1.2: Business Structure Flashcards
Def. Primary sector
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.
Def. Secondary sector
Firms that manufacture and process products from natural resources, including computers, brewing, baking, clothes making and construction.
Def. Tertiary sector
Firms that provide services to consumers and other businesses, such as retailing, transport, insurance, banking.
What are the benefits of industrialisation (growing of secondary from primary)?
- Increase in Gross Domestic Product
- Increasing output of goods can result in lower imports and higher exports pf such products.
- More jobs created -More tax for the government
What are the problems of industrialisation?
People moving from countries to the towns leads to housing and social problems. - Imports of raw materials increase import costs
Why is there an increase in the importance of tertiary sector in developed economies?
Rising economies -> higher living standards -> people spend income on services more
Def. Private sector
Comprises businesses owned and controlled by individuals or groups of individuals.
Def. Public sector
Comprises organisations accountable to and controlled by central or local government.
Def. Mixed economy
Economic resources are owned and controlled by both private and public sectors.
Def. Free-market economy
Economic resources owned largely by the private sector with very little state intervention.
Def. Command economy
Economic resources owned, planned and controlled by the state.
Why are certain goods and services are provided by the governmental organisations?
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.
Local vs National vs International businesses.
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.
Def. Sole traders
A business in which one person provides the permanent finance and in return has full control of the business.
Advantages of sole traders.
- Easy to set up
- Owner has complete control, no disagreements.
- Owner keeps all profits
- The business can be based on their interests or skills, rather then working as an employee for a larger firm.
- Direct contact with the market
- You can make decisions rapidly in response to market changes.
Def. Partnership
A business formed by two or more people to carry on a business together, with shared capital and share responsibilities.
Disadvantage of sole traders
- Unlimited liability- all of owner’s assets are potentially at risk
- Often faces intense competition form larger firms.
- Difficult to raise additional capital
- Long hours often necessary to make business pay.
- You rely heavily on your own decision making capability.
Partnership Advantages (4)
- Partners may specialise in different areas of business, like tax law and marital law, allowing a wider range of services to offer customers.
- Additional capital invested by each partner.
- Losses are shared.
- You can cover for each other if someone is ill or on holiday.
Partnership Disadvantages (4)
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.
Def. Private limited companies (Ltd.)
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.
Def. Limited liability
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.
What’s the difference between companies and “unincorporated” businesses? (3)
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.
Advantages of Ltd.
Limited liability
Separate legal personality
Continuity
Able to raise capital from sale of shares to family, friends and employees.
Higher status
Disadvantages of Ltd. (3)
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
Def. Public Limited Companies (Plc)
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.
Advantages of Plc
- Limited liability
- Separate legal identity
- Continuity
- Access to substantial capital sources due to the ability to issue a prospectus to the public and to offer shares for sale.
Disadvantages of Plc (4)
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)
What is “divorce between ownership and control”
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.
What is nationalisation?
When the government takes over a business that was formerly in the private sector.
What is privatisation?
When a government owned business is sold into the private sector.
What are merit goods?
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.
Why would a country have greater government intervention/bigger public sector? (4)
- 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. - 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 - 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. - 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.
Name some benefits of the private sector. (2)
- Focus on profits means
businesses want to provide
what is demanded and ensure
quality is good - Focus on profits means
businesses want to be
efficient and not waste
resources
Name some benefits of the public sector. (2)
- Focuses on what is beneficial
for society rather than what
is profitable - Will not try to exploit or
mislead customers
Name 2 obligations of company status. (2)
- The business must pay to have its accounts checked annually by independent accountants (called auditors).
- 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.
Define a company. (2)
A company is a business organisation which has its own
legal identity and which has limited liability.
Define a franchise.
A franchise occurs when a franchisor sells the rights to
use or sell their products to a franchisee.
