigating
Economics

97
98
Lesson 1: Microeconomics
I. What is microeconomics?
Microeconomics is the study of the decisions made by individuals and groups, the
factors that affect those decisions, and how those decisions affect others.

II. What is demand?

Demand is the amount of goods or services a consumer is willing and able to buy at
various prices during a given time period. Demand represents consumer behavior.
Two conditions should be met in the law of demand. Firstly, the consumer must be
willing and able to buy the good or service. In other words, the person must want the
product and should be able to pay for it. Secondly, the demand for the product must
be examined for a specific time period - a day, week, month, year, or some other
defined period.

Example: Suppose a person is looking for a new, luxurious house. He is looking for
a house that meets certain requirements, such as location of the house, facilities,
number of rooms, design, etc. however, the price of such a house is more than what
this person is willing and able to pay right now. Regretfully, this person has to look
for another kind of house to buy. At this particular time, this person does not add to
the demand of luxury houses, but this does not mean that this person might not find
himself both willing and able to buy a luxurious house at some time in the future
when he has enough money. The law of demand:

As price quantity demanded

As price quantity demanded

99
The demand schedule: shows the inverse relation between the price of a product and
the quantities consumers demand

The demand curve: plots the information from the demand schedule to illustrate
the inverse relation between price and the quantity demanded. The downward slope
line "D" represents the demand curve.

Five Non-Price Factors Affecting Demand

In addition to price, five non-price factors affect demand and they are usually referred
to as the determinants of demand. Over time, the non-price factors change to create an
entirely new demand curve. This is referred to as a shift in the demand curve.

1. Consumer Tastes
One of the most important of the non-price factors is consumer tastes and preferences.
When people get bored of Toyota's designs, they will shift to other cars that satisfy their
new tastes, such as Hondas. This change in taste causes the Toyota's demand curve to

100
shift to the left from D (0) to D (2). At the price of 30,000 AED quantity will decrease
to two Toyotas instead of five per year. Similarly quantity demanded of Hondas will
increase and Honda’s demand curve will shift to the right.

2. Market Size
Market size means the number of potential buyers. If the market size is large,
producers anticipate high demand, which means higher consumption. Demand will
shift to the right. If the market is small, producers anticipate low demand, and the
curve will shift to the left.

3. Consumer Expectations
Individuals' expectation of their future incomes affects demand and causes it to shift
leftwards or rightwards. If one individual is expecting a raise in his salary, he or she
might decide to increase the demand for goods now. When consumers are optimistic
about their future income level, the demand of goods and services in the market will
increase. The opposite is also true.

101
4. Income
As income Qty. demanded

As income Qty. demanded

Suppose an individual earns 5,000 AED per month. Then the quantity demanded by
this individual that he can afford is now 2 kilograms of steak for the price of 3. But
when this individual's income increases to 10,000 AED, then his new quantity that
he can afford becomes 5 kilograms of steak. This will cause the demand curve to
shift from D (0) to D (1).

5. Prices of Related Goods

The demand for one particular type of goods is often connected to the demand for
other goods related to it called either substitute goods or complementary goods.

 Substitute goods are goods that replace other goods when prices increase.
The same example of Toyota cars and Honda cars could be applied here.
When the price of Toyota cars increases, the demand for Toyota cars
decreases; thus, the demand for Honda cars which is a substitute increases
(the demand curve of Honda cars will shift to the right).

 Complementary goods are goods that are usually used with other goods
such as cars and fuel. An increase in the price of one of the complementary
goods causes the demand for both goods to decrease. As the price of fuel
increases, the demand for cars and fuel decreases. The opposite is also true.

102
III. Supply
The quantity of goods and services that producers offer at each price level is called
supply. The major incentive for producers is profit. Producers supply more products
when they can sell them at higher prices.
As price quantity supplied

As price quantity supplied

As the price of goods (e.g., Potatoes) increases from 20 pence to 40 pence, the profit
oriented producer will increase the quantity supplied from 100 tons to 200 tons. The
opposite is also true.

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IV. The Six Non Price Factors Affecting Supply

Similar to demand, supply is affected by factors other than price. Over time, six non-
price factors change to create an entirely new supply curve. This is referred to as a
shift in the supply curve.
1. Technological Improvement: Technology is the science of production.
Technological improvement uses new knowledge to change methods of
production. Technological improvement often lowers production costs and
thereby increases supply. With lower production costs, businesses find it
profitable to offer a larger amount of a product at each price. Robots, for
example, used in the production of cars to increase the productivity level.
2. Resource Prices: Materials and wages paid are the two primary resource costs.
Lower resource prices result in an increase in the amount of a product a
producer can supply, thus causing the supply curve to shift to the right.
Example: Efficient use of labor in producing cars lowers costs and thus
increases production. Robotics used in the production of cars also reduces costs.
3. Taxes: Taxes are the money paid by producers to the government. Taxes add to
production costs and therefore reduce supply. The more the taxes, the more the
cost of production and thus the less the amount supplied. As taxes decrease, cost
decreases, and quantity supplied increases.
4. Expectations: Expectation concerning future prices of a product affects the
current supply of that product. Many producers base current production goals on
future price expectations. Producers, for example, may expand production in
response to expected price increases, causing increased supplies of their product.
This will cause the supply curve to shift to the right.
5. Market Competition: The larger the number of producers or sellers competing
in a market, the greater is the supply. As more producers enter a field of
production, the supply increases and the supply curve shifts to the right. When
producers leave a field of production, the supply usually decreases and the
supply curve shifts to the left. Example the various producers of mobile phones
cause the quantity of mobile phones supplied to increase, thus causing the
supply curve to shift to the right.

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Lesson 2: Macroeconomics
I. What is macroeconomics?
Macroeconomics considers the performance of the economy as a whole. When we
study macroeconomics we are looking at topics such as GDP, inflation;
unemployment, our trade performance with other countries (i.e. the balance of
payments) and many other issues.
Aggregation is the concept of combining all markets in one overall market.

II. GDP
The GDP measures total local production of goods and services in money value for a
period of one year. Assume that the GDP in UAE for the year 2017 was 382 billion
Dirhams. This amount represents the total value of all products, such as goods and
services produced during that year. Changes in the GDP over periods of time
allow economists to see whether the economy is moving forward (prospering) or
declining (recession).

III. Characteristics of the GDP

1. The GDP for a particular year includes only goods and services produced during
that year. Sales of items produced in previous years are explicitly excluded.
For example, suppose that a person buys a new car produced this year. This car
is added to the GDP of this year since it was produced this year. Cars produced
in previous years but sold this year are not added to the GDP of this year
because production occurred sometime in the past. The same goes for used cars.
They are not included in the GDP of the year when they were resold but are
included in the year when they were produced.

2. Only final goods are included in the GDP. For example, a farmer uses milk
to produce cheese to sell it to a supermarket. The supermarket in return sells
the cheese to consumers. In this example, production occurred when the farmer

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 produced cheese using milk. The second production occurred when the farmer
sold cheese to the supermarket, and the third production occurred when the
supermarket sold cheese to consumers. In calculating GDP, we only consider the
final production (sales of cheese to consumers) and disregard the intermediate
goods involved in the production. The GDP excludes the sales of intermediate
goods and services because, if they were included, we would end up
counting the same outputs several times.

3. The GDP counts for production that occurs locally only (Domestic).
Imported goods are not counted in the local GDP since the production of
imported items occurred on foreign land.

4. Finally, only legal activities are included in the GDP. Only goods and
services that pass through organized markets count in the GDP.

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