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Nature and Scope of Marketing

Definition :

Definition Marketing: “The process of planning and executing the conception,

pricing, promotion, and distribution of ideas, goods, and services to create

exchanges that satisfy individual and organizational objectives.” American

Marketing Association “official” old definition

Nature of Marketing :

Nature of Marketing Marketing is an economic function of exchange. It is a legal

process by which ownership is transferred. It is a system of interacting business

activities. It is a managerial function of organizing and directing business activities

that facilitates the movement of goods from producers to consumers.

It is a philosophy based on consumer orientation and satisfaction . It has dual

objectives – profit making & consumer satisfaction . It is a social process by whichthe society gets goods and services for the satisfaction of needs .

Scope Of Marketing :

Scope Of Marketing Study of consumer wants and needs. Study of buyer behavior.

Product planning and development. Pricing policies. Distribution. Promotion.

Consumer satisfaction . Marketing control.

Study of Consumer wants and needs :

Study of Consumer wants and needs Goods are produced to satisfy human wants.

 Therefore the marketer has to study the wants and needs of consumers. These

wants and needs motivate consumers to purchase goods and services Study of 

Buyer Behaviour Modern marketing emphasises on the study of buyer behaviour.

Analysis of the behaviour pattern of the customers is helpful for market

segmentation and targeting.

Product Planning and Development :

Product Planning and Development Product is the core of marketing . Product

planning and development starts with the generation of product idea and ends with

the development and commercialisation of the product. Product planning covers the

decisions like branding ,packaging ,labelling ,grading etc. and expansion or

contraction of existing product lines

DISTRIBUTION :

DISTRIBUTION Study of marketing channels is one of the major areas of marketing .

Goods are to be distributed at the minimum possible cost,to the largest number of 

consumers. Thus suitable distribution channels should be selected PROMOTION It

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includes advertising,sales promotion and personal selling.these promotional

activities are very essential for the accomplishment of marketing goal

CONSUMER SATISFACTION :

CONSUMER SATISFACTION In the modern world consumer is the king. The

consumers determine what should be the business and where it should be prosper.

 Thus every marketer should importance to consumer satisfaction. In other words

consumer satisfaction is one of the major goals of marketting MARKETING CONTROL

Marketing also covers marketing control through marketing audit and annual

reports.

APPROACHES OF MARKETING :

TRADITIONAL APPROACH :

 TRADITIONAL APPROACH The objective of traditional marketing is profit

maximisation Traditional marketing was sales-oriented and not consumer oriented.It gave emphasis to products. It was concerned with the transfer of ownership. It

gave emphasis to physical movement of goods.

Modern Approach :

Modern Approach Modern marketing is consumer oriented. Modern marketing starts

and end with the consumer Modern marketing starts before production Modern

marketing is the guiding element of business.

Marketing is defined by the AMA as "the activity, set of institutions, and processes

for creating, communicating, delivering, and exchanging offerings that have value

for customers, clients, partners, and society at large."

It can also be defined as "the process by which companies create value for

customers and build strong customer relationships, in order to capture value from

customers in return".

 This replaces the previous definition, which still appears in the AMA's dictionary: "an

organizational function and a set of processes for creating, communicating, and

delivering value to customers and for managing customer relationships in ways that

benefit the organization and its stakeholders." It generates the strategy that

underlies sales techniques, business communication, and business developments. It

is an integrated process through which companies build strong customer

relationships and create value for their customers and for themselves.

Marketing is used to identify the customer, satisfy the customer, and keep the

customer. With the customer as the focus of its activities, marketing management is

one of the major components of business management. Marketing evolved to meet

the stasis in developing new markets caused by mature markets and overcapacities

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in the last 2-3 centuries.[citation needed] The adoption of marketing strategies

requires businesses to shift their focus from production to the perceived needs and

wants of their customers as the means of staying profitable.[citation needed]

 The term marketing concept holds that achieving organizational goals depends on

knowing the needs and wants of target markets and delivering the desired

satisfactions.[4] It proposes that in order to satisfy its organizational objectives, an

organization should anticipate the needs and wants of consumers and satisfy these

more effectively than competitors.

 The term developed from an original meaning which referred literally to going to a

market to buy or sell goods or services. Seen from a systems point of view, sales

process engineering marketing is "a set of processes that are interconnected and

interdependent with other functions, whose methods can be improved using a

variety of relatively new approaches."

Further definitions

 The Chartered Institute of Marketing defines marketing as "the management

process responsible for identifying, anticipating and satisfying customer

requirements profitably." A different concept is the value-based marketing which

states the role of marketing to contribute to increasing shareholder value. In this

context, marketing is defined as "the management process that seeks to maximize

returns to shareholders by developing relationships with valued customers and

creating a competitive advantage."

Marketing practice tended to be seen as a creative industry in the past, which

included advertising, distribution and selling,Merchandise support. However,

because the academic study of marketing makes extensive use of social sciences,

psychology, sociology, mathematics, economics, anthropology and neuroscience,

the profession is now widely recognized as a science, allowing numerous

universities to offer Master-of-Science (MSc) programmes. The overall process starts

with marketing research and goes through market segmentation, business planning

and execution, ending with pre- and post-sales promotional activities. It is also

related to many of the creative arts. The marketing literature is also adept at re-

inventing itself and its vocabulary according to the times and the culture.

Browne (2010) reveals that supermarkets spend millions of dollars intensively

researching and studying consumer behaviour. Their aim is to make sure that

shoppers leave their stores spending much more than they originally planned.

‘Choice’ examined the theory of trolleyology finding that many shoppers

instinctively look to the right when they’re in the supermarket.

Supermarkets move products around to confuse shoppers, the entry point is another

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marketing tactic. Consumer psychologist Dr. Paul Harrison (cited in Browne, 2010)

states that supermarkets are constantly using different methodologies of selling.

One method is performing regular overhauls changing the locations of products all

around to break habitual shopping, and break your budget. Harrison also contends

that people who are shopping in a counter clockwise direction are likely to spend

more money than people shopping in a clockwise direction. Consumer psychologists(cited in Browne, 2010) reported that most people write with their right hand, thus it

is a biological trait that people have the tendency of veering to the right when

shopping, it is understood that supermarkets capitalize on this fact. Found on the

capturing right-hand side are usually appealing products that a shopper might

impulsively buy e.g. an umbrella when the weather is dull.

Evolution of marketing

History of marketing

An orientation, in the marketing context, related to a perception or attitude a firm

holds towards its product or service, essentially concerning consumers and end-

users. Throughout history, marketing has changed considerably in conjunction with

consumer tastes.

Earlier approaches

 The marketing orientation evolved from earlier orientations, namely, the production

orientation, the product orientation and the selling orientation. Orientation Profit

driver Western European timeframe Description Production Production

methods until the 1950s A firm focusing on a production orientation specializes in

producing as much as possible of a given product or service. Thus, this signifies a

firm exploiting economies of scale until the minimum efficient scale is reached. A

production orientation may be deployed when a high demand for a product or

service exists, coupled with a good certainty that consumer tastes will not rapidly

alter (similar to the sales orientation).

Product Quality of the product until the 1960s A firm employing a product

orientation is chiefly concerned with the quality of its own product. A firm would also

assume that as long as its product was of a high standard, people would buy and

consume the product.

Selling Selling methods 1950s and 1960s A firm using a sales orientation

focuses primarily on the selling/promotion of a particular product, and not

determining new consumer desires as such. Consequently, this entails simply selling

an already existing product, and using promotion techniques to attain the highest

sales possible.

Such an orientation may suit scenarios in which a firm holds dead stock, or

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otherwise sells a product that is in high demand, with little likelihood of changes in

consumer tastes that would diminish demand.

Marketing Needs and wants of customers 1970 to present day. The 'marketing

orientation' is perhaps the most common orientation used in contemporary

marketing. It involves a firm essentially basing its marketing plans around themarketing concept, and thus supplying products to suit new consumer tastes. As an

example, a firm would employ market research to gauge consumer desires, use

R&D to develop a product attuned to the revealed information, and then utilize

promotion techniques to ensure persons know the product exists.

Contemporary approaches

Recent approaches in marketing include relationship marketing with focus on the

customer, business marketing or industrial marketing with focus on an organization

or institution and social marketing with focus on benefits to society. New forms of 

marketing also use the internet and are therefore called internet marketing or moregenerally e-marketing, online marketing, search engine marketing, desktop

advertising or affiliate marketing. It attempts to perfect the segmentation strategy

used in traditional marketing. It targets its audience more precisely, and is

sometimes called personalized marketing or one-to-one marketing. Internet

marketing is sometimes considered to be broad in scope, because it not only refers

to marketing on the Internet, but also includes marketing done via e-mail and

wireless media.Orientation Profit driverWestern European timeframe Description

Relationship marketing / Relationship management Building and keeping good

customer relations 1960s to present day Emphasis is placed on the whole

relationship between suppliers and customers. The aim is to provide the best

possible customer service and build customer loyalty.

Business marketing / Industrial marketing Building and keeping relationships

between organizations 1980s to present day. In this context, marketing takes place

between businesses or organizations. The product focus lies on industrial goods or

capital goods rather than consumer products or end products. Different forms of 

marketing activities, such as promotion, advertising and communication to the

customer are used.

Social marketing Benefit to society 1990s to present day Similar characteristics as

marketing orientation but with the added proviso that there will be a curtailment of 

any harmful activities to society, in either product, production, or selling methods.

Branding Brand value 1980s to present day In this context, "branding" is the main

company philosophy and marketing is considered an instrument of branding

philosophy.

Customer orientation

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Constructive criticism helps marketers adapt offerings to meet changing customer

needs.

A firm in the market economy survives by producing goods that persons are willing

and able to buy. Consequently, ascertaining consumer demand is vital for a firm's

future viability and even existence as a going concern. Many companies today havea customer focus (or market orientation). This implies that the company focuses its

activities and products on consumer demands. Generally, there are three ways of 

doing this: the customer-driven approach, the market change identification

approach and the product innovation approach[citation needed].

In the consumer-driven approach, consumer wants are the drivers of all strategic

marketing decisions. No strategy is pursued until it passes the test of consumer

research. Every aspect of a market offering, including the nature of the product

itself, is driven by the needs of potential consumers. The starting point is always the

consumer. The rationale for this approach is that there is no reason to spend R&D

funds developing products that people will not buy. History attests to many productsthat were commercial failures in spite of being technological breakthroughs.

A formal approach to this customer-focused marketing is known as SIVA[13]

(Solution, Information, Value, Access). This system is basically the four Ps renamed

and reworded to provide a customer focus. The SIVA Model provides a

demand/customer-centric alternative to the well-known 4Ps supply side model

(product, price, placement, promotion) of marketing management.

Product → Solution

Promotion → Information

Price → Value

Place → Access

If any of the 4Ps were problematic or were not in the marketing factor of the

business, the business could be in trouble and so other companies may appear in

the surroundings of the company, so the consumer demand on its products will

decrease. However, in recent years service marketing has widened the domains to

be considered, contributing to the 7P's of marketing in total. The other 3P's of service marketing are: process, physical environment and people.

Some qualifications or caveats for customer focus exist. They do not invalidate or

contradict the principle of customer focus; rather, they simply add extra dimensions

of awareness and caution to it.

 The work of Christensen and colleagues[14] on disruptive technology has produced

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a theoretical framework that explains the failure of firms not because they were

technologically inept (often quite the opposite), but because the value networks in

which they profitably operated included customers who could not value a disruptive

innovation at the time and capability state of its emergence and thus actively

dissuaded the firms from developing it. The lessons drawn from this work include:

 Taking customer focus with a grain of salt, treating it as only a subset of one's

corporate strategy rather than the sole driving factor. This means looking beyond

current-state customer focus to predict what customers will be demanding some

years in the future, even if they themselves discount the prediction.

Pursuing new markets (thus new value networks) when they are still in a

commercially inferior or unattractive state, simply because their potential to grow

and intersect with established markets and value networks looks like a likely bet.

 This may involve buying stakes in the stock of smaller firms, acquiring them

outright, or incubating small, financially distinct units within one's organization to

compete against them.

Other caveats of customer focus are:

 The extent to which what customers say they want does not match their purchasing

decisions. Thus surveys of customers might claim that 70% of a restaurant's

customers want healthier choices on the menu, but only 10% of them actually buy

the new items once they are offered. This might be acceptable except for the extent

to which those items are money-losing propositions for the business, bleeding red

ink. A lesson from this type of situation is to be smarter about the true test validity

of instruments like surveys. A corollary argument is that "truly understanding

customers sometimes means understanding them better than they understandthemselves." Thus one could argue that the principle of customer focus, or being

close to the customers, is not violated here—just expanded upon.

 The extent to which customers are currently ignorant of what one might argue they

should want—which is dicey because whether it can be acted upon affordably

depends on whether or how soon the customers will learn, or be convinced,

otherwise. IT hardware and software capabilities and automobile features are

examples. Customers who in 1997 said that they would not place any value on

internet browsing capability on a mobile phone, or 6% better fuel efficiency in their

vehicle, might say something different today, because the value proposition of 

those opportunities has changed.

Organizational orientation

In this sense, a firm's marketing department is often seen as of prime importance

within the functional level of an organization. Information from an organization's

marketing department would be used to guide the actions of other departments

within the firm. As an example, a marketing department could ascertain (via

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marketing research) that consumers desired a new type of product, or a new usage

for an existing product. With this in mind, the marketing department would inform

the R&D department to create a prototype of a product/service based on

consumers' new desires.

 The production department would then start to manufacture the product, while themarketing department would focus on the promotion, distribution, pricing, etc. of 

the product. Additionally, a firm's finance department would be consulted, with

respect to securing appropriate funding for the development, production and

promotion of the product. Inter-departmental conflicts may occur, should a firm

adhere to the marketing orientation. Production may oppose the installation,

support and servicing of new capital stock, which may be needed to manufacture a

new product. Finance may oppose the required capital expenditure, since it could

undermine a healthy cash flow for the organization.

Herd behavior

Herd behavior in marketing is used to explain the dependencies of customers'

mutual behavior. The Economist reported a recent conference in Rome on the

subject of the simulation of adaptive human behavior.[15] It shared mechanisms to

increase impulse buying and get people "to buy more by playing on the herd

instinct." The basic idea is that people will buy more of products that are seen to be

popular, and several feedback mechanisms to get product popularity information to

consumers are mentioned, including smart card technology and the use of Radio

Frequency Identification Tag technology. A "swarm-moves" model was introduced by

a Florida Institute of Technology researcher, which is appealing to supermarkets

because it can "increase sales without the need to give people discounts." Other

recent studies on the "power of social influence" include an "artificial music marketin which some 19,000 people downloaded previously unknown songs" (Columbia

University, New York); a Japanese chain of convenience stores which orders its

products based on "sales data from department stores and research companies;" a

Massachusetts company exploiting knowledge of social networking to improve

sales; and online retailers who are increasingly informing consumers about "which

products are popular with like-minded consumers" (e.g., Amazon, eBay).

Further orientations

An emerging area of study and practice concerns internal marketing, or how

employees are trained and managed to deliver the brand in a way that positively

impacts the acquisition and retention of customers, see also employer branding.

Diffusion of innovations research explores how and why people adopt new products,

services, and ideas.

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With consumers' eroding attention span and willingness to give time to advertising

messages, marketers are turning to forms of permission marketing such as branded

content, custom media and reality marketing.

Marketing research

Marketing research

Marketing research involves conducting research to support marketing activities,

and the statistical interpretation of data into information. This information is then

used by managers to plan marketing activities, gauge the nature of a firm's

marketing environment and attain information from suppliers. Marketing

researchers use statistical methods such as quantitative research, qualitative

research, hypothesis tests, Chi-squared tests, linear regression, correlations,

frequency distributions, poisson distributions, binomial distributions, etc. to interpret

their findings and convert data into information. The marketing research process

spans a number of stages, including the definition of a problem, development of aresearch plan, collection and interpretation of data and disseminating information

formally in the form of a report. The task of marketing research is to provide

management with relevant, accurate, reliable, valid, and current information.

A distinction should be made between marketing research and market research.

Market research pertains to research in a given market. As an example, a firm may

conduct research in a target market, after selecting a suitable market segment. In

contrast, marketing research relates to all research conducted within marketing.

 Thus, market research is a subset of marketing research.

Marketing environment

Marketing environment

Market segmentation

Market segmentation pertains to the division of a market of consumers into persons

with similar needs and wants. For instance, Kellogg's cereals, Frosties are marketed

to children. Crunchy Nut Cornflakes are marketed to adults. Both goods denote two

products which are marketed to two distinct groups of persons, both with similar

needs, traits, and wants.

Market segmentation allows for a better allocation of a firm's finite resources. A firmonly possesses a certain amount of resources. Accordingly, it must make choices

(and incur the related costs) in servicing specific groups of consumers. In this way,

the diversified tastes of contemporary Western consumers can be served better.

With growing diversity in the tastes of modern consumers, firms are taking note of 

the benefit of servicing a multiplicity of new markets.

Market segmentation can be defined in terms of the STP acronym, meaning

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Segment, Target and Position.[citation needed]

Types of Market Research

Market research, as a sub-set aspect of marketing activities, can be divided into the

following parts:

Primary research (also known as field research), which involves the conduction and

compilation of research for a specific purpose.

Secondary research (also referred to as desk research), initially conducted for one

purpose, but often used to support another purpose or end goal.

By these definitions, an example of primary research would be market research

conducted into health foods, which is used solely to ascertain the needs/wants of 

the target market for health foods. Secondary research in this case would be

research pertaining to health foods, but used by a firm wishing to develop an

unrelated product.

Primary research is often expensive to prepare, collect and interpret from data to

information. Nevertheless, while secondary research is relatively inexpensive, it

often can become outdated and outmoded, given that it is used for a purpose other

than the one for which it was intended. Primary research can also be broken down

into quantitative research and qualitative research, which, as the terms suggest,

pertain to numerical and non-numerical research methods and techniques,

respectively. The appropriateness of each mode of research depends on whether

data can be quantified (quantitative research), or whether subjective, non-numeric

or abstract concepts are required to be studied (qualitative research).

 There also exist additional modes of marketing research, which are:

Exploratory research, pertaining to research that investigates an assumption.

Descriptive research, which, as the term suggests, describes "what is".

Predictive research, meaning research conducted to predict a future occurrence.

Conclusive research, for the purpose of deriving a conclusion via a research process.

Marketing planning

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Marketing plan

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 The marketing planning process involves forging a plan for a firm's marketing

activities. A marketing plan can also pertain to a specific product, as well as to an

organization's overall marketing strategy. Generally speaking, an organization's

marketing planning process is derived from its overall business strategy. Thus, when

top management are devising the firm's strategic direction or mission, the intended

marketing activities are incorporated into this plan. There are several levels of marketing objectives within an organization. The senior management of a firm

would formulate a general business strategy for a firm. However, this general

business strategy would be interpreted and implemented in different contexts

throughout the firm.

Marketing strategy

 The field of marketing strategy encompasses the strategy involved in the

management of a given product.

A given firm may hold numerous products in the marketplace, spanning numerousand sometimes wholly unrelated industries. Accordingly, a plan is required in order

to effectively manage such products. Evidently, a company needs to weigh up and

ascertain how to utilize its finite resources. For example, a start-up car

manufacturing firm would face little success should it attempt to rival Toyota, Ford,

Nissan, Chevrolet, or any other large global car maker. Moreover, a product may be

reaching the end of its life-cycle. Thus, the issue of divest, or a ceasing of 

production, may be made. Each scenario requires a unique marketing strategy.

Listed below are some prominent marketing strategy models.

A marketing strategy differs from a marketing tactic in that a strategy looks at the

longer term view of the products, goods, or services being marketed. A tactic refersto a shorter term view. Therefore, the mailing of a postcard or sales letter would be

a tactic, but a campaign of several postcards, sales letters, or telephone calls would

be a strategy.

Marketing specializations

With the rapidly emerging force of globalization, the distinction between marketing

within a firm's home country and marketing within external markets is disappearing

very quickly. With this in mind, firms need to reorient their marketing strategies to

meet the challenges of the global marketplace, in addition to sustaining their

competitiveness within home markets.[16]

Buying behaviour

A marketing firm must ascertain the nature of customers' buying behavior if it is to

market its product properly. In order to entice and persuade a consumer to buy a

product, marketers try to determine the behavioral process of how a given product

is purchased. Buying behavior is usually split into two prime strands, whether selling

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to the consumer, known as business-to-consumer (B2C), or to another business,

known as business-to-business (B2B).

B2C buying behaviour

 This mode of behaviour concerns consumers and their purchase of a given product.

For example, if one imagines a pair of sneakers, the desire for a pair of sneakers

would be followed by an information search on available types/brands. This may

include perusing media outlets, but most commonly consists of information

gathered from family and friends. If the information search is insufficient, the

consumer may search for alternative means to satisfy the need/want. In this case,

this may mean buying leather shoes, sandals, etc. The purchase decision is then

made, in which the consumer actually buys the product. Following this stage, a

post-purchase evaluation is often conducted, comprising an appraisal of the

value/utility brought by the purchase of the sneakers. If the value/utility is high,then a repeat purchase may be made. This could then develop into consumer

loyalty to the firm producing the sneakers.

B2B buying behaviour

Relates to organizational/industrial buying behavior.[17] Business buy either

wholesale from other businesses or directly from the manufacturer in contracts or

agreements. B2B marketing involves one business marketing a product or service to

another business. B2C and B2B behavior are not precise terms, as similarities and

differences exist, with some key differences listed below:

In a straight re-buy, the fourth, fifth and sixth stages are omitted. In a modified re-

buy scenario, the fifth and sixth stages are precluded. In a new buy, all stages are

conducted.

Use of technologies

Marketing management can also rely on various technologies within the scope of its

marketing efforts. Computer-based information systems can be employed, aiding in

better processing and storage of data. Marketing researchers can use such systems

to devise better methods of converting data into information, and for the creation of 

enhanced data gathering methods. Information technology can aid in enhancing an

MKIS' software and hardware components, and improve a company's marketing

decision-making process.

In recent years, the notebook personal computer has gained significant market

share among laptops, largely due to its more user-friendly size and portability.

Information technology typically progresses at a fast rate, leading to marketing

managers being cognizant of the latest technological developments. Moreover, the

launch of smartphones into the cellphone market is commonly derived from a

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demand among consumers for more technologically advanced products. A firm can

lose out to competitors should it ignore technological innovations in its industry.

 Technological advancements can lessen barriers between countries and regions.

Using the World Wide Web, firms can quickly dispatch information from one country

to another without much restriction. Prior to the mass usage of the Internet, suchtransfers of information would have taken longer to send, especially if done via snail

mail, telex, etc.

Recently, there has been a large emphasis on data analytics. Data can be mined

from various sources such as online forms, mobile phone applications and more

recently, social media.

Services marketing

Services marketing relates to the marketing of services, as opposed to tangibleproducts. A service (as opposed to a good) is typically defined as follows:

 The use of it is inseparable from its purchase (i.e., a service is used and consumed

simultaneously)

It does not possess material form, and thus cannot be touched, seen, heard, tasted,

or smelled.

 The use of a service is inherently subjective, meaning that several persons

experiencing a service would each experience it uniquely.

For example, a train ride can be deemed a service. If one buys a train ticket, the use

of the train is typically experienced concurrently with the purchase of the ticket.

Although the train is a physical object, one is not paying for the permanent

ownership of the tangible components of the train.

Services (compared with goods) can also be viewed as a spectrum. Not all products

are pure goods, nor are all pure services. An example would be a restaurant, where

a waiter's service is intangible, but the food is tangible.

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Choosing Distribution MethodsOnce you have selected and developed a unique product or business idea, correctly positioned

and targeted it to buyers, and developed your  packaging and pricing, the selection of distribution

channels and sales representation is key to successful marketing.It's fairly easy to change many of your marketing tactics and strategies on a periodic basis;

 pricing, packaging, and product mix are among these flexible choices. However, distribution andsales decisions, once made, are much more difficult to change. And distribution affects the

selection and utilization of all other marketing tools.

There is a wide variety of possible distribution channels, including:

• retail outlets owned by your company or by an independent merchant or chain

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• wholesale outlets of your own or those of independent distributors or brokers

• sales force compensated by salary, commission, or both

• direct mail via your own catalog or flyers

• telemarketing on your own or through a contract firm

• cybermarketing, join the millions of online businesses

• TV and cable direct marketing and home shopping channels

Distribution choices for a service business follow the same lines as those for a physical product.

For example, financial planning services may be offered from printed material, sold at retail byconsultants, delivered electronically by computer, or relayed by phone, fax or mail.

Steps for selecting distribution and sales force representation include:

• Identify how competitors' products are sold.

• Analyze strengths, weaknesses, opportunities, and threats for your business.

• Examine costs of channels and sales force options.

•

Determine which distribution options match your overall marketing strategy.• Prioritize your distribution choices.

This exercise is applicable for both large and small businesses.

How Are Competitor's Products Sold?Small businesses may face a particular difficulty in identifying their directly competitive selling

channels, not usually in identifying where target buyers buy competitive products.

 A local one-man architect business, Life Designs, provides

residential home design and competes indirectly with all

architectural design firms and home building suppliers.

These include large firms who do both industrial andresidential designs and suppliers of home-building kits

(e.g., log houses and A-frames).

However, Life Design's direct competition is a small

group of similar firms that specialize only in local area

home designs and remodeling. This small one-person

architectural company does not have the time or resourcesto compete with any firm outside his local city area at the

 present time. And some potential target customers may not

 be interested in having anyone but a larger, nationallyknown firm work on their home design.

Small companies should make a list of any competitors in their marketing area that couldcompete directly with them for the same list of potential customers. The list of competitors

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should then be divided into different distribution channels, if applicable.

In the architect example, a list of competitors broken down by different local distributionchannels includes:

• competitors who advertise in local city and county magazines, newspapers, and real-

estate flyers, subdivided by home-design only firms and home-design + industrial-designfirms

• competitors who work with contractors and developers in the local county

• the local university's architectural design department

Architectural competitors who advertise in local city media may be local, regional or national. In

some cases, these competitors solicit home design business from wealthy industrial designclients they are doing work for. Other competitors have contracts to design and modify

development-tract homes for local developers. And some competitors work with contractors to

design home remodeling/addition projects. The local university is active in publicizing student

residential design projects that result in several new home and remodeling/addition jobs eachyear.

The development of a list, broken down into competitive distribution channels, can also be

assigned estimated dollar sales per year to create market segments. Sales estimates can begathered by reviewing secondary research data, networking, and attending trade and association

events, and by speaking with local government and business organizations (e.g., chamber of 

commerce and city, state, and federal housing departments, particularly the agency that issueslocal building permits).

 Next, Life Designs worked on assessing company strengths and weaknesses, along with external

environment opportunities and threats.

Strength, Weakness, Opportunity, ThreatStrength and weakness analysis is an internal company exercise to gauge your ability to competeeffectively. Opportunity and threat analysis is an external exercise centered on competitors and

the external environment that affect a company's ability to compete effectively. Taken together,

they are referred to as SWOT analysis.

Each distribution channel alternative and sales force option carries specific costs that can be

estimated in most industries and categories.

Small businesses need to network with potential or current customers, industry associations,trade suppliers, and competitors to help answer these questions. Key questions are:

• What are the barriers (difficulties) to entering this product category via each distribution

channel?

• How much do various distribution channels cost to successfully enter? Over what period

of time is this money being spent?

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• Should we distribute our business products locally, regionally, nationally? And in what

order, or through all channels at the same time?

• Are some or all of the items we sell subject to varying product life cycles? How do our 

 products compare to competitor product life cycles by channel?

• What types of competitive spending, promotions, advertising, and field sales response

will our business entry encounter by type of distribution channel?

Other considerations. In some categories of small business, other factors should be considered,

such as:

• ease and affordability of entering the product category

• geographic locations of customers

• existing competitors' market shares

•  product life cycle by channel (e.g., vending products may reach saturation in a few

months, or have only seasonal distribution)

•

absolute size of competitors and their financial resources

Case Study: Life Designs ArchitectureOur independent architect who specializes in designing residential homes, Life Designs, has a

strengths, weaknesses, opportunities, and threats (SWOT) list that includes:

Strengths

• ability to respond quickly to customer demands and changes

• ability to make acceptable margins on small jobs, with low overhead

• high-quality of work and experience

• reputation for being affable, honest, and easy to work with

• reputation for good value of services and prices

• appeal to customers of working directly with the architect/principal

Weaknesses

• very limited financial, personnel, and time resources

• a limit of three to four projects at any given time

• inability to sell and work on a project at the same time

• not having a personal relationship with influential local business leaders

•  being known for a limited number of architectural design "styles"

Opportunities

• a growing market for new homes and more upscale homeowners moving to the area,

fostered by a growing local economy

• a chance to contract with a local developer for an exclusive agreement

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• a chance to work with the university architectural design department as a visiting lecturer 

• a chance to relocate his office from his home to a co-op business office center, with

shared secretaries, receptionist, conference rooms, and computers

• the availability of hiring independent sales reps to work with residential owners, real

estate firms, and contractors

Threats

• a growing amount of advertising and business inroads by outside regional and national

firms in the local area

• new local zoning codes and state/federal legislation increasing the cost of new home and

remodeling/addition work 

• increasing costs of building materials

• a possible shortage of skilled building trade people in the area

• a new competitor in the area specializing in residential home design, especially in his

known "style" of design• economic downturns affecting the housing market in general

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David Ricardo (18 April 1772 – 11 September 1823) was an English  political economist, often

credited with systematising economics, and was one of the most influential of the classicaleconomists, along with Thomas Malthus, Adam Smith, and John Stuart Mill. He was also a

member of Parliament, businessman, financier  and speculator , who amassed a considerable

 personal fortune. Perhaps his most important contribution was the law of  comparative advantage,a fundamental argument in favour of free trade among countries and of specialisation among

individuals. Ricardo argued that there is mutual benefit from trade (or exchange) even if one

 party (e.g. resource-rich country, highly skilled artisan) is more productive in every possible areathan its trading counterpart (e.g. resource-poor country, unskilled labourer), as long as each

concentrates on the activities where it has a relative productivity advantage.

Contents

 

• 1 Personal life 

• 2 Ideas 

o 2.1 Value theory o 2.2 Rent 

o 2.3 Trade theory and policy 

§ 2.3.1 Protectionism 

§ 2.3.2 Comparative advantage 

• 3 Ricardian equivalence 

• 4 Ricardo's theories of wages and profits 

• 5 His legacy and influence 

o 5.1 Ricardian socialists 

§ 5.1.1 Unequal Exchange 

o 5.2 Neo-Ricardians 

§ 5.2.1 Evolutionary growth theory o 5.3 The Ricardian theory of international trade 

§ 5.3.1 Contemporary theories 

§ 5.3.2 Neo-Ricardian trade theory 

§ 5.3.3 Ricardo–Sraffa trade theory § 5.3.3.1 Traded intermediate goods 

§ 5.3.3.2 Theoretical developments 

§ 5.3.3.3 Recent episode § 5.3.4 Criticism of the Ricardian theory of trade 

Personal lifeBorn in London, England, Ricardo was the third of 17 children of a Sephardic Jewish family of 

Portuguese origin who had recently relocated from the Dutch Republic. His father was a

successful stockbroker .At age 21, Ricardo eloped with a Quaker , Priscilla Anne Wilkinson, leading to estrangement

from his family. His father disowned him and his mother apparently never spoke to him again.

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Without family support, he started his own business as a stockbroker, in which he became quite

successful thanks to the connections he made when working with his father.

During the Battle of Waterloo, he bet against the French victory and invested in Britishsecurities. By the time he retired from the Exchange at the age of 43, his fortune was estimated at

about £600,000. He then purchased and moved to Gatcombe Park , an estate in Gloucestershire,

now owned and lived in by Princess Anne, the Princess Royal.At the time of his marriage, Ricardo disconnected from Judaism and became a Unitarian. He had

eight children, including three sons, of whom Osman Ricardo (1795–1881; MP for Worcester  

1847–1865) and another David Ricardo (1803–1864, MP for  Stroud 1832–1833), becamemembers of parliament, while the third, Mortimer Ricardo, served as an officer in the Life

Guards and was a deputy lieutenant for Oxfordshire. He was one of the original members of The

Geological Society. His daughter was Sarah Ricardo-Porter , who married George R. Porter and

was an author in her own right (e.g., Conversations in Arithmetic).Ricardo became interested in economics after reading Adam Smith's The Wealth of Nations in

1799 on a vacation to the English resort of Bath. This was Ricardo's first contact with economics.

He wrote his first economics article at age 37 and within another ten years he reached the height

of his fame.In 1819, Ricardo took a seat in the House of Commons, representing Portarlington, an Irish

rotten borough. He held the seat, which had initially been made available to him by his friendRichard "Conversation" Sharp, until his death in 1823. In 1846, his nephew John Lewis Ricardo,

MP for Stoke-on-Trent, advocated free trade and the repeal of the Corn Laws.

Ricardo was a close friend of James Mill, who encouraged him in his political ambitions andwritings about economics. Other notable friends included Jeremy Bentham and Thomas Malthus,

with whom Ricardo had a considerable debate (in correspondence) over such things as the role of 

landowners in a society. He also was a member of London's intellectuals, later becoming a

member of Malthus' Political Economy Club, and a member of the King of Clubs.

Ideas

Value theory

Ricardo's most famous work is his Principles of Political Economy and Taxation (1817). Ricardo

opens the first chapter with a statement of the labour theory of value. Later in this chapter, he

demonstrates that prices do not correspond to this value. He retained the theory, however, as anapproximation. The labour theory of value states that the relative price of two goods is

determined by the ratio of the quantities of labour required in their production. His labour theory

of value, however, required several assumptions:

1. both sectors have the same wage rate and the same profit rate;

2. the capital employed in production is made up of wages only;

3. the period of production has the same length for both goods.

Ricardo himself realized that the second and third assumptions were quite unrealistic and hence

admitted two exceptions to his labour theory of value:

1. production periods may differ;

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2. the two production processes may employ instruments and equipment as capital and not

 just wages, and in very different proportions.

Ricardo continued to work on his value theory to the end of his life.

But the first chapter is but the introduction to a long book that discusses back and forth an

extended series of comparisons and contrasts of the various points of views and of Ricardo's own

reasoning.In the chapter "On Value and Riches," Ricardo makes effort to illustrate that exchange value is

not the same as "value in use". In this way one can factor two often contradictory results. Point 2,

above, that the capital employed in production must be made up of wages only for his valuetheory to hold, is answered by this: that production may be made up of capital and machinery,

 but it doesn't change the principle (which he attributes to Adam Smith) that he tries to lay out in

this chapter. Machinery may add to one measure of value beyond almost all measure withoutadding one penny to the other measure of value. In this way, one is able, Ricardo seems to show,

to factor out somewhat contradictory assumptions which if confounded lead to equally

contradictory results. By making all things perfectly clear, or in attempting to, Mr. Ricardo, seeksto resolve some of those ills of the democratic society in which he lived in so far as reason, and

action, could resolve them. In this pursuit, he took action, sitting in parliament, moving with hisstirring, and amusing, speeches the inner policies of the British Empire.

The key point that Ricardo seems to make, though, is something like this: Accumulation of capital adds riches without decreasing the value of things to be traded, which may bring the

various economic actors to a win-win. Ricardo first attempts to show that new riches are not

adding as much value as one would think because they are always decreasing somewhat from theexchangeable value of what was produced. The decreasing value in exchange as value-in-use

increases he extrapolates to infer that the sum world total of value in exchange is a fixed

constant. Therefore, in the growth of the global economy, the first-world countries, he states, will begin to lose value per trade, even to the purely theoretical extent of taking from the capital base.

Yet, Ricardo notes that with more value-in-use for the rich and the poor, both will likely obtain

more security as the aggression of competition is mitigated by physical economic growth. AdamSmith had thought that due to its effect on value, the growth of wealth of the poor beyondsubsistence levels is likely to take from the overall wealth of the society. All economists

(neoliberal through progressive) still worry about that and so they weaken the wealth of the poor 

to maintain economic growth. Ricardo shows this as unnecessary when we measure value inexchange together with the growth of value-in-riches, rather than by the monopolization value.

The extreme aspects of competition then leave, for the rich and poor alike, an appearance of the

growth of wealth, yet without the actual result of it. Taking a step back and noticing the growthof actual value-in-use may allow people as corporations and laborers, both rich and poor, to

realize this and see a way and means forward.

Rent

Ricardo is responsible for developing theories of rent, wages, and profits. He defined rent as "the

difference between the produce obtained by the employment of two equal quantities of capital

and labor." The model for this theory basically said that while only one grade of land is being

used for cultivation, rent will not exist, but when multiple grades of land are being utilized, rentwill be charged on the higher grades and will increase with the ascension of the grade. As such,

Ricardo believed that the process of economic development, which increased land utilization and

eventually led to the cultivation of poorer land, benefited first and foremost the landowners

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 because they would receive the rent payments either in money or in product.

In a careful analysis of the effects of different forms of taxation, Ricardo concludes in chapters

10 and 12 that a tax on land value, equivalent to a tax on the land rent, was the only form of taxation that would not lead to price increases; it is paid by the landlord, who is not able to pass

it on to a tenant. He stated that the poorest grade land in use has no (land) rent and so pays no

land value tax; as prices are determined at this marginal site for the whole economy, prices willnot be increased by a land value tax. His analysis distinguishes between rent of (unimproved)

land and rent associated with capital improvements such as buildings.

• Accumulation of Inequality of Distribution of varied quantities of Accumulatable

Scarce Necessary Means of Production.

Ricardo's concept of rent is laid out in his book Principles of Political Economy and Taxation.Due to variation in scarcity of land (or some other accumulatable scarce necessities of varied

utility), some land pays a higher monopoly value due to its scarcity than other land. This return

on investment is higher than what one would otherwise expect based simply on the value and

scarcity of the produce; this return on investment comes from the incident of ownership thatallows a monopoly price to be paid. Such premium over real social value that an individual is

able to reap due to incident of ownership constitutes real value to an individual but is at best [8] a

 paper monetary return to society. The portion of such purely individual benefit, and exclusivelythat portion, that accrues to scarce, accumulatable resources such as land or gold or houses, over 

and above any socially beneficial exchange, Ricardo labels Rent.

If all land were equally situated, however scarce, one could determine that all market exchangeof the produce thereof was free and equal and that the exact value of the trade was conveyed

simultaneously to both parties and to society. In the case of increasing scarcity of the land of 

higher absolute utility, the free market principle fails to either properly measure or convey value.

This gap between personal value accrual and social value accrual, in the case of land, isRicardian Rent. Rent therefore constitutes value for nothing and as such constitutes a loss to

society above maximum production, and one that increases at a faster rate than the decline in

 production that comes from the scarcity of the land, as land becomes more scarce. Proposals tosolve this by various types of land tax are explored further. The key problem then, Ricardo

discusses, would be to find a tax that is able to maximally differentiate between tax on profit and

tax on such purely Ricardian rent. No easy task, he points out, as in the case of how onedifferentiates between basic land return, that portion that constitutes such excess above social

 productivity that he labels rent, and the portion that comes from non–rent producing capital

investment in fertilizer, irrigation, deep plowing and land improvements of all types, barns, etc.

• Malthus's criticism and Extrapolation of the problem of Ricardian Rent

In demonstrating that Ricardian Rent constitutes value for nothing (Ricardo was momentarily

neglecting Say's Law that all savings by-definition-equals investment), Ricardo overlooks that

such value-for-nothing doesn't necessarily disappear upon "mis-payment" to a landlord. This iswhat Malthus, Ricardo's personal friend and intellectual opponent, states in his own book on

Rent, one of his works that expounds from a point of view of Malthus's Surplus Value theories,

rather than Malthus's earlier and more quoted Scarcity Value Theory. Thus, says Malthus, Rent,however misplaced, constitutes a prime source of savings and investment for the future. We need

then, if contented by Malthus, only look for such portion of Ricardian Rent that due to its over-

investment (due to its miscalculation) represents lost economic value to the society as a whole.Malthus' Criticism of Ricardian Rent does not in Malthus' book on Rent touch on this problem of 

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Ricardian over-investment as expounded by Malthus (the General Glut controversy); rather, in

his later works, Malthus does so. So: to Ricardo, Economic Rent is a surplus of individual

investors' paper profit (which has its value in control over resources rather than directly in theresources themselves) over societal gain. As such, it does not represent any gain but rather an

unearned transfer of wealth. To Malthus, there is material gain created in the re-investment

which is rent, but at some point such gain may as says Ricardo in regards to the paper profit he believes Economic Rent to be, be in excess of social utility.

 Earlier writers touched on Economic Rent too. Ricardo advises caution in responses to the

 problem of Economic Rent To be clear, the topic of Economic Rent, as expounded by Ricardo,was by earlier writers such as Smith. Ricardo's book forms a sort of textbook of such earlier 

expounded theories, in which he adds his own analysis while comparing and contrasting different

views and pointing out the flaws in them. Ricardo, after spending many chapters contented withthis view of Rent, ascribes it to Smith and then says it is true but probably not so important in an

expanding economy and measures to address it should be marked with caution as they would

likely produce different effects in different situations.[9]

Trade theory and policy

Ø Protectionism

Like Adam Smith, Ricardo was also an opponent of  protectionism for national economies,

especially for agriculture. He believed that the British "Corn Laws"—tariffs on agriculture

 products—ensured that less-productive domestic land would be harvested and rents would bedriven up. (Case & Fair 1999, pp. 812, 813). Thus, the surplus would be directed more toward

feudal landlords and away from the emerging industrial capitalists. Since landlords tended to

squander their wealth on luxuries, rather than investments, Ricardo believed that the Corn Lawswere leading to the stagnation of the British economy. Parliament repealed the Corn Laws in

1846.Ø Comparative advantage

• The Problem of Competitive Advantage

Ricardo extrapolates the problem of monopolistic rent on the land itself to other 

situations/resources that are fundamentally scarce: the buildings that sit on the land, due to the

long time frame of use and large lump-sum cost of building new ones; or gold, which is also a partial monopoly due to its scarcity, and which is not consumable. He then questions whether all

trade has a fundamental problem of inequality that is inevitably hard to bridge. This is the

 problem of absolute competitive advantage—where one party has an unbridgeable competitiveadvantage due to wealth or productive advantages in every field. If so, can trade profitably

continue? Ricardo solves this with Comparative Advantage.• Comparative Advantage: The Solution

This book, Principles of Political Economy, introduces the theory of comparative advantage. 

According to Ricardo's theory, even if a country could produce everything more efficiently than

another country, it would reap gains from specializing in what it was best at producing andtrading with other nations.[10] Ricardo believed that wages should be left to free competition, so

there should be no restrictions on the importation of agricultural products from abroad.

The benefits of comparative advantage are both distributional and related to improved real

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income. Within Ricardo's theory, distributional effects implied that foreign trade could not

directly affect profits, because profits change only in response to the level of wages. The effects

on income are always beneficial because foreign trade does not affect value.Comparative advantage forms the basis of modern trade theory, reformulated as the Heckscher– 

Ohlin theorem, which states that a country has a comparative advantage in the production of a

 product if the country is relatively well-endowed with inputs that are used intensively in producing the product. (Case & Fair 1999, p. 822). See the section The Ricardian theory of 

international trade of this page for another side of the theoretical development.

The theory of comparative advantage as he described it seems to be that both those rich in abilityand the poor alike concentrate each their own analytical powers on meeting the needs and

abilities of the richer, more skilful party to an otherwise unequal exchange and thereby both

 benefit. Ideas often extrapolated are: that both benefit equally; and that somehow in such

exchange each nation, or person, is enabled to focus on its own area of real specialisation in a bi-directional equal trade—but we only start with an idea of purely comparative specialisation in

one direction.

For the contemporary development of Ricardo's idea on international trade, see the section The

 Ricardian theory of international trade in the part His Legacy and Influence.

Ricardian equivalenceAnother idea associated with Ricardo is Ricardian equivalence, an argument suggesting that in

some circumstances a government's choice of how to pay for its spending (i.e., whether to use

tax revenue or issue debt and run a deficit) might have no effect on the economy. Ricardosupports this proposition by noting that it is implied by intertemporal optimisation by tax-payers:

only if tax-payers act irrationally (or capital markets are imperfect) will the proposition fail to be

true. Ironically, while the proposition bears his name, he does not seem to have believed it.Economist Robert Barro is responsible for its modern prominence.

Ricardo's theories of wages and profitsSeveral authorities consider that Ricardo is the source of the concepts behind the so-called Iron

Law of Wages, according to which wages naturally tend to a subsistence level.[11][12][13] Others

dispute the assignment to Ricardo of this idea.Ricardo believed that in the long run, prices reflect the cost of production, and referred to this

long run price as a Natural price. The natural price of labour was the cost of its production, that

cost of maintaining the labourer. If wages correspond to the natural price of labour, then wages

would be at subsistence level. However, due to an improving economy, wages may remainindefinitely above subsistence level:

 Notwithstanding the tendency of wages to conform to their natural rate, their market rate may in

an improving society, for an indefinite period, be constantly above it; for no sooner may the

impulse, which an increased capital gives to a new demand for labor, be obeyed, than another increase of capital may produce the same effect; and thus, if the increase of capital be gradual

and constant, the demand for labour may give a continued stimulus to an increase of people....

It has been calculated, that under favourable circumstances population may be doubled in

twenty-five years; but under the same favourable circumstances, the whole capital of a country

might possibly be doubled in a shorter period. In that case, wages during the whole period wouldhave a tendency to rise, because the demand for labour would increase still faster than the supply.

(On the Principles of Political Economy, Chapter 5, "On Wages").

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In his Theory of Profit , Ricardo stated that as real wages increase, real profits decrease because

the revenue from the sale of manufactured goods is split between profits and wages. He said in

his Essay on Profits, "Profits depend on high or low wages, wages on the price of necessaries,and the price of necessaries chiefly on the price of food."

His legacy and influenceDavid Ricardo's ideas had a tremendous influence on later developments in economics. US

economists rank Ricardo as the second most influential economic thinker, behind Adam Smith,

 prior to the twentieth century.[14]

With his highly logical arguments, he has become the theoretical father of the classical political

economy. Schumpeter coined an expression Ricardian vice, which indicates that rigorous logic

does not provide a good economic theory.[15] This criticism applies also to most neoclassicaltheories, which make heavy use of mathematics, but are, according to him, theoretically

unsound, because the conclusion being drawn does not logically follow from the theories used to

defend it.[citation needed ]

Ricardian socialists

Unequal Exchange

Chris Edward includes Emmanuel's Unequal Exchange theory among variations of neo-Ricardian trade theory.[16] Arghiri Emmanuel argued that the Third World is poor because of the

international exploitation of labour.[17]

The unequal exchange theory of trade has been influential to the (new) dependency theory.[18]

Neo-Ricardians

After the rise of the 'neoclassical' school, Ricardo's influence declined temporarily. It was Piero

Sraffa, the editor of the Collected Works of David Ricardo[19] and the author of seminal

 Production of Commodities by Means of Commodities,[20] who resurrected Ricardo as the

originator of another strand of economics thought, which was effaced with the arrival of theneoclassical school. The new interpretation of Ricardo and Sraffa's criticism against the marginal

theory of value gave rise to a new school, now named neo-Ricardian or Sraffian school. Major 

contributors to this school includes Luigi Pasinetti (1930–), Pierangelo Garegnani (1930–2011),Ian Steedman (1941–), Georffrey Harcourt (1931–), Heinz Kurz (1946–), Neri Salvadori

(1951–), Pier Paolo Saviotti (–) among others. See also Neo-Ricardianism. Neo-Ricardian school

is sometimes seen to be a composing element of Post-Keynesian economics.

Evolutionary growth theory

Several distinctive groups have sprung out of the neo-Ricardian school. One is the evolutionarygrowth theory, developed notably by Luigi Pasinetti, J.S. Metcalfe, Pier Paolo Saviotti, and Koen

Frenken and others.[21][22]

The first step came from Pasinetti.[23][24] He argued that the demand of any commodity came tostagnate and frequently decline as Engel curve shows it. The commodities are produced by each

industry with different growth rate of labour productivity. The consequences are different rate of 

growth of output and employment. To any economic development structural change is inevitable.

If the commodity variety remains constant, demand saturation occurs for any rich eceonmy.Introduction of new commodities (goods and services) is necessary to evade from economic

stagnation.

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The problem of demand saturation and satiety became one of the most topical themes of 

evolutionary economists. Many articles and books have been written.[25][26][27][28][29]

As for the causes and mechanisms of demand saturation, I, Steedman pointed that time plays asimportant a role as income.[30][31] Indeed, the neoclassical economics admits monetary budget as

unique constraint, but for any busy person the time counts as much as price to enjoy the

 purchased commodities. Another constraints, such as house surface, are effective for example inthe Japanese economy, where people live in a "rabbit hutch."

Demand saturation problems are pursued, parallel to evolutionary economists, by Aoki and

Yoshikawa[32][33] and other Japanese researchers.[34][35]

The Ricardian theory of international trade

The Ricardian theory of comparative advantage also became a basic constituent of neoclassical

trade theory. Any undergraduate course in trade theory includes expansions of Ricardo's exampleof four numbers in for form of a two commodity, two country model. Ricardo intended to show

 by this classic example the benefits of free trade from comparative advantage, as in his example

there is one country that is more proficient in producing both commodities relative to the other 

country. Adam Smith would likely reason, by logic of absolute advantage, that there would be noincentive for trade between the two countries. This model was expanded to many-country and

many-commodity cases and also to include migration of people between countries. Major 

general results were obtained by the beginning of 1960's by McKenzie[36][37] and Jones,[38] including his famous formula.

Contemporary theories

Ricardo's idea was even expanded to the case of continuum of goods by Dornbusch, Fischer, and

Samuelson[39] This formulation is employed for example by Matsuyama[40] and others.

Neo-Ricardian trade theory

Inspired by Piero Sraffa, a new strand of trade theory emerged and was named neo-Ricardian

trade theory. The main contributors include Ian Steedman (1941–) and Stanley Metcalfe (1946–).They have criticised neoclassical international trade theory, namely the Heckscher–Ohlin model on the basis that the notion of capital as primary factor has no method of measuring it before the

determination of profit rate (thus trapped in a logical vicious circle).[41][42] This was a second

round of the Cambridge capital controversy, this time in the field of international trade.[43]

The merit of neo-Ricardian trade theory is that input goods are explicitly included to the

analytical framework. This is in accordance with Sraffa's idea that any commodity is a product

made by means of commodities. The limit of their theory is that the analysis is limited to smallcountry cases. The wage of the Rest of the World is determined by assumption and there is no

internal mechanism which generates international wage differences. In this sense the neo-

Ricardian trade theory lacks international value theory.[44]

Ricardo–Sraffa trade theory

Traded intermediate goods

Ricardian trade theory ordinarily assumes that the labour is the unique input. This is a greatdeficiency as trade theory, for the intermediate goods occupy the major part of the world

international trade. Yeats[45] found that 30% of world trade in manufacturing is intermediate

inputs. Bardhan and Jafee[46] found that intermediate inputs occupy 37 to 38% in the imports tothe US for years 1992 and 1997, whereas the percentage of intrafirm trade grew from 43% in

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1992 to 52% in 1997.

McKenzie[36]:177–9 and Jones[47] emphasised the necessity to expand the theory to the cases of 

traded inputs. Paul Samuelson[48]  coined a term Sraffa bonus to name the gains from trade of inputs.

Theoretical developments

John Chipman observed in his survey that McKenzie stumbled upon the questions of intermediate products and discovered that "introduction of trade in intermediate product

necessitates a fundamental alteration in classical analysis."[49] It took may years until recently Y.Shiozawa[50] succeeded to remove this deficiency. The Ricardian trade theory was now

reconstructed to include intermediate input trade in a very general case of many countries and

many goods. This new theory is sometimes called Ricardo–Sraffa trade theory.It is emphasised that the Ricardian trade theory now provides a general theory which includes

trade of intermediates such as materials, fuel and machine tools. The traded intermediate goods

are then used as inputs of productions. Capital goods are nothing other than inputs to the productions. Thus, in the Ricardian trade theory, capital goods move freely from country to

country. Trade in capital goods may transmit the benefit of technological advances across trading

countries.[51] Labour is the unique factor of production that remains immobile in the country of itsorigin.

The neoclassical Heckscher–Ohlin–Samuelson theory assumes only production factors and

finished goods. It has not the concept of intermediate goods. Therefore, it is the Ricardo–Sraffa

trade theory that provides theoretical bases for the topics as outsourcing, fragmentation[52] andintra-firm trade.[53]

Recent episode

In a blog post of 28 April 2007, Gregory Mankiw compared Ricardian theory and Heckscher– 

Ohlin theory and stood by the Ricardian side.[54] Mankiw argued that Ricardian theory is more

realistic than the Heckscher–Ohlin theory as the latter assumes that capital does not move from

country to country. Mankiw's argument contains a logical slip, for the traditional Ricardian tradetheory does not admit any inputs. Shiozawa's result saves Mankiw from his slip.[44]

Criticism of the Ricardian theory of trade

Ricardo's plea for free trade received attacks from those people who think trade restriction is

necessary. Utsa Patnaik claims that Ricardian theory of international trade contains a logical

fallacy. Ricardo assumed that in both countries two goods are producible and actually are produced, but developed and underdeveloped countries often trade those goods which are not

 producible in their own country. For example, many Northern countries do not produce tropical

fruits. In these cases, one cannot define which country has comparative advantage.[55]

Ricardo's theory of  comparative advantage is also flawed in that it assumes production iscontinuous and absolute. In the real world, events outside the realm of human control (e.g.

natural disasters) can disrupt production. In this case, specialisation could cripple a country that

depends on imports from foreign, naturally disrupted countries. For example, if an industrially based country trades its manufactured goods to an agrarian country in exchange for agricultural

 products, a natural disaster in the agricultural country (e.g. drought) may cause an industrially

 based country to starve.

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Mercantilism is the economic doctrine in which government control of foreign trade is of  paramount importance for ensuring the prosperity and military security of the state. In particular,

it demands a positive balance of trade. Mercantilism dominated Western European economic

 policy and discourse from the 16th to late-18th centuries.[1] Mercantilism was a cause of frequentEuropean wars in that time and motivated colonial expansion. Mercantilist theory varied in

sophistication from one writer to another and evolved over time. Favors for powerful interests

were often defended with mercantilist reasoning.Mercantilist policies have included:

• Building a network of overseas colonies

• Forbidding colonies to trade with other nations

• Monopolizing markets with staple ports;

• Promote accumulation of gold and silver 

•

Forbidding trade to be carried in foreign ships;• Export subsidies;

• Maximizing the use of domestic resources;

• Restricting domestic consumption with non-tariff barriers to trade.

Jean-Baptiste Colbert's work in seventeenth century France exemplified classical mercantilism.

In the English-speaking world its ideas were criticized by Adam Smith with the publication of The Wealth of Nations in 1776 and later  David Ricardo with his explanation of comparative

advantage. Mercantilism was rejected by Britain and France by the mid-19th century. The British

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Empire embraced free-trade and used its power as the financial center of the world to promote

the same.

Neomercantilism is a 20th century economic policy that uses the ideas and methods of neoclassical economics. The new mercantilism has different goals and focuses on more rapid

economic growth based on advanced technology. It promotes such policies as substitution state

taxing, subsidizing, spending, and general regulatory powers for tariffs and quotas, and protection through the formation of supranational trading blocs.[2]

Mercantilism in its simplest form was naive  bullionism, but mercantilist writers emphasized the

circulation of money and rejected hoarding. Their emphasis on monetary metals accords withcurrent ideas regarding the money supply, such as the stimulative effect of a growing money

supply. Specie concerns have since been rendered moot by fiat money and floating exchange

rates. In time, the heavy emphasis on money was supplanted by industrial policy, accompanied

 by a shift in focus from the capacity to carry on wars to promoting general prosperity. Matureneomercantilist theory recommends selective high tariffs for "infant" industries or to promote the

mutual growth of countries through national industrial specialization. Currently, advocacy of 

mercantilist methods for maintaining high wages in advanced economies are popular among

workers in those economies, but such ideas are rejected by most policymakers and economists.

Contents

• 1 Influence

• 2 Theory 

o 2.1 Infinite growth

• 3 Origins

• 4 Policies 

o 4.1 France

o 4.2 Great Britain

o 4.3 Other countries

o 4.4 Wars and imperialism

• 5 Criticisms

• 6 Legacy

• 7 Reverse-mercantilism

Influence

Mercantilism was the dominant school of thought in Europe throughout the late Renaissance and

early modern period (from the 15th to the 18th century). Mercantilism encouraged the many

intra-European wars of the period and arguably fueled European expansion and imperialism  —  both in Europe and throughout the rest of the world — until the 19th century or early 20th

century.

Arguments have been made for the historical promotion of mercantilism in Europe sincerecorded history, with authors noting the trade policies of Athens and its Delian League 

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specifically mention control of value of trade in bullion as necessary for the promotion of the

Greek  polis. Additionally, the noted competition of  medieval monarchs for control of the market

town trade and of the spice trade, as well as the copious documentation of  Venice, Genoa, andPisa regarding control of the Mediterranean trade of bullion clearly points to an early

understanding of mercantilistic principles. However, as a codified school, mercantilism's real

 birth is marked by the Empiricism of the Renaissance, which first began to quantify large-scaletrade accurately.

England began the first large-scale and integrative approach to mercantilism during the

Elizabethan Era (1558–1603). An early statement on national balance of trade appeared in Discourse of the Common Weal of this Realm of England , 1549: "We must always take heed that

we buy no more from strangers than we sell them, for so should we impoverish ourselves and

enrich them."[3] The period featured various but often disjointed efforts by the court of  Queen

Elizabeth to develop a naval and merchant fleet capable of challenging the Spanish strangleholdon trade and of expanding the growth of bullion at home. Queen Elizabeth promoted the Trade

and Navigation Acts in Parliament and issued Orders in Council to her Admiralty for the

 protection and promotion of English shipping. A systematic and coherent explanation of balance

of trade was made public through Thomas Mun's c.1630 "England's treasure by forraign trade,or, The balance of our forraign trade is the rule of our treasure"[4]

These efforts organized national resources sufficiently in the defense of England against the far larger and more powerful Spanish Empire, and in turn paved the foundation for establishing a

global empire in the 19th century.[citation needed ] The authors noted most for establishing the English

mercantilist system include Gerard de Malynes and Thomas Mun, who first articulated theElizabethan System, which in turn was then developed further by Josiah Child. Numerous

French authors helped cement French policy around mercantilism in the 17th century. This

French mercantilism was best articulated by Jean-Baptiste Colbert (in office, 1665–1683),

though policy liberalised greatly under Napoleon.In Europe, academic belief in mercantilism began to fade in the late 18th century, especially in

England, in light of the arguments of Adam Smith and the classical economists. The repeal of the

Corn Laws by Robert Peel symbolised the emergence of free trade as an alternative system.Mercantilism never returned to popularity among economists as the principle Comparative

Advantage shows the gains from international trade. However, during the Great Recession 

countries raised tariffs in an attempt to protect their industries, sharply reducing world trade.

Theory

Most of the European economists who wrote between 1500 and 1750 are today generallyconsidered mercantilists; this term was initially used solely by critics, such as Mirabeau and

Smith, but was quickly adopted by historians. Originally the standard English term was

"mercantile system". The word "mercantilism" was introduced into English from German in the

early 19th century.The bulk of what is commonly called "mercantilist literature" appeared in the 1620s in Great

Britain.[5] Smith saw English merchant Thomas Mun (1571–1641) as a major creator of the

mercantile system, especially in his posthumously published Treasure by Foreign Trade (1664),which Smith considered the archetype or manifesto of the movement. [6] Perhaps the last major 

mercantilist work was James Steuart’s Principles of Political Economy published in 1767.[7]

"Mercantilist literature" also extended beyond England. For example, Italy, France, and Spain produced noted writers of mercantilist themes including Italy's Giovanni Botero (1544–1617)

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and Antonio Serra (1580-?); France's, Jean Bodin, Colbert and other  physiocrats precursors; and

the Spanish School of Salamanca writers Francisco de Vitoria (1480 or 1483–1546), Domingo de

Soto (1494–1560), Martin de Azpilcueta (1491–1586), and Luis de Molina (1535–1600). Themesalso existed in writers from the German historical school from List, as well as followers of the

"American system" and British "free-trade imperialism," thus stretching the system into the 19th

century. However, many British writers, including Mun and Misselden, were merchants, whilemany of the writers from other countries were public officials. Beyond mercantilism as a way of 

understanding the wealth and power of nations, Mun and Misselden are noted for their 

viewpoints on a wide range of economic matters.[8]

Merchants in Venice

The Austrian lawyer and scholar Philipp Wilhelm von Hornick , in his Austria Over All, If She

Only Will of 1684, detailed a nine-point program of what he deemed effective national economy,which sums up the tenets of mercantilism comprehensively:[9]

• That every inch of a country's soil be utilized for agriculture, mining or manufacturing.

• That all raw materials found in a country be used in domestic manufacture, since finished

goods have a higher value than raw materials.

• That a large, working population be encouraged.

• That all export of gold and silver be prohibited and all domestic money be kept in

circulation.

• That all imports of foreign goods be discouraged as much as possible.

• That where certain imports are indispensable they be obtained at first hand, in exchange

for other domestic goods instead of gold and silver.

• That as much as possible, imports be confined to raw materials that can be finished [in

the home country].

• That opportunities be constantly sought for selling a country's surplus manufactures to

foreigners, so far as necessary, for gold and silver.

• That no importation be allowed if such goods are sufficiently and suitably supplied at

home.

Other than Von Hornick, there were no mercantilist writers presenting an overarching scheme for 

the ideal economy, as Adam Smith would later do for classical economics. Rather, each

mercantilist writer tended to focus on a single area of the economy.[10] Only later did non-

mercantilist scholars integrate these "diverse" ideas into what they called mercantilism. Somescholars thus reject the idea of mercantilism completely, arguing that it gives "a false unity to

disparate events". Smith saw the mercantile system as an enormous conspiracy by manufacturers

and merchants against consumers, a view that has led some authors, especially Robert E.Ekelund and Robert D. Tollison to call mercantilism "a rent-seeking society". To a certain extent,

mercantilist doctrine itself made a general theory of economics impossible. Mercantilists viewed

the economic system as a zero-sum game, in which any gain by one party required a loss byanother.[11] Thus, any system of policies that benefited one group would by definition harm the

other, and there was no possibility of economics being used to maximize the "commonwealth",

or common good.[12] Mercantilists' writings were also generally created to rationalize particular  practices rather than as investigations into the best policies.[13]

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Mercantilist domestic policy was more fragmented than its trade policy. While Adam Smith

 portrayed mercantilism as supportive of strict controls over the economy, many mercantilists

disagreed. The early modern era was one of letters patent and government-imposed monopolies;some mercantilists supported these, but others acknowledged the corruption and inefficiency of 

such systems. Many mercantilists also realized that the inevitable results of quotas and price

ceilings were black markets. One notion mercantilists widely agreed upon was the need for economic oppression of the working population; laborers and farmers were to live at the

"margins of subsistence". The goal was to maximize production, with no concern for 

consumption. Extra money, free time, or education for the "lower classes" was seen to inevitablylead to vice and laziness, and would result in harm to the economy.[14]

Infinite growth

The mercantilists saw a large population as a form of wealth which made possible thedevelopment of bigger markets and armies. The opposing doctrine of  physiocracy predicted that

mankind would outgrow its resources.

OriginsScholars debate over why mercantilism dominated economic ideology for 250 years.[15] One

group, represented by Jacob Viner , argues that mercantilism was simply a straightforward,

common-sense system whose logical fallacies could not be discovered by the people of the time,as they simply lacked the required analytical tools.

The second school, supported by scholars such as Robert B. Ekelund, contends that mercantilism

was not a mistake, but rather the best possible system for those who developed it. This schoolargues that mercantilist policies were developed and enforced by rent-seeking merchants and

governments. Merchants benefited greatly from the enforced monopolies, bans on foreign

competition, and poverty of the workers. Governments benefited from the high tariffs and payments from the merchants. Whereas later economic ideas were often developed by academics

and philosophers, almost all mercantilist writers were merchants or government officials.

[16]

Monetarism offers a third explanation for mercantilism. European trade exported bullion to payfor goods from Asia, thus reducing the money supply and putting downward pressure on prices

and economic activity. The evidence for this hypothesis is the lack of inflation in the English

economy until the Revolutionary and Napoleonic wars when paper money was extensively used.

A fourth explanation lies in the increasing professionalisation and technification of the wars of the era, which turned the maintenance of adequate reserve funds (in the prospect of war) into a

more and more expensive and eventually competitive business.

Mercantilism developed at a time when the European economy was in transition. Isolated feudal estates were being replaced by centralized nation-states as the focus of power. Technological

changes in shipping and the growth of urban centers led to a rapid increase in international trade.[17]

Mercantilism focused on how this trade could best aid the states. Another important changewas the introduction of double-entry bookkeeping and modern accounting. This accounting made

extremely clear the inflow and outflow of trade, contributing to the close scrutiny given to the

 balance of trade.[18] Of course, the impact of the discovery of America cannot be ignored. New

markets and new mines propelled foreign trade to previously inconceivable heights. The latter led to “the great upward movement in prices” and an increase in “the volume of merchant

activity itself.”[19]

Prior to mercantilism, the most important economic work done in Europe was by the medieval

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scholastic theorists. The goal of these thinkers was to find an economic system that was

compatible with Christian doctrines of piety and justice. They focused mainly on

microeconomics and local exchanges between individuals. Mercantilism was closely alignedwith the other theories and ideas that were replacing the medieval worldview. This period saw

the adoption of the very Machiavellian realpolitik and the primacy of the raison d'état in

international relations. The mercantilist idea that all trade was a zero sum game, in which eachside was trying to best the other in a ruthless competition, was integrated into the works of 

Thomas Hobbes. The dark view of human nature also fit well with the Puritan view of the world,

and some of the most stridently mercantilist legislation, such as the Navigation Acts, wereenacted by the government of  Oliver Cromwell.[20]

Policies

French finance minister and mercantilist Jean-Baptiste Colbert served for over 20 years.

Mercantilist ideas were the dominant economic ideology of all of Europe in the early modern

 period, and most states embraced it to a certain degree. Mercantilism was centered in England

and France, and it was in these states that mercantilist polices were most often enacted.

France

Mercantilism arose in France in the early 16th century, soon after the monarchy had become the

dominant force in French politics. In 1539, an important decree banned the importation of woolen goods from Spain and some parts of Flanders. The next year, a number of restrictions

were imposed on the export of bullion.[21]

Over the rest of the sixteenth century further protectionist measures were introduced. The heightof French mercantilism is closely associated with Jean-Baptiste Colbert, finance minister for 22

years in the 17th century, to the extent that French mercantilism is sometimes called Colbertism.

Under Colbert, the French government became deeply involved in the economy in order toincrease exports. Protectionist policies were enacted that limited imports and favored exports.

Industries were organized into guilds and monopolies, and production was regulated by the state

through a series of over a thousand directives outlining how different products should be

 produced.[22]

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To encourage industry, foreign artisans and craftsmen were imported. Colbert also worked to

decrease internal barriers to trade, reducing internal tariffs and building an extensive network of 

roads and canals. Colbert's policies were quite successful, and France's industrial output andeconomy grew considerably during this period, as France became the dominant European power.

He was less successful in turning France into a major trading power, and Britain and the

 Netherlands remained supreme in this field.[22]

Due to its popularity at the time Adam Smith'sWealth of Nations was banned due to its criticism of government control present in

Mercantilism.[23]

Great Britain

In England, mercantilism reached its peak during the 1340-1789 Long Parliament government

(1640–1660). Mercantilist policies were also embraced throughout much of the Tudor and Stuart 

 periods, with Robert Walpole being another major proponent. In Britain, government controlover the domestic economy was far less extensive than on the Continent, limited by common law 

and the steadily increasing power of Parliament.[24] Government-controlled monopolies were

common, especially before the English Civil War , but were often controversial.[25]

With respect to its colonies, British mercantilism meant that the government and the merchants became partners with the goal of increasing political power and private wealth, to the exclusion

of other empires. The government protected its merchants—and kept others out—by trade

 barriers, regulations, and subsidies to domestic industries in order to maximize exports from andminimize imports to the realm. The government had to fight smuggling—which became a

favorite American technique in the 18th century to circumvent the restrictions on trading with the

French, Spanish or Dutch. The goal of mercantilism was to run trade surpluses, so that gold andsilver would pour into London. The government took its share through duties and taxes, with the

remainder going to merchants in Britain. The government spent much of its revenue on a superb

Royal Navy, which not only protected the British colonies but threatened the colonies of the

other empires, and sometimes seized them. Thus the British Navy captured New Amsterdam (New York) in 1664. The colonies were captive markets for British industry, and the goal was to

enrich the mother country.[26]

British mercantilist writers were themselves divided on whether domestic controls werenecessary. British mercantilism thus mainly took the form of efforts to control trade. A wide

array of regulations was put in place to encourage exports and discourage imports. Tariffs were

 placed on imports and bounties given for exports, and the export of some raw materials was banned completely. The Navigation Acts expelled foreign merchants from England's domestic

trade. The nation aggressively sought colonies and once under British control, regulations were

imposed that allowed the colony to only produce raw materials and to only trade with Britain.

This led to friction with the inhabitants of these colonies, and mercantilist policies (such asforbidding trade with other empires and controls over smuggling) were a major irritant leading to

the American Revolution.

Over all, however, mercantilist policies had a positive impact on Britain helping turn it into theworld's dominant trader, and an international superpower [citation needed ]. One domestic policy that

had a lasting impact was the conversion of "waste lands" to agricultural use. Mercantilists felt

that to maximize a nation's power all land and resources had to be used to their utmost, and thisera thus saw projects like the draining of The Fens.[27]

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Mercantilism helped create trade patterns such as the triangular trade in the North Atlantic, in

which raw materials were imported to the metropolis and then processed and redistributed toother colonies.

Other countries

The other nations of Europe also embraced mercantilism to varying degrees. The Netherlands,

which had become the financial center of Europe by being its most efficient trader, had littleinterest in seeing trade restricted and adopted few mercantilist policies. Mercantilism became

 prominent in Central Europe and Scandinavia after the Thirty Years' War  (1618–1648), with

Christina of Sweden, Jacob Kettler of Courland, Christian IV of Denmark being notable proponents. The Habsburg Holy Roman Emperors had long been interested in mercantilist

 policies, but the vast and decentralized nature of their empire made implementing such notions

difficult.

Some constituent states of the empire did embrace Mercantilism, most notably Prussia, whichunder Frederick the Great had perhaps the most rigidly controlled economy in Europe. During

the economic collapse of the seventeenth century Spain had little coherent economic policy, but

French mercantilist policies were imported by Philip V with some success. Russia under Peter I (Peter the Great) attempted to pursue mercantilism, but had little success because of Russia's lack 

of a large merchant class or an industrial base.

Wars and imperialism

Mercantilism was economic warfare and was well suited to an era of military warfare.[28] Since

the level of world trade was viewed as fixed, it followed that the only way to increase a nation's

trade was to take it from another. A number of wars, most notably the Anglo-Dutch Wars and the

Franco-Dutch Wars, can be linked directly to mercantilist theories. Most wars had other causes but they reinforced mercantilism by clearly defining the enemy, and justified damage to the

enemy's economy.

Mercantilism fueled the imperialism of this era, as many nations expended significant effort to build new colonies that would be sources of gold (as in Mexico) or sugar (as in the West Indies),

as well as becoming exclusive markets. European power spread around the globe, often under the

aegis of companies with government-guaranteed monopolies in certain defined geographicalregions, such as the Dutch East India Company or the British Hudson's Bay Company (operating

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in present-day Canada).

Criticisms

Much of Adam Smith's The Wealth of Nations is an attack on mercantilism.

Adam Smith and David Hume were the founding fathers of anti-mercantilist thought. A number of scholars found important flaws with mercantilism long before Adam Smith developed an

ideology that could fully replace it. Critics like Hume, Dudley North, and John Locke 

undermined much of mercantilism, and it steadily lost favor during the 18th century.In 1690, John Locke argued that prices vary in proportion to the quantity of money. Locke's

Second Treatise also points towards the heart of the anti-mercantilist critique: that the wealth of 

the world is not fixed, but is created by human labor (represented embryonically by Locke'slabor theory of value). Mercantilists failed to understand the notions of absolute advantage and

comparative advantage (although this idea was only fully fleshed out in 1817 by David Ricardo)and the benefits of trade.[29]

For instance, suppose Portugal was a more efficient producer of both wine and cloth thanEngland, yet in England it was relatively cheaper to produce cloth compared to wine. Thus if 

Portugal specialized in wine and England in cloth, both states would end up better off if they

traded. This is an example of the reciprocal benefits of trade due to a comparative advantage. Inmodern economic theory, trade is not a zero-sum game of cutthroat competition because both

sides can benefit.

Hume famously noted the impossibility of the mercantilists' goal of a constant positive balanceof trade. As bullion flowed into one country, the supply would increase and the value of bullion

in that state would steadily decline relative to other goods. Conversely, in the state exporting

 bullion, its value would slowly rise. Eventually it would no longer be cost-effective to exportgoods from the high-price country to the low-price country, and the balance of trade wouldreverse itself. Mercantilists fundamentally misunderstood this, long arguing that an increase in

the money supply simply meant that everyone gets richer.[30]

The importance placed on bullion was also a central target, even if many mercantilists hadthemselves begun to de-emphasize the importance of gold and silver. Adam Smith noted at the

core of the mercantile system was the "popular folly of confusing wealth with money," bullion

was just the same as any other commodity, and there was no reason to give it special treatment.

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[31] More recently, scholars have discounted the accuracy of this critique. They believe Mun and

Misselden were not making this mistake in the 1620s, and point to their followers Josiah Child

and Charles Davenant, who, in 1699, wrote: "Gold and Silver are indeed the Measure of Trade, but that the Spring and Original of it, in all nations is the Natural or Artificial Product of the

Country; that is to say, what this Land or what this Labour and Industry Produces." [32] The

critique that mercantilism was a form of rent-seeking has also seen criticism, as scholars suchJacob Viner in the 1930s point out that merchant mercantilists such as Mun understood that they

would not gain by higher prices for English wares abroad.[33]

The first school to completely reject mercantilism was the physiocrats, who developed their theories in France. Their theories also had several important problems, and the replacement of 

mercantilism did not come until Adam Smith published The Wealth of Nations in 1776. This

 book outlines the basics of what is today known as classical economics. Smith spends a

considerable portion of the book rebutting the arguments of the mercantilists, though often theseare simplified or exaggerated versions of mercantilist thought.[16]

Scholars are also divided over the cause of mercantilism's end. Those who believe the theory was

simply an error hold that its replacement was inevitable as soon as Smith's more accurate ideas

were unveiled. Those who feel that mercantilism was rent-seeking hold that it ended only whenmajor power shifts occurred. In Britain, mercantilism faded as the Parliament gained the

monarch's power to grant monopolies. While the wealthy capitalists who controlled the House of Commons benefited from these monopolies, Parliament found it difficult to implement them

 because of the high cost of group decision making.[34]

Mercantilist regulations were steadily removed over the course of the Eighteenth Century inBritain, and during the 19th century the British government fully embraced free trade and

Smith's laissez-faire economics. On the continent, the process was somewhat different. In France

economic control remained in the hands of the royal family and mercantilism continued until the

French Revolution. In Germany mercantilism remained an important ideology in the 19th andearly 20th centuries, when the historical school of economics was paramount.[35]

LegacyAdam Smith rejected the mercantilist focus on production, arguing that consumption was

 paramount to production. He added that mercantilism was popular among merchants because it

was what is now called "rent seeking".[36] However John Maynard Keynes argued thatencouraging production was just as important as consumption,and he favoured the "new

mercantilism". Keynes also noted that in the early modern period the focus on the bullion

supplies was reasonable. In an era before paper money, an increase for bullion was one of thefew ways to increase the money supply. Keynes said mercantilist policies generally improved

 both domestic and foreign investment. Domestic because the policies lowered the domestic rate

of interest.And it increased investment by foreigners in the nationby tending to create a favorable

 balance of trade.[37]

Keynes and other economists of the 20th century also realized the balance of payments is an

important concern. Since the 1930s, all nations have closely monitored the inflow and outflow of 

capital, and most economists agree that a favorable balance of trade is desirable.[citation needed ]Keynes also supported government intervention in the economy as necessity, as did

mercantilism.[38]

As of 2010, the word "mercantilism" remains a pejorative term, often used to attack variousforms of  protectionism.[39] The similarities between Keynesianism, and its successor ideas, with

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mercantilism have sometimes led critics to call them neo-mercantilism. Indeed, Paul Samuelson,

writing within a Keynesian framework, defended mercantilism, writing: "With employment less

than full and Net National Product suboptimal, all the debunked mercantilist arguments turn outto be valid."[40]

Some other systems that do copy several mercantilist policies, such as Japan's economic system, 

are also sometimes called neo-mercantilist.[41]

In an essay appearing in the 14 May 2007 issue of  Newsweek , business columnist Robert J. Samuelson argued that China was pursuing an

essentially mercantilist trade policy that threatened to undermine the post-World War II 

international economic structure.[42]

Murray Rothbard, representing the Austrian School of economics, describes it this way:

“Mercantilism, which reached its height in the Europe of the seventeenth and

eighteenth centuries, was a system of statism which employed economic fallacy to

 build up a structure of imperial state power, as well as special subsidy andmonopolistic privilege to individuals or groups favored by the state. Thus,

mercantilism held exports should be encouraged by the government and imports

discouraged.[43]”

In one area economists rejected Smith well before Keynes: in the use of data. Mercantilists, who

were generally merchants or government officials, gathered vast amounts of trade data and usedit extensively in their research and writing. William Petty, a strong mercantilist, is generally

credited with being the first to use empirical analysis to study the economy. Smith rejected this,

arguing that deductive reasoning from base principles was the proper method to discover economic truths. Today, many schools of economics accept that both methods are important.

In specific instances, protectionist mercantilist policies also had an important and positive impact

on the state that enacted them. Adam Smith himself, for instance, praised the Navigation Acts as

they greatly expanded the British merchant fleet, and played a central role in turning Britain intothe naval and economic superpower from the 18th Century onward.[44] Some economists thus feel

that protecting infant industries, while causing short-term harm, can be beneficial in the long

term. Nonetheless, the publication of The Wealth of Nations in 1776 had a profound impact on the end

of the mercantilist era[when?] and the later adoption of free-market policy. By 1860, England

removed the last vestiges of the mercantile era. Industrial regulations, monopolies and tariffswere withdrawn.[citation needed ]

Reverse-mercantilismReverse-mercantilism[45] is an economic system which strives to increase corporate wealth and

monopoly by subsidizing some corporate entities while regulating, taxing and controlling borders

(blocking outsourcing and creating tariffs) for all competitors.

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5 ways to choose your method of distribution

for your target marketAny business owner knows that one of the most important ways to success is properly marketing

your product or service to your customers. And in order to do that you need to know who your 

target market is. Once you've chosen your target market, you need to decide the best ways to

advertise and distribute your product or service to your customers. But how can you choose?There are so many options-mail, TV offers, kiosks in the mall, grocery store coupons, etc. What

you need to realize is that your method of distribution directly ties into your target market. So if 

you're in need of some guidance in this matter, keep reading. You will learn 5 ways to chooseyour method of distribution for your target market.

In order to market your service, it is essential that you tailor your efforts to a particular group of 

the population so that the people seeing your product/service will be the most likely to buy it. Soit is imperative that you first clearly identify who your customers are. This is not to say that

 people not in your target market will not buy your product-it is quite to the contrary. If you have

a good product, the chances are high that almost anyone could be interested in it. However, your success will be greater if you market specifically to one group.

There are three major types of markets:

1. Consumer market: this includes individuals and households who buy goods for their own useof benefit (think drug and/or grocery items as the most common types of these products)2. Industrial market: this includes individuals, groups or organizations that purchase your product

for use in producing other products

3. Reseller market: this includes middlemen or intermediaries, such as wholesalers and retailerswho buy finished goods and resell them for a profit.

Think about what kind of product you have. Where does it fit in this list?

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Once you've identified your target market, you need to determine how to reach them. How are

you going to distribute your product or service to them? Here are some questions to help you

decide how to choose your method of distribution.

1. What do your customers do? If your target market is stay-at-home moms, you could market

your product during day-time television or in wholesale superstores like Costco or BJs. If your target market is middle-aged, lower-income males, you might choose to market your product in

certain magazines or during evening televisions.

2. What methods of distribution are best suited for your product? It's possible that your productwould not sell well if seen on an infomercial. In this case, you should avoid infomercials and

look to another type of distribution. Maybe it would do better as a consignment.

3. Who are your competitors and what methods of distribution do they use? Looking at these two

 points may give you a better idea of where you should be headed with your product.4. What kind of advertising message do you want to send? Your method of distribution has

important implications that affect your advertising message. You must take into account your 

target market's opinions and lifestyle when answering this questions.

5. Does your level of available capital or production capacities restrict your chose of distributionmethods? It is possible that your desired method or distribution is too pricey or complicated for 

your company at this point. Therefore you may have to look for other alternatives in distribution.

When determining your method of distribution, you may not know right away which process

would be best for you. It may take a few tries before you finally find the marketing strategy that

works best for your company and offers the highest rate of success.

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Understanding distribution channelsThis is the ‘place’ element of the 7Ps marketing mix. It is about getting the product into the right place, at the right time and in the right conditions for customers to buy them.

 Physical distribution – this is how to direct the flow of physical products from manufacturers to

the point where it is most convenient for customers to buy them – it is part of the bundle of  benefits that make up the product

 Logistics – this is concerned with process of moving raw materials through production and

distribution processes to the point where the finished product is needed. Involves strategicdecision-making about warehouse location, materials management, stock levels and information

systems

Functions involved:

• transport

• stock-holding and storage

• local knowledge (on distributions methods)

•  promotion (incentives)

• display for sale

Methods of directing distribution:

 Zero Step – manufacturer, to customer 

One Step – manufacturer, to retailer, distributor or franchisee, to customer 

Two Step – manufacturer, to wholesaler or central buyer for retail group, to retailer, to customer 

Three Step – manufacturer, to agent, to wholesaler, to retailer, to customer 

 Intermediaries are:

• middlemen who links producers to other middlemen or those who ultimately use the

 product.

• someone who mediates or brings about a settlement between the supplier and the buyer 

The role of the intermediary:

 Agents  – do not buy goods themselves, but act as go-betweens on behalf of the manufacturer to

the wholesalers and retailers, and earn commission on the sales

Wholesalers – buy goods, stock a range of products from potentially competing manufacturers to

sell on to other organisations

 Retailers  – intermediaries or traders operating outlets which sell directly to customers

 Distributors (dealers) – contracted to by a manufacturer’s goods and sell them to customers

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 Franchisees – independent organisations which in exchange for an initial fee and a share of sales

revenue are allowed to trade under the name of a parent organisation

 Multiple Stores – these buy goods for retailing direct from the producer, sometimes under their 

own brand

 Export and import houses – specialise in buying and selling goods from other countries

Alternative kinds of intermediaries:

 Direct marketing – techniques which products are promoted via a medium which allows a directresponse from the customer (adverts with coupons, mailings with reply-paid order forms)

Vending machines – customers purchase directly from the machine, provide access to places

traditional retailers might have trouble reaching

Telephone selling – inbound – customers call as result of marketing communication; outbound – 

customers are called by sales operators

 Electronic retailing – online retailing more common as customers become more internet-literate

Disadvantages of using intermediaries from the prospective of the producer:

• the cost involved

• do they really understand the product?

• loss of control from the manufacturer to the customer 

•  possible disruptions in delivery and process

• lack of loyalty to the manufacturers

• working to different perimeters

• the effect on brand reputation

Channel decision:

 Direct distribution – does not involve using an intermediary (active)

 Indirect distribution – involves using intermediaries (passive)

Choosing the right channels – strategic decision based on the choice of target market the product

characteristics

 Logistics – transporting products to the right locations, tactical decisions involving transportdecisions, warehouse decisions, financial decisions.

Logistical issues:

 Possibility of multiple channels  – a different delivery system for each channel

 Location of customers  – different physical distribution solutions for different locations

Compatibility – delivery methods must be compatible with the channel, product, customers and

supplier 

 Nature of goods  – perishable versus non-perishable

Geography, environment and terrain – delivery techniques depending on the location

Storage and distribution costs – warehousing is expensive, an alternative is just-in-time

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 purchasing : delivering in small batches at the exact time needed

 Import/expert costs – such as custom duties and international insurance

Factors in channel distributions:

Customer  characteristics – they need to receive a good service, whatever they expect, and

feedback is always important Product characteristics – these can be complex, and more knowledge may be needed within

certain circumstances

 Distributor characteristics – this depends on the equipment and personnel

Competitor characteristics – should the company do what their competitors do? Does it work 

well for them? Should the company revolutionise?

Supplier characteristics – these processes are on view, and they have a reputation to maintain

Making the channel decision:

What type of distributor is needed, and how many of each type? – Mix and match the logistics

according to the circumstancesWho will carry out specific marketing tasks? – it is important not to lose control, especially to

 preserve their involvement with the product

 How will effectiveness of distributors be evaluated? – this depends on performance levels, orderstaken, total sales, and feedback 

Channel market coverage:

 Intensive  – everywhere

Selective – certain kind of customer 

 Exclusive – certain outlets

The many aspects of a productWritten on Saturday 13 November 2010 by Alice in Just me, Marketing 

Products are “a bundle of benefits which satisfy a set of wants that customers have”. There are

three key facts here: benefits rather than features, wants rather than needs, and customers, the

most important element of a business.

You can break a product down into three aspects: physical (what it looks like), functional (what it

does) and symbolic (what it means to the customer and how they associate with it).  Primary

characteristics are benefits that are common with competitors, whereas auxiliary characteristics are features and benefits that are unique to the product.

A product needn’t just be goods, it can also be an idea, a service, or a combination of all of these.If you’re aiming your product at B2C (business to customer) they’re known as consumer  products, and can be divided into convenience (cheap, frequently purchased items), shopping  

(specific products people shop around for), speciality (planned purchased products) and

unsought (sold, not bought, like insurance) goods. B2B (business to business) or industrial 

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 products are products that are bought for manufacturing purposes: installations, raw materials,

components, equipment, processes; or for the purposes of resale: consumable supplies.

Products can be separated into four levels: core (basic physical product with minimum features);

expected or actual (generic product plus some extra expected features); augmented (factors that

differentiate the product, such as accessories and benefits, or the difference between one brand

and another); potential (all the possible features and benefits ever wanted by the customer).

There are four elements of a product: branding – the product’s personality, describing expected

quality, performance and reaction from the customers. It is described as a ‘lens’ through whichcustomers see the product, and through which marketers promote.  Product lines and product 

ranges – a product portfolio is necessary if a company produces more than one product. These

may be broad (a wide range) or deep (many variations). Packaging – design makes a product

more desirable, noticeable, and informative of the product’s benefit. It should also protect the product, be convenient for distribution purposes, and help promote the product apart from

competitors. Service support – a service element could consist of after-sales assistance or support

helplines. It contributes to added value, and can differentiate from competitors.

There are five variables of  service marketing : Intangibility – services that cannot be touched or viewed (and therefore difficult to perceive)

 Inseparability – services that cannot be separated from the provider or got from elsewhere

(provided at the same time as the client is receiving it, like a consultation or online search)

 Heterogeneity – services with a lack of sameness, or a standard service that varies with each

delivery (services that involve people who have different needs, or adapted to suit separate

scenarios)

 Perishability – services that cannot be stored for later provision (such as nontransferable flight

tickets or a cruise)

Ownership – service purchase that does not transfer ownership of the property (it is bought first,then produced and then consumed, like food in a restaurant)

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Question 1

The precautionary demand for money is:

Your answer:

c) Directly related to interest rates

Correct answer:

b) An active balance

Feedback:

The precautionary demand for money is an active balance (there are positive reasons to hold it).

Page reference: 442

Question 2

The liquidity trap occurs when the demand for money:

Your answer:

c) Means that an increase in money supply leads to a fall in the interest rate

Correct answer:

a) Is perfectly interest elasticFeedback:

The liquidity trap occurs when the demand for money is perfectly interest elastic.

Page reference: 454

Question 3

A fall in interest rates is likely to:

Your answer:

b) Increase savings

Correct answer:

a) Increase aggregate demand

Feedback:

A fall in interest rates is likely to lead to more borrowing and spending and increase aggregatedemand.

Page reference: 448

Question 4

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According to the quantity theory of money an increase in the money supply is most likely to lead

to inflation if:

Your answer:

b) The number of transactions decreases

Correct answer:d) The velocity of circulation and the number of transactions is constant

Feedback:

According to the quantity theory of money an increase in the money supply is most likely to lead

to inflation if the velocity of circulation and the number of transactions is constant.

Page reference: 450

Question 5

A reduction in the money supply is likely to:

Your answer:

d) Decrease deflation

Correct answer:

b) Increase the interest rate

Feedback:

A reduction in the money supply is likely to increase the interest rate; with a fall in the supply of 

money the price of money (i.e. the interest rate) should increase to restore equilibrium.

Page reference: 445

Question 6

To reduce the supply of money the government could:Your answer:

c) Sell government bonds

Feedback:

To reduce the supply of money the government could sell government bonds; this would take

money out of the system.

Page reference: 454

Question 7

The speculative demand for money occurs when:

Your answer:

a) Individuals hold money just in case an emergency happens

Correct answer:

c) Individuals hold money rather than other assets because they are worried about the price of the

other assets falling

Feedback:

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The speculative demand for money occurs when individuals hold money rather than other assets

 because they are worried about the price of the other assets falling.

Page reference: 443

Question 8

An outward shift in the demand for money, other things being equal should lead to:

Your answer:

b) A higher interest rate but the same quantity of money

Feedback:

An outward shift in the demand for money, other things being equal should lead to a higher 

interest rate but the same quantity of money. The supply will not increase but with more demandthe price (the interest rate) should increase.

Page reference: 445

Question 9

The interest rate in the UK is determined by:Your answer:

d) The Federal Reserve Board

Correct answer:

c) The Monetary Policy Committee

Feedback:

The Monetary Policy Committee decides on the Bank of England's interest rate in the UK.

Page reference: 445

Question 10

Open Market Operations occur when the government:

Your answer:

b) Buys and sells bonds and securities

Feedback:

Open market Operations occur when the government sells to take money out of the system or 

 buys them to inject money into it.

Page reference: 455

Question 1

Which of the following is not an argument for protectionism?

 Your answer:

b) To increase the level of imports

Feedback:

Protectionism would reduce the level of imports into an economy.

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Page reference: 500

Question 2

A demand switching policy to improve the trade position could involve:

 Your answer:

c) Tariffs

Feedback:

A demand switching policy could be tariffs as these make imports moreexpensive.Page reference: 494

Question 3

Free trade is based on the principle of:

 Your answer:

a) Comparative advantageFeedback:

Free trade is based on the principle of comparative advantage.Page reference: 485

Question 4

If a country can produce 10 of product A or 4 of product B the opportunitycost of 1B is:

 Your answer:

d) 1B

Correct answer:

b) 2.5A

Feedback:

If a country can produce 10 of product A or 4 of product B the opportunitycost of 1B is 2.5A.Page reference: 485

Question 5

 Tariffs:

 Your answer:b) Increase government earnings from tax

Feedback:

 Tariffs increase government earnings from tax.Page reference: 500

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Question 6

 The terms of trade measure:

 Your answer:

a) The income of one country compared to another

Correct answer:

d) Export prices compared to import prices

Feedback:

 The terms of trade measure export prices compared to import prices.Page reference: 488

Question 7

In a floating exchange rate system:

 Your answer:

b) The exchange rate should adjust to equate the supply and demand of thecurrency

Feedback:

In a floating exchange rate system the exchange rate should adjust toequate the supply and demand of the currency.Page reference: 492

Question 8

 The balance of payments equals:

 Your answer:

c) A measure of the economic transactions between UK residents and therest of the world.

Feedback:

A measure of the economic transactions between UK residents and the restof the world.Page reference: 490

Question 9

If there was a balance of payments deficit then in a floating exchange ratesystem:

 Your answer:

a) The external value of the currency would tend to fall

Feedback:

If there was a balance of payments deficit then in a floating exchange ratesystem the external value of the currency would tend to fall.Page reference: 492

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Question 10

 To prevent the external value of the currency from falling, the governmentmight:

 Your answer:

b) Sell its own currencyCorrect answer:

c) Buy its own currency with foreign reserves

Feedback:

 To prevent the external value of the currency from falling, the governmentmight buy its own currency with foreign reserves; this would increasedemand for the currency.Page reference: 492

income elasticity of demand

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DefinitionProportionate change in the demand for a good in response to a change in income. It is reflected

in how people change their consumption habits with changes in their income levels. In a growing

economy (where income levels are rising) goods whose demand is highly income-dependent willsell more than the goods whose demand is not income-dependent. For example, demand for 

staple food items normally does not increase with higher income levels; but demand for gourmet

food or restaurant food does increase as individual's income grows. Also called incomesensitivity of demand, it is mathematically expressed as percent change in quantity demanded ÷

 percent change in income.

Definition of 'Distribution Channel'The chain of businesses or intermediaries through which a good or service passes until it reaches

the end consumer. A distribution channel can include wholesalers, retailers, distributors and eventhe internet. Channels are broken into direct and indirect forms, with a "direct" channel allowingthe consumer to buy the good from the manufacturer and an "indirect" channel allowing the

consumer to buy the good from a wholesaler. Direct channels are considered "shorter" than

"indirect" ones.

Investopedia explains 'Distribution Channel'

Goods and services often pass to consumers through multiple channels. While increasing thenumber of ways in which a consumer can find a good has the potential to increase sales, it also

creates a complex system that can make distribution management difficult. In addition, the

longer the distribution channel the less profit a product manufacturer might get from the sale.

Read more: http://www.investopedia.com/terms/d/distribution-channel.asp#ixzz1qjXvBuUU

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Unit 01Results

You have answered 6 out of 10 questions correctly.

Your percentage score is 60%.

Question 1

The resources in an economy:

Your answer:

c) Always increase over time

Correct answer:

d) Are limited at any moment in time

Feedback:

Remember that resources are inputs into the production process.

Page reference: 04

Question 2

Human wants are:

Your answer:

c) Unlimited

Feedback:

Unlimited - we all want as much as we can get. It is resources that are limited, not wants.

Page reference: 06

Question 3

The sacrifice involved when you choose a particular course of action is called the:

Your answer:b) Opportunity cost

Feedback:

The sacrifice involved when you choose a particular course of action is called the opportunity

cost.

Page reference: 07

Question 4

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Which one of the following is not one of the basic economic questions?

Your answer:

d) How to minimize economic growth

Feedback:

The key economic questions focus on what to produce, how, and for whom.Page reference: 07

Question 5

The basic economic problems will not be solved by:

Your answer:

d) The creation of unlimited resources

Feedback:

Resources can be allocated by market forces, the government, or a combination of the two

Page reference: 08

Question 6

The free market involves:

Your answer:

a) The free provision of products

Correct answer:

c) Market forces of supply and demand

Feedback:

The free market involves market forces of supply and demand and the price mechanism.

Page reference: 08

Question 7

A mixed economy:

Your answer:

d) Allocates resources via market forces and government intervention

Feedback:

A mixed economy involves the private sector and the public sector; the free market provides

some items and the government provides and regulates others.

Page reference: 10Question 8

Which of the following is NOT likely to be true in a command economy?

Your answer:

b) The profits of a business belong to the government

Correct answer:

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d) Market forces determine what is produced and who receives the products

Feedback:

A command economy allocates resources via government directives

Page reference: 08

Question 9The public sector includes:

Your answer:

b) Government ownership of assets

Feedback:

The public sector involves organizations owned by the government.

Page reference: 16

Question 10

Which of the following is a normative statement in economics?

Your answer:

a) More spending by the government reduces poverty

Correct answer:

d) The government should concentrate on reducing unemployment

Feedback:

Remember normative economics is a matter of opinion rather than a testable "fact".

Page reference: 14

Question 1

If an economy is productively efficient:

 Your answer:

d) The distribution of income is equal

Correct answer:

c) More of one product can only be produced if less of another product isproduced

Feedback:

If an economy is productively efficient more of one product can only beproduced if less of another product is produced.Page reference: 23

Question 2

Economic growth can be shown by:

 Your answer:

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d) A decision by the government to produce inside the production possibilityfrontier

Correct answer:

c) An outward shift of the production possibility frontier

Feedback:Economic growth can be shown by an outward shift of the productionpossibility frontier; this shows more products can be produced.Page reference: 29

Question 3

As resources are shifted from one industry to another this can be shown by:

 Your answer:

d) The pivoting of the production possibility frontier

Correct answer:

b) A movement along the production possibility frontier

Feedback:

As resources are shifted from one industry to another this can be shown by amovement along the production possibility frontier.Page reference: 25

Question 4

In a free market the combination of products produced will be determined by:

 Your answer:

a) Market forces of supply and demandFeedback:

In a free market the combination of products produced will be determined bymarket forces of supply and demand.Page reference: 25

Question 5

If an economy moves from producing 10 units of A and 4 units of B toproducing 7 As and 5Bs, the opportunity cost of the 5th B is:

 Your answer:

c) 3As

Feedback:

If an economy moves from producing 10 units of A and 4 units of B toproducing 7 As and 5Bs, the opportunity cost of the 5th B is 3As.Page reference: 23

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Question 6

An economy may operate outside the Production Possibility Frontier if:

 Your answer:

d) It is trading with other economies

Feedback:

An economy may operate outside the Production Possibility Frontier if it istrading with other economies.Page reference: 29

Question 7

 The resources in the economy do not include:

 Your answer:

a) Demand

Feedback:Demand is not a resource.Page reference: 04

Question 8

 The resources in an economy are:

 Your answer:

b) Fixed at any moment

Feedback:

 The resources in an economy are fixed at any moment but can change overtime.Page reference: 04

Question 9

Any combination of products inside the production possibility frontier is:

 Your answer:

d) Productively inefficient

Feedback:

Any combination of products inside the production possibility frontier is

productively inefficient because more of one product could be producedwithout producing less of another.Page reference: 27

Question 10

An outward shift of the production possibility frontier may be caused by:

 Your answer:

a) An increase in demand

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Correct answer:

c) Better training of employees

Feedback:

An outward shift of the production possibility frontier may be caused by

better training of employees because this will make them more productive.Page reference: 28

Question 1

Which best describes a demand curve?

 Your answer:

c) The quantity consumers are willing and able to buy at each and everyincome all other things unchanged

Correct answer:d) The quantity consumers are willing and able to buy at each and everyprice all other things unchanged

Feedback:

Remember effective demand shows what consumers want and what they canafford at each price all other things unchanged.Page reference: 37

Question 2

A fall in price:

 Your answer:a) Will cause an inward shift of demand

Correct answer:

c) Leads to a movement along a demand curve

Feedback:

Remember a movement along a demand curve is due to price changes;changes in other factors shift the curve.Page reference: 39

Question 3

Demand for a normal product may shift outwards if:

 Your answer:

c) The price of a complement rises

Correct answer:

b) The price of a substitute rises

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Feedback:

Remember a movement along a demand curve is due to price changes;changes in other factors shift the curve. If a substitute becomes moreexpensive customers switch to this product and demand shifts outwardsPage reference: 44

Question 4

According to the law of diminishing marginal utility:

 Your answer:

d) Total utility will rise at a falling rate as more units are consumed

Feedback:

 The extra satisfaction from consuming a unit will generally fall as more unitsare consumed.Page reference: 39

Question 5If marginal utility is zero:

 Your answer:

d) Total utility is maximized

Feedback:

 This means there is no extra utility from consuming another unit.Page reference: 39

Question 6

A decrease in income should: Your answer:

b) Shift demand for an inferior product outwards

Feedback:

Remember consumers will buy less of an inferior good when they have moreincome as they switch to more luxurious products.Page reference: 46

Question 7

An increase in the price of a complement for product A would:

 Your answer:

a) Shift demand for product A outwards

Correct answer:

b) Shift demand for product A inwards

Feedback:

Remember that complements are purchased together.

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Page reference: 46

Question 8

An increase in price, all other things unchanged, leads to:

 Your answer:

c) A contraction of demand

Feedback:

 This is a movement along the demand curve and leads to a fall in thequantity demanded.Page reference: 39

Question 9

If a product is a Veblen good:

 Your answer:

c) Demand is directly related to priceFeedback:

Remember Veblen goods are products of conspicuous consumption. Demandis upward sloping.Page reference: 43

Question 10

If a product is an inferior good:

 Your answer:

a) Demand is inversely related to income

Feedback:

With inferior goods less is bought when income increases.Page reference: 46

Question 1

Average income increases from £20,000 p.a. to £22,000 p.a. Quantitydemanded per year increases from 5000 to 6000 units. Which of thefollowing is correct?

 Your answer:a) Demand is price inelastic

Correct answer:

d) The product is normal

Feedback:

 The percentage change in demand is +20%; the percentage change in

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income is +10%. This means the product is normal because demand riseswith more income and has an income elasticity of +2.Page reference: 70

Question 2

 The price decreases from £2,000 to £1,800. Quantity demanded per yearincreases from 5000 to 6000 units. Which of the following is correct?

 Your answer:

a) The price elasticity of demand is -2

Feedback:

 The percentage change in demand is +20%; the percentage change in priceis -10% so the price elasticity of demand is -2.Page reference: 56

Question 3

If the price elasticity of demand is unit then a fall in price: Your answer:

a) Reduces revenue

Correct answer:

b) Leaves revenue unchanged

Feedback:

 This means the percentage change in quantity demanded equals thepercentage change in price so price changes will not alter the revenue. Page reference: 56

Question 4

If the cross elasticity of demand is -2:

 Your answer:

a) The products are substitutes and demand is cross price elastic

Correct answer:

c) The products are complements and demand is cross price elastic

Feedback:

 This means that e.g. a 10% increase in the price of one product reduces the

quantity demanded of another product by 20%; the products arecomplements and the cross price elasticity is elastic (because the effect onquantity demanded is greater than the change in price in percentages).Page reference: 73

Question 5

 The income elasticity is +2 and income increases by 20%. Sales were 5000units, what will they be now?

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 Your answer:

b) 7000

Feedback:

 This means that a percentage increase in income will lead to an increase in

quantity demanded that is twice as great; this means sales will increase by40% to 7000 units.Page reference: 70

Question 6

 The price elasticity of demand is a negative number this means:

 Your answer:

c) The demand curve is downward sloping

Feedback:

 This means that an increase in price leads to a fall in quantity demanded;

this means the demand curve is downward sloping. We cannot tell howresponsive the quantity demanded from this, only that price and quantitydemanded are inversely related.Page reference: 56

Question 7

Price increases from 10 to 12 pence and the price elasticity of demand is-0.5. The quantity demanded was 500 units. What will it be now?

 Your answer:

a) 550 units

Correct answer:

c) 450 units

Feedback:

 This means that any given percentage fall in price leads to an increase inquantity demanded that is half as much; a 20% price increase will reduce thequantity demanded by 10%. This means the quantity demanded will be 450units.Page reference: 56

Question 8

If demand is price inelastic:

 Your answer:

b) An increase in price decreases revenue

Correct answer:

c) An increase in price increases revenue

Feedback:

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 This means that the percentage change in quantity demanded is less thanthe percentage change in price; this means a price increase will increaserevenue.Page reference: 56

Question 9

For an inferior good:

 Your answer:

c) The price elasticity of demand is negative; the income elasticity of demand is positive.

Correct answer:

a) The price elasticity of demand is negative; the income elasticity of demand is negative.

Feedback:

For an inferior good demand falls as income increases; the quantitydemanded falls as price increases; this means the income elasticity and theprice elasticity will both be negative.Page reference: 74

Question 10

For a normal good:

 Your answer:

d) The price elasticity of demand is positive; the income elasticity of demandis positive.

Correct answer:c) The price elasticity of demand is negative; the income elasticity of demand is positive.

Feedback:

For a normal good demand increases as income increases and the quantitydemanded falls a price increases.Page reference: 74

Question 1

Which best describes a supply curve?

 Your answer:

c) The quantity producers are willing and able to sell at each and everyincome all other things unchanged

Correct answer:

b) The quantity producers are willing and able to sell at each and every priceall other things unchanged

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Feedback:

A supply curve shows the quantity producers are willing and able to supply ateach and every price, all other things unchanged.Page reference: 79

Question 2If a 4% increase in price leads to a increase in the quantity supplied of 8%:

 Your answer:

a) Supply is price elastic

Feedback:

 This means the quantity supplied changes twice as much as price (inpercentages).Page reference: 87

Question 3

Supply is likely to be more price elastic:

 Your answer:

a) In the short run rather than the long run

Correct answer:

d) If it is easy to expand output

Feedback:

Supply will be more price elastic the bigger the quantity supplied relative tothe price change.Page reference: 87

Question 4

A supply curve that starts at the origin has:

 Your answer:

d) A positive price elasticity of supply

Correct answer:

b) A price elasticity of supply equal to one

Feedback:

 This means the supply curve has a unit price elastic.Page reference: 87

Question 5

A contraction in supply occurs when:

 Your answer:

b) The supply curve shifts inwards

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Correct answer:

c) The quantity supplied falls when the price falls

Feedback:

 This occurs when quantity supplied falls with a price fall.

Page reference: 80Question 6

An increase in the costs of production will:

 Your answer:

d) Shift supply inwards

Feedback:

 This will reduce the quantity supplied at each and every price all other thingsunchanged.Page reference: 82

Question 7

An increase in price, all other things unchanged, leads to:

 Your answer:

c) A contraction of supply

Correct answer:

d) An extension of supply

Feedback:

An increase in price should lead to an increase in the quantity supplied (an

extension of supply).Page reference: 80

Question 8

An increase in productivity should:

 Your answer:

c) Lead to a shift in supply outwards (i.e. more supplied at each and everyprice)

Feedback:

An increase in productivity should increase the quantity supplied at each andevery price all other things unchanged.Page reference: 82

Question 9

An increase in price from 25 pence to 30 pence leads to an increase in thequantity supplied from 40 units to 44 units. The price elasticity of supply is:

 Your answer:

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b) + 0.5

Feedback:

Quantity supplied increases 10%; price increases 20%; this means the priceelasticity of supply is +0.5.Page reference: 87

Question 10

 The price elasticity of supply is +4. The price increases by 15%. Sales wereoriginally 200 units. What will they be now?

 Your answer:

c) 60 units

Correct answer:

b) 320 units

Feedback:

 The change in quantity supplied will be 4*15%=60%; this means thequantity supplied increases by 120 units.Page reference: 87

Question 1

If demand increases in a market this will usually lead to:

 Your answer:

a) A higher equilibrium price and output

Feedback:

An outward shift in demand will lead to a higher price and output.Page reference: 96

Question 2

An increase in income will:

 Your answer:

d) Lead to an extension of demand

Correct answer:

c) Shift the demand curve

Feedback:Changes in income shift the demand curve.Page reference: 46

Question 3

A reduction in the costs of production will:

 Your answer:

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b) Shift the demand curve

Correct answer:

c) Shift the supply curve

Feedback:

A change in cost conditions will affect the supply curve.Page reference: 82

Question 4

A shift in supply will have a bigger effect on price than output if demand is:

 Your answer:

a) Income elastic

Correct answer:

d) Price inelastic

Feedback:A shift in supply will affect the equilibrium price more than the quantity if demand is steep i.e. price inelastic.Page reference: 101

Question 5

Assuming a downward sloping demand curve and upward sloping supplycurve, a higher equilibrium price may be caused by:

 Your answer:

a) A fall in demand

Correct answer:

d) An increase in demand

Feedback:

Assuming a downward sloping demand curve and upward sloping supplycurve, a higher equilibrium price may be caused by an increase in demand.Page reference: 95

Question 6

If the price was fixed below the equilibrium price there would be:

 Your answer:c) Equilibrium

Correct answer:

b) Excess demand

Feedback:

If the price was fixed too low there would be excess demand.

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Page reference: 95

Question 7

A movement along the demand curve may be caused by:

 Your answer:

a) A change in income

Correct answer:

d) A shift in supply

Feedback:

A movement along the demand curve may be caused by a shift in supply.Page reference: 100

Question 8

A subsidy paid to producers:

 Your answer:d) Leads to an extension of supply

Correct answer:

a) Shifts the supply curve

Feedback:

A subsidy to producers will reduce their costs and shift the supply curve.Page reference: 108

Question 9

A movement along the supply curve may be caused by: Your answer:

c) A shift in demand

Feedback:

A change in demand conditions changes the equilibrium price and leads to amovement along the supply curve.Page reference: 96

Question 10

 The price mechanism cannot:

 Your answer:

b) Act as an incentive

Correct answer:

d) Shift the demand curve

Feedback:

 The price mechanism is a signal, incentive and rationing device; changes in

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price lead to a movement along the demand curve not a shift in it.Page reference: 95

What is Economics

Question 1

The resources in an economy:

a) Are always fixed

b) Can never decrease

c) Always increase over time

d) Are limited at any moment in time

Question 2

Human wants are:

a) Always fixed

b) Limited

c) Unlimited

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d) Likely to decrease over time

Question 3

The sacrifice involved when you choose a particular course of action is called the:

a) Alternative

b) Opportunity cost

c) Consumer cost

d) Producer cost

Question 4

Which one of the following is not one of the basic economic questions?

a) What to produce

b) Who to produce for 

c) How to produce

d) How to minimize economic growth

Question 5

The basic economic problems will not be solved by:

a) Market forces

b) Government intervention

c) A mixture of government intervention and the free market

d) The creation of unlimited resources

Question 6

The free market involves:

a) The free provision of products

b) The subsidising of products by the government

c) Market forces of supply and demand

d) All trade via barter 

Question 7

A mixed economy:

a) Allocates resources via supply but not demand

b) Allocates resources via demand but not supply

c) Allocates resources via supply and demand

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d) Allocates resources via market forces and government intervention

Question 8

Which of the following is NOT likely to be true in a command economy?

a) Businesses may pursue social objectives

b) The profits of a business belong to the government

c) Resources are allocated by government directives

d) Market forces determine what is produced and who receives the products

Question 9

The public sector includes:

a) Investors owning companies

b) Government ownership of assets

c) Market forces of supply and demand

d) Private enterprise

Question 10

Which of the following is a normative statement in economics?

a) More spending by the government reduces poverty

b) Higher taxes lead to less desire to work 

c) The UK economy is growing fast relative to other European Union members

d) The government should concentrate on reducing unemployment

The production possibility frontier

Question 1

If an economy is productively efficient:

a) Everyone is wealthy

b) Resources are unemployed

c) More of one product can only be produced if less of another product is produced

d) The distribution of income is equal

Question 2

Economic growth can be shown by:

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a) An inward shift of the production possibility frontier 

b) A movement along the production possibility frontier 

c) An outward shift of the production possibility frontier 

d) A decision by the government to produce inside the production possibility frontier Question 3

As resources are shifted from one industry to another this can be shown by:

a) An inward shift of the production possibility frontier 

b) A movement along the production possibility frontier 

c) An outward shift of the production possibility frontier 

d) The pivoting of the production possibility frontier 

Question 4

In a free market the combination of products produced will be determined by:

a) Market forces of supply and demand

b) The government

c) The law

d) The public sector 

Question 5

If an economy moves from producing 10 units of A and 4 units of B to producing 7 As and 5Bs,

the opportunity cost of the 5th

B is:

a) 7As

b) 10As

c) 3As

d) 1A

Question 6

An economy may operate outside the Production Possibility Frontier if:

a) It is not utilizing its resources fullyb) It is being productively efficient

c) It is a mixed economy

d) It is trading with other economies

Question 7

The resources in the economy do not include:

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a) Demand

b) Land

c) Labour 

d) CapitalQuestion 8

The resources in an economy are:

a) Constantly increasing

b) Fixed at any moment

c) Constantly decreasing

d) Able to be transferred easily between industries

Question 9

Any combination of products inside the production possibility frontier is:

a) Allocatively inefficient

b) X inefficient

c) Consumer inefficient

d) Productively inefficient

Question 10

An outward shift of the production possibility frontier may be caused by:

a) An increase in demand

b) More government spending

c) Better training of employees

d) Productive inefficiency

Demand

Question 1

Which best describes a demand curve?

a) The quantity consumers would like to buy in an ideal world

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b) The quantity consumers are willing to sell

c) The quantity consumers are willing and able to buy at each and every income all other 

things unchanged

d) The quantity consumers are willing and able to buy at each and every price all other 

things unchanged

Question 2

A fall in price:

a) Will cause an inward shift of demand

b) Will cause an outward shift of supply

c) Leads to a movement along a demand curve

d) Leads to a higher level of production

Question 3Demand for a normal product may shift outwards if:

a) Price decreases

b) The price of a substitute rises

c) The price of a complement rises

d) Income falls

Question 4

According to the law of diminishing marginal utility:

a) Utility is at a maximum with the first unit

b) Increasing units of consumption increase the marginal utility

c) Marginal product will fall as more units are consumed

d) Total utility will rise at a falling rate as more units are consumed

Question 5

If marginal utility is zero:

a) Total utility is zero

b) An additional unit of consumption will decrease total utility

c) An additional unit of consumption will increase total utility

d) Total utility is maximized

Question 6

A decrease in income should:

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a) Shift demand for an inferior product inwards

b) Shift demand for an inferior product outwards

c) Shift supply for an inferior product outwards

d) Shift supply for an inferior product inwardsQuestion 7

An increase in the price of a complement for product A would:

a) Shift demand for product A outwards

b) Shift demand for product A inwards

c) Shift supply for product A outwards

d) Shift supply for product A inwards

Question 8

An increase in price, all other things unchanged, leads to:

a) Shift demand outwards

b) Shift demand inwards

c) A contraction of demand

d) An extension of demand

Question 9

If a product is a Veblen good:

a) Demand is inversely related to income

b) Demand is inversely related to price

c) Demand is directly related to price

d) Demand is inversely related to the price of substitutes

Question 10

If a product is an inferior good:

a) Demand is inversely related to income

b) Demand is inversely related to price

c) Demand is directly related to price

d) Demand is directly related to the price of substitutes

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 The elasticity of demand

Question 1

Average income increases from £20,000 p.a. to £22,000 p.a. Quantity demanded per year 

increases from 5000 to 6000 units. Which of the following is correct?

a) Demand is price inelastic

b) The good is inferior 

c) Income elasticity is -2

d) The product is normal

Question 2

The price decreases from £2,000 to £1,800. Quantity demanded per year increases from 5000 to

6000 units. Which of the following is correct?

a) The price elasticity of demand is -2

b) The good is inferior 

c) Income elasticity is + 0.5

d) Income elasticity is + 2

Question 3

If the price elasticity of demand is unit then a fall in price:

a) Reduces revenue

b) Leaves revenue unchanged

c) Increases revenue

d) Reduces costs

Question 4

If the cross elasticity of demand is -2:

a) The products are substitutes and demand is cross price elastic

b) The products are substitutes and demand is cross price inelastic

c) The products are complements and demand is cross price elastic

d) The products are complements and demand is cross price inelastic

Question 5

The income elasticity is +2 and income increases by 20%. Sales were 5000 units, what will they be now?

a) 3000

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b) 7000

c) 5500

d) 4500

Question 6The price elasticity of demand is a negative number this means:

a) Demand is price elastic

b) Demand is price inelastic

c) The demand curve is downward sloping

d) An increase in income will reduce the quantity demanded

Question 7

Price increases from 10 to 12 pence and the price elasticity of demand is -0.5. The quantity

demanded was 500 units. What will it be now?

a) 550 units

b) 500 units

c) 450 units

d) 490 units

Question 8

If demand is price inelastic:

a) An increase in price must raise profits

b) An increase in price decreases revenue

c) An increase in price increases revenue

d) A decrease in price reduces sales

Question 9

For an inferior good:

a) The price elasticity of demand is negative; the income elasticity of demand is negative.

b) The price elasticity of demand is positive; the income elasticity of demand is negative.c) The price elasticity of demand is negative; the income elasticity of demand is positive.

d) The price elasticity of demand is positive; the income elasticity of demand is positive.

Question 10

For a normal good:

a) The price elasticity of demand is negative; the income elasticity of demand is negative.

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b) The price elasticity of demand is positive; the income elasticity of demand is negative.

c) The price elasticity of demand is negative; the income elasticity of demand is positive.

d) The price elasticity of demand is positive; the income elasticity of demand is positive.

Supply

Question 1

Which best describes a supply curve?

a) The quantity consumers would like to buy in an ideal world

b) The quantity producers are willing and able to sell at each and every price all other things

unchanged

c) The quantity producers are willing and able to sell at each and every income all other things unchanged

d) The quantity producers are willing and able to sell at each and every point in time all

other things unchanged

Question 2

If a 4% increase in price leads to a increase in the quantity supplied of 8%:

a) Supply is price elastic

b) Supply is income elastic

c) Price elasticity of demand is -2d) Price elasticity of supply is -2

Question 3

Supply is likely to be more price elastic:

a) In the short run rather than the long run

b) If factors of production are relatively immobile between industries

c) If there are very few producers

d) If it is easy to expand output

Question 4

A supply curve that starts at the origin has:

a) A price elasticity of supply greater than one

b) A price elasticity of supply equal to one

c) A price elasticity of supply less than one

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d) A positive price elasticity of supply

Question 5

A contraction in supply occurs when:

a) Demand shifts outwards

b) The supply curve shifts inwards

c) The quantity supplied falls when the price falls

d) The supply curve shifts outwards

Question 6

An increase in the costs of production will:

a) Shift demand outwards

b) Shift demand inwards

c) Shift supply outwards so more is supplied at each and every price, all other thingsunchanged

d) Shift supply inwards

Question 7

An increase in price, all other things unchanged, leads to:

a) A shift in supply outwards

b) A shift in supply inwards

c) A contraction of supply

d) An extension of supply

Question 8

An increase in productivity should:

a) Lead to a contraction of supply

b) Lead to an expansion of supply

c) Lead to a shift in supply outwards (i.e. more supplied at each and every price)

d) Lead to an inward shift in supplyQuestion 9

An increase in price from 25 pence to 30 pence leads to an increase in the quantity supplied from40 units to 44 units. The price elasticity of supply is:

a) + 2

b) + 0.5

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c) - 2

d) - 0.5

Question 10

The price elasticity of supply is +4. The price increases by 15%. Sales were originally 200 units.

What will they be now?

a) 80 units

b) 320 units

c) 60 units

d) 120 units

Market Equilibrium

Question 1

If demand increases in a market this will usually lead to:

a) A higher equilibrium price and output

b) A lower equilibrium price and higher output

c) A lower equilibrium price and output

d) A higher equilibrium price and lower output

Question 2

An increase in income will:

a) Lead to a movement along the demand curve

b) Shift the supply curve

c) Shift the demand curve

d) Lead to an extension of demand

Question 3

A reduction in the costs of production will:

a) Lead to a movement along the supply curve

b) Shift the demand curve

c) Shift the supply curve

d) Lead to an extension of supply

Question 4

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A shift in supply will have a bigger effect on price than output if demand is:

a) Income elastic

b) Income inelastic

c) Price elastic

d) Price inelastic

Question 5

Assuming a downward sloping demand curve and upward sloping supply curve, a higher equilibrium price may be caused by:

a) A fall in demand

b) An increase in supply

c) Improvements in production technology

d) An increase in demand

Question 6

If the price was fixed below the equilibrium price there would be:

a) Excess supply

b) Excess demand

c) Equilibrium

d) Downward pressure on prices

Question 7A movement along the demand curve may be caused by:

a) A change in income

b) A change in the number of buyers

c) A change in advertising

d) A shift in supply

Question 8

A subsidy paid to producers:

a) Shifts the supply curve

b) Shifts the demand curve

c) Leads to a contraction in supply

d) Leads to an extension of supply

Question 9

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A movement along the supply curve may be caused by:

a) A change in technology

b) A change in the number of producers

c) A shift in demand

d) A change in costs

Question 10

The price mechanism cannot:

a) Act as a signal

b) Act as an incentive

c) Act as a rationing device

d) Shift the demand curve

The free market system: advantages and

disadvantages

Question 1

Which best describes consumer surplus?

a) The price consumers are willing to pay for a unit

b) The cost of providing a unitc) The profits made by a firm

d) The difference the price a consumer pays for an item and the price he/she is willing to pay

Question 2

In the free market the price mechanism:

a) Acts as a signal to producers

b) Can provide an incentive to reallocate resources

c) Acts as a rationing device

d) Is set by the governmentf 

Question 3

Community surplus equals:

a) Producer surplus minus consumer surplus

b) Profits plus utility

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c) Total utility minus plus profit

d) Consumer surplus plus producer surplus

Question 4

Monopoly power:

a) Is likely to increase consumer surplus

b) Is likely to increase community surplus

c) Is likely to lead to higher producer surplus

d) Is likely to lead to lower prices and lower output

Question 5

A negative production externality means

a) The social marginal cost is greater than the private marginal cost

b) The social marginal benefit is greater than the private marginal cost

c) The social marginal cost is greater than the private marginal benefit

d) The social marginal cost is less than the private marginal cost

Question 6

A positive externality occurs when:

a) The social marginal cost is greater than the private marginal cost

b) The social marginal benefit is greater than the private marginal benefit

c) The social marginal cost is greater than the private marginal benefit

d) The social marginal cost is less than the private marginal cost

Question 7

A merit good

a) Is a public good

b) Involves a negative externality

c) Is overprovided in the free market

d) Is under provided in the free market

Question 8

A demerit good

a) Is a public good

b) Involves a positive externality

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c) Is overprovided in the free market

d) Is under provided in the free market

Question 9

A public good will probably:

a) Be underprovided in the free market

b) Be overprovided in the free market

c) Not be provided in the free market

d) Has no opportunity cost

Question 10

Asymmetric information occurs when

a) Information is free

b) Buyers and sellers have access to different information

c) Community surplus is maximized

d) Community surplus is minimized

Intervening in the market system

Question 1

If the price in a market is fixed by the government below equilibrium:

a) There is excess equilibrium

b) There is excess supply

c) There is excess demand

d) There is equilibrium

Question 2

If the price in a market is fixed by the government above equilibrium:

a) There is excess equilibrium

b) There is excess supply

c) There is excess demand

d) There is equilibrium

Question 3

Merit goods are:

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a) Not provided in the free market economy

b) Under provided in the free market economy

c) Over provided in the free market economy

d) Provided freeQuestion 4

Agricultural prices tend to be unstable because:

a) Supply is price elastic

b) Demand is price elastic

c) Supply is stable

d) Demand and supply are price inelastic

Question 5

When supply increases in an agricultural market farmer's earnings might fall because:

a) Supply is price elastic

b) Demand is price inelastic

c) The government buys up all the excess production

d) All output must be sold at a maximum price

Question 6

Which of the following is the government most likely to subsidize?

a) Negative externalities

b) Positive externalities

c) Monopolies

d) Oligopolies

Question 7

With a positive externality:

a) There is under-consumption in the free market

b) There is over consumption in the free market

c) The government may tax to decrease production

d) Society could be made off if less was produced

Question 8

A public good:

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a) Is provided by the government

b) Is free

c) Has the properties of being non-excludable and non-diminishable

d) Has external costsQuestion 9

 Nationalization occurs when:

a) The government sells assets to a the private sector 

b) The government bans a product

c) The government takes ownership of a business

d) The government taxes a product to a raise its price

Question 10

If a maximum price is set above equilibrium there will be:

a) A price fall

b) A price increase

c) Excess supply

d) Excess demand

Costs: short run and long run

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David Ricardo was born in 1772 and made a fortune as a stockbroker and loan broker. At the age

of 27, he read An Inquiry into the Nature and Causes of Wealth of Nations by Adam Smith and

was energized by the theories of economics. His main economic ideas are contained in Principles

of Political Economy and Taxation (1817). This set out a series of theories which would later  become theoretical underpinnings of both Marx's Das Kapital and Marshallian economics,

including the theory of rent, the labour theory of value and above all the theory of  comparative

advantage.

Ricardo wrote his first economic article ten years after reading Adam Smith and ultimately, the

" bullion controversy" gave him fame in the economic community for his theory on inflation in

19th century England. This theory became known as monetarism, the theory that excess currency leads to inflation. He was also a factor in creating classical economics, which meant he fought

for free trade and free competition without government interference by enforcing laws or 

restrictions. 

Contents 1 Diminishing returns

2 Comparative advantage

3 How Ricardian economics is used today

4 Works cited

5 References

Diminishing returns

Another idea Ricardo is known for in his Essay on the Influence of a Low Price of Corn on the Profits of Stock is the Law of Diminishing Returns (Ricardo, Economic Essays, Henderson 826).

The law of diminishing returns states that if you add more units to one of the factors of  production and keep the rest constant, the quantity or output created by the extra units will

eventually get smaller to a point where overall output will begin to fall ("Diminishing Returns").

For example, consider a simple farm that has two inputs: labor and land. Suppose the farm has100 hectares of land and one worker (the labor input). This land-labor combination produces

some level of output. If we increase the amount of land, and the amount of labor stays the same,

the worker will have to give less attention to each acre of land (if everything else stays the same).So, output might go up, but the additional (marginal) output from adding an acre of land may

decrease. If we continue to add more and more land that must be tended by our one worker, we

will eventually add so much land that output actually starts to decrease as our worker becomesoverwhelmed (that is, less labor time, on average, is devoted to each acre). This is the typicalstylized result of increasing one productive input while holding the others constant (versus

increasing all inputs, generating economies of scale).

Comparative advantage

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Ricardo was opposed to tariffs and other restrictions on international trade. Ricardo devised an

idea that is well known as the theory of comparative advantage (Henderson 827, Fesfeld 325).

According to the Washington Council on International Trade, comparative advantage is the

ability to produce a good at a lower cost, relative to other  goods, compared to another country. In

the Principles of Economics, Ricardo states that comparative advantage is a specializationtechnique used to create more efficient production (52) and describes opportunity cost between

 producers (53). With perfect competition and undistorted markets, countries tend to export goodsin which they have a comparative advantage ("Comparative Advantage").

For example, we should think of two countries that both make cards and pencils and use the

same amount of time to make one unit of items (please see table). Country one can make 4 pencils if they specialize just in pencils at the expense of one card, but this country can also

make ¼ of a card at the expense of one pencil. The same logic goes for country two: if country

two makes only pencils, it will make 2 pencils at the expense of 1 card. If country twospecializes only in cards, it will make ½ of a card at the expense of a pencil. For this example,

Pakistan has a comparative advantage in pencils over China (4 pencils to 2 pencils), whereas,

China has a comparative advantage in cards over Pakistan (½ of a card to ¼ of a card). InRicardo's idea of comparative advantage, these two countries should specialize in what they do

 best. According to The Fortune Encyclopedia of Economics, Ricardo's idea of comparative

advantage is "the main basis for most economists' belief in free trade today" (827).

1 Card 1 Pencil

Pakist

an

4

Pencils

1/4 of a

Card

China2

Pencils

1/2 of a

Card

How Ricardian economics is used todayThough David Ricardo was of the 19th century, many people use his work in everyday

economics. Ricardo's theory on rent consisted mostly of an agricultural model featuring farmersand landowners. Since highly productive land was desired for more crops and the market would

 pay the same price for crops grown on both favorable and unfavorable land, farmers were eager 

to pay more for highly productive land to grow more crops for the extra money (Henderson 827).

Ricardo also had another influential theory: minimum wages. He knew that once the population

rose more greatly, the demand for jobs would increase, making the wages decrease to a level that

would not support people because many were willing to take the low-paying jobs to survive (St.

Clair 9, Fusfeld 325). This observation of minimum wage work is especially true today whenlooking at the controversy with the enforcement of a minimum wage law. In Ricardo's book, On

the Principles of Political Economy and Taxation, he is saying that the jobs we give more valueto are paid better than those we do not value as much (11-2). To Ricardo, value had much to dowith the cost of production, which included wages and profit (St. Clair 27) and how much you

 paid a worker affected the price you put on the item. He also believed the value of a product was

related to the quality of labor necessary for the production (Principles of Political 5). An exampleof this would be paying a slightly higher price for an item that is handmade, rather than being

manufactured. Though this is true, Ricardo also thought the labor or machine itself should be

considered when selling an item and that a little of every item should be priced to include this

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factor of labor (St. Claire 24). Ricardo addressed many of the issues we face today in our 

economic world, such as minimum wage and rent (Fusfeld 325). These issues are perhaps as

important to us today as they were in the 19th century, which is why David Ricardo's economictheories are still an important part of modern economics.

David R. Stead, University of York

David Ricardo (1772-1823) was one of the greatest theoretical economists of all time. The third

child of Abigail and Abraham (a prosperous Jewish stockbroker who had emigrated to London

from Holland), Ricardo attended school in London and Amsterdam and at the age of fourteenentered his father's business. In 1793 he married a Quaker, Priscilla Wilkinson, with whom he

was to have eight children. The couple's different religious backgrounds meant that the marriage

created a rift with both their families, and Ricardo was forced to set up independently as a broker 

on the London Stock Exchange. Ricardo, though, prospered in the financial business to a far greater extent than his father, amassing a fortune of about £700,000 (equivalent to approximately

£40 million today).

Ricardo became interested in economics in 1799 after, apparently by chance, reading the work of 

Adam Smith. He subsequently published pamphlets and articles analyzing various economic

 problems of the day, including the stability of the currency and the national debt. After some

struggle ("I fear the undertaking exceeds my powers," he wrote), his classic work, The Principlesof Political Economy, appeared in 1817. Two of Ricardo's most important contributions were the

theory of rent and the concept of comparative advantage. The former, which drew on the writings

of (among others) his close friend and critic Robert Malthus, defined rent as "that portion of the produce of the earth which is paid to the landlord [by the tenant farmer] for the use of the

original and indestructible powers of the soil." Rent, Ricardo argued, is what remains from gross

farm revenue after all the farmer's production costs have been paid, including remuneration for 

the capital and labor he had expended on the land. It is an unearned surplus (now referred to asan economic rent) in that its payment is not necessary to ensure a supply of farmland. For 

Ricardo, rent arises from the advantages that one site has over another due to differing degrees of soil fertility: rent per acre is highest on the most fertile land, and declines to zero on the worst

quality soil.

Comparative advantage, Ricardo believed, ensured that international trade would bring benefitsfor all countries; his theory remains the foundation of the economic case for free trade today. He

argued that each country should specialize in making the products in which it possessed a

comparative advantage, that is could produce relatively efficiently. Portuguese sunshine, for 

example, gave Portuguese entrepreneurs a comparative advantage in producing wine, whereasEngland's wet climate meant that her comparative advantage was in making cloth. Ricardo

showed that, by specializing in production and then trading, Portugal and England would eachachieve greater consumption of both wine and cloth than in the absence of international trade.

 Not surprisingly, then, Ricardo opposed the protectionist Corn Laws in place during his lifetime,

and upon retiring from the Stock Exchange in 1819, made his case directly to the House of 

Commons as the member for Portarlington, a pocket borough in Ireland. Ricardo's Parliamentarycareer was influential but brief: four years later he died suddenly after contracting an ear 

infection.

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Understanding distribution channels

This is the ‘place’ element of the 7Ps marketing mix. It is about getting the product into the right

 place, at the right time and in the right conditions for customers to buy them.

 Physical distribution – this is how to direct the flow of physical products from manufacturers to

the point where it is most convenient for customers to buy them – it is part of the bundle of 

 benefits that make up the product

 Logistics – this is concerned with process of moving raw materials through production and

distribution processes to the point where the finished product is needed. Involves strategic

decision-making about warehouse location, materials management, stock levels and information

systemsFunctions involved:

transport

stock-holding and storage

local knowledge (on distributions methods)

 promotion (incentives)

display for sale

Methods of directing distribution:

 Zero Step – manufacturer, to customer 

One Step – manufacturer, to retailer, distributor or franchisee, to customer 

Two Step – manufacturer, to wholesaler or central buyer for retail group, to retailer, to customer 

Three Step – manufacturer, to agent, to wholesaler, to retailer, to customer 

 Intermediaries are:

middlemen who links producers to other middlemen or those who ultimately use the

 product.

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someone who mediates or brings about a settlement between the supplier and the buyer 

The role of the intermediary:

 Agents  – do not buy goods themselves, but act as go-betweens on behalf of the manufacturer to

the wholesalers and retailers, and earn commission on the sales

Wholesalers – buy goods, stock a range of products from potentially competing manufacturers tosell on to other organisations

 Retailers  – intermediaries or traders operating outlets which sell directly to customers

 Distributors (dealers) – contracted to by a manufacturer’s goods and sell them to customers

 Franchisees – independent organisations which in exchange for an initial fee and a share of sales

revenue are allowed to trade under the name of a parent organisation

 Multiple Stores – these buy goods for retailing direct from the producer, sometimes under their 

own brand

 Export and import houses – specialise in buying and selling goods from other countries

Alternative kinds of intermediaries: Direct marketing – techniques which products are promoted via a medium which allows a direct

response from the customer (adverts with coupons, mailings with reply-paid order forms)

Vending machines – customers purchase directly from the machine, provide access to placestraditional retailers might have trouble reaching

Telephone selling – inbound – customers call as result of marketing communication; outbound – 

customers are called by sales operators

 Electronic retailing – online retailing more common as customers become more internet-literate

Disadvantages of using intermediaries from the prospective of the producer:

the cost involved do they really understand the product?

loss of control from the manufacturer to the customer 

 possible disruptions in delivery and process

lack of loyalty to the manufacturers

working to different perimeters

the effect on brand reputation

Channel decision:

 Direct distribution – does not involve using an intermediary (active) Indirect distribution – involves using intermediaries (passive)

Choosing the right channels – strategic decision based on the choice of target market the productcharacteristics

 Logistics – transporting products to the right locations, tactical decisions involving transport

decisions, warehouse decisions, financial decisions.

Logistical issues:

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 Possibility of multiple channels  – a different delivery system for each channel

 Location of customers  – different physical distribution solutions for different locations

Compatibility – delivery methods must be compatible with the channel, product, customers and

supplier 

 Nature of goods  – perishable versus non-perishableGeography, environment and terrain – delivery techniques depending on the location

Storage and distribution costs – warehousing is expensive, an alternative is just-in-time purchasing : delivering in small batches at the exact time needed

 Import/expert costs – such as custom duties and international insurance

Factors in channel distributions:

Customer  characteristics – they need to receive a good service, whatever they expect, and

feedback is always important

 Product characteristics – these can be complex, and more knowledge may be needed within

certain circumstances Distributor characteristics – this depends on the equipment and personnel

Competitor characteristics – should the company do what their competitors do? Does it work 

well for them? Should the company revolutionise?

Supplier characteristics – these processes are on view, and they have a reputation to maintain

Making the channel decision:

What type of distributor is needed, and how many of each type? – Mix and match the logistics

according to the circumstances

Who will carry out specific marketing tasks? – it is important not to lose control, especially to

 preserve their involvement with the product

 How will effectiveness of distributors be evaluated? – this depends on performance levels, orderstaken, total sales, and feedback 

Channel market coverage:

 Intensive  – everywhere

Selective – certain kind of customer 

 Exclusive – certain outlets

The many aspects of a productWritten on Saturday 13 November 2010 by Alice in Just me, Marketing 

Products are “a bundle of benefits which satisfy a set of wants that customers have”. There arethree key facts here: benefits rather than features, wants rather than needs, and customers, the

most important element of a business.

You can break a product down into three aspects: physical (what it looks like), functional (what it

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does) and symbolic (what it means to the customer and how they associate with it).  Primary

characteristics are benefits that are common with competitors, whereas auxiliary characteristics 

are features and benefits that are unique to the product.

A product needn’t just be goods, it can also be an idea, a service, or a combination of all of these.

If you’re aiming your product at B2C (business to customer) they’re known as consumer 

 products, and can be divided into convenience (cheap, frequently purchased items), shopping  (specific products people shop around for), speciality (planned purchased products) and

unsought (sold, not bought, like insurance) goods. B2B (business to business) or industrial 

 products are products that are bought for manufacturing purposes: installations, raw materials,components, equipment, processes; or for the purposes of resale: consumable supplies.

Products can be separated into four levels: core (basic physical product with minimum features);

expected or actual (generic product plus some extra expected features); augmented (factors thatdifferentiate the product, such as accessories and benefits, or the difference between one brand

and another); potential (all the possible features and benefits ever wanted by the customer).

There are four elements of a product: branding – the product’s personality, describing expected

quality, performance and reaction from the customers. It is described as a ‘lens’ through whichcustomers see the product, and through which marketers promote.  Product lines and product 

ranges – a product portfolio is necessary if a company produces more than one product. Thesemay be broad (a wide range) or deep (many variations). Packaging – design makes a product

more desirable, noticeable, and informative of the product’s benefit. It should also protect the

 product, be convenient for distribution purposes, and help promote the product apart fromcompetitors. Service support – a service element could consist of after-sales assistance or support

helplines. It contributes to added value, and can differentiate from competitors.

There are five variables of  service marketing :

 Intangibility – services that cannot be touched or viewed (and therefore difficult to perceive)

 Inseparability – services that cannot be separated from the provider or got from elsewhere(provided at the same time as the client is receiving it, like a consultation or online search)

 Heterogeneity – services with a lack of sameness, or a standard service that varies with each

delivery (services that involve people who have different needs, or adapted to suit separatescenarios)

 Perishability – services that cannot be stored for later provision (such as nontransferable flight

tickets or a cruise)

Ownership – service purchase that does not transfer ownership of the property (it is bought first