1.2: Business Structure

Question 1

Def. Primary sector

Answer 1

Firms engaged in farming, fishing, oil extraction and all other industries that extract natural resources so that they can be used and processed by other firms.

Question 2

Def. Secondary sector

Answer 2

Firms that manufacture and process products from natural resources, including computers, brewing, baking, clothes making and construction.

Question 3

Def. Tertiary sector

Answer 3

Firms that provide services to consumers and other businesses, such as retailing, transport, insurance, banking.

Question 4

What are the benefits of industrialisation (growing of secondary from primary)?

Answer 4

1. Increase in Gross Domestic Product
2. Increasing output of goods can result in lower imports and higher exports pf such products.
3. More jobs created -More tax for the government

Question 5

What are the problems of industrialisation?

Answer 5

People moving from countries to the towns leads to housing and social problems. - Imports of raw materials increase import costs

Question 6

Why is there an increase in the importance of tertiary sector in developed economies?

Answer 6

Rising economies -> higher living standards -> people spend income on services more

Question 7

Def. Private sector

Answer 7

Comprises businesses owned and controlled by individuals or groups of individuals.

Question 8

Def. Public sector

Answer 8

Comprises organisations accountable to and controlled by central or local government.

Question 9

Def. Mixed economy

Answer 9

Economic resources are owned and controlled by both private and public sectors.

Question 10

Def. Free-market economy

Answer 10

Economic resources owned largely by the private sector with very little state intervention.

Question 11

Def. Command economy

Answer 11

Economic resources owned, planned and controlled by the state.

Question 12

Why are certain goods and services are provided by the governmental organisations?

Answer 12

They may be too significant to be left to private businesses. Examples usually include health, education services, defence and public law and order (police force), or ‘strategic’ industries such public transport. - Public goods are owned by the government because they cannot be charged for for private businesses to make profit. Eg. Street lights.

Question 13

Local vs National vs International businesses.

Answer 13

Local businesses: operate in a small part of the country with no objective to expand eg. hairdressing businesses.
National businesses: have branches or operations across most of the country without expanding internationally. eg. national banking firms.
International businesses: operate in many countries.

Question 14

Def. Sole traders

Answer 14

A business in which one person provides the permanent finance and in return has full control of the business.

Question 15

Advantages of sole traders.

Answer 15

1. Easy to set up
2. Owner has complete control, no disagreements.
3. Owner keeps all profits
4. The business can be based on their interests or skills, rather then working as an employee for a larger firm.
5. Direct contact with the market
6. You can make decisions rapidly in response to market changes.

Question 16

Def. Partnership

Answer 16

A business formed by two or more people to carry on a business together, with shared capital and share responsibilities.

Question 16

Disadvantage of sole traders

Answer 16

1. Unlimited liability- all of owner’s assets are potentially at risk
2. Often faces intense competition form larger firms.
3. Difficult to raise additional capital
4. Long hours often necessary to make business pay.
5. You rely heavily on your own decision making capability.

Question 17

Partnership Advantages (4)

Answer 17

1. Partners may specialise in different areas of business, like tax law and marital law, allowing a wider range of services to offer customers.
2. Additional capital invested by each partner.
3. Losses are shared.
4. You can cover for each other if someone is ill or on holiday.

Question 18

Partnership Disadvantages (4)

Answer 18

1.Unlimited liability
2. Profits are shared
3. Many disagreements may occur which slows down the process of decision making.
4. If a partner makes a mistake, the rest are also liable for that partners actions.

Question 18

Def. Private limited companies (Ltd.)

Answer 18

To small to medium sized business that is owned by shareholders who are often members of the same family. This company cannot sell shares to the public.

Question 19

Def. Limited liability

Answer 19

The only potential loss a shareholder has if the company fails is the amount invested in the company, and it does not spread to the shareholder’s personal assets.

Question 20

What’s the difference between companies and “unincorporated” businesses? (3)

Answer 20

Limited liability
Legal personality: A company is recognised in law as having a legal identity separate from its owners.
Continuity: If the owner dies, the company is inherited.

Question 21

Advantages of Ltd.

Answer 21

Limited liability
Separate legal personality
Continuity
Able to raise capital from sale of shares to family, friends and employees.
Higher status

Question 22

Disadvantages of Ltd. (3)

Answer 22

Legal formalities involved in establishing the business
Capital cannot be raised by selling shares to the public
Less secrecy because end of year accounts can be available for public inspection

Question 23

Def. Public Limited Companies (Plc)

Answer 23

A limited company, often a large business, with legal rights to sell shares to the general public - share prices are quoted on the national stock exchange.

Question 24

Advantages of Plc

Answer 24

1. Limited liability
2. Separate legal identity
3. Continuity
4. Access to substantial capital sources due to the ability to issue a prospectus to the public and to offer shares for sale.

Question 25

Disadvantages of Plc (4)

Answer 25

Legal formalities in formation
Legal requirements concerning disclosure of information to shareholers and the public, eg. annual publication of reports and accounts
risk of takeover due to availability of the shares on the stock exchange
shareholders influenced by short term objectives (profits)

Question 26

What is “divorce between ownership and control”

Answer 26

This only happens in Plc, where original owners don’t own the majority of shares, therefore they can no longer have full control over the business. At the annual general meeting, shareholders vote for a board of directors who control the management and decision making of the business. Major investors, however, are only interested in short term gains.

Question 27

What is nationalisation?

Answer 27

When the government takes over a business that was formerly in the private sector.

Question 28

What is privatisation?

Answer 28

When a government owned business is sold into the private sector.

Question 29

What are merit goods?

Answer 29

Merit goods are goods or services, such as education
and health, whose benefits individuals may not fully
appreciate. For example, when thinking about how much
to spend on healthcare, people will think of the benefits
to themselves rather than the benefits that being healthy
also bring to those around them.

Question 30

Why would a country have greater government intervention/bigger public sector? (4)

Answer 30

1. They may want more provision of healthcare and
   education for everyone. In the private sector, this will
   only be provided for those who can pay.
2. They may want to provide a full range of services,
   including some that are not profitable; for example, rail
   or bus links to remote areas
3. They may want to use some businesses to help maintain
   employment levels in a region or economy, even if it is
   not as efficient as it could be.
4. They may worry that the private sector is misleading
   customers, or selling products which are cheap to make
   but not safe, in order to make more profits.

Question 31

Name some benefits of the private sector. (2)

Answer 31

1. Focus on profits means
   businesses want to provide
   what is demanded and ensure
   quality is good
2. Focus on profits means
   businesses want to be
   efficient and not waste
   resources

Question 32

Name some benefits of the public sector. (2)

Answer 32

1. Focuses on what is beneficial
   for society rather than what
   is profitable
2. Will not try to exploit or
   mislead customers

Question 33

Name 2 obligations of company status. (2)

Answer 33

1. The business must pay to have its accounts checked annually by independent accountants (called auditors).
2. The company accounts must be made public, so that
   outsiders can see the revenue and profits of the
   business, as well as what it owns. This means that there
   is less privacy of affairs than if you are a sole trader.

Question 34

Define a company. (2)

Answer 34

A company is a business organisation which has its own
legal identity and which has limited liability.

Question 35

Define a franchise.

Answer 35

A franchise occurs when a franchisor sells the rights to
use or sell their products to a franchisee.