2016 BPP PASSCARD F1

ACCA APPROVED CONTENT PROVIDER FIA Passcards FIA FAB / ACCA Paper F1 Accountant in Business Passcards for exams from 1 September 2015 – 31 August 2016

FIA FAB ACCA Paper F1 Accountant in Business

First edition 2011, Fourth edition March 2015 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in ISBN 9781 4727 3542 3 any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior e ISBN 9781 4727 2875 3 written permission of BPP Learning Media. British Library Cataloguing-in-Publication Data © A catalogue record for this book is available from the BPP Learning Media Ltd British Library 2015 Published by Printed in the United Kingdom by BPP Learning Media Ltd, Ricoh UK Limited BPP House, Aldine Place, Unit 2 142-144 Uxbridge Road, Wells Place London W12 8AA Merstham RH1 3LG www.bpp.com/learningmedia Your learning materials, published by BPP Learning Media Ltd, are printed on paper obtained from traceable sustainable sources.

Preface Contents Welcome to BPP Learning Media's FIA FAB/ACCA F1 Passcards. They save you time. Important topics are summarised for you. They incorporate diagrams to kick start your memory. They follow the overall structure of the BPP Learning Media Interactive Texts, but BPP Learning Media's new Passcards are not just a condensed book. Each card has been separately designed for clear presentation. Topics are self contained and can be g rasped visually. Passcards are just the right size for pockets, briefcases and bags. Passcards focus on the exam you will be facing. Run through the complete set of Passcards as often as you can during your final revision period. The day before the exam, try to go through the Passcards again! You will then be well on your way to completing your exam successfully. Good luck! Page iii

Preface Contents Page Page 83 1 Business organisations and their 10 Identifying and preventing fraud 93 stakeholders 1 11 Leading and managing people 107 5 12 Recruitment and selection 123 2 The business environment 17 13 Diversity and equal opportunities 131 3 The macroeconomic environment 29 14 Individuals, groups and teams 139 4 Microeconomic factors 43 15 Motivating individuals and groups 151 5 Business organisation, structure 163 and strategy 173 6 Organisational culture and committees 51 16 Training and development 189 7 Corporate governance and social 17 Performance appraisal responsibility 57 18 Personal effectiveness and 8 The role of accounting 65 communication 9 Control, security and audit 75 19 Ethical considerations

1: Business organisations and their stakeholders Topic List This chapter explains why organisations are formed and considers some of the different types of organisation. Types of business organisation Organisations are influenced by stakeholders. The Stakeholders second part of this chapter identifies different stakeholder groups, and considers how management may respond to these groups.

Types of business Stakeholders organisation Organisation 'A social arrangement which pursues collective goals, which controls its own performance and which has a boundary separating it from its environment.' They enable people to be more Points of difference Ownership – public or private sector PRODUCTIVE: Control – owners, workers or government Activities Overcoming individual limitations Profit orientation – or not Saving time Legal status – limited company/partnership Accumulating and sharing knowledge Size – small or multinational Enabling synergy Sources of finance Enabling specialisation Technology usage Other organisation types to consider are co-oper ative societies, mutual associations and non-governmental organisations (NGOs).

Types of business Stakeholders organisation Stakeholders Those individuals or groups that have an interest in what the organisation does . Contractual Internal External Connected Contractual relationships Employees Community Shareholders relationships Management Government Customers Pressure groups Suppliers Financiers Each of these groups has its own particular interests to defend, such as: Jobs (employees) Loan security (financiers) Different interests and aims can lead to conflict Tax revenues (governments) Page 3 1: Business organisations and their stakeholders

Types of business Stakeholders organisation Mendelow suggests that stakeholders may be positioned on a matr ix. LEVEL OF INTEREST Low High High C D POWER A B Low Key players are to be found in segment D Those in segment B should be kept informed Those in segment C should be kept satisfied Minimal effort should be expended on segment A

2: The business environment Topic List An organisation has many interactions with its environment, and general environmental trends can be Analysing the environment usefully summarised in the PEST model. The PEST Employment protection model is here drawn out into its component par ts. Data protection The chapter concludes with the competitive forces which Health and safety protection can shape the organisation, and the value chain within it. Social, cultural and technological trends Porter

Analysing the Employment Data Health and Social, cultural and Porter environment protection protection safety protection technological trends All organisations must take account of the environment in which they operate. POLITICS TECHNOLOGY COMPETING ORGANISATIONS MATERIALS SUPPLIERS GOODS TO POLLUTION LABOUR CUSTOMERS CAPITAL ORGANISATION WAGE TO LABOUR PROFIT TO INVESTORS ECONOMY SOCIETY (& CULTURE) GENERAL ENVIRONMENT

Legal factors affecting all companies Factor Example General legal framework: Basic ways of doing business, negligence proceedings contract, tort, agency Criminal law Theft, insider dealing, bribery, deception Company law Directors and their duties, reporting requirements, takeover proceedings, shareholders' rights, insolvency Employment law Trade Union recognition, Social Chapter provisions, minimum wage, unfair dismissal, redundancy, maternity, Equal Opportunities Health and Safety Fire precautions, safety procedures Data protection Use of information about employees and customers Marketing and sales Laws to protect consumers (eg refunds and replacement, 'cooling off' per iod after credit agreements), what is or isn't allowed in advertising Environment Pollution control, waste disposal Tax law Corporation tax payment, Collection of income tax (PAYE) and National Insurance contributions, sales tax (VAT) Page 7 2: The business environment

Analysing the Employment Data Health and Social, cultural and Porter environment protection protection safety protection technological trends There are several ways in which the government can affect the economic structure of an industry, by encouraging or stifling: Capacity expansion Role is felt in: Demand for goods and services Divestment strategies Product standards Emerging industries Environmental protection Entry barriers Monetary policy Competition R&D Regional policy Labour costs Political change complicates the planning activities of man y firms, and this is par ticularly felt in international trade – higher level of political risk.

Analysing the Employment Data Health and Social, cultural and Porter environment protection protection safety protection technological trends Much legislation has been aimed at this area. Legislation Companies must be very careful when handling these matters. Retirement Note that you will not be examined on specific Resignation legislation and exam questions will not be Dismissal – wrongful country specific. – unfair Disciplinary procedures Redundancy Equal opportunities Page 9 2: The business environment

Analysing the Employment Data Health and Social, cultural and Porter environment protection protection safety protection technological trends The main legislation in the UK is the Data Protection Act 1998 co vered here as an example of 'typical' data protection legislation. Data Protection Principles 1 Personal data shall be processed fairly and lawfully 2 Obtained only for specified and lawful purposes 3 Adequate, relevant and not excessive 4 Accurate and up-to-date 5 Not kept for longer than necessary 6 Processed in accordance with the r ights of data subjects 7 Appropriate measures shall be taken against unauthorised use Compensation Correction of data 8 Shall not be transferred to a country where data protection rights are not upheld Access to data held The Act also establishes rights for data subjects Sue (damages)

Analysing the Employment Data Health and Social, cultural and Porter environment protection protection safety protection technological trends Employers and employees have duties and obligations. Employee duties Although laws differ in different countries, the main points Take reasonable care and principles are often similar. Allow employer to carry out duties Not interfere with machinery Employer duties Inform employer of dangers Use all equipment properly All work practices must be safe implement Environment must be safe and Health and safety policy Plant/machinery maintained Statement of principles Training promote Detail of safety procedures Communication of policies Compliance with the law Risk assessments and controls Detailed equipment instructions Share information Training requirements Identify those most at risk Employ competent advisers Page 11 2: The business environment

Analysing the Employment Data Health and Social, cultural and Porter environment protection protection safety protection technological trends Population affects an organisation's supply of labour and hence its human resources policies . Cultural trends will also have an impact on a business and demand for its products/services. Factors to consider Changing age structure Buying patterns Women participating Income and wealth Older workers Health and diet Family life cycle Equal opportunities Social structures/class Environmentalism

Technology has often resulted in reduced staff reduced spans of control; reduced layers: 'flatter' organisations Information systems such as intranets Centralised systems can help to foster unity and coherency Decentralised systems Effects of IT on organisations Routine processing is quicker For the employee it can lead to information Digital information is easily sorted overload, and changes in the nature of Employee skills base changing work, but it also fosters close business Continued change to keep up relationships regardless of geographical Customer service enhanced location, and more flexible working Information as a 'commodity' arrangements. Email, voicemail, video-conferencing Outsourcing of operations to specialists 2: The business environment Page 13

Analysing the Employment Data Health and Social, cultural and Porter environment protection protection safety protection technological trends The value chainSUPPORT MARGIN ACTIVITIES The value chain model is one way of analysing what a fir m does – and how it organises and performs its activities in order to add value. FIRM INFRASTRUCTURE HUMAN RESOURCE MANAGEMENT TECHNOLOGY DEVELOPMENT PROCUREMENT INBOUND OPERATIONS OUTBOUND MARKETING SERVICE MARGIN LOGISTICS LOGISTICS & SALES PRIMARY ACTIVITIES The margin is what the customer pays over and above the costs to the fir m.

Activity Comment Inbound logistics Receiving, handling and storing inputs to the production system: warehousing, transport, inventory control and so on. Operations Convert resource inputs into a final product. Resource inputs are not only materials. People are a resource especially in ser vice industries. Outbound logistics Storing the product and its distr ibution to customers: packaging, testing, delivery and so on. Marketing and sales Informing customers about the product, persuading them to b uy it, and enabling them to do so: advertising, promotion and so on. After sales service Installing products, repairing them, upgrading them, providing spare parts and so forth. Procurement Acquire the resource inputs to the pr imary activities (eg purchase of mater ials, subcomponents equipment). Technology development Product design, improving processes and/or resource utilisation. Human resource management Recruiting, training, developing and rewarding people. Firm infrastructure Planning, finance, quality control: Porter believes they are crucially important to an organisation's strategic capability in all primary activities. Page 15 2: The business environment

Analysing the Employment Data Health and Social, cultural and Porter environment protection protection safety protection technological trends Porter's five forces model Potential entrants Bargaining Threat of Bargaining power of new entrants power of suppliers Industry competitors customers Suppliers Customers Rivalry among existing firms Threat of substitute products or service Substitute

3: The macroeconomic environment Topic List Macroecomonics is a branch of economics which considers the economy as a whole. Government policies and objectives This chapter presents an overview of the goals of The business cycle macroeconomic policy. Macroeconomic policy objectives National income and economic growth relate to economic growth, inflation, unemployment and Inflation and unemployment the balance of payments, looking at the complete Fiscal and monetary policy national economy. The balance of payments

Government policies The business National income Inflation and Fiscal and The balance of and objectives cycle and economic growth unemployment monetary policy payments There is a circular flow of income in the economy. Expenditure, output and income will all have the same total value. Income (Y) Households Consumption (C) Firms Total expenditure (E) Saving (S) Financial Investment spending (I) Taxation (T) sector Import demand (M) Government spending (G) Government sector Export demand (X) Foreign sector

All modern governments are expected to manage their national economies to some e xtent. Objectives of economic Government influences over company decisions policy Decision Comment To achieve economic Output capacity Grants or tax incentives to invest growth – an increase in Competition national income Forbid or allow takeovers/mergers To control price inflation Monopolies Outlaw anti-competitive practices To achieve full employment Sales demand Opening markets to new entrants (eg gas) To achieve a balance between exports and Break them up; regulate them Government policy affects demand imports (known as the Health and safety Legislation, regulations balance of payments) Employment Equal opportunities legislation Consumers Product safety standards Tax Sales tax procedures, income tax, accounting control Page 19 3: The macroeconomic environment

Government policies The business National income Inflation and Fiscal and The balance of and objectives cycle and economic growth unemployment monetary policy payments G Overall economic Market demand O O policy Cost of finance R Taxation G V Protection vs Free Trade A Grants, incentives, sponsorship N E Industry policy Regulation (eg investor protection, I R company law) S Entry barriers, capacity A Environment and Distribution T Workplace regulation, employment law I N infrastructure O M policy Labour supply, skills, education N E Social policy Trade promotion, export credits N EU and GATT obligations Export promotion to allies,aid recipients Foreign policy T

Government policies The business National income Inflation and Fiscal and The balance of and objectives cycle monetary policy payments and economic growth unemployment The business cycle is the continual sequence of rapid growth in national income, followed by a slow-down in growth and then a fall in national income. After this recession comes growth again, which peaks, followed again by recession... Four main phases Output Actual output 1 Recession 1 4 2 Depression Trend in output 3 Recovery 3 4 Boom 2 Governments will seek to stabilise Time the system and avoid wide 3: The macroeconomic environment fluctuations. Page 21

Government policies The business National income Inflation and Fiscal and The balance of and objectives cycle and economic growth unemployment monetary policy payments Equilibrium national income This is where the demand for goods and services is in balance with the available supply, and demand is exactly sufficient to encourage firms to produce at the level of output where resources are fully emplo yed. Inflationary gap Occurs when resources are already fully employed, so that any increase in demand will only ser ve to increase prices. Deflationary gap Occurs when there is unemployment of resources, so that any change in demand will affect output. Prices are fairly constant, but actual national income is below full employment national income. Stagflation A combination of high unemployment and high inflation.

Economic growth can be measured by increases in the real gross national product (GNP) per head of the population Actual economic growth is the annual % increase in national output, which typically fluctuates with the tr ade cycle Factors Growth in potential Growth in demand New investment Technological output (capacity) Natural resources progress Labour Terms of These should move in step, but they will depend on: Capital international trade Advantages of growth Disadvantages of growth Higher income per head High levels of consumption Use of natural resources Better standard of living Creation of pollution Welfare provision Structural unemployment Needs higher levels of saving to be able to invest more cut in consumption Page 23 3: The macroeconomic environment

Government policies The business National income Inflation and Fiscal and The balance of and objectives cycle and economic growth unemployment monetary policy payments Inflation is the name given to an increase in pr ice levels. Causes Why is it a problem? Demand pull factors Redistribution of income and wealth Cost push factors Balance of payments effects Import cost factors Uncertainty of the value of money Expectations create it Price uncertainty Increase in the money supply Resource cost of changing prices Harmful to growth and investment Goods and services are grouped into a single price index in order to measure how the real value of money is changing. Based upon a chosen basket of items, the resulting consumer price index can be used for various purposes. RPI RPIX (excluding mortgage payments) CPI RPIY (excluding sales tax as well)

The rate of unemployment can be calculated as: Number of unemployed × 100% Government options Total workforce Spend money directly on jobs Encouraging private sector growth Consequences Encouraging training Offering grant assistance Loss of output Encouraging labour mobility Loss of human capital Restricting trade union negotiating strength Inequalities in income distribution Abolishing minimum wage regulations Social costs Increased burden of welfare payments Real wage unemployment Categories Frictional * – 'matching' period Seasonal * – yearly patterns Structural – changed industry conditions Technological – skills, redundancy Cyclical – following the trade cycle * short-term only Page 25 3: The macroeconomic environment

Government policies The business National income Inflation and Fiscal and The balance of and objectives cycle and economic growth unemployment monetary policy payments Fiscal policy aims to manage aggregate demand in the economy. (Aggregate demand is the total demand for goods and services in the economy.) Exercised through A Expenditure planning B Revenue raising (especially taxation) C Borrowing when A e xceeds B ('PSNCR' in the UK) Options x1 Increase expenditure and reduce taxes = stimulated demand, higher PSNCR 2 Reduce expenditure and increase taxes = reduced demand, reduced PSNCR 3 Increase expenditure and finance with higher taxes 4 Reduce expenditure and use these savings to reduce taxes. Direct or indirect Revenue raiser Redistribute income TAXATION Aims for: Discourages certain and wealth Flexibility activities Protection from Efficiency To cover social costs foreign competition Non-distorting effects of some products Stabilising effect

Monetary policy uses money supply, interest rates, exchange rates or credit controls to influence agg regate demand and control inflation (reducing economic uncer tainty, stimulating investment and output). Money supply Interest rates Exchange rates Credit controls Increase in money 'The price of money' Affects price of a Restrictions on supply will raise country's exports bank lending to prices and incomes Assumes a reduce demand relationship between Depends upon interest rates and domestic rate of expenditure inflation and interest rates Effective and rapid mechanism Page 27 3: The macroeconomic environment

Government policies The business National income Inflation and Fiscal and The balance of and objectives cycle and economic growth unemployment monetary policy payments The UK balance of payments consists of the following elements C A Trade in goods ('balance of trade') U C Trade in services RC RO Income from overseas investment/employment E U Transfers (payments/receipts to/from overseas bodies such as the EU) N N Capital amount, eg public sector capital flows; loans T T Financial account, eg investment in overseas facilities The deficit or surplus on the current account is often ref erred to as the 'balance of payments', even though it is not the full picture. DEFICIT SURPLUS Rectify via: Importing more than it is exporting Exporting more than importing Devaluing the currency Restrict imports, eg via tariffs Higher borrowings from abroad Invest abroad Selling assets, eg shares Add to official reserves Domestic deflation to reduce demand

4: Microeconomic factors Topic List In this chapter we look at how the price of a product and the amount of it demanded and supplied are deter mined The market through the interaction of demand and supply. This is Demand another chapter on fundamentals that must be Elasticity of demand understood properly. Supply Also pay attention to the factors other than price that Elasticity of supply affect demand and supply, and the difference between The price mechanism movements along a curve, as opposed to a shift in the Maximum and minimum prices curve. These are fruitful sources of exam questions.

The market Demand Elasticity of Supply Elasticity of The price Maximum and demand supply mechanism minimum prices A market Consumers are rational Potential buyers and potential sellers come together They prefer more to less. for the purpose of exchange. They will substitute one good for another if the In economics, sellers are referred to as firms. Buyers price is right. of consumer goods and services are known as They attempt to maximise total utility from a households. limited income. Marginal utility from a good diminishes as Utility consumption of it increases. Quantities purchased will be adjusted until is the pleasure or benefit or satisfaction derived from their marginal utilities are equal. If this is not the consumption of a good. Marginal utility is the so, it means that the consumer w ould actually extra utility derived from the consumption of one prefer to consume more of one good and less additional unit. of another.

The market Demand Elasticity of Supply Elasticity of The price Maximum and demand supply mechanism minimum prices The demand curve Relates quantity demanded Substitutes to price payable $ are goods that are alternatives (eg tea and coffee). A rise in the price of a good is likely to produce an Slopes down because increase in demand for its substitutes. D marginal utility declines as Complements consumption increases are goods that are bought and used together (eg tea Q and milk). A rise in the price of a good is likely to produce a fall in demand for its complement. Demand is influenced by If demand for a good rises when household Price of the good income rises, it is a normal good (eg holidays). Price of other goods (substitution effect) If demand falls, it is an inferior good (eg coach Income (income effect) travel, which could be substituted for rail or air Taste and fashion travel). Expectation of price changes 4: Microeconomic factors Page 31

The market Demand Elasticity of Supply Elasticity of The price Maximum and demand supply mechanism minimum prices A movement along the demand curve shows how demand responds to a change in price and nothing else! Any change in the other factors that affect demand cause a shift in the position of the demand cur ve. A leftward shift may be caused by A rightward shift may be caused by $ A fall in household income (including 0 Q A rise in household income an increase in direct taxes) (including a reduction in direct A fall in the price of substitutes Original taxes) A rise in the price of complements demand curve A rise in the price of substitutes A change in taste away from the A fall in the price of complements good A change in taste towards the good An expected fall in price An expected rise in price An expectation of a fall in price will lead consumers to put off their purchases in the hope of benefiting from the lo wer price later. An expected price rise will lead consumers to buy early and stockpile in order to avoid paying a higher price later.

The market Demand Elasticity of Supply Elasticity of The price Maximum and demand supply mechanism minimum prices Price elasticity of demand (PED) A measure of the change in demand for a good in response to a change in its price. When demand is elastic a small change in price produces a large change in demand. When the demand is inelastic, a large change in price produces only a small change in demand. PED = percentage change in quantity demanded Price and quantity may be values at a point percentage change in price or averages over an arc. Price PED > 1 means that demand is elastic. Price PED < 1 means that demand is inelastic. An increase in price from PA to PB PB X An increase in price from PA to PB leads to a rise in total expenditure: PA leads to a fall in total expenditure: Area X is greater Y Area Y is greater PB X than area Y. than area X. D PA YD Quantity Quantity Notice that elasticity varies along a straight line demand curve! Page 33 4: Microeconomic factors

The market Demand Elasticity of Supply Elasticity of The price Maximum and demand supply mechanism minimum prices Price PED = 0 Price PED = ∞ Demand is perfectly inelastic and remains constant at any price. Demand is unlimited at the current price and zero at a D D higher price. Quantity Quantity When PED = 1, demand responds proportionally to any change in price and total expenditure is constant, whatever the price. This is known as unit elasticity. PED is affected by Availability of substitutes Time horizon Luxury vs necessity Percentage of income The most important influence. Easy If expenditure on a availability of substitutes makes demand Elasticity is low in the Demand for goods which are short term. Over the necessary for everyday life tends to good only more elastic: price rises lead to longer term provision of be relatively inelastic while demand constitutes a small substitution. substitutes and for luxury goods is elastic. awareness of them proportion of a The definition of the market can also increases. Goods which are habit-forming tend consumers' income, affect PED (eg demand for a particular to be inelastic (eg cigarettes; alcohol) brand of bread will be more elastic than demand for it is likely to be inelastic. demand for bread overall).

Income elasticity of demand (IED) Cross elasticity of demand (CED) is a measure of the change in demand f or a good in is a measure of the change in demand f or a good in response to a change household income. Demand response to a change in the pr ice of another good. for normal goods increases as household income rises. If demand for a good falls when household CED % change in quantity of good A demanded income rises, the good is an inferior good. % change in price of good B = IED = % change in quantity demanded If CED is positive, the goods are substitutes (eg a % change in household income fall in the price of B will cause a fall in demand for A). Demand for a good is income elastic if its IED > 1 If CED is negative, the goods are complements (eg a and income inelastic if IED < 1. Inferior goods have fall in the price of B will cause a r ise in demand for A). a negative income elasticity of demand. A change in household income, or in the price of another good, shifts the demand curve to the left or r ight. Page 35 4: Microeconomic factors

The market Demand Elasticity of Supply Elasticity of The price Maximum and demand supply mechanism minimum prices The supply curve Factors influencing supply $ A shift of the supply cur ve to the $ S S1 S right could be caused by any of the factors below. Q Shows the quantity of a good which Expectation of a future fall in Q suppliers would want to produce at a price, to obtain a better pr ice given price. now As with demand, a shift in pr ice will cause A fall in the price of a substitute in supply a movement along the supply curve, but a change in the other factors will cause a A rise in the price of a good in joint supply shift in the supply curve. Technological improvements Fall in the cost of factors of production Introduction of a subsidy The opposite effects will move the curve to the left. Remember: a firm's supply curve is its marginal cost curve (above its average variable costs in the short term).

The market Demand Elasticity of Supply Elasticity of The price Maximum and demand supply mechanism minimum prices Price elasticity of supply The elasticity of supply of a good indicates the responsiveness of supply to the change in price. It is a measure of firms' ability to adjust the quantity of goods the y supply. Elasticity of supply = % change in quantity supplied % change in price Perfectly inelastic supply Unit elastic supply Perfectly elastic supply Price s Price (Supply curve passes s Price ($) ($) ($) through origin) s s s1 0 s s s1 0 Page 37 Quantity supplied 0 Quantity supplied Quantity supplied 4: Microeconomic factors

The market Demand Elasticity of Supply Elasticity of The price Maximum and demand supply mechanism minimum prices

Factors affecting elasticity of supply Existence of inventories of all kinds of goods and their per ishability Ease of adjusting labour inputs up or do wn; availability of labour Spare capacity Availability of raw materials and components Barriers to entry make supply inelastic Time scale Elasticities vary with time During the market period only existing inventories and levels of output are available. Supply is very inelastic. Over the short run, quantities can be adjusted by working overtime or short time. Supply is quite elastic. Over the long run plant can be built or shut down. Supply is very elastic. Page 39 4: Microeconomic factors

The market Demand Elasticity of Supply Elasticity of The price Maximum and demand supply mechanism minimum prices The price mechanism Functions of the price mechanism Price S Market prices and their movements act as signals to producers, enabling them to produce what is most needed. P When a firm operates efficiently, responding to market signals and controlling its costs, it receives a reward in the form of profit. D The actions of firms in responding to the profit oppor tunities allocate resources to their best use. Q Quantity The price mechanism brings supply and Price S demand together at the equilibrium price, P. Consumer surplus: some This is also the market clearing price since would have paid more than D quantity Q is both supplied so demanded and the market price. Quantity there is neither surplus nor shortage. At prices above P, there will be excess supply. Producer surplus: some would have sold at less than At prices below P, there will be excess the market price. demand.

The market Demand Elasticity of Supply Elasticity of The price Maximum and demand supply mechanism minimum prices Some governments attempt to overcome market forces by regulating prices. A maximum (ceiling) price might be used to combat inflation or to mak e basic goods affordable. A minimum (flow) price might be used to secure the incomes of f avoured producers, such as farmers. Price S A maximum price set below the equilibrium price P produces a shortage quantity AB, since at price M, Z quantity B is demanded, but only quantity A is P supplied. However, quantity A could be fully utilised b y M purchasers who are prepared to pay price Z, so a black market may be created to divert production to D these consumers at this price. Quantity AQB Page 41 4: Microeconomic factors

The market Demand Elasticity of Supply Elasticity of The price Maximum and demand supply mechanism minimum prices Price S A minimum price set above the equilibrium price P M produces a surplus quantity AB, since at price M, quantity A is demanded, but quantity B is supplied. P This leads to excess supply, as with the EU Common Agricultural Policy. Governments may introduce production quotas, to limit production. Alternatively, they may purchase the excess, putting D it into store, or dumping it overseas, or producers A Q B Quantity might sell at less than the official minim um price. Minimum wage Minimum wages set by law are intended to ensure that the lo west paid workers are not exploited. If a minimum wage is set above the equilibrium price, it is likely to cause unemployment. However, where there is effectively a single purchaser (monopsonist) of labour a minim um wage may increase employment. When such employers hold wages down they generally have vacancies: a minimum wage makes it easier for them to recruit.

5: Business organisation, structure and strategy Topic List This chapter identifies the various influences upon organisational structure: hierarchy, strategy, Informal organisation departmentation and centralisation. Organisational structure Levels of strategy in the organisation Centralisation and decentralisation

Informal Organisational Levels of strategy Centralisation and organisation structure in the organisation decentralisation The informal organisation exists alongside the formal one. It is loosely structured, flexible and spontaneous, with constantly fluctuating membership and relationships. Aspects of the informal organisation + Satisfying to members – Can distract energy/attention from task objectives Relationships, social networks and cliques + Can cut through red-tape, inefficiency Informal ways of doing things, customs etc. – Can 'cut corners' → safety, quality risks Informal channels of communication + Can bypass lengthy channels, communication via networks blockages The 'grapevine' + Wider sharing of information/ideas for problem- solving The 'grapevine' or 'bush telegraph' is the informal information network. It is typically very fast and – Icnoamcmcuurnaiccyatmioany undermine management inaccurate, circulating gossip and rumour. It exists Managers can harness the power of the informal even where the formal communication system of organisation by: gathering information from it; using it the organisation is adequate. to disseminate information; encouraging positive goals for networking (eg problem-solving or innovation).

Informal Organisational Levels of strategy Centralisation and organisation structure in the organisation decentralisation Mintzberg believes that all organisations can be analysed into fiv e components. Strategic Apex Methods of departmentation Functional Technostructure Middle Support Geographic Line Staff Product/brand Customer Operating Core Page 45 5: Business organisation, structure and strategy