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Business Environment


I wish my greats thanks to Mr.Dinith Samaragunarathne , he gave us encouragement to do the assignment and he explained very clearly to us and he explained again and again to us to capture. And I would like to thanks BCAS management who gave a opportunity to do a HND in business management.

With faith fully s.kumar


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Business Environment Contents

ACKNOWLEDGEMENT .............................................................................................................................. 1 Executive summary.................................................................................................................................. 3 Task 2: Investigate the economic, social and global environment in which organizations operate ............ 4 2.1 Explain in detail different economic systems and how the allocate and make effective use of the resources. ............................................................................................................................................ 4 2.2 Explain the term policy and discuss the impact of social welfare policy and industrial policy initiations on organizations and the community at large .................................................................... 11 2.3 Evaluate how macroeconomic policy of a country effect organizations and its stakeholders ........ 14 2.4: Explain the impact of the global economic policy of country effect organizations and its stakeholders ...................................................................................................................................... 22 Task 3: Investigate the behavior of organizations and the market environment .................................... 25 3.1 How does different market structure in practice deviate from the model of perfect competition . 25 3.2 define supply and demand &use different examples to illustrate the relationship between market forces and organization response ...................................................................................................... 33 3.4: Discuss the role of the competition commission and regulatory bodies. ...................................... 39 Task 4: Explore the significance of international trade and the European dimension for UK business ..... 42 4.2: Evaluate the impact of two policies of the European Union on UK business organizations. .......... 42 4.3 Analyze the economic implications for any country in the UK of entry in to European & Monetary Union (EMU) ...................................................................................................................................... 51 Conclusion ............................................................................................................................................. 58 Reference .............................................................................................................................................. 59


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Executive summary
This assignment concerns about to the global environment and international trade, European Union etc. This assignment examines the economic policy of a country effect the organizations and its stakeholders from both a theoretical and practical viewpoint. The unit is intended to develop an understanding of the environment of people within the organization. It also aims to provide the basics for, and to underpin future study in, specialist areas of business.

 Economic system, economic policy and macro economic policy  Market structure, supply and demand & competition commission  International trade, European union, Economic Monetary Union

In accomplishing this assignment I have obtained information from Internet, lecturing notes and the Books. During the assignment period I have gone through news articles and I tried for our level best to do this assignment with in short period of given time.


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Task 2: Investigate the economic, social and global environment in which organizations operate
2.1 Explain in detail different economic systems and how the allocate and make effective use of the resources.
In order to obtain useful information for your assignment you need to identify what kind of information you need. Different kinds of information can be found in different types of resources. The kind of information you need will then determine which resource is the most appropriate.

In economics, land comprises all naturally occurring resources whose supply is inherently fixed. Examples are any and all particular geographical locations, mineral deposits, and even geostationary orbit locations and portions of the electromagnetic spectrum. Natural resources are fundamental to the production of all goods, including capital goods. Location values must not be confused with values imparted by fixed capital improvements. In classical economics, land is considered one of the three factors of production (along with capital, and labor). Income derived from ownership or control of natural resources is referred to as rent.

Labor economics seeks to understand the functioning and dynamics of the market for labour. Labour markets function through the interaction of workers and employers. Labour economics looks at the suppliers of labour services (workers), the demanders of labour services (employers), and attempts to understand the resulting pattern of wages, employment, and income.

What Does Economic Capital Mean? The amount of capital that a firm, usually in financial services, needs to ensure that the company stays solvent. Economic capital is calculated internally and is the amount of capital the firm should have to support any risks it takes on.


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The measurement process involves converting a given risk to the amount of capital that is required to support it. The calculations are based on the institution's financial strength (e.g., credit rating) and expected losses. Financial strength is represented by the probability of the firm not becoming insolvent over the measurement period and is the confidence level in the statistical calculation. Most banks will use a confidence measurement of between 99.96% and 99.98%, which is the insolvency rate expected for an institution with a AA or Aa credit rating. The firm's expected loss is the anticipated average loss over the measurement period. Expected losses represent the cost of doing business and are usually absorbed by operating profits. The relationship between frequency of loss, amount of loss, expected loss, financial strength and economic capital can be seen in the following graph:


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Investopedia explains Economic Capital Economic capital is used for measuring and reporting market and operational risks across a financial organization. Economic capital measures risk using economic realities rather than accounting and regulatory rules, which have been known to be misleading. As a result, it is thought to give a more realistic representation of a firm's solvency.
in finance, mainly for financial services firms, economic capital is the amount of risk capital, assessed on a realistic basis, which a firm requires to cover the risks that it is running or collecting as a going concern, such as market risk, credit risk, and operational risk. ...

What is the role of entrepreneurship in economic development? At a minimum the answer should be able to explain the role of entrepreneurs in the structural transformation of countries from low income, primary-sector based societies into high-income service and technology based societies. More broadly though, it should also be able to explain the role of entrepreneurs in the opposite pole of stagnating development (including conflict) and in high innovation-driven growth. Although economic development lacks a general theory of entrepreneurship, which could encompass a variety of development experiences, much progress has been made in extending the understanding of entrepreneurship in the process of development. This paper surveys the progress with the purpose of distilling the outlines for a more general theory of entrepreneurship in economic development. Entrepreneurship in developing countries remains a relatively under-researched phenomenon, so by surveying the current state of research, and by discussing the role of entrepreneurship in dual economy models of structural transformation and growth, a secondary objective of this paper is to identify avenues for further research. Finally, the policy implications from the economic literature suggest that a case for government support exists, and that this should focus on the quantity, the quality, and the allocation of entrepreneurial ability. Many routinely adopted policies for entrepreneurship, such as provision of credit and education, are shown to have more subtle effects, not all of which are conducive to growth-enhancing entrepreneurship.


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Economic system

The set of institutions and mechanisms by which a society provides answers to the three fundamental questions. organized way in which a state or nation allocates its resources and apportions goods and services in the national community. Basic means of achieving economic goals that is inherent in the economic structure of a society. Major economic systems are capitalism, socialism and communism. the system of production, distribution and consumption.

There are basically 4 types of Economic systems:

1. Market Economy 2. Mixed Economy 3. Planned Economy 4. Command Economy

Market Economy
In a market economy, national and state governments play a minor role. Instead, consumers and their buying decisions drive the economy. In this type of economic system, the assumptions of the market play a major role in deciding the right path for a countrys economic development. Market economies aim to reduce or eliminate entirely subsidies for a particular industry, the pre-determination of prices for different commodities, and the amount of regulation controlling different industrial sectors. The absence of central planning is one of the major features of this economic system. Market decisions are mainly dominated by supply and demand. The role of the government in a market economy is to simply make sure that the market is stable enough to carry out its economic activities properly.


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Business Environment Advantage and Disadvantage of market economy

In recent years, market economies have been coming more and more popular. Three major examples of market economies are The United States, Japan, and France.  One major advantage is that market economies can adjust to change easily. If there is a demand for one thing, companies have the ability to change what they produce instead of having to go through too much government protocol first. Rational self-interest in market economies is also encouraged.  People have the ability to make much money as they can and do what is in their best interest. Another positive to market economies is that the government tries to stay out of the way of businesses.  Although the government sets certain standards businesses must follow, for the most part businesses can do as they please, allowing them to produce what they want, how they want.  A fourth advantage to the market economy is that there is a great variety of goods and services for consumers. If there is a demand for a good or service, the demand will almost always be met in a market economy.

Although there are a lot of positives to market economies, there are also many negatives that go along with it too.  One major problem with this type of economy is that it doesnt always provide the basic needs to everyone in the society. The weak, sick, disabled, and old sometimes have trouble providing for the selves and often slip into poverty.  Another problem is that it becomes hard for a government with so many private businesses to provide sufficient defense, education, and health care to its people.  A third disadvantage to this type of economy is that there is uncertainty in the business world. One company could easily be forced out of business causing all of its employees to become unemployed and lose their means of income.


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The final major disadvantage is that occasionally there are market failures. This can cause some companies to become way to powerful and become a monopoly.

Planned Economy A planned economy is also sometimes called a command economy. The most important aspect of this type of economy is that all major decisions related to the production, distribution, commodity and service prices, are all made by the government. The planned economy is government directed, and market forces have very little say in such an economy. This type of economy lacks the kind of flexibility that is present a market economy, and because of this, the planned economy reacts slower to changes in consumer needs and fluctuating patterns of supply and demand. On the other hand, a planned economy aims at using all available resources for developing production instead of allotting the resources for advertising or marketing. Mixed Economy A mixed economy combines elements of both the planned and the market economies in one cohesive system. This means that certain features from both market and planned economic systems are taken to form this type of economy. This system prevails in many countries where neither the government nor the business entities control the economic activities of that country - both sectors play an important role in the economic decisionmaking of the country. In a mixed economy there is flexibility in some areas and government control in others. Mixed economies include both capitalist and socialist economic policies and often arise in societies that seek to balance a wide range of political and economic views.


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command economy

An economy where supply and price are regulated by the government rather than market forces. Government planners decide which goods and services are produced and how they are distributed. The former Soviet Union was an example of a command economy. Also called a centrally planned economy. The command economy is an economic system that is controlled by a centralized federal government. In most examples of a command economy, the focus of the control is on the industrial goods that are manufactured with the country. Sometimes referred to as a centrally planned economy, it is not unusual for the government to own and operate the production facilities producing the goods, or to maintain a high level of control over companies that are allowed to operate within the country.


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2.2 Explain the term policy and discuss the impact of social welfare policy and industrial policy initiations on organizations and the community at large
 Governmental: Basic principles by which a government is guided. Declared objectives which a government seeks to achieve and preserve in the interest of national community. See also public policy.  Insurance: Formal contract issued by an insurer that contains terms and conditions of the insurance cover and serves as its legal evidence.  Organizational: Set of basic principles and associated guidelines, formulated and enforced by the governing body of an organization, to direct and limit its actions in pursuit of long-term goals. See also corporate policy.

The social responsibility of organizations differs from the good manners. Therefore the social responsibility of organizations should not be impediment to the principles of community life while reverence and respecting the traditions in which the community is based upon. Since the establishment of any organization exclusively depends on the behavior of the society.

Also in order to achieve the objectives of organizations, consideration must be given not to hamper the social life while executing the business venture. The business organization is legally grateful to conform to all the commercial standards educating such requirements to the consumer and to ensure them of the overall satisfaction they have to get from the transaction in terms of the purchase they make.


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Every organization should accept the main international rights of the consumer (Consumer Rights). Which are?

 The right to getting information.  The right to getting protected.  The right to choice.  The right to getting the attention.

Every established organization should be concern about the following characteristics when talking about the social responsibility towards the public.

 Environment friendliness.  It should not be involved in any kind of transaction or dealings in terms of forgery, adulteration, short measuring and weighing, hoarding and black marketeering.  Get involved in full employment.  Enhance the national productivity level.  Get involved in various social service activities.  Comply with the tax regulation without causing default, dealing and deception.  Social responsibility of organizations towards its customers.  Sell quality goods at a reasonable price.  Honesty and Trustworthiness.  Providing authentic information.  Treat every consumer equally.  Introduce new goods and services.  Fulfill the given promises accordingly on the goods sold and services.  Providing discount facilities.


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Social responsibility of organizations towards the public.

 Act in a fair and honest manner.  Never humiliate anyone or treat in an unequal manner.  Never act in an environment polluting manner.  Help to solve problems faced by the public such as environment pollution, unemployment, eradication of diseases etc.  Get involved in community oriented projects.  Contribute donation for religious activities.


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Business Environment 2.3 Evaluate how macroeconomic policy of a country effect organizations and its stakeholders Macro Economic
I would define macroeconomics similarly to how I defined it in What is Economics?. Macroeconomics examines the economy as a whole and answers questions such as 'What causes the economy to grow over time?', 'What causes short-run fluctuations in the economy?' 'What influences the values various economic indicators and how do those indicators affect economic performance?

Macroeconomics can be best understood in contrast to microeconomics which considers the decisions made at an individual or firm level. Macroeconomics considers the larger picture, or how all of these decisions sum together. An understanding of microeconomics is crucial to understand macroeconomics. To understand why a change in interest rates leads to changes in real GDP, we need to understand how lower interest rates influence decisions, such as the decision of how much to save, at the firm or household level. Once we understand how an individual, on average, will change their behavior we will then understand the large scale relationships in an economy.

Four Economic Objectives 1. Full Employment 2. Economic Stability 3. Economic growth and economic development 4. Equity


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Full Employment State of economy in which all eligible people who want to work can find employment at prevailing wage rates. However, it does not imply 100 percent employment because allowances must be made for frictional unemployment and seasonal factors. The first definition of full employment would be the situation where everyone willing to work at the going wage rate is able to get a job. This would imply that unemployment is zero because if you are not willing to work then you should not be counted as unemployed. To be classified as unemployed you would need to be actively seeking work. This does not mean everyone of working age is in employment. Some adults may leave the labour force, for example, women looking after children.

Diagram of Full Employment

In this diagram full employment would be at an output of Y2. Here any increase in AD only causes inflation. In practise it is difficult to know precisely what counts as full employment. Practical reasons make it difficult for every firm to operate at 100% capacity. Optimal capacity may considered to be 85%


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Economic Stability Economic stability refers to an absence of excessive fluctuations in the macroeconomy. An economy with fairly constant output growth and low and stable inflation would be considered economically stable. An economy with frequent large recessions, a pronounced business cycle, very high or variable inflation, or frequent financial crises would be considered economically unstable. inflation is measured as the growth of the money supply in an economy, without a commensurate increase in the supply of goods and services. This results in a rise in the general price level as measured against a standard level of purchasing power. There are a variety of inflation measures in use, related to different price indices, because different prices affect different people. Two widely known indices for which inflation rates are commonly reported are the Consumer Price Index (CPI), which measures nominal consumer prices, and the GDP deflator, which measures the nominal prices of goods and services produced by a given country or region. Economic growth and economic development Economic development is the increase in the amount of people in a nation's population with sustained growth from a simple, low-income economy to a modern, high-income economy. Its scope includes the process and policies by which a nation improves the economic, political, and social well-being of its people. Gonalo L Fonsesca at the New School for Social Research defines economic development as "the analysis of the economic development of nations."


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Economic growth versus economic development Economic development refers to social and technological progress. It implies a change in the way goods and services are produced, not merely an increase in production achieved using the old methods of production on a wider scale. Economic growth implies only an increase in quantitative output; it may or may not involve development. Economic growth is often measured by rate of change of gross domestic product (eg., percent GDP increase per year.) Gross domestic product is the aggregate value-added by the economic activity within a country's borders. Economic development typically involves improvements in a variety of indicators such as literacy rates, life expectancy, and poverty rates. GDP does not take into account other aspects such as leisure time, environmental quality, freedom, or social justice; alternative measures of economic wellbeing have been proposed (more). A country's economic development is related to its human development, which encompasses, among other things, health and education. Equity
Ownership interest in a corporation in the form of common stock or preferred stock. It also refers to total assets minus total liabilities, in which case it is also referred to as shareholder's equity or net worth or book value. In real estate, it is the difference between what a property is worth and what the owner owes against that property (i.e. the difference between the house value and the remaining mortgage or loan payments on a house). In the context of a futures trading account, it is the value of the securities in the account, assuming that the account is liquidated at the going price. In the context of a brokerage account, it is the net value of the account, i.e. the value of securities in the account less any margin requirements.

macroeconomic policy In this chapter we consider the ways in which government economic policies can be used to achieve aims such as low inflation, stable growth and high levels of employment.
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Is there a need for macroeconomic policy? A central issue in macroeconomics is whether or not markets, left alone, automatically bring about long run economic equilibrium. If the free operation of market forces eventually resulted in a full employment level of national income with stable prices and economic growth, there would be no need for government intervention in the macro economy - no need for fiscal monetary exchange rate and supply side policies. The reality is that all governments intervene through their macroeconomic policies in a bid to achieve certain policy objectives and improve the overall performance of the economy. Main Objectives of Government Economic Policy
y y y y y y

Sustained economic growth Stable prices (low inflation) A high level of employment A rise in average living standards Sustainable position on the balance of payments Sound government finances

The Main Problems of Managing the Macroeconomic The governments task of managing the economy is made difficult by several factors some of which are discussed below:

Inaccurate economic data: All of the main macroeconomic indicators are subject to a margin of error. They rely on statistical data collected from tax returns and surveys and data is often revised many months after its first release Conflicting policy objectives: A policy of stimulating aggregate demand may reduce unemployment in the short term but initiate a period of higher inflation and exacerbate the current account of the balance of payments. Choices have to be made between objectives i.e. there exist trade-offs between them


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Selecting the right policy instrument: Each macroeconomic objective requires a separate policy instrument: The usual rule of thumb is that one main policy instrument should be assigned to one policy objective. So, for example, interest rates might be assigned as the main instrument for keeping control of inflation, whilst fiscal policy instruments such as changes to the tax system might be allocated to achieving some supply-side objectives such as increasing the labour supply, boosting incentives, raising investment and increasing productivity. There are quite deep-rooted disagreements between some economists (who belong to different schools of thought) as to which policies are most effective to meet a certain objective

Uncertain time lags when running a policy: Changes in economic policies are subject to uncertain time lags e.g. a change in interest rates is estimated to take some 18-24 months to work its way fully through the whole economy to filter through to a change in prices. The length of the time lags can change over the years as the reactions of consumers and businesses to policy measures alters

External shocks: Unexpected external shocks to economy such as the events surrounding Sept 11th 2001 or unexpected volatility in exchange rates and commodity prices can upset economic forecasts and take the economy some distance from the expected path. The Government might under-estimate or exaggerate the potential impact of an economic shock to either the demand or supply-side of the economy and therefore apply too little or too much of a policy response.


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The main policies of economic management

Fiscal Policy

Fiscal policy involves the use of government spending, taxation and borrowing to influence both the pattern of economic activity and also the level and growth of aggregate demand, output and employment.

Monetary Policy

Monetary policy involves the use of interest rates to control the level and rate of growth of aggregate demand in the economy.

Supply-side Policies

Supply-side economic policies are mainly micro-economic policies designed to improve the supply-side potential of an economy, make markets and industries operate more efficiently and thereby contribute to a faster rate of growth of real national output. Most governments now accept that an improved supply-side performance is the key to achieving sustained economic growth without a rise in inflation. But supply-side reform on its own is not enough to achieve this growth. There must also be a high enough level of aggregate demand so that the productive capacity of an economy is actually brought into play. There are two broad approaches to the supply-side. Firstly policies focused on product markets where goods and services are produced and sold to consumers and secondly supply-side policies applied to the labor market a factor market where labour is bought and sold.


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Business Environment Macro economic policy effect on a country and its stakeholders

Pro-Poor Macroeconomic Policies Require Poverty and Social Impact Analysis Rafael Gomes* Max Lawson** Rafael Gomes ( is a research consultant on corporate citizenship and was a Programmed Officer at the European Network on Debt and Development (EURODAD), Brussels, Belgium at the time of writing this article. Oxfam Great Britain, 274 Banbury Rd, Oxford, OX2 7DZ, UK. ( The views expressed in this article are those of the authors. They do not necessarily reflect the views of EURODAD or Oxfam.


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Business Environment 2.4: Explain the impact of the global economic policy of country effect organizations and its stakeholders
Global economy policy impact of a UK economy

UK Economy: The United Kingdom is a major developed capitalist economy. It is currently the world's sixth largest by nominal GDP and the sixth largest by purchasing power parity. It is the third largest economy in Europe after Germany's and France's in nominal terms,[3] and the second largest after Germany's in terms of purchasing power parity. Its GDP PPP per capita is the 18th highest in the world. The United Kingdom is also a member of the G7, G8, G-20 major economies, the Commonwealth of Nations, the Organisation for Economic Cooperation and Development, the World Trade Organisation, and the European Union. The UK was the first country in the world to industrialize in the 18th and 19th centuries, and for much of the 19th century possessed a predominant role in the global economy. However, by the late 19th century, the Second Industrial Revolution in the United States


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and the German Empire meant that they had begun to challenge Britain's role as the leader of the global economy. The extensive war efforts of both World Wars in the 20th century and the dismantlement of the British Empire also weakened the UK economy in global terms, and by that time Britain had been superseded by the United States as the chief player in the global economy. At the start of the 21st century however, the UK still maintains an important role in the global economy, due to its large gross domestic product and the financial importance that its capital, London, possesses in the world.

Macro economy impact on UK economy

y The United Kingdom is one of the worlds leading advanced economies. It has the second largest economy in the European Union (EU) behind Germany and just ahead of France and it is the second biggest exporter of services in the global economy and ranked eighth in global exports of goods. In 2006 the UK will contribute 3 per cent to global output. y In terms of per capita national income, the UK is ranked in the top fifteen nations of the world and in 2006 it is forecast that the UK will have a per capita income (PPP adjusted) of $31,529 some distance behind that of the United States and also Norway and Ireland, two of Europes richest countries. y Britain has enjoyed a period of continuous growth that stretches back to 1992, the longest sustained expansion for over forty years. However, in 2005, real GDP grew by 1.8%, the slowest pace of growth for twelve years. y Over 27 per cent of the UKs GDP in 2005 came from exports of goods and services. Imports amounted to 31.5 per cent of national income leading to a large trade deficit in goods and services with other countries.


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UK key economic indicators are:
Expenditure method for calculating national income in UK, we find that almost 70% of GDP in the UK is accounted for by private consumption. The level of inflation as measured by Consumer price index.

Some examples of globalization effects in the Uk economy as follows; Rising level of import penetration: The companies from Asian pacific forcing them self to launch in the UK economy to sells their products and to get markets and attract the Europeans towards them. Particularly in those industries where Britains previous comparative advantage has been eroded such as textiles and clothing and the manufacture of lower-valued added electronic products. Structural change in industries: For example the long term loss of out put and employment in industries such as textiles. This creates problems where factor resources are occupationally and geographically immobile. The UK has probably lost forever its comparative advantage in producing low value added manufactory products. Other countries with significantly lower labor costs can now meet global demand at lower cost than the UK can. Because of Globalization lot of people migrated to UK from various countries and the various culture of the people accommodated. Because of this the expectation of various culture groups effects in the UK economy as well. Because of free of cash flow, money moves around the world and the currency and the economy of UK is more vulnerable to financial speculation. The UK currency rate has come down and there is a financial crisis which affects the economy of UK. [Presently The UK and USA economics are facing this financial crisis] Globalization effects not only in the UK economy but it affects all economies in the world, doesnt matter whether its a Developed country or Developing country. BM/06 Page 24

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Task 3: Investigate the behavior of organizations and the market environment

3.1 How does different market structure in practice deviate from the model of perfect competition

market structure
The concept of market structure is central to both economics and marketing. Both disciplines are concerned with strategic decision making. In decision-making analysis, market structure has an important role through its impact on the decision-making environment. The extent and characteristics of competition in the market affect choice behavior among the actors
y y y y

Degree of competition in the industry High levels of competition Perfect competition Limited competition Monopoly Degrees of competition in between

Advantages of Perfect Competition:

y y y y y

High degree of competition helps allocate resources to most efficient use Price = marginal costs Normal profit made in the long run Firms operate at maximum efficiency Consumers benefit


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Based on the above characteristics we can identify 4 types of Market. 1. Perfect Competition 2. Monopoly 3. Oligopoly 4. Monopolistic Competition
Market Structure Continuum

Different Types of Market Structure

This report will look at the competition policy within the UK and state what it does within the different market structures. With this the report will show two examples of where the competition authorities have had to investigate. Also the report will use the supermarkets as an example and show how they are able to meet their company's objectives within their market structure. The four types of market structures that we have studied are perfect competition, monopolistic competition, monopoly and oligopoly. These categories have been made to help people understand how businesses operate and how prices, outputs and profits are determined. The four market structure types are there mainly for the purposes of organization. Perfect competition is an ideal state of economic affairs which does not exists in any industry. A perfect competitive industry has multiple firms selling the exact same product. The number of firms is large so that no single firm can influence price and the products are so similar that the consumer has no reason to choose one for another. Two factors that are necessary in perfect competition are perfect knowledge and perfect mobility. Perfect knowledge is when everyone is aware of every economic opportunity.


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Perfect competition
This market structure has a vast amount of companies with no barriers to entry new companies can join easily. Product pricing rarely changes, and is usually low, as no one company has the resources to develop the product or business image. E.g. advertising. The downside to this type of market is that there is little reason for competition, as the price will not have a significant difference when consumers go to a different company. Another is that there is no chances of the market being able to innovate as all business in the sector are small and cannot afford a research and development.

Oligopoly Market

An oligopoly market has a small number of firms, which are all able to make supernormal profits. The advantages are that these companies have the resources to reduce the price of their products, this can sometimes lead to price wars such as in the case of the big supermarkets. Also the supernormal profit can help innovate the market through research and development programs. As there a fewer firms the more market share there is between them and the more influence they can have on the market. Another advantage is that these companies do not always compete on price and sometimes try to entice customers into their shops through. The features of Oligopoly: Few numbers: Small numbers of firms are in the business of production or servicing the entire market of the industry. For an example if we take print journalism as an industry, where only few firms dominate the production of national dailies this involvement will be in oligopoly market structure. BM/06 Page 27

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Interdependence: An oligopoly firm does not decide on matters related to production and price determination without carefully considering what the other firms in the industry will do. This is because actions of an individual firm could be counteracted by actions of another firm in the industry. Fore instance vigorous marketing strategy by one milk food firm may be concentrated by an equally vigorous marketing strategy by another milk food firm. Product Type: In Oligopoly products may be standardized or differentiated. For instance cement may be standardized in content. Except the brand name, packing or price, the quality and content of these products may be standardized and similar. Ex of products: Automobile, News papers Entry and Exit: Important characteristic of an oligopoly market structure is the difficulty of new comers to enter. A number of reasons make entry of new firms to oligopolistic markets difficult. Some of these reasons also make exist of firms difficult. Therefore in oligopoly markets, firms can earn positive economic profits for a longer time and continue their business, without threats from new competition. The reasons that make entry and exits difficult are:

Monopolistic Market
A company is classified as having a monopoly when it is either the only company within its market or holds over 70% of the market share. E.g. Microsoft is affectively a monopoly as almost every computer uses their Widow's operating system. The advantage to monopolistic company is that it is able to price its products at what ever it wants as no company can compete with them. Even though innovation is slow the company will still have a research and development section of their business.


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The downside to this is that there is almost no entry for new companies to join the market and the monopolistic company can be very wasteful. By this the report means that the company could be wasting money through slack working practices, bad deliveries, bad after care service, etc Looking at the different markets that businesses are in the report has found that for a company to succeed it needs a good amount of competition to keep the company working efficiently. The barriers of entry need to be low to allow new companies to enter, as they will bring in new competition and innovation. The amount of profit a company is able to receive should be high enough to allow them the chance to innovate the market with new products.

Monopolistic Competition
A market structure in which several or many sellers each produce similar, but slightly differentiated products. Each producer can set its price and quantity without affecting the marketplace as a whole. Monopolistic competition is a market structure characterized by a large number of relatively small firms. While the goods produced by the firms in the industry are similar, slight differences often exist. As such, firms operating in monopolistic competition are extremely competitive but each has a small degree of market control.

The four characteristics of monopolistic competition are: (1) large number of small firms, (2) similar, but not identical products, (3) relatively good, but not perfect resource mobility, and (4) extensive, but not perfect knowledge.


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Large Number of Small Firms: A monopolistically competitive industry contains a large number of small firms, each of which is relatively small compared to the overall size of the market. This ensures that all firms are relatively competitive with very little market control over price or quantity. In particular, each firm has hundreds or even thousands of potential competitors.

Similar Products: Each firm in a monopolistically competitive market sells a similar, but not absolutely identical, product. The goods sold by the firms are close substitutes for one another, just not perfect substitutes. Most important, each good satisfies the same basic want or need. The goods might have subtle but actual physical differences or they might only be perceived different by the buyers. Whatever the reason, buyers treat the goods as similar, but different.

Relative Resource Mobility: Monopolistically competitive firms are relatively free to enter and exit an industry. There might be a few restrictions, but not many. These firms are not "perfectly" mobile as with perfect competition, but they are largely unrestricted by government rules and regulations, start-up cost, or other substantial barriers to entry.

Extensive Knowledge: In monopolistic competition, buyers do not know everything, but they have relatively complete information about alternative prices. They also have relatively complete information about product differences, brand names, etc. Each seller also has relatively complete information about production techniques and the prices charged by their competitors.


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The four characteristics of monopolistic competition mean that a monopolistically competitive firm faces a relatively elastic, but not perfectly elastic, demand curve, such as the one displayed in the exhibit to the right. Each firm in a monopolistically competitive market can sell a wide range of output within a relatively narrow range of prices.

Demand Curve, Monopolistic Competition

Demand is relatively elastic in monopolistic competition because each firm faces competition from a large number of very, very close substitutes. However, demand is not perfectly elastic (as in perfect competition) because the output of each firm is slightly different from that of other firms. Monopolistically competitive goods are close substitutes, but not perfect substitutes.

In the exhibit to the right, the monopolistically competitive firm can sell up to 10 units of output within the range of $5.50 to $6.50. Should the price go higher than $6.50, the quantity demanded drops to zero.


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Short-Run Production,

Monopolistic Competition


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Business Environment 3.2 define supply and demand &use different examples to illustrate the relationship between market forces and organization response
Market forces:
In Market there are two forces operating 1. Demand 2. Supply

It is describing effects on price and quantity in a market. It predicts that in a competitive market, price will function to equalize the quantity demanded by consumers, and the quantity supplied by producers, resulting in an economic equilibrium of price and quantity.

The amount of a particular economic good or service that a consumer or group of consumers will want to purchase at a given price. The demand curve is usually downward sloping, since consumers will want to buy more as price decreases. Demand for a good or service is determined by many different factors other than price, such as the price of substitute goods and complementary goods. In extreme cases, demand may be completely unrelated to price, or nearly infinite at a given price. Along with supply, demand is one of the two key determinants of the market price. Effective demand: - must be willing and able to pay.


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Demand function:
Demand function shows, the factors affecting the demand for a particular good or service. It is as follows, Qdx = (Px, Py, T, I, G )

Qdx- - - Quantity demanded of good x - - - Function Px - - - Price of good x Py - - - Price of other goods T - - - Consumer taste or preference I - - - Consumer income

Demand theory:
Demand theory means, the negative relationship between the price and the quantity demanded of a good or service. According to this theory, if price goes up, quantity demanded goes down. Similar, if price goes down, quantity demanded goes up.

The reasons for demand theory:

There are should be reason as to why people decrease the quantity that the price goes up. 1) Income effect 2) Substitute effect


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Movement along the demand curve:

Government along the demand curve takes place there is changing price, while other factors effect in demand do not change. It is as follows,

Shifting demand curve

There are two possibilities: either the demand curve shifts to the right or it shifts to the left. This happens when factors which affect the demand curve change while the price doesnt change. In the diagram above we see two shifts in the demand curve: D1 D3 would be an example of an outward shift of the demand curve (or an increase in demand). When this happens, more is demanded at each price. A movement from D1 D2 would be termed an inward shift of the demand curve or (decrease in demand). When this happens, less is demanded at each price. BM/06 Page 35

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The total amount of a good or service available for purchase; along with demand, one of the two key determinants of price. Supply is the willingness on the part of producers to provide goods and services at given prices.

Supply function:
Supply function shows, the factors affecting the supply for a particular good or service. It is as follows.

Qsx =

(Px, Py, C, T, W )

Qsx - - - Quantity supplied of product x - - - Function Px - - - Price of product x Py - - - Price of other goods C - - - Cost of product T - - - Technology W - - - Weather

Supply theory:
Supply theory means, the positive relationship between the price and the quantity supplied of a good or service. This means, if the price goes up, quantity supplied goes up. Similar, if the price goes down, quantity supplied goes down.


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Supply formula:
Supply formula is the mathematical expression of the positive relationship between the price and quantity supplied. It is as follows.

Qsx = a+bp

Qsx - - - Quantity supplied of product x a - - - Quantity supplied when the price is at 0 level (+) - - - the positive relationship between price and quantity supplied b= Q/ P Q - - - Changing quantity supplied P - - - Changing price p - - - Price

Supply schedule means, the quantity price levels.

supplied at various


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Shifts in the Supply Curve

The supply curve can shift position. If the supply curve shifts to the right (from S1 to S2) this is an increase in supply; more is provided for sale at each price. If the supply curve moves inwards from S1 to S3, there is a decrease in supply meaning that less will be supplied at each price.

Changes in the costs of production: Lower costs of production mean that a business can supply more at each price. For example a magazine publishing company might see a reduction in the cost of its imported paper and inks. A car manufacturer might benefit from a stronger exchange rate because the cost of components and new technology bought from overseas becomes lower. These cost savings can then be passed through the supply chain to wholesalers and retailers and may result in lower market prices for consumers.


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Business Environment 3.4: Discuss the role of the competition commission and regulatory bodies. Role of the CC
The Competition Commission (CC) is one of the independent public bodies which help ensure healthy competition between companies in the UK for the benefit of companies, customers and the economy. We investigate and address issues of concern in three areas:
In mergers - when larger companies will gain more than 25% market share and where a merger appears likely to lead to a substantial lessening of competition in one or more markets in the UK. In markets - when it appears that competition may be being prevented, distorted or restricted in a particular market. In regulated sectors where aspects of the regulatory system may not be operating effectively or to address certain categories of dispute between regulators and regulated companies.

Our investigations are thorough and open. If our investigations conclude that the situation significantly damages or restricts competition in the UK, then we work to determine and implement appropriate remedies. A wide range of remedies is available to the CC both in merger and market investigations. For example, in a merger investigation, the CC can stop a merger from going ahead, require a firm to sell off part of its business, or require them to behave in a way that safeguards competition. If the CC decides that remedies are required, we will consult with relevant parties on the choice and form of these measures and then set out our decision on remedies in our final report. Following publication of the final report we will work with relevant parties to prepare undertakings or orders that give effect to our requirement. We are required to consult the public on undertakings and orders before these are implemented.


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Our inquiries are always initiated following a concern referred to us by another authority: usually the Office of Fair Trading. We also investigate issues referred to us by the sector regulators for communications, gas and electricity, water, rail, airports, postal services, or by the Secretary of State for Business, Innovation and Skills. Click here for further detail on sources of our investigations; we cannot investigate companies or markets without a referral from one of these bodies.

Role of the competition commission on UK

The Competition Commission (CC) is one of the independent public bodies which help ensure healthy competition between companies in the UK for the benefit of companies, customers and the economy. We investigate and address issues of concern in three areas:

In mergers - when larger companies will gain more than 25% market share and where a merger appears likely to lead to a substantial lessening of competition in one or more markets in the UK. In markets - when it appears that competition may be being prevented, distorted or restricted in a particular market. In regulated sectors where aspects of the regulatory system may not be operating effectively or to address certain categories of dispute between regulators and regulated companies.


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A wide range of remedies is available to the Competition Commission both in merger and market investigations. For example: In a merger investigation, the Competition Commission can stop a merger from going ahead, require a firm to sell off part of its business, or require them to behave in a way that safeguards competition y If the Competition Commission decides that remedies are required, then it will consult with relevant parties on the choice and form of these measures and then set out its decision on remedies in its final report.

Following publication of the final report it will work with relevant parties to prepare undertakings or orders that give effect to its requirement. Competition Commission required to consult the public on undertakings and orders before these are implemented.

In taking these above mentioned actions, the Commission must balance issues related to competition with the broader social and economic goals outlined in the Act, such as employment, international competitiveness, efficiency and technology gains, as well as the ability of small and medium sized businesses and firms owned or controlled by historically disadvantaged persons to compete.


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Task 4: Explore the significance of international trade and the European dimension for UK business
4.2: Evaluate the impact of two policies of the European Union on UK business organizations.

The European Union (EU) is a supranational economic and political organization of 27 member states, located primarily in Europe. It was established on It was established by the Treaty of Maastricht in 1993 upon the foundations of the pre-existing European Economic Community. In the initial stage it was include 15 countries and later on it included UK. Sixteen member states have adopted a common currency, the euro. It has developed a role in foreign policy, representing its members in the World Trade Organization, at G8 summits, and at the United Nations. The United Kingdom has a mixed economy that is the fifth largest in the world in terms of market exchange rates and the sixth largest by purchasing power parity (PPP). It is considered the second largest economy in Europe after Germany's Its GDP PPP per capita in 2007 is the 22nd highest in the world. The United Kingdom is one of the world's most globalised countries. The capital, London (see Economy of London), is a major financial centre of the world, in front of New York City, Hong Kong and Singapore according to a report compiled by the City of London. The British economy is made up (in descending order of size) of the economies of England, Scotland, Wales and Northern Ireland. In 1973, the UK acceded to the European Economic Community which is now known as the European Union after the ratification of the Treaty of Maastricht in 1993. The European Union has various policies but it maintains 2 policies on trade BM/06 Page 42

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1. Agriculture policy 2. Fisheries Policy

Agriculture policy Agricultural policy describes a set of laws relating to domestic agriculture and imports of foreign agricultural products. Governments usually implement agricultural policies with the goal of achieving a specific outcome in the domestic agricultural product markets. Outcomes can involve, for example, a guaranteed supply level, price stability, product quality, product selection, land use or employment.
The creation of a common agricultural policy was proposed in 1960 by the European Commission. In 1960, the Common agriculture policy (CAP) mechanisms were adopted by the six founding Member States and two years later, in 1962, the CAP came into force and its guide by the three major principals. [Market unity, Community preference and financial solidarity]

The Basic objective of Common Agriculture Policy: 1. Increase productivity of Agriculture Products 2. Ensure a fair standard of living for the agricultural Community 3. Stabilize markets 4. Secure availability of food suppliers 5. Ensure providing food at reasonable price for the consumers.


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Reformed Common Agricultural Policy should incentivise biodiversity

Peta Hodge 27th January 2010 European landowners and conservationists have today joined forces in calling for biodiversity and other environmental issues to be placed at the heart of reform of the Common Agricultural Policy (CAP).Not the most regular of bedfellows, the Country Land and Business Association (CLA) and the RSPB want to see a reformed CAP providing financial incentives to improve biodiversity and deliver a range of other environmental benefits including cleaner water and a reduction in the pace of global warming. The two UK organizations are echoing the proposals made by their European representative bodies the European Landowners Organization (ELO) and Birdlife International in a joint paper published today. The paper argues that sustainable management of Europes land requires continued active intervention by farmers and landowners which is why reform of the CAP is so vital. The conservationists and landowners believe that the new-look CAP should share more of the characteristics of current CAP rural development and agric-environment measures than current farm support measures. They argue that policies and budgets are needed at the European level if we are to meet the food and environmental challenges we face globally. Europe plays an important role in global food security and in driving higher environmental standards of production around the world, the coalition believes. Mark Avery, RSPB director of conservation, said: Landowners and conservationists may not always see eye to eye but where reforming the CAP is concerned we are very definitely singing from the same hymn sheet. The current system needs to be overhauled to reward farmers properly for the environmental benefits they provide and which are so vitally important for protecting wildlife on farmland. CLA South East regional director Rupert Ashby added: Both organizations see a continuing role for a European policy and budget to help achieve Food and Environmental Security (FES). BM/06 Page 44

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We agree that the CAP must change to meet this centurys emerging challenges: the growing demand for food, dangers of global warming and threats to Europes biodiversity and environmental quality. The call form the CLA and RSPB for a reformed CAP to incentivize improved biodiversity, comes just two days after the Environment Secretary, Hilary Benn, told the Guardian newspaper that the international community needed find a way to price the impact of their decisions on biodiversity. The comments expanded on views put forward by the Environment Secretary at the UK/Brazil Biodiversity workshop earlier this month, when he said: We need the real benefits of biodiversity and the real costs of its loss to be part of our economic systems and markets. Because if we dont understand the costs then we cant value it, and if we dont value it then we risk losing it. He also used the Guardian article to repeat his call for an Intergovernmental Platform on Biodiversity and Ecosystem Services to be established. He said: "We need to have a biodiversity equivalent of the Intergovernmental Panel on Climate Change. One of the reasons we have made big progress on climate change is because we had a respected scientific body saying 'this is what is going on'. We need the same for biodiversity. The United Kingdom business population has increased greatly. Businesses have also acquired a key role in UK economic policies paralleled by a huge development in support structures to promote them. Despite broad rhetorical claims that policies and support help develop a strong enterprise culture and promote UK economic prosperity, the precise outcomes of these policies have been difficult to pin down. As policies developed over the twenty years, the evaluation of their achievements has also proved difficult because of methodological problems. This paper examines the problems of evaluating business policies and support and draws out some key implications for their future in the UK It concludes that even allowing for the problems of evaluation, one of the best and clearest supported findings is of poor take-up of the support offered. In other words, although small businesses have become much more important in the UK economy, it is unlikely that this has been due to state intervention. Because of the well-entrenched unanimity on the value of small business support in the UK, little attention has been given to whether the support represents good value for public money. Small and medium-


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sized businesses now account for well over half of business turnover and jobs in the UK. Not only can there be doubts about whether the policies and support are cost effective but more importantly, the question can be asked whether such policies are needed at all any more

Fisheries Policy
The Common Fisheries policy first rules were created in 1970. When the fisheries policy was originally set up the intention was to create a free trade area in fish and fish products with common rules. It sets quotas for which member states are allowed to catch what amounts of each type of fish, as well as encouraging the fishing industry by various market interventions. In 1976 The EU extended its fishing waters from 12 miles to 200 miles (22.2 km to 370.4 km) from the coast, in line with other international changes. This required additional controls and the CFP as such was created in 1983. The Common Fisheries Policy (CFP) is the European Union's instrument for the management of fisheries and aquaculture.

The first common measures in the fishing sector date from 1970, when it was agreed that, in principle, EU fishermen should have equal access to Member States' waters. However, in order to ensure that smaller vessels could continue to fish close to their home ports, a coastal band was reserved for local fishermen who have traditionally fished these areas. Measures were also adopted for a common market in fisheries products. A structural policy was set up to coordinate the modernization of fishing vessels and on-shore installations. All these measures became more significant when, in 1976, Member States extended their rights to marine resources from 12 to 200 miles from their coasts, in line with international developments. Member States also decided that the European Union was best placed to manage fisheries in the waters under their jurisdiction and to defend their interests in international negotiations. After years of difficult negotiations the CFP was born in 1983. Two decades later, the policy underwent a radical reform. The 2002 reform of the CFP aimed at ensuring the sustainable development of fishing activities from an


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environmental, economic and social point of view. It also aimed to improve the basis of the decision-making process through sound and transparent scientific advice and increased participation of stakeholders. Coherence with other EU policies such as environmental and development policies was an important element, as were accountability and effectiveness.

Common fisheries policy has four types of mechanisms

1. Regulation of production, quality, grading, packaging and labeling 2. Encouraging producers organizations intended to protect fishermen from sudden market changes. 3. Setting minimum fish prices and financing buying up of unsold fish. 4. Set rules for trade with non-EU countries.

The CFP today

The Common Fisheries Policy was reformed in 2002 to ensure sustainable exploitation of living aquatic resources. The reform introduced a precautionary approach to protect and conserve living aquatic resources, and to minimize the impact of fishing activities on marine eco-systems. The reform aimed to contribute to efficient fishing activities within an economically viable and competitive fisheries and aquaculture industry, providing a
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fair standard of living for those who depend on fishing activities and taking into account the interests of consumers. The 2002 reform of the CFP opened for a more long-term approach to fisheries management, involving the establishment of multi-annual recovery plans for stocks outside safe biological limits and of multi-annual management plans for other stocks. It aimed to progressively implement an eco-system-based approach to fisheries management. In 2008, the Commission launched a review of the Common Fisheries Policy which will be based on an analysis of the achievements and shortcomings of the current policy, and will look at experiences from other fisheries management systems to identify potential avenues for future action.

Conservation To ensure that the fishing pressure is not higher than the stocks can sustain, the conservation measures under the CFP set up rules for total allowable catches, limitation of fishing effort, technical measures (rules in relation to fishing gears and minimum landing sizes), and impose obligations to record and report catches and landings. Environment The CFP includes several measures to limit the environmental impact of fishing. Among them is the protection of non target species such as marine mammals, birds and turtles, juvenile fish and vulnerable fish stocks (see for example the strategy to prevent by catches and eliminating discards), and the protection of sensitive habitats (see for example the measures to eliminate destructive fishing practices).


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Structures The European Fisheries Fund (EFF) is the financial component of the CFP. The EFF will run for seven years (2007-2013) with a total budget of around 3.8 billion. The EFF aims to support the objectives of the Common Fisheries Policy (CFP) by

supporting sustainable exploitation of fisheries resources and a stable balance between these resources and the capacity of Community fishing fleet ; strengthening the competitiveness and the viability of operators in the sector ; promoting environmentally-friendly fishing and production methods; providing adequate support to people employed in the sector. fostering the sustainable development of fisheries areas.

y y y y

Fleet management The CFP fleet management policy is designed to limit the fishing capacity of the EU fleet, to achieve a better balance between fishing capacity and the available resources. The common organization of the markets The common organization of the markets (COM) aims to balance the needs of the EU market and the interests of European Union fishermen and to ensure that the rules on fair competition are respected. Relations with third countries The EU has a considerable number of agreements with third countries which give access to fishing waters of third countries. After the reform of the CFP in 2002, the agreements were transformed from access arrangements with a financial contribution to genuine partnerships for the development of sustainable and responsible fisheries. The Community is party to international agreements in the areas of fisheries and law of the sea and plays an important role in a number of regional fisheries organizations, which manage fish resources of the open seas and play an important role in the fight against illegal fishing and destructive fishing practices.
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Control and enforcement It is the responsibility of the EU Member States to make sure that the rules agreed under the CFP are respected. Fisheries controls play a central role in encouraging compliance, deterring fraud and ensuring sustainable fishing. To make sure that all national enforcement authorities apply the same standards of quality and fairness in their enforcement, there is also an EU Inspectorate. To strengthen controls, it was decided in the 2002 reform to set up an EU fisheries control agency. The Community Fisheries Control Agency (CFCA) became operational in 2007. It will strengthen the uniformity and effectiveness of enforcement by pooling EU and national means of inspection and control, and will coordinate enforcement activities. In 2008, the Commission proposed a reform of the EU fisheries control system, to foster a culture of compliance with fisheries rules and create a level playing field for Europe's fishermen. More on the development of the Common Fisheries Policy
y y

The review of the Common Fisheries Policy (2008) The 2002 reform of the Common Fisheries Policy


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Business Environment 4.3 Analyze the economic implications for any country in the UK of entry in to European & Monetary Union (EMU)
The European Union (EU) is a supranational economic and political organization of 27 member states, located primarily in Europe. It was established by the Treaty of Maastricht in 1993 upon the foundations of the pre-existing European Economic Community. With almost 500 million citizens, the EU combined generates an estimated 30% share (US$16.8 trillion in 2007) of the world's nominal gross world product.


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Business Environment Propose o f European Union

The EU has developed a single market through a standardized system of laws which apply in all member states, guaranteeing the freedom of movement of people, goods, services and capital. It maintains a common trade policy, agricultural and fisheries policies, and a regional development policy. Sixteen member states have adopted a common currency, the euro. It has developed a role in foreign policy, representing its members in the World Trade Organization, at G8 summits, and at the United Nations. Twenty-one EU countries are members of NATO. The EU has developed a role in justice and home affairs, including the abolition of passport controls between many member states under the Scheme Agreement, which incorporates also non-EU states. The EU operates through a hybrid system of intergovernmental and supranationalism. In certain areas it depends upon agreement between the member states. However, it also has supranational bodies, able to make decisions without unanimity between all national governments. Important institutions and bodies of the EU include the European Commission, the European Parliament, the Council of the European Union, the European Council, the European Court of Justice and the European Central Bank. EU citizens elect the Parliament every five years. The EU traces its origins to the European Coal and Steel Community formed among six countries in 1951 and the Treaty of Rome in 1957. Since then the union has grown in size through the accession of new countries, and new policy areas have been added to the remit of the EU institutions BM/06 Page 52

Business Environment Trade barriers

The Trade Barriers Regulation (TBR) gives European businesses a tool for tackling discriminatory treatment in export markets Since 1995 the Trade Barriers Regulation (TBR) has given European businesses a tool for tackling trade barriers in export markets. Businesses can use the TBR to ask the European Commission to investigate restrictions on their sales abroad, discriminatory treatment in foreign markets, difficulty obtaining patents or licenses or any other form of unfair barrier to their export of goods or services. In the last decade dozens of companies or industries have used the TBR to tackle problems in export markets, as well as unfair foreign trade practices that cause injury within the EU internal market. TBR cases have helped improve export conditions for carmakers in Colombia, pharmaceutical products in Turkey, textiles in Brazil and in many other cases.

Economic Benefits of EU for UK

If the UK were to leave the EU, there would be no net loss of jobs or trade. In addition, we would be between 17 billion and 40 billion per year better off, possibly more. These are the findings of A Cost Too Far?, published by Civets. Prime Minister Blair often claims that 60 per cent of the UKs trade and three million jobs depend on our EU membership. Closer analysis reveals this to be a highly misleading claim.


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Would there be a cost of leaving the EU? The author concludes that, if the UK were to leave the EU, there would be no net loss of jobs or trade. However, to draw any such conclusion involves complex calculations, and it is widely accepted that assumptions have to be made that can influence the final figure. The author provides a range of estimates from rock bottom, through most likely, to high. His rock-bottom figure draws largely on official sources and deploys the most cautious of assumptions. The net costs of EU membership are appraised in five areas: EU regulation, the common agricultural policy, net payments to EU institutions, the single market, and inward investment. In keeping with earlier cost-benefit studies the results in A Cost Too Far? are expressed as a percentage of GDP and rounded to the nearest half percentage point. In this Factsheet the estimates are in pounds. Overall, the net cost of remaining in the EU ranges from the rock-bottom estimate of 17.6 billion to the most likely of 40 billion. EU Regulation: The rock-bottom estimate is 6.3 billion and the most likely, 20 billion. Based on the Governments own regulatory impact assessments (RIAs), the total cost of regulation between 1999 and 2004 (one-off costs spread over the period plus recurring costs), according to the British Chambers of Commerce, was 7.91 billion per year. Based on information supplied by the House of Commons Library in May 2004, 83 per cent of the cost of regulations originated in EU directives. If rounded down to 80 per cent, then about 6.33 billion of the 7.91 billion total cost is due to the EU. There were no RIAs before 1999 and the estimate for the period from 1973 to 1999 has to be more tentative. An official study of the overall impact of EU regulation in the Netherlands has put the figure at two per cent of GDP. If also true of the UK, the net cost would be 20 billion. CAP: The rock-bottom figure is 7 billion and the most likely, 15 billion. The Treasury estimated the cost at about 1.2% of GDP (currently about 12 billion). Allowing for subsidies paid to UK farmers, this produces a net figure of about 7 billion. An OECD study put the total cost to the EU in 2002 at 1.4 per cent of GDP (14 billion), producing a net cost of 9 billion. However, allowing for costs and subsidies not included in the OECD study, and for subsidies received by UK farmers, the most likely net figure is 15 billion. BM/06 Page 54

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Payments to EU Institutions: This is an annual figure published by the Office for National Statistics and so no range is given. The latest Pink Book shows net payments of 4.3 billion. Over the last ten years, the UK has paid a similar net average amount each year, paying out an average of 11 billion per annum and receiving back 7 billion in aid. Single (Internal) Market: A study by the European Commission in 1996 and an academic study published in 1998 are often quoted in support of the claim that the single market raised total EU output by between one and 1.5 per cent. More recently, the European Commission has claimed that the internal market increased EU GDP in 2002 by 1.8% compared with a year earlier. However, a number of independent studies have found no hard evidence of net benefits. For example, the Bundesbank could find no evidence that it has helped German trade. The UK economy is unlikely to be any different. The Institute of Directors reviewed studies from the Commission, the OECD and others and noted the absence of persuasive evidence of the benefits of the single market. In 2003 an Institute of Directors survey of members found that trading in the EU 14 was on balance unattractive and more costly, with more paperwork than before the single market. The overall conclusion of A Cost Too Far? is that the balance of costs and benefits for the UK economy is zero, that it could be negative, and that the UK would not suffer economically by being outside the single market.

Inward Investment: The UK is one of the worlds leading overseas investors, but also a recipient of significant inward foreign direct investment (FDI). UK Trade and Investment, part of the DTI, monitors investment flows and its annual review for 2002/03 lists the main reasons why the UK attracts investment. Access to the single market is one among several other advantages, including the skilled and English-speaking labor force, the flexible labor market, good communications, the strong science and technology base in universities, low corporation tax, ease of market entry and tax allowances for start-ups. These other advantages would remain and, if the UK left the EU, the impact on inward investment is likely to be neutral. BM/06 Page 55

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Some studies, including one by the NIESR, claim that FDI would fall if the UK left the EU. A Cost Too Far? questions this contention by looking at the earnings on all inward investment made by the main economic sectors. The two biggest are oil and gas (39 per cent of earnings) and financial services (18 per cent). The study argues that oil and gas would continue to attract investment because they are high value products in a stable part of the world. Investments in financial services, another global industry, are mainly denominated in US dollars, and will go wherever the best return is to be found. The City has not suffered from the introduction of the euro and would be unlikely to suffer if the UK left the EU. Investment in manufacturing of chemicals, plastics and fuel products (10 per cent by earnings) and other industries (11 per cent) might be influenced by our EU membership, but it is a factor of declining importance.

Hitched to a Falling Star?: Is it wise to link our fortunes to a region of the world with a poor record of economic growth and whose share of both world markets and GDP is destined to fall? Even the European Commission takes a gloomy view of the EUs prospects. In its December 2002 review it forecast a 44 per cent decline in the EU-15 share of global GDP from 18 per cent in 2000 to ten per cent in 2050. In 2050, as in 1950 and 2000, the three most populous countries in the world are likely to be India (1.6 billion), China (1.5 billion) and the USA (0.4 billion). The working-age population of the EU, even after its current enlargement to 25 members, is projected to decline by 20 per cent to 30 per cent by 2050; whereas the working-age population of the USA is expected to increase by nearly one-third.


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Economics Costs of European Union for the UK.

1. Common Agricultural Policy has inflated prices of agricultural goods.

2. Common Agricultural Policy has been a major stumbling block in trade negotiations making it more difficult to reduce tariffs on UK exports. Thus some UK exporters have lost out as a result of EUs protectionism in agriculture.

3. Common Agricultural Policy has tended to favor large farmers. Thus it has done nothing to reduce inequality within agriculture. The CAP has also tended to perpetuate inefficient farms. Although reforms to CAP have reduced the quantity of food surpluses there is still a significant % of the EU budget spent on subsidizing inefficient farms.

4. Cost of bureaucracy and European parliament. Although the press have often exaggerated the real cost of the EU it remains an extra level of bureaucracy for the UK to deal with.

5. Free movement of labor has caused pressure on housing within the UK in certain cities like London. On the other hand immigrants from Eastern Europe have filled various job vacancies and played an important role in the economy.


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EU plays big role in Europe economy. The EU operates through a hybrid system of intergovernmental and supranational. In certain areas it depends upon agreement between the member states. However, it also has supranational bodies, able to make decisions without unanimity between all national governments. Important institutions and bodies of the EU.


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Fig 01 -24/02/2010, 11.00am

Fig 02 -28/02/2010, 08.00pm

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Fig 10 -28/03/2010, 11.00pm

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