Explain why inflation creates uncertainty for firms.

When prices and costs are changing unpredictably a firm cannot forecast revenues or costs reliably, so it cannot judge whether a long-term investment will pay.

Menu costs are the costs a firm incurs in changing its prices, such as reprinting price lists, relabelling stock and updating systems.

What are shoe-leather costs?

Shoe-leather costs are the time and effort spent searching for the best prices and moving money around to stop it losing value when inflation is high.

Explain how inflation damages a country's international competitiveness.

If domestic prices rise faster than those of competitors, the country's exports become relatively dearer abroad and imports relatively cheaper at home, so it loses market share.

Why does a firm exporting to a low-inflation country suffer most from domestic inflation?

Its costs and prices are rising while its rivals' are not, so the price gap widens each year and it must either lose sales or absorb the difference in its margin.

Edexcel A-Level Economics B 9EB0

Scarcity, Choice and Potential Conflicts

Topic overview Scarcity and the economic problem Choice, trade-offs and opportunity cost Profit maximisation, sales maximisation and satisficing Survival, market share and other business objectives Stakeholders and their objectives Stakeholder conflicts and corporate social responsibility

Enterprise, Business and the Economy

Topic overview The entrepreneur and creative destruction Adding value Entrepreneurial motives Factors of production Division of labour and specialisation The wider economic environment and the firm

Introducing the Market

Topic overview Consumer objectives and the demand curve Movements along and shifts of the demand curve Producer objectives and the supply curve Movements along and shifts of the supply curve Equilibrium price and quantity Excess demand, excess supply and market forces Shifts in demand and supply in real markets Limitations of the supply and demand model Functions of the price mechanism Mass markets, niche markets and market growth Market research and consumer insight Market segmentation Market mapping and competitive advantage Adding value, pricing decisions and dynamic markets

The Role of Credit in the Economy

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Market Failure and Government Intervention

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Revenue, Costs, Profits and Cash

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Business Growth and Competitive Advantage

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Firms, Consumers and Elasticities of Demand

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Productive Efficiency

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Life in a Global Economy

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The Economic Cycle

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Introduction to Macroeconomic Policy

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Globalisation

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Economic Factors in Business Expansion

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Impact of Globalisation on Global Companies

Topic overview Globalisation and glocalisation Ethnocentric, polycentric and geocentric approaches to global markets Price and non-price competition in global markets Branding and differentiation in global markets Cultural and language barriers in global markets Adapting marketing strategy for niche and mass markets

Impact of Globalisation on Local and National Economies

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Global Labour Markets

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Inequality and Re-Distribution

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Competition and Market Power

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Market Power and Market Failure

Topic overview Cartels, collusion and restrictive practices Monopsony, natural monopoly and power in the labour market The implications of market failure for firms, consumers and government Promoting competition: anti-competitive practices, mergers and privatisation Regulating natural monopolies and protecting consumers and employees The Competition and Markets Authority and EU competition policy The benefits and costs of regulation

Market Failure Across the Economy

Topic overview Merit and demerit goods Factor immobility and information failure Externalities and social costs and benefits Environmental externalities and environmental change Policies to correct market failure

Macroeconomic Policies and Impact on Firms and Individuals

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The Economic Cycle

The impact of inflation on firms and individuals

3 things to know
Papers 2 and 3

Overview

How inflation creates uncertainty and affects investment, menu and shoe-leather costs, international competitiveness and floating exchange rates, how inflation can benefit a firm, confusing demand with inflation, fixed cash wages, fiscal drag, redistribution from savers to borrowers, anticipated against unanticipated inflation, and index-linking.

What you need to know

Answer each one before you reveal it.

Your recallNot started

Key term

How does inflation affect a firm's investment decisions?

Key term

What are menu costs?

Key term

State one way inflation can benefit a firm.

Questions from this subtopic

Each one with the model answer underneath.

1
Explain why inflation creates uncertainty for firms.
Model answer
When prices and costs are changing unpredictably a firm cannot forecast revenues or costs reliably, so it cannot judge whether a long-term investment will pay.
2
How does inflation affect a firm's investment decisions?
Model answer
The uncertainty raises the risk attached to long-term projects and the return needed to justify them, so some investment is postponed or cancelled.
3
What are menu costs?
Model answer
Menu costs are the costs a firm incurs in changing its prices, such as reprinting price lists, relabelling stock and updating systems.
4
What are shoe-leather costs?
Model answer
Shoe-leather costs are the time and effort spent searching for the best prices and moving money around to stop it losing value when inflation is high.
5
Explain how inflation damages a country's international competitiveness.
Model answer
If domestic prices rise faster than those of competitors, the country's exports become relatively dearer abroad and imports relatively cheaper at home, so it loses market share.
6
Why does a firm exporting to a low-inflation country suffer most from domestic inflation?
Model answer
Its costs and prices are rising while its rivals' are not, so the price gap widens each year and it must either lose sales or absorb the difference in its margin.

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Scarcity, Choice and Potential Conflicts

Enterprise, Business and the Economy

Introducing the Market

The Role of Credit in the Economy

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ABorrowing becomes dearer and saving more rewarding.

BMortgage holders have less disposable income left.

CSpending on credit-financed items falls.

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Wage rate means the amount an employer pays for one hour of work.

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