CIMA - C04 Fundamentals of Business Economics: Study Text

489 Pages·2010·5.86 MB·English

by  Bpp Learning Media

Certificate Paper C4
FUNDAMENTALS OF
BUSINESS ECONOMICS

For assessments in 2010 and 2011

Study Text
In this February 2010 edition
• A user-friendly format for easy navigation
• Regular fast forward summaries emphasising the key points in each
chapter
• Assessment focus points showing you what the assessor will want
you to do
• Questions and quick quizzes to test your understanding
• Question bank containing objective test questions with answers
• A full index
BPP Learning Media's i-Pass product also supports this paper.
FOR ASSESSMENTS IN 2010 and 2011
First edition June 2006

A note about copyright
Third edition February 2010
Dear Customer
ISBN 9780 7517 8071 0 What does the little © mean and why does it matter?
(previous edition 9780 7517 5282 3)
Your market-leading BPP books, course materials and
e-ISBN 9780 7517 8399 5
e-learning materials do not write and update themselves.
People write them: on their own behalf or as employees of an
British Library Cataloguing-in-Publication Data organisation that invests in this activity. Copyright law
A catalogue record for this book protects their livelihoods. It does so by creating rights over
is available from the British Library the use of the content.
Breach of copyright is a form of theft – as well as being a
Published by criminal offence in some jurisdictions, it is potentially a
serious breach of professional ethics.
BPP Learning Media Ltd With current technology, things might seem a bit hazy but,
BPP House, Aldine Place basically, without the express permission of BPP Learning
London W12 8AA Media:
• Photocopying our materials is a breach of copyright
www.bpp.com/learningmedia
• Scanning, ripcasting or conversion of our digital
materials into different file formats, uploading them to
Printed in the United Kingdom facebook or emailing them to your friends is a breach of
copyright
You can, of course, sell your books, in the form in which you
Your learning materials, published by BPP Learning
have bought them – once you have finished with them. (Is
Media Ltd, are printed on paper sourced from
this fair to your fellow students? We update for a reason.) But
sustainable, managed forests.
the e-products are sold on a single user licence basis: we do
not supply ‘unlock’ codes to people who have bought them
All our rights reserved. No part of this publication may second-hand.
be reproduced, stored in a retrieval system or
And what about outside the UK? BPP Learning Media strives
transmitted, in any form or by any means, electronic,
to make our materials available at prices students can afford
mechanical, photocopying, recording or otherwise,
by local printing arrangements, pricing policies and
without the prior written permission of BPP Learning
partnerships which are clearly listed on our website. A tiny
Media Ltd.
minority ignore this and indulge in criminal activity by
illegally photocopying our material or supporting
We are grateful to the Chartered Institute of organisations that do. If they act illegally and unethically in
Management Accountants for permission to one area, can you really trust them?
reproduce past examination questions. The suggested
solutions in the exam answer bank have been
prepared by BPP Learning Media Ltd.
©
BPP Learning Media Ltd
2010
ii
Contents
Page
Introduction
The BPP Learning Media Study Text – The BPP Learning Media Effective Study Package – Help yourself
study for your CIMA assessment – Learning outcomes and syllabus – The assessment – Tackling
multiple choice questions – Tackling objective test questions – International terminology
Part A The goals and decisions of organisations
1 The economic problem...............................................................................................................................................................3
2 Economic systems and organisations.........................................................................................................................................9
3 Theory of costs.........................................................................................................................................................................39
Part B The market system and the competitive process
4 Price determination – The price mechanism.............................................................................................................................65
5 Elasticities of demand and supply.............................................................................................................................................93
6 Market failures, externalities and intervention.........................................................................................................................119
7a Market structures – Perfect competition and monopoly..........................................................................................................135
7b Market structures – Monopolistic competition, oligopoly and duopoly..................................................................................163
8 Public policy and competition.................................................................................................................................................181
Part C The financial system
9 Finance and Financial Intermediaries......................................................................................................................................197
10 Credit and banking..................................................................................................................................................................225
Part D The macroeconomic context of business
11 National income accounting....................................................................................................................................................251
12 Macroeconomic theory...........................................................................................................................................................273
13 Inflation and unemployment....................................................................................................................................................301
14 Macroeconomic policy............................................................................................................................................................317
15 International trade – The foreign exchange market..................................................................................................................361
16 International trade – The international economy.....................................................................................................................389
Appendix – Present value tables.......................................................................................................................................................419
Question bank .................................................................................................................................................................................423
Answer bank ....................................................................................................................................................................................443

Index ...............................................................................................................................................................................................455

Review form and free prize draw
i ii
The BPP Learning Media Study Text
Aims of this Study Text

To provide you with the knowledge and understanding, skills and application techniques that you need if you are
to be successful in your exams

This Study Text has been written around the Fundamentals of Business Economics syllabus.
• It is comprehensive. It covers the syllabus content. No more, no less.
• It is written at the right level. Each chapter is written with CIMA's precise learning outcomes in
mind.
• It is targeted to the assessment. We have taken account of guidance CIMA has given and the
assessment methodology.

To allow you to study in the way that best suits your learning style and the time you have available, by following
your personal Study Plan (see page (vii))

You may be studying at home on your own until the date of the exam, or you may be attending a full-time course.
You may like to (and have time to) read every word, or you may prefer to (or only have time to) skim-read and
devote the remainder of your time to question practice. Wherever you fall in the spectrum, you will find the BPP
Learning Media Study Text meets your needs in designing and following your personal Study Plan.

To tie in with the other components of the BPP Learning Media Effective Study Package to ensure you have the
best possible chance of passing the exam (see page (v))

Learning to Learn Accountancy
BPP Learning Media's ground-breaking Learning to Learn Accountancy book is designed to be used both at the
outset of your CIMA studies and throughout the process of learning accountancy. It challenges you to consider
how you study and gives you helpful hints about how to approach the various types of paper which you will
encounter. It can help you focus your studies on the subject and exam, enabling you to acquire knowledge,
practise and revise efficiently and effectively.

iv Introduction
The BPP Learning Media Effective Study Package
Recommended
The BPP Learning Media Effective Study Package
period of use

From the outset and Learning to Learn Accountancy
throughout
Read this invaluable book as you begin your studies and refer to it as you work through the
various elements of the BPP Learning Media Effective Study Package. It will help you to
acquire knowledge, practise and revise, efficiently and effectively.

Three to twelve Study Text
months before the
Use the Study Text to acquire knowledge, understanding, skills and the ability to apply
assessment techniques.

Throughout i-Pass
i-Pass, our computer-based testing package, provides objective test questions in a variety of
formats and is ideal for self-assessment.

One to six months Practice & Revision Kit
before the assessment
Try the numerous assessment-format questions, for which there are full worked solutions
where relevant prepared by BPP Learning Media's own authors. Then attempt the two mock
assessments.

From three months Passcards
before the assessment
Work through these short, memorable notes which are focused on what is most likely to
until the last minute
come up in the assessment you will be sitting.

Introduction v
Help yourself study for your CIMA assessment
Assessments for professional bodies such as CIMA are very different from those you have taken at college or
university. You will be under greater time pressure before the assessment – as you may be combining your
study with work. There are many different ways of learning and so the BPP Study Text offers you a number of
different tools to help you through. Here are some hints and tips: they are not plucked out of the air, but based on
research and experience. (You don't need to know that long-term memory is in the same part of the brain as
emotions and feelings - but it's a fact anyway.)
The right approach
1 The right attitude
Believe in yourself Yes, there is a lot to learn. Yes, it is a challenge. But thousands have
succeeded before and you can too.
Remember why you're doing it Studying might seem a grind at times, but you are doing it for a reason: to
advance your career.
2 The right focus
Read through the Syllabus and These tell you what you are expected to know and are supplemented by
learning outcomes Assessment focus points in the text.
3 The right method
The whole picture You need to grasp the detail - but keeping in mind how everything fits into
the whole picture will help you understand better.
• The Introduction of each chapter puts the material in context.
• The Syllabus content, Learning outcomes and Assessment focus
points show you what you need to grasp.
In your own words To absorb the information (and to practise your written communication
skills), it helps to put it into your own words.
• Take notes.
• Answer the questions in each chapter. You will practise your written
communication skills, which become increasingly important as you
progress through your CIMA assessments.
• Draw mindmaps.
• Try 'teaching' a subject to a colleague or friend.
Give yourself cues to jog your The BPP Learning Media Study Text uses bold to highlight key points.
memory
• Try colour coding with a highlighter pen.
• Write key points on cards.
vi Introduction
4 The right review
Review, review, review It is a fact that regularly reviewing a topic in summary form can fix it in your
memory. Because review is so important, the BPP Learning Media Study
Text helps you to do so in many ways.
• Chapter roundups summarise the 'fast forward' key points in each
chapter. Use them to recap each study session.
• The Quick quiz is another review technique you can use to ensure that
you have grasped the essentials.
• Go through the Examples in each chapter a second or third time.
Developing your personal Study Plan
BPP Learning Media's Learning to Learn Accountancy book emphasises the need to prepare (and use) a study
plan. Planning and sticking to the plan are key elements of learning success.
There are four steps you should work through.
Step 1
How do you learn?
First you need to be aware of your style of learning. The BPP Learning Media Learning to Learn
Accountancy book commits a chapter to this self-discovery. What types of intelligence do you
display when learning? You might be advised to brush up on certain study skills before launching
into this Study Text.
BPP Learning Media's Learning to Learn Accountancy book helps you to identify what intelligences
you show more strongly and then details how you can tailor your study process to your preferences.
It also includes handy hints on how to develop intelligences you exhibit less strongly, but which
might be needed as you study accountancy.
Are you a theorist or are you more practical? If you would rather get to grips with a theory before
trying to apply it in practice, you should follow the study sequence on page (viii). If the reverse is
true (you like to know why you are learning theory before you do so), you might be advised to flick
through Study Text chapters and look at examples, case studies and questions (Steps 8, 9 and 10 in
the suggested study sequence) before reading through the detailed theory.
Step 2
How much time do you have?
Work out the time you have available per week, given the following.
• The standard you have set yourself
• The time you need to set aside later for work on the Practice & Revision Kit and Passcards
• The other exam(s) you are sitting
• Very importantly, practical matters such as work, travel, exercise, sleep and social life
Hours
Note your time available in box A. A
Introduction v ii
Step 3
Allocate your time
• Take the time you have available per week for this Study Text shown in box A,
multiply it by the number of weeks available and insert the result in box B. B

• Divide the figure in box B by the number of chapters in this text and insert the
result in box C. C
Remember that this is only a rough guide. Some of the chapters in this book are longer and more
complicated than others, and you will find some subjects easier to understand than others.
Step 4
Implement
Set about studying each chapter in the time shown in box C, following the key study steps in the
order suggested by your particular learning style.
This is your personal Study Plan. You should try and combine it with the study sequence outlined
below. You may want to modify the sequence a little (as has been suggested above) to adapt it to
your personal style.
BPP Learning Media's Learning to Learn Accountancy gives further guidance on developing a study
plan, and deciding where and when to study.
Suggested study sequence
It is likely that the best way to approach this Study Text is to tackle the chapters in the order in which you find
them. Taking into account your individual learning style, you could follow this sequence.
Key study steps Activity
Step 1 Each numbered topic is a numbered section in the chapter.
Topic list
Step 2 This gives you the big picture in terms of the context of the chapter, the learning outcomes the
Introduction chapter covers, and the content you will read. In other words, it sets your objectives for study.
Step 3 Fast forward boxes give you a quick summary of the content of each of the main chapter
Fast forward sections. They are listed together in the roundup at the end of each chapter to provide you with
an overview of the contents of the whole chapter.
Step 4 Proceed methodically through the chapter, reading each section thoroughly and making sure
Explanations you understand.
Step 5 • Key terms can often earn you easy marks (and they are highlighted in the index at the
Key terms and back of the text).
Assessment focus
• Assessment focus points state how we think the examiner intends to examine certain
points
topics.
Step 6 Take brief notes, if you wish. Avoid the temptation to copy out too much. Remember that being
Note taking able to put something into your own words is a sign of being able to understand it. If you find
you cannot explain something you have read, read it again before you make the notes.
viii Introduction
Key study steps Activity
Step 7 Follow each through to its solution very carefully.
Examples
Step 8 Make a very good attempt at each one.
Questions
Step 9 Check yours against ours, and make sure you understand any discrepancies.
Answers
Step 10 Work through it carefully, to make sure you have grasped the significance of all the fast
Chapter roundup forward points.
Step 11 When you are happy that you have covered the chapter, use the Quick quiz to check how much
Quick quiz you have remembered of the topics covered and to practise questions in a variety of formats.
Step 12 Either at this point, or later when you are thinking about revising, make a full attempt at the
Question(s) in the Question(s) suggested at the very end of the chapter. You can find these at the end of the
question bank Study Text, along with the Answers so you can see how you did.
Short of time: Skim study technique?
You may find you simply do not have the time available to follow all the key study steps for each chapter, however
you adapt them for your particular learning style. If this is the case, follow the skim study technique below.
• Study the chapters in the order you find them in the Study Text.
• For each chapter:
– Follow the key study steps 1-2
– Skim-read through step 4, looking out for the points highlighted in the fast forward boxes (step 4)
– Jump to step 10
– Go back to step 5
– Follow through step 7
– Prepare outline answers to questions (steps 8/9)
– Try the Quick quiz (step 11), following up any items you can't answer
– Do a plan for the Question (step 12), comparing it against our answers
– You should probably still follow step 6 (note-taking), although you may decide simply to rely on the
BPP Leaning Media Passcards for this.
Introduction i x