1. Understanding Business Activity Flashcards
Define needs and wants with examples
Needs are essential goods or services necessary for living.
They satisfy the basic things for life. Examples - Food, water, shelter, warmth, clothing etc.
Wants are non-essential goods and services that people would like to have. They involve interests & tastes. Examples - Coke, Pizza, Mansions, Massage, Branded shirts etc.
Define the economic problem.
There are not enough resources to satisfy people’s unlimited wants
Define scarcity.
There are not enough goods and services to meet the wants of the population.
Unlimited wants + Limited resources -> Scarcity
Name the factors of production and explain them briefly.
Land = All of the natural resources provided by nature
Labor = All people’s efforts to make products
Capital = All finance, machinery & equipment in manufacturing products
Enterprise = All people that have skills & have risk-taking ability to combine the factors of production to produce a good / service
Define entrepreneur.
Individuals who, typically, set up and run a business and take all the risks associated with this.
Define opportunity cost and give an application.
Opportunity cost is the next best alternative given up by choosing another item.
I can go to school by bus or car.
I choose car so the opportunity cost is bus.
Define specialisation.
Specialisation occurs when people and businesses concentrate on what they are best at doing.
Define efficient.
preventing the wasteful use of a particular resource.
Define division of labor.
It is a form of specialisation.
This occurs when the production process is split up into different tasks and each worker performs one of these tasks.
Give advantages of specialisation.
Specialised task training
Increases efficiency which reduces costs
Increases output
Saves time
Give disadvantages of specialisation.
Bored workers
Possible drops in efficiency
Production stopped due to absence
Define added value.
Added value is the difference between the price of the finished product/service and the cost of the inputs involved in making it.
How to increase added value?
There are two main ways:
Increase the selling price but keep the cost of materials the same.
Reduce the cost of materials but keep the price the same.
Why is added value important?
Added value is important because sales revenue is greater than the cost of materials bought in by the business. This means the business:
can pay other costs such as labour costs, management expenses and costs including advertising and power
may be able to make a profit if these other costs come to a total that is less than the added value.
Define private sector.
businesses owned by private individuals. They are NOT owned and controlled by the government e.g. Starbucks.
Define public sector.
businesses and organisations owned and control by the government, e.g. Thai Post.
Define mixed economy.
A mixed economy has both a private and a public sector.
What is often the main objective of private sector businesses?
Profit maximisation or maximise sales.
What is often the main objective of public sector businesses?
Providing public service to all.
Creating employment.
Develop poor economy areas.
Define shareholders.
The owners of a limited company. They buy shares which represent part ownership of a company.
Define dividends.
Payments made to shareholders from the profits (after tax) of a company. They are the return to shareholders for investing in the company.
What is privatisation and why does it occur?
In recent years many governments have sold some of their businesses to the private sector. This is known as privatisation. They have done this because:
They believe the private sector can run them more efficiently (due to the profit motive)
Private sector owners may invest more capital into the business that the government can afford.
Competition in the private sector can help improve quality.
The government can earn much needed revenue from the sale.
Name and define the three types of industry in which businesses operate.
Primary production: this involves acquiring raw materials. For example, metals and coal have to be mined, oil drilled from the ground, rubber tapped from trees, foodstuffs farmed and fish trawled. This is sometimes known as extractive production.
Secondary production: this is the manufacturing and assembly process. It involves converting raw materials into components, for example, making plastics from oil. It also involves assembling the product, e.g. building houses, bridges and roads.
Tertiary production: this refers to the commercial services that support the production and distribution process, e.g. insurance, transport, advertising, warehousing and other services such as teaching and health care.
Define chain of production.
This shows the various stages of production that a good or service passes through before it reaches the consumer.
How are the three sectors of industry compared?
Percentage of the country’s total number of workers employed in each sector or
Value of output of goods and services and the proportion this is of national output.
Define de-industrialisation.
Occurs when there is a decline in the importance of the secondary, manufacturing, sector of industry in a country.
Why does the relative importance of a sector change?
Sources of some primary products, such as timber, oil and gas, become depleted e.g. Somalia where deforestation is a serious problem.
Most developed countries are losing competitiveness in manufacturing to the newly industrialised countries such as Brazil, Russia, India, China and South Africa (BRICS).
As a country’s wealth and living standard increase, consumers tend to spend a higher portion of their income on services such as travel and restaurants.
What is the difference between skills and characteristics?
Characteristics are inherent i.e. you either have them or you don’t.
Skills can be learnt.
What are the characteristics of a successful entrepreneur?
Leadership skills, self-confidence, risk-taking, innovative, committed and self-motivated, multi-skilled
Give the benefits and drawbacks of being an entrepreneur.
Benefits-
Independence, own ideas, may become famous and successful, income may be higher than working as an employee, able to make use of personal interests and skills.
Drawbacks-
Risk of failure, capital tied up, lack of knowledge and experience when starting, Opportunity cost (lost income from not being an employee somewhere else)
Define business plan.
A document containing the business objectives [k] and important details about the operations, finance and owners of a business [k].
How does a business plan help?
To help gain finance from a bank/other investors/government grants.
To set objectives/goals/targets.
To encourage careful planning that will reduce risks of financial failure.
To be clear how the business is going to operate and to identify the human and physical requirements of the business.
To identify the target market from market research.
Identify the level of demand for the product/service.
How does a business plan not help?
Entrepreneurs may have some knowledge already of the business they are setting up.
Business plans go out of date quickly so time spent preparing it is wasted and could have been spent on other activities.
What are the contents of a business plan?
Executive summary
Business aims OR targets OR vision statement
Marketing OR any element of their marketing mix e.g. pricing, product, place or promotion
Market research
Financial statements e.g. cash flow forecast OR budgets
List of potential competitors
Human resources e.g. number of employees OR skills needed
Production details
Organisational and management details e.g. structure, type of business, name and location of business
Define grants.
Free money from government if you meet certain targets for example setting up a business in an area with a poor economy.
Define interest.
The rate (usually a percentage) which a saver receives if they have money in a savings account. Also applies to loans from the bank.
Define loan.
Money that is borrowed that is expected to be paid back with interest.
Define premises.
Where the business is run for example a shop or factory.
Define enterprise zones.
An area in which policies to encourage economic growth and development are implemented.
Why do governments support start-up businesses?
Reduce unemployment – new businesses will often create jobs to help reduce unemployment.
Increase competition – new businesses give consumers more choice and compete with already established businesses.
Increase output – the economy benefits from increased output of goods and services.
Benefit society – entrepreneurs may create social enterprises which offer benefits to society other than jobs and profit (for example, supporting disadvantaged groups in society).
Can grow further – all large businesses were small once! By supporting today’s new firms the government may be helping some firms that grow to become very large and important in the future.
Give the benefits and drawbacks to governments for supporting start-ups.
Benefits-
Small businesses can meet demands of smaller markets which means more customers needs are being met which will mean more benefit for the economy.
Larger businesses might not want to produce custom-made goods which restricts choice for customers so small business could produce those goods providing more choice.
Create a number of jobs increases which means more people have more money to spend which helps grow the economy.
Can provide important goods and services to larger businesses.
Drawbacks-
Opportunity cost - the money invested in small businesses cannot be invested in education or health care meaning both these areas would suffer.
Larger businesses can find suppliers from other countries to produce goods and services meaning consumer choice is not restricted.
Depends on government objectives as they want to improve education and healthcare, therefore investment in small businesses is not a priority.
How can we measure business size?
Give methods and their limitations.
The number of employees: This is easy to calculate and compare with other businesses.
Limitations - business which use more machinery and technology i.e. capital intensive production may have few employees but they still might be big. Example Microsoft has less employees than some smaller businesses but it is still considered to be one of the biggest businesses in the world.
Value of capital employed:
This means the total value of capital invested into the business (value of machinery and long-term loans).
Limitations - A business which might not have a lot of investment in machinery may still be big. Take the example of management consultancy firms like McKinsey & Company, they are a global business.
Value of output:
Calculating the value of output is a common way of comparing businesses in the same industry, especially in manufacturing.
Limitations – A high value of output does not mean that a business large when using the other measures. A firm employing few people, producing several very expensive computers may have higher sales turnover than a company producing cheaper products who employs more people. For value of output to be considered all the products must be sold.
Value of sales (sales revenue/turnover):
The income of a business during a period of time from the sale of goods or services.
Total revenue = quantity sold × price
This measure is often used to compare retailing businesses who sell similar products e.g. Tesco Lotus and Big C.
Limitations - A business may have lower revenue but this does not reduce their size. Also, it could be misleading to compare businesses in different industries that sell different products, for example Apple and Starbucks.
Market share- this is the percentage of total market sales achieved by a business. This is often used to compare the proportion of sales one business has to another.
market share = company sales/total market sales x 100
Limitations - A business may lose its higher profit margin by increasing market share too quickly by reducing prices and offering too many special deals to achieve greater sales volumes.
Which is the best method to measure business size?
There is no best method, it depends on the businesses being compared and what you want to measure.
If you want to know the size of a firm in an industry then using one measure as a comparison would be useful.
However, if you wish to know the absolute size of a business then you would need to use at least two of the measures in order to get a more complete idea of their size and to help conduct a comparison.
Why do businesses grow?
Profit – Seek to earn more money for owners.
Reduce costs – Economies of scale (Bulk buying of more items but at a reduced cost for each item). 500 items costs 10,000 Baht. 1000 items costs 16,000 Baht.
Market Share – Firms seek to be the market leader. Have the largest amount of sales in a market.
Ambitious Owner – The owner may want the status of a bigger company
What are the two ways businesses can grow?
Internal Growth – this happens when a business expands its current operations.
This could be Bon Chon Chicken opening a new restaurant or McDonald’s offering a new product on their menu. This is often paid for by the businesses current profit.
External Growth – this happens when a business merges (joins) with another business or takes over a business. A take over is when one business (Business A) buys out the owners of another business (Business B) and it becomes part of Business A.
Why do some businesses remain small?
There are several reasons why many businesses remain small, including:
the type of industry the business operates in = Businesses in these industries offer personal services or specialised products. If they were to grow too large, they would find it difficult to offer the close and personal service demanded by consumers.
In these industries, it is often very easy for new businesses to be set up and this creates new competition. This helps to keep existing businesses relatively small.
the market size = If the market – that is, the total number of customers – is small, the businesses are likely to remain small.
For example shops in rural areas.
It is also why businesses which produce goods or services of a specialised kind, which appeal only to a limited number of consumers, such as very luxurious cars or expensive fashion clothing, remain small.
the owners’ objectives = Some business owners prefer to keep their business small.
They could be more interested in keeping control of a small business, knowing all their staff and customers, than running a much larger business.
Owners sometimes wish to avoid the stress and worry of running a large business.
Why do businesses fail?
Poor Management – lack of experience and bad decisions
Failure to change as the business environment changes
Poor financial management – shortage of cash
Growing too quickly – leads to problems with money and management
Define sole trader.
A sole trader is a business that is owned by one person. The owner has total control over the business. It may have one or more employees. A sole trader is liable for any debts that the business incurs.
Why is being a sole trader a risky business?
Sole traders have what is known as unlimited liability.
What is unlimited liability?
if a business fails, the owner would have to sell their personal belongings if necessary in order to pay off debts owed by the business.
What kind of debts could be incurred by a sole trader?
capital borrowed from the bank
money owed to suppliers
employee wages.
What documentation does the sole trader need to complete?
register as self-employed with the Inland Revenue, and complete annual self-assessment tax forms.
They should also prepare a business plan.
What are the key features of a sole trader?
1 owner
Total control over decision making
Keep all the profit
As many employees as they need
Unlimited liability
Liable/responsible for all debts
Personal possessions at risk
List the advantages of being a sole trader.
Owner has control of decision making
Any profits can be kept by the owner
