1.1 The Economic Problem

Question 1

Define scarcity

Answer 1

Resources are limited in supply and so choices have to be made for their use.
= LIMITED RESOURCES AND UNLIMITED DEMANDS.

• main economic problem.
• when choices/decisions made must consider distribution/ use of resources optimally.
• Scarcity causes Opportunity cost.

Question 2

Allocation of resources

Answer 2

= WAY ‘FACTORS of PRODUCTION’ & ‘RAW MATERIALS’ USED IN THE PRODUCTION OF PARTICULAR GOODS/SERVICES IN DEMAND.

Question 3

What is the result of humans having unlimited wants?

Answer 3

Choices having to be made over the allocation of resources

Question 4

Define the economic problem

Answer 4

the concept that wants are unlimited but resources are limited so choices have to be made about their use

Question 5

Define opportunity cost

Answer 5

= NEXT BEST ALTERNATIVE FORGONE WHEN A CHOICE IS MADE.
- economic decisions come with sacrifice -> next best alt forgone is the loss of the benefit from the other choice.

Question 6

Define Trade-off

Answer 6

the choice between 2 options
= SITUATION WHERE HAVING MORE OF 1 THING LEADS TO LESS OF ANOTHER.

Question 7

Economic agents?

Answer 7

= GOV, CONSUMERS; PRODUCERS.

Question 8

What is the importance of an opportunity cost to a consumer?

Answer 8

May choose to buy something of a higher quality at the opportunity cost of buying something else, due to the higher cost

Question 9

What is the importance of an opportunity cost to a producer?

Answer 9

Choosing to sell a good at a higher price may incur the opportunity cost of the demand for that good

Question 10

What is the importance of an opportunity cost to the government?

Answer 10

Choosing to invest money into different departments (e.g. Education) has the opportunity cost of investing it in other areas (e.g. Healthcare)

Question 11

whats a Free Market Economy?

Answer 11

= ECONOMIC SYSTEM WHERE THERE’S NO INTERFERENCE FROM OTHER AGENCIES (economic agents) - LIKE GOV.

Question 12

what are Market Forces?

Answer 12

= DEMAND & SUPPLY = DETERMINE ALLOCATION OF RESOURCES in market.

Question 13

Give the 10 possible business objectives

Answer 13

= AIMS/ TARGETS BUSINESSES TRY TO ACHIEVE.
- provides them with a direction/ purpose + measures progress.

Return on Investment (ROI)
Profit Maximisation
Sales Maximisation
Satisficing
Survival
Market Share
Cost Efficiency
Employee Welfare
Customer Satisfaction
Social Objectives (CSR)

Question 14

Entrepreneur

Answer 14

= INDIVIDUAL SET UP BUSINESS, ACCEPTS RISKS INVOLVED, MAKES DECISIONS ON WHAT/ HOW TO PRODUCE; HOW TO MARKET PRODUCT.

Question 15

Return on Investment (ROI)

Answer 15

= (net) PROFITS ENTREPRENEURS MAKE BY TAKING RISKS WHEN MAKING INVESTMENTS/ASSETS.

• higher ROI = more attractive the investment/ asset.

ROI = (net profit / capital investment) x100%

Question 16

Define Profit Max

Answer 16

= WHEN COSTS ARE AT LOWEST AND REVENUE IS AT HIGHEST.

• short/ long- run objective.
• usually first objective firms consider.
• cheap source of finance providing stable costs & output levels that returns greatest profit.
• greater wages 4 employees and dividends 4 shareholders (both stakeholder groups happy).

(public limited comp) PLC’s have short-run profit max as obj as shareholders expect high profits.

Question 17

Define Sales Maximisation

Answer 17

= AIMS TO SELL AS MUCH OF GOOD/SERVICE WITHOUT MAKING A LOSS.

• important in v. Competitive Markets = keeps out competitors - detters them.
• helps business earn more profits long-term.
• usually obj 4 not-for-profit organisations.

Question 18

Define Satisficing

Answer 18

Wanting to make profits without profit maximising (profits are important but not the be all and end all)

Question 19

Define Survival

Answer 19

= SELL AS MUCH AS POSSIBLE SHORT-TERM 2 KEEP MARKET POSITION, EVEN IF LOSS LONG-TERM.

• short-term
• businesses entering competitive market OR during times of economic downturn until economic growth again.

Question 20

Define Market Share

Answer 20

= PORTION OF MARKET CONTROLLED BY FIRM/PRODUCT.

• calculated: (total sales by business/ total sales in market) x100%.
• good market share = allows business to survive better in market.
• achieved by sales max.

Question 21

How can firms increase market shares?

Answer 21

• advertise
• expand production
• reduce price
• takeover (horizontal integration)

Question 22

What is Horizontal Integration?

Answer 22

2 businesses in same industry have joined together.
= TAKEOVER

Question 23

Define Cost efficiency

Answer 23

COMPANY LOWERS AVG. COSTS BY FIND CHEAPER RESOURCE & MANUFACTURING PROCESSES.

• offer customers cheaper prices
• in competitive markets, will gain customers from LESS efficient producers.

Question 24

Define Employee Welfare

Answer 24

taking care of employees (ADEQUATE PAY + GOOD WORKING CONDITIONS) so they’re more productive + do better quality job.

-> makes them more loyal to company, les likely to leave = LOWERING EMPLOYEE TURNOVER.

Question 25

Define Customer Satisfaction

Answer 25

SOURCE OF COMPETITIVE ADVANTAGE Improved quality or customer service => Improves competitiveness ==> improving customer satisfaction. Good rep. means able to charge higher prices for their good/product. Leads to customer LOYALTY

Question 26

Define Social Objectives

Answer 26

AIM 2 CREATE BENEFITS 4 SOCIETY BY PURSUING SOCIAL/ ENVIRONMENTAL/ ETHICAL GOALS. Businesses focus on Corporate Social Responsibility (CSR) and help local area. (produce goods more ethically OR hire groups discriminated against)

Question 27

What are the Factors of Production?

Answer 27

Capital, Enterprise, Lan, Labour

Question 28

What is short-run?

Answer 28

when quantity of (at least) 1 Factor of Production is fixed - whilst quantities of others are varied.

Question 29

What is long-run?

Answer 29

when quantities of all Factors of Production can be varied.

Question 30

Define stakeholder

Answer 30

Someone who has an interest in the firm OR feels impact from it. each have their own OBJECTIVES.

Question 31

Define internal stakeholder

Answer 31

People from within the organisation: - employees - owners/entrepreneurs - managers

Question 32

Define external stakeholder

Answer 32

People outside organisation with an interest: - shareholders - customers - suppliers/ creditors - society - gov

Question 33

Define Shareholder & their objective?

Answer 33

LEGAL OWNERS OF BUSINESS (may've helped set up business OR bought Shares on Stock Exchange). Objective: WANT HIGH PROFITS SO THEY GET HIGH DIVIDENDS.

Question 34

Define dividend?

Answer 34

DISTRIBUTION OF PROFITS BY CORPORATION TO ITS SHAREHOLDERS. When earn a profit/surplus => able to pay portion of profit as dividend 2 shareholders. (Any amount not distributed is taken + re-invested in business).

Question 35

Employees' objective?

Answer 35

their the biggest asset + biggest production cost of businesses. WANT HIGH WAGES + GOOD WORKING CONDITIONS.

Question 36

Consumers' objective?

Answer 36

WANT HIGH QUALITY GOODS WITH LOW PRICES

Question 37

Managers' objective?

Answer 37

WANT HIGH SALARIES + BONUSES + PERSONAL BENEFITS

Question 38

Governments' objective?

Answer 38

WANT EARN CORPORATION TAX FROM BUSINESS'S PROFITS.

Question 39

Suppliers' objective?

Answer 39

WANT BUSINESS STAY SUCCESSFUL SO REMAIN THEIR CUSTOMER.

Question 40

Define Creditors?

Answer 40

BUSINESS OWES THEM MONEY --> usually in exchange 4 materials/ services.

Question 41

A possible stakeholder conflict?

Answer 41

Managers want BIG BONUS, but would decrese money 4 shareholder's dividends = problem. ==> so when firm sells shares - relinquish some control 2 gain this investment. ==> SHAREHOLDER ACTIVISM = shareholders excercise power as part owner 2 manipulate company 2 fullfill their motives. ## Footnote Business' main goal = **maximize profits** + enhance **shareholder value** BUT labour costs are unavoidable so might upset other stakeholders: **employees**.

Question 42

define Corporate culture

Answer 42

set of important assumptions shared by people working in particular business + influence ways decisions taken.

Question 43

What is CSR?

Answer 43

CORPORATE SOCIAL RESPONSIBILITY: - Take account shareholders' interests - Treat employees/ suppliers/ customers fairly - Avoiding polluting activities - Donating parts of profits 2 charities & foundations 2 help improve world. (businesses may do bare min. law entails as CSR isn't regulated).

Question 44

difference between Tax AVOIDANCE and EVASION?

Answer 44

tax AVOIDANCE = finding legal ways 2 reduce tax liability. tax EVASION = illegally failing 2 pay taxes due.

Question 45

Define difference between Transnational (TNC) + Multinational Corporations (MNCs)

Answer 45

MNCs= business with operations in 1+ country TNCs= are global

Question 46

Define Business Ethics?

Answer 46

- Beyond CSR - MORAL CODE OF ETHICS BUSINESS FOLLOWS. e.g. not investing in countries which have human rights issues. - MORAL DESPITE FINANCE (COST) e.g. Body Shop doesn't use ingredients tested on animals.

Question 47

Give 2 advantages of CSR for a business

Answer 47

1) Improve public image 2) Help the local community

Question 48

Give 2 disadvantages of CSR

Answer 48

1) Reduces profits 2) Takes a lot of time