Certificate Paper C4 FUNDAMENTALS OF BUSINESS ECONOMICS For assessments in 2010 and 2011 Study Text In this February 2010 edition • A user-friendly format for easy navigation • Regular fast forward summaries emphasising the key points in each chapter • Assessment focus points showing you what the assessor will want you to • Questions and quick quizzes to test your understanding • Question bank containing objective test questions with answers • A full index BPP Learning Media's i-Pass product also supports this paper FOR ASSESSMENTS IN 2010 and 2011 First edition June 2006 Third edition February 2010 A note about copyright Dear Customer ISBN 9780 7517 8071 (previous edition 9780 7517 5282 3) e-ISBN 9780 7517 8399 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Your market-leading BPP books, course materials and e-learning materials not write and update themselves People write them: on their own behalf or as employees of an organisation that invests in this activity Copyright law protects their livelihoods It does so by creating rights over the use of the content Published by Breach of copyright is a form of theft – as well as being a criminal offence in some jurisdictions, it is potentially a serious breach of professional ethics BPP Learning Media Ltd BPP House, Aldine Place London W12 8AA With current technology, things might seem a bit hazy but, basically, without the express permission of BPP Learning Media: www.bpp.com/learningmedia Printed in the United Kingdom Your learning materials, published by BPP Learning Media Ltd, are printed on paper sourced from sustainable, managed forests All our rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of BPP Learning Media Ltd We are grateful to the Chartered Institute of Management Accountants for permission to reproduce past examination questions The suggested solutions in the exam answer bank have been prepared by BPP Learning Media Ltd © BPP Learning Media Ltd 2010 ii What does the little © mean and why does it matter? • Photocopying our materials is a breach of copyright • Scanning, ripcasting or conversion of our digital materials into different file formats, uploading them to facebook or emailing them to your friends is a breach of copyright You can, of course, sell your books, in the form in which you have bought them – once you have finished with them (Is this fair to your fellow students? We update for a reason.) But the e-products are sold on a single user licence basis: we not supply ‘unlock’ codes to people who have bought them second-hand And what about outside the UK? BPP Learning Media strives to make our materials available at prices students can afford by local printing arrangements, pricing policies and partnerships which are clearly listed on our website A tiny minority ignore this and indulge in criminal activity by illegally photocopying our material or supporting organisations that If they act illegally and unethically in one area, can you really trust them? Contents Page Introduction The BPP Learning Media Study Text – The BPP Learning Media Effective Study Package – Help yourself study for your CIMA assessment – Learning outcomes and syllabus – The assessment – Tackling multiple choice questions – Tackling objective test questions – International terminology Part A The goals and decisions of organisations The economic problem .3 Economic systems and organisations Theory of costs 39 Part B The market system and the competitive process 7a 7b Price determination – The price mechanism .65 Elasticities of demand and supply 93 Market failures, externalities and intervention 119 Market structures – Perfect competition and monopoly 135 Market structures – Monopolistic competition, oligopoly and duopoly 163 Public policy and competition .181 Part C The financial system 10 Finance and Financial Intermediaries 197 Credit and banking 225 Part D The macroeconomic context of business 11 12 13 14 15 16 National income accounting 251 Macroeconomic theory 273 Inflation and unemployment 301 Macroeconomic policy 317 International trade – The foreign exchange market 361 International trade – The international economy .389 Appendix – Present value tables .419 Question bank 423 Answer bank 443 Index .455 Review form and free prize draw iii The BPP Learning Media Study Text Aims of this Study Text To provide you with the knowledge and understanding, skills and application techniques that you need if you are to be successful in your exams This Study Text has been written around the Fundamentals of Business Economics syllabus • It is comprehensive It covers the syllabus content No more, no less • It is written at the right level Each chapter is written with CIMA's precise learning outcomes in mind • It is targeted to the assessment We have taken account of guidance CIMA has given and the assessment methodology To allow you to study in the way that best suits your learning style and the time you have available, by following your personal Study Plan (see page (vii)) You may be studying at home on your own until the date of the exam, or you may be attending a full-time course You may like to (and have time to) read every word, or you may prefer to (or only have time to) skim-read and devote the remainder of your time to question practice Wherever you fall in the spectrum, you will find the BPP Learning Media Study Text meets your needs in designing and following your personal Study Plan To tie in with the other components of the BPP Learning Media Effective Study Package to ensure you have the best possible chance of passing the exam (see page (v)) Learning to Learn Accountancy BPP Learning Media's ground-breaking Learning to Learn Accountancy book is designed to be used both at the outset of your CIMA studies and throughout the process of learning accountancy It challenges you to consider how you study and gives you helpful hints about how to approach the various types of paper which you will encounter It can help you focus your studies on the subject and exam, enabling you to acquire knowledge, practise and revise efficiently and effectively iv Introduction The BPP Learning Media Effective Study Package Recommended period of use The BPP Learning Media Effective Study Package From the outset and throughout Learning to Learn Accountancy Three to twelve months before the assessment Study Text Throughout i-Pass Read this invaluable book as you begin your studies and refer to it as you work through the various elements of the BPP Learning Media Effective Study Package It will help you to acquire knowledge, practise and revise, efficiently and effectively Use the Study Text to acquire knowledge, understanding, skills and the ability to apply techniques i-Pass, our computer-based testing package, provides objective test questions in a variety of formats and is ideal for self-assessment One to six months before the assessment Practice & Revision Kit From three months before the assessment until the last minute Passcards Try the numerous assessment-format questions, for which there are full worked solutions where relevant prepared by BPP Learning Media's own authors Then attempt the two mock assessments Work through these short, memorable notes which are focused on what is most likely to come up in the assessment you will be sitting Introduction v Help yourself study for your CIMA assessment Assessments for professional bodies such as CIMA are very different from those you have taken at college or university You will be under greater time pressure before the assessment – as you may be combining your study with work There are many different ways of learning and so the BPP Study Text offers you a number of different tools to help you through Here are some hints and tips: they are not plucked out of the air, but based on research and experience (You don't need to know that long-term memory is in the same part of the brain as emotions and feelings - but it's a fact anyway.) The right approach The right attitude Believe in yourself Yes, there is a lot to learn Yes, it is a challenge But thousands have succeeded before and you can too Remember why you're doing it Studying might seem a grind at times, but you are doing it for a reason: to advance your career The right focus Read through the Syllabus and learning outcomes The right method The whole picture In your own words Give yourself cues to jog your memory vi Introduction These tell you what you are expected to know and are supplemented by Assessment focus points in the text You need to grasp the detail - but keeping in mind how everything fits into the whole picture will help you understand better • The Introduction of each chapter puts the material in context • The Syllabus content, Learning outcomes and Assessment focus points show you what you need to grasp To absorb the information (and to practise your written communication skills), it helps to put it into your own words • Take notes • Answer the questions in each chapter You will practise your written communication skills, which become increasingly important as you progress through your CIMA assessments • Draw mindmaps • Try 'teaching' a subject to a colleague or friend The BPP Learning Media Study Text uses bold to highlight key points • Try colour coding with a highlighter pen • Write key points on cards The right review Review, review, review It is a fact that regularly reviewing a topic in summary form can fix it in your memory Because review is so important, the BPP Learning Media Study Text helps you to so in many ways • Chapter roundups summarise the 'fast forward' key points in each chapter Use them to recap each study session • The Quick quiz is another review technique you can use to ensure that you have grasped the essentials • Go through the Examples in each chapter a second or third time Developing your personal Study Plan BPP Learning Media's Learning to Learn Accountancy book emphasises the need to prepare (and use) a study plan Planning and sticking to the plan are key elements of learning success There are four steps you should work through Step How you learn? First you need to be aware of your style of learning The BPP Learning Media Learning to Learn Accountancy book commits a chapter to this self-discovery What types of intelligence you display when learning? You might be advised to brush up on certain study skills before launching into this Study Text BPP Learning Media's Learning to Learn Accountancy book helps you to identify what intelligences you show more strongly and then details how you can tailor your study process to your preferences It also includes handy hints on how to develop intelligences you exhibit less strongly, but which might be needed as you study accountancy Are you a theorist or are you more practical? If you would rather get to grips with a theory before trying to apply it in practice, you should follow the study sequence on page (viii) If the reverse is true (you like to know why you are learning theory before you so), you might be advised to flick through Study Text chapters and look at examples, case studies and questions (Steps 8, and 10 in the suggested study sequence) before reading through the detailed theory Step How much time you have? Work out the time you have available per week, given the following • • • • The standard you have set yourself The time you need to set aside later for work on the Practice & Revision Kit and Passcards The other exam(s) you are sitting Very importantly, practical matters such as work, travel, exercise, sleep and social life Hours Note your time available in box A A Introduction vii Step Allocate your time • Take the time you have available per week for this Study Text shown in box A, multiply it by the number of weeks available and insert the result in box B B • Divide the figure in box B by the number of chapters in this text and insert the result in box C C Remember that this is only a rough guide Some of the chapters in this book are longer and more complicated than others, and you will find some subjects easier to understand than others Step Implement Set about studying each chapter in the time shown in box C, following the key study steps in the order suggested by your particular learning style This is your personal Study Plan You should try and combine it with the study sequence outlined below You may want to modify the sequence a little (as has been suggested above) to adapt it to your personal style BPP Learning Media's Learning to Learn Accountancy gives further guidance on developing a study plan, and deciding where and when to study Suggested study sequence It is likely that the best way to approach this Study Text is to tackle the chapters in the order in which you find them Taking into account your individual learning style, you could follow this sequence Key study steps Step Topic list This gives you the big picture in terms of the context of the chapter, the learning outcomes the chapter covers, and the content you will read In other words, it sets your objectives for study Step Fast forward Fast forward boxes give you a quick summary of the content of each of the main chapter sections They are listed together in the roundup at the end of each chapter to provide you with an overview of the contents of the whole chapter Step Explanations Proceed methodically through the chapter, reading each section thoroughly and making sure you understand Step Note taking Introduction Each numbered topic is a numbered section in the chapter Step Introduction Step Key terms and Assessment focus points viii Activity • Key terms can often earn you easy marks (and they are highlighted in the index at the back of the text) • Assessment focus points state how we think the examiner intends to examine certain topics Take brief notes, if you wish Avoid the temptation to copy out too much Remember that being able to put something into your own words is a sign of being able to understand it If you find you cannot explain something you have read, read it again before you make the notes Key study steps Activity Step Examples Follow each through to its solution very carefully Step Questions Make a very good attempt at each one Step Answers Step 10 Chapter roundup Step 11 Quick quiz Step 12 Question(s) in the question bank Check yours against ours, and make sure you understand any discrepancies Work through it carefully, to make sure you have grasped the significance of all the fast forward points When you are happy that you have covered the chapter, use the Quick quiz to check how much you have remembered of the topics covered and to practise questions in a variety of formats Either at this point, or later when you are thinking about revising, make a full attempt at the Question(s) suggested at the very end of the chapter You can find these at the end of the Study Text, along with the Answers so you can see how you did Short of time: Skim study technique? You may find you simply not have the time available to follow all the key study steps for each chapter, however you adapt them for your particular learning style If this is the case, follow the skim study technique below • Study the chapters in the order you find them in the Study Text • For each chapter: – Follow the key study steps 1-2 – Skim-read through step 4, looking out for the points highlighted in the fast forward boxes (step 4) – Jump to step 10 – Go back to step – Follow through step – Prepare outline answers to questions (steps 8/9) – Try the Quick quiz (step 11), following up any items you can't answer – Do a plan for the Question (step 12), comparing it against our answers – You should probably still follow step (note-taking), although you may decide simply to rely on the BPP Leaning Media Passcards for this Introduction ix 66 C Government expenditure acts as an injection into the economy, so decreasing government expenditure will help reduce aggregate demand in the economy Increasing taxation (fiscal policy) and increasing interest rates (monetary policy) will also help reduce aggregate demand 67 B Government expenditure is greater than government receipts from taxation, so the country has a budget deficit Injections into the economy (I + G + X) = $965m Withdrawals from the economy (S + T + M) = $940m Because injections are greater than withdrawals, economic activity will be increasing 68 D If Country A has 8% inflation and Country B has 12% inflation, Country A's currency will tend to strengthen against Country B's A large deficit on the balance of trade can persist for many years if there are adequate inward capital flows A fixed exchange rate makes foreign currency reserves essential 69 B The depreciation in Euravia's currency means that imports into Euravia will become more expensive, leading to imported inflation However, as a result of imported goods becoming more expensive demand for imports is likely to decrease rather than to increase In effect, the cost of travelling overseas is like an import, and so it also becomes more expensive By contrast, exports from Euravia are likely to become cheaper, so we would expect demand for exports from Euravia to increase 70 C A conclusion from the law of comparative advantage is that if free trade is allowed, countries will specialise in the production of goods and services in which they have a comparative advantage over other countries As a result, the world's economic resources will be put to their most productive uses, and total output will be maximised It does not follow that each country of the world will maximise its own national income or economic wealth (statement A), because the distribution of wealth between the individual countries in the world could be uneven, with some countries earning much more than others from their output and their exports 71 A A production possibility boundary shows the possible combinations of two goods that a country can produce with its resources The slope of the line for each country indicates the opportunity cost of producing corn in terms of lost production of clothing, and the opportunity cost of producing clothing in terms of lost production of corn In Burra, the opportunity cost of producing corn is a lot less than it is in Mula (If it were the same in both countries, the slopes of the production possibility boundaries would be parallel to each other.) This means that Burra has a comparative advantage in the production of corn By the same analysis, we can conclude that Mula has a comparative advantage in the production of clothing Statement B cannot be proved or disproved Absolute advantage cannot be ascertained from the diagram Burra might be a country with many more resources than Mula, and absolute advantage refers to the production capabilities of each country per unit of resource Statement C cannot be proved or disproved either, because although Burra can produce more output in total than Mula, its national income per head of population depends on population size, for which we not have any information 452 Answer bank 72 C In the short run the depreciation will increase the deficit It only reduces it in the long run A is true by definition, because of B; D is true because a risk in the exchange rate will reduce the price of imports 73 D The balance on the current account is made up of: Trade in goods (net position of exports minus imports) Trade in services (net position of exports minus imports) Income from capital investments overseas Transfers to overseas bodies Total $m –325 260 125 –80 –20 Capital flows are recorded in the capital account, and investment flows in the financial account 74 B Reducing the country's exchange rate will make its exports cheaper in other countries (increasing demand for its exports) and will make imports into it more expensive (reducing demand for exports) An expansionary fiscal policy and a reduction in interest rates will both increase aggregate demand in the country, and in doing so are likely to increase the demand for imports If a foreign company invests in the country, this will be recorded in the financial account, not the current account 75 A The WTO's main functions are to promote free trade, resolve trade disputes and provide a framework of rules for international trade to operate within However, it has no financing or banking functions Answer bank 453 454 Answer bank Index and key terms 455 456 Note: Key Terms and their references are given in bold Absolute advantage, 403 Accelerator Principle, 290 Accounting profits, 44 Ad valorem tax, 324 Advantages of floating exchange rates, 372 Agency theory, 13 Aggregate demand, 274 and National Income, 274 Aggregate supply, 274 Aggregation (in Financial intermediation), 209 Aims of banks, 231 Allocative efficiency, 146, 183 Allocative inefficiency, 157, 186 Alternative Investment Market (AIM), 204, 212 Arbitrage, 369 Arc elasticity of demand, 94 Automatic stabilisers, 330 Average costs, 41 Average propensity to consume, 278 Average revenue, 136 B ackwards integration, 413 Balance of payments, 302, 390 and the capital account, 391 and the current account, 391 and the exchange rate, 370 and the financial account, 391 Balance of trade, 392 Balanced budget multiplier, 329 Balancing item, 391 Bank multiplier, 228 Bank of England, 234, 236 Bank overdraft, 202 Banks, 215, 226 Barriers to entry, 150, 156 Base currency, 364 Basel II agreement, 231 Baumol's sales maximisation model, 14 Benchmark, 235 Big Bang, 184 Bills of exchange, 202 Black marketeers, 86 Bonds, 203 Borrowing, 203 Breakeven analysis, 140 Broad money, 233 Budget, 318 Budget deficit, 319, 320 Budget surplus, 319, 320 Buffer stocks, 114 Building societies, 216 Business confidence, 336 Business cycles, 295 Business expansion, 57 C adbury report, 21 Capital, Capital account, 390 Capital adequacy, 230 Capital markets, 209, 214 Capital-output ratio, 291 Cartels, 167 Cash reserve ratio, 346 Causes of unemployment, 307 Central bank, 234, 235 Centrally planned economy, Certificates of Deposit, 211 Ceteris paribus, 71 Charities, 10 Circular flow of income, 257 Clearing banks, 226 Clearing system, 226 Cobweb effect, 111 Coincident indicator, 345 Collusion, 167 Collusive oligopoly, 170 Command economy, 4, 120 Commercial banks, 226 Commercial Paper, 202, 203 Common Agricultural Policy (CAP), 114 Common market, 409 Comparative advantage, 403, 404 Competition Commission, 191 Competition Policy, 190 Complements, 71 Compromise, 19 Compulsory competitive tendering, 184 Conditions of demand, 74 Conglomerate diversification, 56 Constant returns to scale, 50 Consumer Prices Index (CPI), 199, 303 Consumer surplus, 83 Consumer watchdog bodies, 189 Consumption, 276 Consumption function, 278 Contestable markets, 172 Index 457 Corporate governance, 15 Cost accounting, 43 Cost-plus pricing, 77 Cost of capital, 28 Commercial Paper, 202, 203 Cost push inflation, 304 Credit agreements, 202 Credit controls, 348 Credit creation, 228 Credit multiplier, 228, 229 Credit risk, 381 Cross elasticity of demand, 106 Crowding out, 281, 329 Cum div, 29 Currency blocs, 374 Currency of invoice, 379 Currency risk, 366 Current account, 390, 392 Current account deficit, 395 Customs duties, 406 Customs union, 409 Cyclical or demand-deficient unemployment, 308 D ead weight loss, 151 Deadweight burden, 154 Debentures, 203 Deficit on current account, 393 Deficit units, 200 Definition of money, 233 Deflation, 395 Deflationary gap, 294, 310 Demand, 68, 94 Demand curve, 69 Demand deficient unemployment, 308 Demand management, 274, 275, 310 Demand pull inflation, 304 Demand schedule, 68 Demerit good, 125 Demultiplier, 286 Denial/withdrawal, 19 Deregulation, 183 Derivative financial instruments, 214 Derived demand, 66 Dimensional economies of scale, 52 Diminishing marginal utility, 67 Diminishing returns, 45 Direct quote, 363 Direct tax, 323 Disadvantages of floating exchange rates, 373 Discounting, 30 458 Index Diseconomies of scale, 50, 51, 54 Disincentive effect, 326 Distribution of income, 73 Diversification, 413 Dividend valuation model, 28 Documentary credits, 382 Domestic deflation, 398 Dominance, 19 Dumping, 88, 407 Duopoly, 171 Earnings per share (EPS), 26, 27 Earnings yield, 28 Economic exposure, 378 Economic growth, 318 Economic indicator, 345 Economic policy objectives, 318 Economic profits, 44 Economic system, Economic wealth, 252 Economics, Economies of scale, 50, 52 Elasticity, 94 Elasticity of demand, 94 for imports, 395 Elasticity of supply, 107 factors affecting, 108 Embargo on imports, 407 Endowment assurance, 220 Enterprise, Enterprise Act (2002), 191 Entrepreneurship, 50 Equilibrium in the balance of payments, 393 Equilibrium price, 82 Equity, 203 Eurobonds, 203, 214 Eurocurrency markets, 412 European Central Bank (ECB), 377 European Economic Area, 411 European Free Trade Association (EFTA), 411 European Union, 405, 409 Ex div, 29 Excess capacity theorem, 166 Exchange controls, 406 Exchange rate, 344, 362 Exchange Rate Mechanism (ERM), 373 Exchange rate risk, 379 Exchange rate stability, 375 Exchange rate systems, 374 Expectational inflation, 305 Expectations augmented Phillips curve, 312, 350 Expenditure approach to measuring national income, 261 Expenditure reducing, 395 Expenditure switching, 395 Explicit costs, 44 Export credit guarantees, 407 Export credit insurance, 383 Export multiplier, 285 Export subsidies, 407 Exports, 259 External balance, 318 External debt, 399 External economies of scale, 53 Externalities, 121, 123 F actor incomes, 254 Factors of production, 5, 40 Fiduciary responsibility, 16 Financial account, 390 Financial instruments, 200 Financial intermediaries, 200, 201, 208, 215 Financial intermediation, 198, 201 Firms, 12, 66 Fiscal drag, 330 Fiscal policy, 318, 328 Fiscal year, 206 Fisher equation, 305 Fixed costs, 40, 41, 46 Fixed exchange rates, 374 Floating exchange rates, 371 Floor price, 87 Flow of funds, 200 Footsie (FTSE 100) Index, 212 Foreign currency, 393 Foreign exchange markets, 365 Foreign exchange or currency risk, 377 Forward exchange contract, 379 Forward integration, 413 Forward rate, 364 Fractional reserve system, 230 Free cash flow to equity (FCFE), 31 Free cash flow to the firm (FCFF), 31 Free cash flow valuation, 30 Free floating exchange rates, 371 Free riders, 122, 124 Free trade area, 409 Frictional unemployment, 307 Full employment, 310, 318 Functions and qualities of money, 198 G8 Group, 409 Game theory, 170, 171 GDP deflator, 267, 270 GDP price deflator, 199 Giffen goods, 102 Gini coefficient, 174 Globalisation, 411, 412 of capital markets, 214 Gold, 374 Government bond, 244 Government intervention in foreign exchange markets, 373 Government payments, 205 Government receipts, 205 Government spending, 259 multiplier, 285 Greenbury report, 22 Gross domestic product (GDP), 254, 255 Gross national product (GNP), 255 Gross value added, 256 Hampel report, 22 Herfindahl index, 174 Higgs report, 22 Hog cycle, 110 Horizontal integration, 56, 413 Households, 66 Hyperinflation, 302 Imperfections in a market, 121 Implicit costs, 44 Import cost-push inflation, 305 Import quotas, 395, 407 Import restrictions, 407 Imports, 258 Incidence of tax, 324 Income approach to measuring national income, 260, 263 Income effect, 102 Income elasticity of demand, 104 Incomes policy, 341 Indirect quote, 363 Indirect taxation, 101, 125, 324, 327 Indirect taxes, 127 Industry concentration, 173 Inelastic demand, 97 Infant industries, 408 Inferior goods, 72, 105 Index 459 Inflation, 267, 302, 310, 318, 337, 348 and the exchange rate, 368 and the value of money, 199 Inflationary expectations, 350 Inflationary gap, 293, 310 Injections, 258 into the circular flow of income, 258 Institutional investors, 216 Insurance, 217 Insurance broker, 219 Insurance contract, 217 Insurance policy, 217 Insurance underwriter, 219 Integration/collaboration, 19 Interest, Interest rate parity, 369 Interest rates, 237, 342, 346, 349 and the balance of payments, 398 and the exchange rate, 369 Internal economies of scale, 53 International Monetary Fund (IMF), 399 International trade, 403 Investment, 259, 280 Investment banks, 226 Investment multiplier, 285 Investment trust, 216 Issued share capital, 203 J curve, 396 J curve effect, 396 Japan, 394 K eynesian demand for money, 333 Kinked oligopoly demand curve, 169 Labour, Laffer curve, 325 Lagged payments, 378 Lagging indicator, 345 Land, Law of diminishing returns, 47 Lead payments, 378 Leading indicator, 345 Less developed countries, 408 Letters of credit, 382 Liberalisation, 183 Limited liability, 11 Liquidity, 231 Liquidity preference, 241, 334, 335 460 Index Loanable funds theory of interest rates, 339 London Inter-Bank Offered Rate, 235 Long run, 40, 109 Long run costs, 49 Long run supply curve, 78 Lorenz curve, 174 M 0, 233 M4, 233 Macroeconomics, Management buy-outs, 216 Management discretion model, 14 Managerial economies, 53 Managerial model of the firm, 14 Managerial objectives, 14 Marginal costs, 41 Marginal efficiency of capital, 283 Marginal propensity to consume (MPC), 277 Marginal propensity to save (MPS), 277, 285 Marginal revenue, 136 Marginal taxation rates, 325 Marginal utility, 67 Market, 66 Market clearing price, 82 Market concentration, 58, 173 Market demand, 73 Market demand curve, 70 Market economy, Market failure, 120, 182, 193 Market period, 109 Market supply curve, 79 Marshall-Lerner conditions, 396 Matching receipts and payments, 378 Maximum prices, 86 Mergers, 56 Merit goods, 124 Mezzanine finance, 203 Microeconomics, Minimum efficient scale, 54 Minimum price legislation, 87 Minimum prices, 87 Minimum wages, 89 Mixed economy, Monetarists, 305, 338 Monetary policy, 318, 342, 345, 348 Monetary theory, 333 Money market, 209, 211 hedges, 380 Money supply, 337 342 Monopolies, 121 Oligopoly, 167 OPEC, 168 Open market operations, 235 Opportunity cost, 7, 44, 404 Options, 214 Ordinary shares, 245 Organisational coalition, 15 Ostentation, goods of, 103 Output approach to measuring national income, 260 Over the counter (OTC) markets, 210 Pollution, 122, 125 policies, 126 Precautionary motive, 333 Price ceiling, 86 Price discrimination, 151 Price earnings (P/E) ratio, 27 Price elasticity of demand, 94 Price elasticity of supply, 107 Price leadership, 170 Price legislation, 125 Price mechanism, 66, 82, 121 Price regulation, 85 Price theory, 66 Primary markets, 110 Primary sector, 12 Principal sources of long-term capital, 203 Principal sources of short-term capital, 202 Private benefit, 122 Private cost, 122 Private costs, 121 Private sector, 11 Privatisation, 184 Producer surplus, 83 Product differentiation, 164, 167 Production possibility curve, Production quotas, 88 Productive inefficiency, 186 Profit, 5, 40, 43 Profit maximisation, 13, 136 Profit maximising position, 138, 139 Profit seeking organisations, 11 Profitability, 231 Progressive tax, 322 Proportional tax, 322 Protectionism, 406 Protectionist measures, 397 Public goods, 124 Public Sector Borrowing Requirement (PSBR), 319 Public sector net cash requirement (PSNCR), 281, 319 Public sector organisations, 11 Purchasing power parity theory, 368 P/E ratio, 27 Qualitative controls, 347 Monopolistic competition, 164 Monopoly, 147 Monopsony/monopsonists, 121 Moral suasion, 347 Multinational enterprises, 411 Multiplier, 284-289 Mutual organisations, 10 NAIRU (Non-accelerating inflational rate of unemployment), 310 Narrow money, 233 National debt, 330 National income, 254, 270 National income accounting, 252 Nationalised industries, 188 Natural monopoly, 148 Natural rate hypothesis, 350 Natural rate of unemployment, 310 Net national product, 254 Net present value, 31, 283 New classical school, 351 New quantity theory of money, 337 Nominal and real rates of interest, 236 Nominal rates of interest, 237 Non-price competition, 164 Non-profit organisations, 10 Normal goods, 72, 105 Normal profit, 40, 43, 142 North American Free Trade Agreement (NAFTA), 411 Objectives of firms, 13 Parallel markets, 212 Pension funds, 216 Perfect competition, 120, 141 Phillips curve, 311 Point elasticity of demand, 94 Qualities of money, 198 Quantitative controls, 346 Quantity theory of money, 305, 333 Index 461 Raising capital, 204 Raising finance, 204 Rationality, 67 Rationing, 86 Raw materials costs, 79 Real rates of interest, 237 Real wage unemployment, 308 Recession, 295 Redistribution of wealth, 125, 302 Reference currency, 364 Regressive tax, 321 Regulation of markets, 182 Re-insurance, 219 Rent, Research and development, 53 Reserve requirements, 346 Retail banks, 226 Retail Prices Index, 303 Retained earnings, 204 Retained profits and other reserves, 203 Return on capital employed (ROCE), 25 Return on investment, 24 Risk, 238 Risk management, 214 ROCE, 25 S ales maximisation model, 14 Satisficing, 14 Savings, 258, 276 Scarce resource, Scarcity, of resources, Seasonal unemployment, 307 Secondary sector, 12 Secular period, 109 Security, 231 Selective indirect tax, 127 Self-regulation, 182 Set-aside, 88 Share price indices, 212 Share prices, 212 Shareholders' interest, 23 Shareholder wealth, 25 Short run, 40, 109 Short run average cost (SRAC) curve, 46 Short run costs, 41 Short run supply curve, 76 Single currency, 375 Single premium bonds, 220 Small firms, 58 462 Index Social benefit, 122 Social cost, 122 Specialisation, 404 Specific tax, 324 Speculation, 368, 384 Speculative motive, 334 Spot rate, 364 Stagflation, 295 Stakeholder conflicts, 19 Stakeholder influence, 18 Stakeholders, 17 Statutory minimum wage, 89 Stock Exchange, 184 Combined Code, 22 Structural unemployment, 307 Subsidies, 125, 130 Substitute goods, 71, 103 Substitution effect, 102 Sunk costs, 44 Supernormal profits, 150 Supply, 75 Supply curve, 76 Supply schedule, 76 Supply side policies, 318 Supply side economic policies, 351, 352 Suppression, 19 Surplus on current account, 394 Surplus units, 200 Swaps, 214 Takeovers, 56 Tariffs, 395, 406 Taxation, 258, 320, 321 Technical efficiency, 143 Technical inefficiency, 157, 186 Technological changes, 336 Technological developments, 79 Technological progress, 155 Technological unemployment, 307 Term currency, 364 Term life, 220 Term structure of interest rates, 241 Terms of trade, 400 Tertiary sector, 12 Time horizon, 103 Total costs, 41 Total revenue, 136 Trade cycles, 275, 295 Transactions motive, 333 Transfer payments, 205, 258 Transformation curve, Translation exposure, 378 Transmission mechanism, 339 Treasury bill, 244 Types of unemployment, 307 Underlying rate of inflation, 303 Unemployment, 306, 307 Unit elasticity of demand, 98 Unit trusts, 216 Universal Life Contract, 220 Utility, 67 Value added method of measuring national income, 264 Variable costs, 40, 41, 46 Velocity of circulation, 305 Venture capital, 203, 216 Vertical integration, 56, 413 Voluntary unemployment, 308 Wage-price spiral, 305 Wages, Whole Life Contract, 220 Williamson's management discretion model, 14 Withdrawals, 258 from the circular flow of income, 258 World Bank, 399 World Trade Organisation, 409 X-Inefficiency, 157 Yield curve, 242 Yield on Commercial paper, 238 Yield on equities (dividend yield), 243 Yield on financial instruments, 237 Yield on Treasury bills, 239 Yields on bonds, 240 Index 463 464 Index Review Form & Free Prize Draw – Paper C4 Fundamentals Of Business Economics (02/10) All original review forms from the entire BPP range, completed with genuine comments, will be entered into one of three draws on 31 July 2010, 31 January 2011 and 31 July 2011 The names on the first four forms picked out on each occasion will be sent a cheque for £50 Name: Address: During the past six months you recall seeing/receiving any of the following? (Tick as many boxes as are relevant) How have you used this Interactive Text? (Tick one box only) Home study (book only) On a course: college Our advertisement in Financial Management With 'correspondence' package Our advertisement in Pass Other Our advertisement in PQ Our brochure with a letter through the post Why did you decide to purchase this Interactive Text? (Tick one box only) Our website www.bpp.com Which (if any) aspects of our advertising you find useful? (Tick as many boxes as are relevant) Have used BPP Texts in the past Recommendation by friend/colleague Recommendation by a lecturer at college Prices and publication dates of new editions Saw information on BPP website Information on Text content Saw advertising Facility to order books off-the-page Other None of the above Which BPP products have you used? Text Success CD Learn Online Kit i-Learn Home Study Package Passcard MCQ cards i-Pass Home Study PLUS Your ratings, comments and suggestions would be appreciated on the following areas Very useful Useful Not useful Good Adequate Poor Introductory section (Key study steps, personal study) Chapter introductions Key terms Quality of explanations Case studies and other examples Assessment focus points Questions and answers in each chapter Fast forwards and chapter roundups Quick quizzes Question Bank Answer Bank Index Icons Overall opinion of this Study Text Excellent Yes No Do you intend to continue using BPP products? On the reverse of this page are noted particular areas of the text about which we would welcome your feedback The BPP author of this edition can be e-mailed at: adrianthomas@bpp.com Please return this form to: Janice Ross, CIMA Certificate Publishing Manager, BPP Professional Education, FREEPOST, London, W12 8BR Review Form & Free Prize Draw (continued) TELL US WHAT YOU THINK Please note any further comments and suggestions/errors below Free Prize Draw Rules Closing date for 31 July 2010 draw is 30 June 2010 Closing date for 31 January 2011 draw is 31 December 2010 Closing date for 31 July 2011 draw is 30 June 2011 Restricted to entries with UK and Eire addresses only BPP employees, their families and business associates are excluded No purchase necessary Entry forms are available upon request from BPP Professional Education No more than one entry per title, per person Draw restricted to persons aged 16 and over Winners will be notified by post and receive their cheques not later than weeks after the relevant draw date The decision of the promoter in all matters is final and binding No correspondence will be entered into ... A1 units of A and none of B B1 units of B and none of A A2 units of A and B2 of B (point P on the curve) A3 units of A and B3 of B (point Q on the curve) (b) The combination of A4 units of A and... Syllabus Paper C4 Fundamentals of Business Economics This is an introduction to business economics and assumes no prior knowledge of the subject It aims to provide students with a knowledge of the fundamental... trust them? Contents Page Introduction The BPP Learning Media Study Text – The BPP Learning Media Effective Study Package – Help yourself study for your CIMA assessment – Learning outcomes and syllabus