Business Studies

Demand

100

What is Demand?

Demand refers to the quantity of a good or service that consumers are willing and able to purchase at various prices over a period of time. It is not just about wanting something—it also depends on having the ability to pay for it.

200

What factors can cause a shift in demand for a product?

A shift in demand means the entire demand curve moves either to the right (increase in demand) or to the left (decrease in demand). This happens when factors other than price change. Key factors include:

• Consumer income (more income = more demand for normal goods)
• Tastes and preferences (trends, advertising, health awareness)
• Price of related goods (substitutes and complements)
• Expectations of future prices (if prices are expected to rise, demand may increase now)
• Population changes (more people = more demand)
• Seasonal factors (e.g., demand for heaters in winter)

300

How does a change in consumer income affect demand for normal goods?

For normal goods, when consumer income increases, demand also increases because people can afford to buy more.
Conversely, if income decreases, demand for these goods usually falls.
Example: As income rises, people may buy more fresh produce or branded clothing.

400

What happens to the demand for a product if the price of a substitute increases?

If the price of a substitute good (a product that can replace another) increases, the demand for the original product increases.
Example: If the price of Coca-Cola rises, more people may buy Pepsi instead, increasing Pepsi’s demand.

500

Why is understanding demand important for setting prices and planning production?

Understanding demand helps businesses:

• Set appropriate prices: If demand is high, prices can be raised; if low, prices may need to be lowered.
• Avoid overproduction or underproduction: Knowing demand helps match supply to expected sales.
• Forecast revenue: Demand estimates help predict income and plan budgets.
• Respond to market changes: Businesses can adjust quickly if they understand what drives demand.

Supply

100

What is Supply?

Supply refers to the quantity of a good or service that producers are willing and able to offer for sale at different prices over a certain period of time. It reflects the producer’s side of the market.

200

List three factors that can influence the supply of a product.

1. Production Costs – If the cost of raw materials, labour, or energy increases, supply may decrease because it becomes more expensive to produce goods.
2. Technology – Improved technology can increase supply by making production more efficient.
3. Government Policies – Taxes, subsidies, and regulations can either encourage or discourage production.

300

Why might a business reduce supply even if demand is high?

A business might reduce supply despite high demand due to:

• Limited resources or capacity (e.g., shortage of raw materials or labour)
• Strategic pricing (to create scarcity and drive prices up)
• Maintenance or production issues (e.g., machinery breakdowns)
• Regulatory restrictions (e.g., environmental limits or quotas)

400

What happens to supply if new technology makes production more efficient?

Supply usually increases because:

• Production becomes faster and cheaper
• More goods can be produced with the same resources
• Businesses can offer more products at the same or lower prices

500

Why is understanding supply important for managing inventory and pricing strategies?

Understanding supply helps businesses:

• Avoid overstocking or stockouts, which can lead to lost sales or wasted resources
• Set competitive prices based on how much product is available
• Plan production schedules to meet expected demand
• Respond to market changes quickly and efficiently

Taxation

100

What is taxation? Name two types of taxes commonly used in New Zealand.

axation is the process by which governments collect money from individuals and businesses to fund public services and infrastructure. It is a compulsory financial charge that helps the government operate and provide essential services like healthcare, education, transport, and public safety.

1. Income Tax – A tax on the earnings of individuals and businesses.
2. Goods and Services Tax (GST) – A 15% tax added to most goods and services sold in New Zealand.

200

Why do governments collect taxes?

Governments collect taxes to:

• Fund public services (e.g., hospitals, schools, roads)
• Support welfare and social programs
• Maintain law and order
• Invest in infrastructure and economic development
• Redistribute wealth and reduce inequality

300

How does GST affect the final price of a product for consumers?

GST increases the final price that consumers pay. For example, if a product costs $100 before tax, the 15% GST adds $15, making the total price $115. Businesses collect this tax on behalf of the government.

400

How can tax rates influence consumer spending and business investment?

• Higher tax rates reduce disposable income, which can lead to lower consumer spending.
• Lower tax rates can encourage spending and stimulate economic activity.
• For businesses, high taxes may discourage investment, while lower taxes can make expansion and hiring more attractive.

500

How might changes in corporate tax rates affect business decisions about expansion or hiring?

• Lower corporate tax rates can increase after-tax profits, giving businesses more funds to invest in growth, hire more staff, or expand operations.
• Higher corporate tax rates may lead businesses to cut costs, delay expansion, or reduce hiring to maintain profitability.

Pricing strategy

100

Why might a business use penetration pricing when launching a new product?

Penetration pricing involves setting a low initial price to attract customers quickly and gain market share. Businesses use this strategy to:

• Encourage trial and adoption of a new product
• Compete with established brands
• Build customer loyalty early
• Create buzz and increase visibility
  Once the product is established, the business may gradually raise the price.

200

Why do luxury brands often keep prices high even if demand drops?

Luxury brands maintain high prices to:

• Preserve their exclusive image and brand prestige
• Signal high quality and status
• Avoid devaluing the brand through discounts
• Target a niche market that values uniqueness over affordability
  Lowering prices could harm the brand’s reputation and reduce perceived value.

300

How can pricing affect consumer perception of quality?

Consumers often associate higher prices with better quality, especially when they lack other information. This is known as price-quality signaling.

• A low price might suggest the product is cheap or inferior
• A high price can imply premium materials, craftsmanship, or performance
  Businesses use pricing strategically to position their products in the market.

400

If a business notices that lowering the price doesn’t increase sales, what might be the issue?

Several factors could be at play:

• Poor product quality or lack of appeal
• Weak brand recognition or marketing
• Strong competition offering better value
• Target market mismatch
• Limited distribution or accessibility
  Price alone doesn’t guarantee demand—other elements of the marketing mix (product, place, promotion) must also be effective.

500

How can government policies (like subsidies or taxes) influence supply and pricing?

• Subsidies lower production costs, allowing businesses to increase supply and potentially lower prices for consumers.
• Taxes (like excise duties or carbon taxes) increase costs, which can reduce supply and lead to higher prices.
  Government policies can also influence business decisions about what to produce, how much to produce, and how to price goods.

Mixed topics

100

Scenario: A business decides to automate part of its production process. 

Question: How might this decision affect different stakeholders?

👷‍♂️ Employees

• Negative impact: Some jobs may be lost or changed, especially if automation replaces manual tasks.
• Positive impact: Employees may be upskilled to operate or manage automated systems, leading to new opportunities and safer working conditions.

🧑‍💼 Managers/Owners

• Positive impact: Automation can increase efficiency, reduce long-term costs, and improve product consistency.
• Challenges: Initial investment costs and managing change within the workforce.

🛍️ Customers

• Positive impact: Faster production may lead to quicker delivery and potentially lower prices.
• Negative impact: If automation affects product quality or customer service, satisfaction may decline.

🚚 Suppliers

• Impact depends on the type of automation: If fewer raw materials are needed or production methods change, suppliers may see reduced or altered demand.

🏛️ Government

• Positive impact: Increased productivity and competitiveness in the economy.
• Concerns: Potential job losses may require support through retraining programs or unemployment benefits.

🏘️ Local Community

• Negative impact: Job losses can affect local employment rates and economic activity.
• Positive impact: If the business grows due to automation, it may contribute more to the local economy over time.

200

Scenario: A business’s income statement shows increasing revenue but decreasing net profit over three months.
Question: What could be causing this trend, and what should the business investigate?

✅ Possible Causes:

1. Rising Operating Expenses:

   • Costs such as wages, rent, utilities, or marketing may have increased faster than revenue.
   • The business should review its expense breakdown to identify which costs are growing.

2. Higher Cost of Goods Sold (COGS):

   • If the cost of raw materials or production has increased, gross profit may shrink even if sales are rising.
   • Investigate supplier pricing, wastage, or inefficiencies in production.

3. Discounting or Promotions:

   • The business may be offering heavy discounts to boost sales, increasing revenue but reducing profit margins.
   • Check if pricing strategies are sustainable.

4. Increased Debt or Interest Payments:

   • If the business has taken on new loans, interest expenses may be eating into profits.
   • Review the finance costs section of the income statement.

5. One-off or Unexpected Expenses:

   • Legal fees, equipment repairs, or other unusual costs may have occurred.
   • Look for non-recurring expenses in the statement.

6. Inventory or Stock Issues:

   • Overstocking or spoilage can lead to write-downs, affecting net profit.
   • Review inventory management practices.

🔍 What the Business Should Investigate:

• Compare monthly expense categories to spot increases.
• Analyse gross profit margin trends.
• Review pricing and discounting strategies.
• Check for non-operating expenses or one-time costs.
• Evaluate efficiency in operations and cost control measures.

300

Why is depreciation included as an expense in the income statement even though it’s not a cash payment?

Depreciation is included as an expense in the income statement even though it’s not a cash payment because it reflects the gradual reduction in value of a business’s fixed assets (like machinery, vehicles, or equipment) over time due to wear and tear, usage, or obsolescence. 

✅ Key Reasons:

1. Matching Principle (Accounting Rule):
   Depreciation spreads the cost of an asset over its useful life, matching the expense to the periods in which the asset helps generate revenue. This gives a more accurate picture of profitability.

2. True Cost of Operations:
   Even though no cash leaves the business when depreciation is recorded, it represents the real economic cost of using long-term assets in the production process.

3. Asset Value Tracking:
   Depreciation helps track the declining book value of assets on the balance sheet, ensuring financial statements reflect current asset values more accurately.

4. Tax Purposes:
   Depreciation is a tax-deductible expense, which reduces taxable income and therefore the amount of tax a business has to pay.

🧾 Example:

If a business buys a delivery van for $30,000 and expects to use it for 5 years, it might record $6,000 in depreciation each year. This $6,000 is shown as an expense on the income statement, even though the cash was spent upfront.

400

Scenario: A business shifts its pūtake from profit-driven to sustainability-focused.
Question: What changes might occur in its operations and stakeholder relationships?

When a business shifts its pūtake (purpose) from being profit-driven to sustainability-focused, several changes can occur in both its operations and stakeholder relationships:

🔧 Changes in Operations:

1. Sustainable Sourcing:
   The business may begin using eco-friendly or ethically sourced materials, even if they cost more.

2. Waste Reduction:
   Processes may be redesigned to reduce waste, recycle materials, or lower carbon emissions.

3. Energy Efficiency:
   Investment in renewable energy or energy-saving technologies may become a priority.

4. Product Design:
   Products may be redesigned to be more durable, recyclable, or biodegradable.

5. Cost Structure:
   Short-term costs may increase due to sustainable practices, but long-term savings and brand value may improve.

🤝 Changes in Stakeholder Relationships:

1. Customers:

   • Environmentally conscious customers may become more loyal.
   • New customer segments may be attracted by the business’s values.

2. Employees:

   • Staff may feel more motivated and proud to work for a purpose-driven company.
   • The business may attract talent that values sustainability.

3. Investors:

   • Some investors may be concerned about reduced short-term profits.
   • Others may be drawn to the long-term value and reduced risk of sustainable practices.

4. Suppliers:

   • The business may seek new suppliers that meet sustainability standards.
   • Existing suppliers may need to adapt to new expectations.

5. Community and Government:

   • The business may gain stronger community support and positive media attention.
   • It may also benefit from government incentives or avoid penalties related to environmental regulations

500

1. Scenario: A competitor launches a similar product at a lower price.
   Question: What pricing strategies could your business use to respond?

2. How might inflation affect the pricing decisions of a business?

Your business could consider the following pricing strategies:

1. Price Matching or Undercutting:
   Lower your price to match or beat the competitor’s price to retain market share.

2. Value-Based Pricing:
   Emphasise the added value of your product (e.g., better quality, service, warranty) to justify a higher price.

3. Bundle Pricing:
   Offer your product as part of a bundle with other items or services to increase perceived value.

4. Loyalty Discounts or Promotions:
   Provide limited-time offers, discounts, or loyalty rewards to retain existing customers and attract new ones.

5. Psychological Pricing:
   Use pricing tactics like $9.99 instead of $10.00 to make the product appear cheaper.

6. Product Differentiation:
   Focus on branding, features, or customer experience to shift the focus away from price alone.

Question: How might inflation affect the pricing decisions of a business?

Inflation can significantly influence how a business sets its prices:

1. Increased Costs:
   As the cost of raw materials, labour, and utilities rise, businesses may need to increase prices to maintain profit margins.

2. Reduced Consumer Purchasing Power:
   Higher prices across the economy can lead to lower demand, so businesses must balance price increases carefully to avoid losing customers.

3. Frequent Price Adjustments:
   In high inflation environments, businesses may need to review and adjust prices more often to keep up with rising costs.

4. Shrinkflation:
   Some businesses may reduce the size or quantity of a product instead of raising the price directly.

5. Strategic Communication:
   Businesses may need to explain price increases to customers to maintain trust and loyalty.