Do you know how i would go about answering this question- i am currently working for a manufacturing Global company called Smurfit Kappa who specialise in the paper and packaging industry.

Firstly, You could undergo SWOT analysis – Strengths, Weaknesses, opportunities, threats.

Strengths could include:

• Current profitable orders.
• Existing technology and skilled labour forces.

Weaknesses could include:

• Appreciation in exchange rate, which makes exports less competitive
• Over reliance on small number of customers.
• High ratio of debt
• Difficulty in finding suitable management / workers

Opportunities could include:

• Finding new export markets in developing countries like China
• Diversifying into new markets e.g. packaging aimed at ebay sellers.
• Improving production process to reduce costs and increase profit margins.

Threats Could include:

• Declining market as people switch to electronic forms of communication and less demand for paper.
• Increasing competitiveness decreasing profit margins.
• Increasing costs of production.

Future Strategies may include:

• Developing market share in new countries.
• Introducing new range or products which meet changing circumstances.
• Looking to streamline production process and reduce costs:
• New technology that helps cut costs.
• Better working practises e.g. giving workers more performance related bonuses to encourage innovation and harder work.
• Get outside consultants. Sometimes existing managers can’t see the wood for the trees. Getting outside consultants in may help provide a fresh approach.

Things to Watch Out For

• Economic Climate – is this is a good time to invest with rising oil prices and slowing economy?
• Does the firm have enough expertise to diversify into new areas?

OCR exam question: Discuss factors that might explain differences in Car Prices across Europe

1. Purchasing power of Pound. Quite a few goods tend to be more expensive in the UK than the continent.

2. Different Living Costs. Exchange rates don’t always reflect local purchasing power of currencies. For example, in Poland living costs are relatively low, reflecting lower wages and lower cost of renting. Garages in UK, have to charge higher prices to cover the cost of renting in the UK.

3. Tax Rates. UK has higher tax rates on new cars. However, the price differences look at pre tax prices.

4. Price Discrimination. It is argued demand is more inelastic in the UK, UK consumers have less alternatives. This enables UK prices to be higher.

5. Monopoly Power. Car firms in UK have monopoly power to set higher prices.The european market is more competitive and this helps keep prices down. Many UK car dealers were found to have close ties and arrangements with car firms to keep prices high. However, this has slightly been reduced since the introduction of car supermarkets.

6.  Labour Costs. Producing cars is relatively labour intensive. Therefore, higher wages will increase cost. However, recently car production has become more capital intensive with greater use of machines. Therefore, labour costs are less significant. This means that high wage economies like Germany can still compete with China.

High profit enables.

1. Investment in Research & Development. This leads to better technology and dynamic efficiency. This profit is particularly important for some industries such as oil exploration and car manufacture. Without this investment the economy will stagnate and lose international competitiveness, leading to job losses in some sectors.

2. Reward for Shareholders.

Shareholders are given dividends. Higher profit leads to higher dividends and encourages people to buy shares. Shareholders are an important source of finance for firms. Profit is important to be able to renumerate shareholders.

3. High Profit should Attract New Firms into the industry.

For example, the high price of oil and hence profits for oil companies should encourage firms to develop new oil fields. This assumes the market is contestable and new firms can actually enter.

4. Risk Bearing Economies

Profit can be saved and provide insurance for an unexpected downturn, such as recession or rapid appreciation in the exchange rate.

5. Tax Revenues.

Governments charge corporation tax on company profits and this provides several billion pound of tax revenue per year. In UK the corporation tax rate is 20%

A contestable market mean that there is freedom of entry and exit into the market. Therefore, there must be low sunk costs. Because there is freedom of entry and exit, there is always the threat of new firms entering.

It is difficult to enter the banking sector because:

1. Brand Loyalty to existing banks. People prefer big established banks; small new banks are more risky. A new firms would have to spend a lot on advertising.
2. Economies of scale. Banks usually have a national presence in each of the major towns. This includes organisational economies of scale, the benefits of having a branch in each town.
3. Risk Bearing economies. Trust is very important for a bank. The bigger it’s balance sheet and deposits the more people will trust the bank.

(b) Discuss whether high profits and the dominant market share in the banking sector suggests that there should be more government intervention – either through windfall taxes or regulation of prices. (30)

British banks are highly profitable. They made a combined profit of £42bn in 2007

- High profits are arguably because of monopoly power. Bank have the monopoly power to set high interest rates; there is a lack of competition in the banking sector and it is difficult to encourage new firms to enter. Therefore, there is a case to have a windfall tax on profits and / or for the government to regulate prices. e.g. maximum prices for overdraft penalties.

However,

• New firms have entered the banking sector. e.g. online internet banks like Egg. Therefore, there is more competition than people might think
• A tax on profits may reduce the amount banks are willing to lend to business and consumers. It may encourage banks to try and avoid tax payment e.g. offshore accounts. Also, Banks already pay alot in corporation tax. However, banks don’t lend out of profit; profit mainly goes to shareholders and does not benefit the economy.
• Higher taxes may create a disincentive to be efficient by banks.. Because efficiency savings just get taxed.

More reasons to Regulate Banks

Banks are able to set charges far higher than the marginal cost. (this is allocatively inefficient) For example, the cost of going overdrawn has received penalties of upto £60; this is a clear example of monopoly exploitation and therefore, governments are justified to set maximum prices.

• However, limiting penalty charges may encourage consumers to go into debt and overdrawn.

The high profits of the banks are unnecessary. They do not need to invest in risky investment projects like oil exploration companies. Therefore, a windfall tax will not harm the productivity and dynamic efficiency of the banking sector.

The banking sectors is an oligopoly rather than pure monopoly. There are 5 banks are more building societies which create a reasonably competitive market.

• British banks set for bumper profits
• Top 10 British Banks

In the UK, interest rates have only fallen slightly since the start of the global credit crisis. The Bank of England has reduced rates from 5.75% to 5.25%. The Bank is still worried about inflationary pressure (CPI inflation recently increased to 2.6%) Also the RPI rate suggests underlying inflation (the rate people actually face) is higher at over 4%

There is an increase in cost push inflation, due to factors such as: rising energy prices and rising food prices. This makes it difficult for the MPC to cut rates and still achieve the government’s inflation target of 2%

However, I still feel that interest rates will fall over the next 12 months. Falling house prices will definitely reduce consumer spending and this will reduce economic growth and therefore inflation. With low confidence and falling spending, the MPC might be able to cut rates to 4.75% or 4.5% by the beginning of 2009. If the housing market really starts to crash as some economists predict, we could even see interest rates fall to under 4%. However, at the moment I don’t think a housing crash is the most likely scenario

 Credit Crisis and Interest Rates

However, although the Bank may cut base rates, business may not see interest rates fall. This is because the commercial banks take advantage of the credit crunch to raise their own interest rates. Therefore, commercial lending rates may increase due to shortage of funds, even though the bank cuts the base rates.

• CPI Inflation Forecast
• Inflation forecasts
• Effects of Interest rates 

Not really thought about this before.

Price elastic products mean that an increase in price will cause a bigger % fall in demand. Therefore, presumably they offer less scope for increasing price. Elastic products suggest the good is in a competitive market and therefore it is more difficult to make profits. If demand was price inelastic a firm could put up prices  and make profits. This is the case of monopoly.

When Price Elastic products are Beneficial

1. For a Sales Maximising Firm.

If a firm wishes to increase market share and increase its sales then  price elastic means that cuts in price will beneficial in increasing sales.

• However, it depends on how other firms react. If One firm cuts its price, demand may be elastic, but if all the other firms follow suit demand is likely to be inelastic and the price war only causes a small increase in sales (see Oligopoly Kinked demand curve)

2. Economies of Scale

If a firm is producing a good with economies of scale. Cutting prices will enable lower average costs because output can increase, this could even increase profitability.

3. Elasticity is not the Most Important Factor in Determining Profitability.

Having inelastic demand goods (e.g. trains) doesn’t make a firm profitable. Similarly having price elastic good doesn’t mean you are unprofitable. The key is whether Revenue is Greater than Costs. For example, confectionary is quite elastic, there are many different types to choose from; but the market is still quite profitable.

Note demand for chocolate is inelastic. but demand for individual bars is price elastic.

Cigarettes have very inelastic demand, but, individual brands are still elastic because there is choice for consumers.

Most goods have an elastic demand, unless there is a pure monopoly.

• In a recession people tend to save money because there is a fall in confidence. If people expect to be made unemployed then you don’t want to spend and borrow, it is less risky to save.
• The paradox of thrift states that in a recession people are nervous so save more. This makes the recession worse because it causes a further fall in consumption. People think they are doing a good, responsible thing to save, but actually they are making the recession worse.
• In recessions, interest rates tend to fall. Because inflation is lower and Central Banks wish to try and stimulate the economy.
• The government will also try to use expansionary fiscal policy. This involves cutting taxes and increasing government spending. It will cause higher government borrowing (higher budget deficit) Expansionary fiscal policy may not work in the long run due to crowding out.
• In the US the authorities are trying both lower interest rates and lower taxes.
• The problem with lower interest rates is that it is causing a further devaluation of the dollar.
• Also lower interest rates may not actually  help increase spending if confidence is low (e.g. because of falling house prices)
• There is a limit to how much the government can cut taxes because government borrowing is already quite high. US national debt is about 65% of GDP. In the recession this will definitely increase.
• Stock Markets fall because firms make less profit. There is also the danger firms may go out of business

Before, the supermarkets entered the market for selling petrol, there was much less competition in the market for petrol. Therefore, independent retailers were able to set higher prices and gain higher profit margins.

I believe prior to the entry of supermarkets, petrol retail was dominated by the big 5 oil companies like Shell and Esso. The average profit margin on the retail of petrol was higher. This enabled independent retailers to be competitive and in some cases undercut the big petrol companies.

Economies of Scale. The big supermarkets can take advantage of economies of scale in the distribution and selling of petrol because they already have a national distribution network. This enables them to undercut the costs of independent retailers

Supermarkets have incentive to Sell Cheap Petrol. Independent retailers make all their profit from petrol (except selling food in small shops). However, supermarkets have an incentive to offer cheap petrol to encourage people to go to Tesco or Sainsbury’s. People often do both petrol buying and a big supermarket shop. Therefore, even if the profit margin on petrol is very low, it doesn’t matter because they will make profit from selling more groceries. This has been another factor in lowering prices.

The effect of supermarkets is to increase consumer and reduce the profit margin on the RETAIL of petrol. (I emphasise retail because, although it may be hard to believe there is a small profit margin on selling petrol at forecourts.

The effect is that many independent retailers have been forced out of business. One ancedotal piece of evidence – an independent retailers said they no longer accepted cheques for petrol payments because it would mean they make a loss on selling petrol

Top 10 Rich List

1 Warren Buffett Investments $(bn) 62.0

2 Carlos Slim Helu Telecoms 60.0

3 Bill Gates Software 58.0

4 Lakshmi Mittal Steel 45.0

5 Mukesh Ambani Petrochemicals 43.0

6 Anil Ambani Diverse sources 42.0

7 Ingvar Kamprad Ikea stores 31.0

8 KP Singh Property 30.0

9 Oleg Deripaska Aluminium 28.0

10 Karl Albrecht Aldi stores 27.0

The richest Britain is the Duke of Westminster with $14bn (ranked no. 46). The richest young person is Mark Zuckerberg, the founder of Facebook, currently worth $1.3bn.

According to the Forbes list, Bill Gates has been the richest person for the last 13 years