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Business Management 061 Topic 1 Tutorial Answer Sample

Section A: Short Answers

1. List and define with examples the five factors of production.

a. Labour: refers to the human resources required to run the economy or business. Example: to

run a restaurant the owner would require Chefs, waiters, dish washer and cashier.

b. Capital: refers to the financial resources required to start the business. Example: A restaurant

would need money to build or renovate his restaurant and the source of financial can be from

his own savings or borrowing from the bank.

c. Entrepreneurs: refers to the persons who risk starting a business. Example: the restaurant

owner quits his normal job and took the risk of opening a restaurant not knowing whether it

will succeed or not.

d. Physical resources: refers to the tangible things used to conduct business. Example: A

restaurant would need tables and chairs, stoves, ovens, dish-washing machine and other

equipment in order to run smoothly.

e. Information resources: refers to the data and other information used by businesses. Example:

before deciding on the location, the restaurant owner has studied the statistics of eating habits

of a certain location to determine the best area to set-up his restaurant.

2. List down all the external environments of business that may affect an organisation.

a. The domestic business environment

b. The global business environment

c. The technological environment

d. The political-legal environment

e. The socio-cultural environment

f. The economic environment

3. List and define policies that government used to manage their economy.

a. Fiscal Policy

� The ways in which a government collects and spends revenues.

• Tax rates can play an important role in fiscal policy.

b. Monetary Policy

� The manner in which a government controls its money supply.

� Working mainly through the Federal Reserve System, the government can influence banks’

willingness to lend money and prompt interest rates to go up or down.

c. Stabilisation Policy

� Coordinating fiscal and monetary policies to smooth fluctuations in output and

unemployment and to stabilise prices.

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Section B: Essay

1. With examples, discuss in detail the concept and theories behind Demand and Supply.

In any business, how they operate is always subjected to the law of demand and supply.

Demand is referred to the willingness and ability of buyers to purchase a product (a good or a service).

Supply is referred to the willingness and ability of producers to offer a good or service for sale.

Under the theory of Demand, buyers will purchase (demand) more of a product as its price

drops and less of a product as its price increases. Because demand is always referred to the consumers

any changes in the price of the product it would affect the buying pattern of the consumers. The

changes or movement of price and quantity demanded are usually explained using the demand curve.

Let us illustrate this using an example on the price and quantity demanded for a loaf of bread.

In Figure 1, we can see that the original price of the bread is at P0 and the quantity demanded is at Q0.

If the seller decided to increase the price of the bread to P1, consumer we decline to buy at a higher

price and hence cause the quantity demanded to decrease to Q1. However, if the seller decided to

decrease the price of bread to P2, consumer will take the opportunity of the lower price and the

quantity demanded will increase to Q2.

Figure 1: The demand curve of a loaf of bread

Price (P)

Quantity Demanded (Q)

Dd

Dd

Demand Curve (Dd)

Q1 Q2 Q0

P1

P2

P0

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Under the theory of supply, producers will offer (supply) more of a product for sale as its price

rises and less of a product as its price drops. The demand of consumer can indirectly affect the amount

that supplier will supply in the market. Just like demand is referred to the consumer, supply is referred

to the producer or supplier. The changes or movement of price and quantity supplied can also be

explained using the supply curve. Let us illustrate this referring back to our example in Figure 1.

In Figure 2, we can see that the original price of the bread is set at P0 and the quantity being supplied is

at Q0. If consumer demand for bread is very high and this will cause the price of bread to increase. The

supplier is willing to increase their supply because of the higher price. If we look at Figure 2, the price

of bread has increase to P1 and because of this the supplier has increase their supply of bread to Q1.

However if consumer is not willing to buy at P1 but prefer to buy at P2, supplier is not willing to supply

at price P2 because it may not cover their operating costs of the producing the bread. Hence at P2,

quantity supplied will drop to Q2 even if the consumer demand is very high.

With the Figure 1 and 2, we can conclude that the law of demand and supply can adversely

influence on how price and product is being consumed and supplied in the market.

Figure 2: The supply curve of a loaf of bread

Price (P)

Quantity Supplied (Q)

Ss

Ss

Supply Curve (Ss)

Q1 Q2 Q0

P1

P2

P0

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2. Discuss in detail, with examples, the four types of competitions in the economy.

In the world today, any businesses that exist are always subjected to competition. Economies

have categories competition into four types of competition. These competitions are Perfect

Competition, Monopolistic Competition, Oligopoly Competition and Monopoly Competition.

In perfect competition, prices are determined by supply and demand because no single firm is

powerful enough to influence the price of its product. All firms in an industry are small but the number

of firms in the industry is large. The principles of perfect competition is that buyers view all products as

identical where buyers and sellers know the prices that others are paying and receiving in the

marketplace. It is relative easy for firms to enter or leave the market. Prices are set exclusively by

supply and demand and accepted by both sellers and buyers. In this type of market seller usually

compete in terms of pricing of their product to increase their sales. An example of this industry is the

food packaging industry where firms like instant noodle producer or makers compete in terms of price

to sell their instant noodle packets.

Firms that are willing to compete in terms of quantity, quality and of course, price, will basically

shift their competition type to monopolistic. In monopolistic competition, there are numerous sellers

trying to differentiate their products from those of competitors so as to have some control over price.

There are many sellers, but fewer if compared to perfect competition. Similar to perfect competition,

sellers can enter or leave the market easily. The large number of buyers relative to sellers applies

potential limits to prices. The food packaging industry can be also used for example, where firms like

Mamee and Maggi has incorporate their size of instant noodle, the taste of their instant noodle and

the varieties flavour or types of their instant noodle to compete in the industry besides competing

using price.

An oligopoly is an industry with only a few large sellers. The differences between oligopoly and

monopolistic is that in oligopoly, any entry by new competitors is very hard because large capital

investment is needed. Any actions of one firm can significantly affect the sales of every other firm in

the industry. The prices of comparable products are usually similar. As the trend toward globalization

continues, most experts believe that oligopolies will become increasingly prevalent. An example for

this industry is the airline industry. In Malaysia airlines like MAS and Airasia have constantly compete in

terms of the pricing of their tickets and the quality of their services.

A monopoly competition is an industry or market that has only one producer (or else is so dominated by

one producer that other firms cannot compete with it). The sole supplier enjoys complete control over the

prices of its products; its only constraint is a decrease in consumer demand due to increased prices. In the real

world, firms are not allowed to have a monopoly structure because it may cause problems to consumer if they

are unable to purchase the product if the price is high. This is why governments usually control or monitor firms

activities. Firms that produce necessity product like water or electricity is known as natural monopolies. It is a

industries in which one firm can most efficiently supply all needed goods or services. This industry is typically

allowed and regulated by legislated acts and governmental agencies. In most cases most of the firms are run and

operated by the government. An example would be Tenaga Nasional in West Malaysia and SESCO in Sarawak,

where these two firms sell and supply electricity to the population.

A company can start big or small and as they gradually progress they will compete in the different types

of competitions mention above. In any industry, the level of competition can change between the four

competitions and this is depending on the amount of new firms or companies that are entering the market.