1.2 Enterprise, Business and the Economy Flashcards
Define Entrepreneur and their role?
someone who sets up a business, taking a financial risk
- they use CREATIVE DESTRUCTION by organising Factors of Production 2 create + set up ENTERPRISE.
- make decisions 2 operate/ expand/ develop/ ADD VALUE (by selling output more than cost of input).
- are innovative.
Define Enterprise
- a person spotting a business opportunity and setting up a business.
- a project or undertaking that is especially difficult, complicated, or risky.
Define Creative Destruction
way which innovation improves quality ==> which leaves old products obsolete + leads to economic growth.
Define Innovation
developing an idea that will generate new OR improved products/ techniques.
Define Adding Value
creating something of a HIGHER VALUE than the COST of raw materials.
Define Equity
share capital
Define Turnover
sales revenue
Define Patents
make it illegal 2 copy new ideas/technologies (usually 20yrs)
What 7 things does an Entrepreneur have full control over?
Purchasing new locations Investing in new equipment Hiring staff Market Research Increasing brand strength Innovation Diversifying the product range
Define Multiplier Effect
one thing leads 2 another.
What are Costs of Production?
= ALL PAYMENTS MADE TO GET PRODUCT INTO MARKET PLACE:
- wages
- raw materials
- business rates
- premises
- components
- energy bills
What’s the Formula for Profit?
Profit = Sales revenue – Total Costs (costs of productivity)
What’s the formula for sales revenue?
Sales Revenue = Price x Quantity
Define investment
spending now to generate income in future
Define Incentives
financial/other rewards inducing people 2 behave certain way
Give 4 non-financial motives
entrepreneurial motives
- Ethical stance
- Social Entrepreneurship (focusing on their environmental purpose)
- Independence (some people don’t like being told what to do = flexibility)
- Home Working (work to fit around a family with no congestion)
reasons for setting up business thats not linked to making profit.
Social Entrepeneurship
Business methods & strategies 2 achieve social objs; seek innovation solutions 2 difficult social problems.
Define ‘factors of production’
CELL
All inputs needed to make a product or provide a service
C = capital x3
E = enterprise
L = land
L = labour
economic resources entrepreneurs bring together 2 make profit
What are the 4 types of capital
- Physical
- FIxed
- Working
- Financial
Define Physical Capital
PREMISE + EQUIPMENT repeatedly used in production
Define Financial Capital
MONEY used 2 PURCHASE physical capital
Define Fixed Capital
MACHINES/ BUILDINGS which company operates.
Define Working Capital
finance needed by buiness 2 cover production costs
wages, rent; cost of other inputs needed.
Define Enterprise
The people generating the ideas
Fundamental 2 organisation of economic activity + willingness 2 take risks in return 4 profit.
Define Labour
The work that people do in order to turn raw materials into products
Define division of labour
organising employees so an individual specialises in one part of the production process
Give 5 advantages of the division of labour
- More jobs improves the economy
- Reduces wastage of time and materials =productivity
- Physical Capital/ equipment can be used continuously
- Less training needed
- Higher output = lower costs
Give 3 disadvantages of the division of labour
- More jobs means higher costs for companies
- Higher wages needed to motivate staff
- Lack of innovation
Define Efficiency
maximising use of resources, including time, whilst maximising output, quality considered.
IMPORTANT CAUSE MARKET = VERY COMPETITIVE
How can firms be more efficent?
- workers more specialised
- use tech = make firm capital intensive.
- training employees
- focus on employee welfare
- faster production cycle = speed up assembly line
- efficient supply chain
Whats a measure of efficiency?
output per person, per period of time, quality considered.
Define specialisation
When individual/ firm/ region/ country CONCENTRATES ON PRODUCTION OF LIMITED range of goods/ services.
Focusing expertise in particular field.
HIGHER WORKER PRODCUTIVITY = OUTPUT INCREASES => LOWERS FIRMS COSTS ==> offer LOWER PRICES to consumers.
then REINVEST + EXPAND or PAY HIGHER DIVIDENDS.
Define Capital Intensive (specilisation)
focus on INVESTMENT in MACHINES etc…
Define Labour intensive (specialistion)
Focus on PHYSICAL WORK of people
Profit per product formula
profit per product = PRICE - AVERAGE COST
assuming avg. cost still the same.
Give 5 advantages of specialisation to employers
- Staff become HIGHLY TRAINED -> improves QUALITY of product.
- Lowers costs of multi-training => reducing firms costs.
- Improves production levels + speed ==> increases sales & profits.
- Increases COMPETATIVE ADVANTAGE over rivals
- LOWER UNIT COSTS (EoS) => LOWER PRICES => INCREASE DEMAND => INCREASE MARKET SIZE.
HIGHER OUTPUT + HIGHER QUALITY
Give 5 disadvantages of specialisation 2 employers
- REPETAIVE work = DEMOTIVATING (lowering quality) => high EMPLOYEE TURNOVER => WASTEAGE + COSTS MONEY (2 advertise for job vacancy).
- person missing = harder 2 replace becasue they’re specialised.
- Lack of INNOVATION
- RISK not spread.
- More firms lower prices => MORE COMPETITION => LOWER PROFIT MARGINS.
Give 3 advantages of Specialisation to employees
- firms higher profit margins => HIGHER WAGES
- JOBS CREATION
- EMPLOYEMNT 4 low level of skills.
Give 2 disadvantages of Specialisation to employees.
- REPETIVE work => DEMOTIVATION
- focused on 1 task too long => LESS TRANSFERABLE SKILLS => leave can’t gain other job ===> STRUCTURAL UNEMPLOYMENT.
- LESS FLEXIBLE
Define Comparative Advantage
when country PRODUCES good/service at LOWER OPPORTUNITY COST/ higher quality than other countries.
leads to a COMPETITIVE ADVANTAGE.
Define Competitive Advantage
factors allowing company 2 produce good/service CHEAPER/ BETTER QUALITY than rivals
Define Profit Margin
amount by which REVENUE FROM SALES EXCEEDS COSTS in business.
wider econ environment
Define interest rate
the cost of borrowing/ price of money/ reward for savings
expressed as %
Who sets the Intrest Rate?
= set by BANK OF ENGLAND.
- determined by state of econ + economic targets
Define Collateral
SECURITY AGAINST LOAN
- form of property/ other assets (car)
- borrower fails 2 repay loan => bank seizes collateral 2 RECOVER LOSSES.
COLLATERAL ===> LOWER intrest rates 4 borrower. - UNSECURED LOANS = HIGHER intrest rates (don’t include collateral)
Banks ask for collateral as security against loan
E.G when banks reposses houses (borrowers failed 2 repay monthly mortgage payments).
What is the overall impact of RISING Intrest Rates?
REDUCED ECONOMIC GROWTH (lower consumer D/ consumption) but LOWER INFLATION (prices go down = value of money increases) ==> FALL IN INVETMENT.
REDUCED INVESTMENT, REDUCED CONSUMPTION/ D , FALL IN HOUSE PRICES
Impact of RISING Intrest Rates on CONSUMERS + SAVERS
:( CONSUMERS: if variable mortgage => increse in monthly repayments => reducing disposable income => cut back lux/ unnecessary goods.
- house prices fall.
:) SAVERS: encourage savings SO => get more money from savings
Impact of RISING Intrest Rates on BORROWERS + BUSINESSES
BORROWERS: DISCOURAGED => intrest paid back on loans is expensive => riskier 2 take out loan (harder 2 pay back).
- detreimental 2 small business => trying 2 start-up - not able 2 pay back lender.
(larger) BUSINESSES: have 2 pay back increased intrest on loans = SUFFER + Decreased consumer D => selling less ==> lower PROFIT MARGINS ==> less likely expand as losing profits from increased COSTS OF PRODUCTION ==> reduce size of workforce.
Impact of RISING Intrest Rates on SUPPLY of goods/services
- Expensive 2 invest -> firms buy less capital euipment (machinery) + lack of Demand ==> B2B transactions fall + banks go out of business.
- Suppliers increse prices 2 compensate 4 own increased intrest payments.
Whats overall impact of FALLING Intrest Rates?
INCREASED INFLATION but INCREASED ECONOMIC GROWTH + INCREASED CONSUMPTION/ D ===> HIGHER GDP.
Impact of FALLING Intrest Rates on CONSUMERS + SAVERS
:) CONSUMERS: lower monthly mortgage payments => higher disposable income => more likely spend more (cars; holidays) ==> INCRESES NET CONSUMER SPENDING => HIGHER CONSUMPTION.
:( SAVERS: discouraged - gain less from savings => more likely spend what would’ve saved on large purchases (cars; holidays).
Impact of FALLING Intrest Rates on BORROWERS + BUSINESSES
BORROWERS: encourages borrowing => loans easier 2 pay back,
* BUT harder 2 obtain = banks not willing 2 give out loans (don’t gain much from this).
(larger) BUSINESSES: increase in sales => more likely take out loans 2 expand
=> low IR encourage **investment, expansion + job creation **from raised profits.
Define exchange rate
price of one currency in exchange for/ in terms of another (£1=$1.5)
whos affected by exchange rates?
- TOURISTS
- FOREIGN INVESTMENTS/ BUSINESSES
- BUSINESSES IMPORTING/ EXPORTING
FLUCTUATIONS in exchange rate causes UNCERTAINTIES.
difference between exports + imports?
exports = SELLING abroad
imports = BUYING from abroad
What causes changes in exchange rates?
MARKET FORCES (D&S) causes => FLOATING EXCHANGE RATE (constant fluctuations).
=> more curency demanded —-> more price of it rises.
Define Floating Exchange rate?
when govs allow exchange rate to be determined by ‘market forces’ + there’s no attempt 2 influence the exchange rate.
constant fluctuations
Define appreciation?
currency RISES IN VALUE against another
- pound becomes STRONGER/ buys MORE $
- £1 = $1.60
SPICEED
Define Depreciation
currency FALLS IN VALUE against another
- pound becomes WEAKER/ buys LESS $
- £1 = $1.40
- EXPORTS INCREASE
- FDI in UK INCREASE
- foreigners coming into uk increases
WPIDEC
Define Foreign Direct Investment (FDI)
net transfer of funds 2 purchase/ acquire physical capital, such as factories + machines, e.g. Nissan, a Japanese firm, building car factory in UK.
FDI net inflows are the value of** inward** direct investment made by non-resident investors in the reporting economy. This is usually reported for a given year
WHat does SPICED stand for?
Strong Pound
Imports Cheaper
Exports Dearer
firms importing = able 2 buy cheaper raw materials + goods
firms exporting = less demand.
What does WPIDEC stand for?
Weak Pound
Imports Dearer (expensive - UK give up MORE £ 4 same amount foreign currency)
Exports Cheaper (FOREIGN countries give up LESS currency 4 same £)
greater demand (4 UK goods) from abroad
Describe intrest rates link to exchange rate changes in UK?
- Increase in UK Intrest Rates
- Better return on UK saving accounts
- HOT MONEY FLOWS into take adv of HIGHER Intrest Rates
- Increased D for £
- Appreciation in value of £
intrest rate CHANGES D 4 certain currency –> DRAWS more/ less FOREIGN INVESTORS 2 TAKE ADVANTAGE of intrest rate changes
Define Hot Money Flows.
CAPIAL FLOWS moving 2 countries with Higher Interest Rates/ expected Exchange Rates changes.
How does an increase in the interest rate effect the exchange rate?
Increase in exchange rate
What industries benefit from a weak pound?
Hotels
flooding of tourists attracted 2 weaker pound - cheaper stay but business 4 hotels
Define Balance of Payments (BOP)
RECORD of all FINANCIAL TRANSACTIONS made between consumers/ firms/ gov from UK with other countries.
States how much spent on Imports + the value of Exports.
How does an increase in the exchange rate affect the balance of payments?
Imports down
Exports up
BOP decrease
Define direct taxation
tax paid depending upon individual/ firm income
TAX CHARGED ON EARNINGS
- CORPORATION TAX
- INCOME TAX
INCREASE IN TAX = DECRESES D FOR MOST GOODS/SERVICES
Define Corporation tax
tax levied/ charged on profits business makes (% of profits made)
- Decrease corporation tax => allows firm keep more profits ==> encourage investment 4 future growth.
- High Corporation tax => deter foreign companies from basing in UK.
Define Income tax
levied/ charged on incomes of individuals.
change in income tax => affects consumers disposable income.
Define Indirect tax
tax charged/ levied on things other income/ profits
- VAT
- CAR TAX
- INSURANCE
INCREASE IN TAX = DECRESES D FOR MOST GOODS/SERVICES
Define VAT
Value Added Tax
Collected by business (takes 20% of value of sales) less the cost of all inputs bought from other businesses.
Increase in VAT => increase in prices 4 consumers ==> reduces consumer spending.
Value Added Tax
Define unemployment
no. of people willing + able to work but not able 2 find employment.
Define Underemployment
people who want fulltime work only find part-time work.
What are problems with unemployment?
- OPPORTUNITY COST (alternative = employment)
- LOSS OF OUTPUT/ GROWTH/ INCOME
- Less spending money so less sales from lower disposable income = SLOWS ECONOMIC GROWTH.
- RETRAINING = EXPENSIVE
- NEGATIVE MULTIPLIER EFFECT (loss of jobs in area leads 2 less spending ==> causing other 2 loose out)
- RISING SOCIAL COSTS (social deprevation)
- FISCAL COSTS (gov earns less tax revenue. bc people earn less)
- Skill shortages
- LOW MORALE
Define Fiscal cost
COSTS TO gov changing taxation + spending 2 influence AD
cost of gov stimulating ecoomic growth.
Define AD (Aggregate Demand)
total level of planned expenditure in economy.
OVERALL DEMAND.
Define skills shortage
people available 4 work** don’t have skills** employers seeking.
*when the economy is growing = unemployment is low + new technology is widely adopted. *
Effects of RISING UNEMPLOYMENT on firms?
- Less Disposable Income => Less spending => less D => less Output => RISING Unemployment.
- Rise Supply of Labour => less Competitive Wages as Workers Willing 2 Work 4 Less => Wages fall ==> BUT means fall in Costs = Increse Profit Margin.
- Retrain unskilled => expensive => increases firms’ costs.
- inferior/ cheap goods = see increase in sales.
Effects of FALLING UNEMPLOYMENT on firms?
- more Disposable Income => more Spending => increase D => more Hours/ Jobs available => Unemployment FALLS
- Lower Supply of Labour => increased Profits demand higher Wages => more Competitive Wages 2 gain new workers => increase Disposable Income.
- superior/ lux goods ==> increase in sales.
Define inflation
persisent rise in general/ average price level ==> corresponding fall in value of money.
PRICES INCREASE
GOV TARGET 2%
Define Hyperinflation
inflation at VERY HIGH RATE.
define DEflation
NO INFLATION so avg/ general price level is Decreasing
PRICES DECREASE
opposite to inflation
Define DISinflation
REDUCTION IN RATE OF INFLATION
How is inflation measured?
- BASKET OF GOODS METHOD
- CPI + RPI
- following years, % change compared 2 base year (100)
Whats CPI?
CONSUMER PRICE INDEX:
headline rate used 2 measure gneral inflation BUT excludes some items.
- less uncertain
- allows easier comparison of markets
WHats RPI?
RETAIL PRICE INDEX:
include house costs:
- mortgage repayments
- petrol costs
- council tax etc.
What are the main types of inflation?
COST-PUSH INFLATION
DEMAND -PULL INFLATION
Define Demand- Pull inflation
RISE IN AD (overall demand) SLOWER THAN INCRESE IN AS.
- consumers compete 2 buy limited amounts of goods/services ==> PRICES ARE DRIVEN.
“ too much money chasing too few goods”
define Cost-Push inflation
PRICES PUSHED- UP due 2 INCREASES FACTORS OF PRODUCTION (cell) when COMPANIES ALREADY RUNNING AT MAX.
- firms pass higher prices 2 consumers == 2 MAINTAIN PROFIT MARGINS.
- attempt 2 CUT COSTS / CHEAPER SUPPLIERS (if thats where increased price from).
Give 2 negative impacts of inflation (on firms)?
- MENU COSTS (cost by quicly changing prices- changing price lists/ udapting website on costs)
- WAGE PRESSURE (trade unions negotiate as Higher Wages demanded 2 cover costs of inflation ==> expensive ==> increases business costs WHILST cuts down PROFIT MARGIN).
- RAW MATERIALS COSTS INCREASING (makes business increase prices 2 keep stable profit margin —– but rise in suppliers prices caused by rise in theor costs e.g. petrol costs increasing their delivery prices)
- CONSUMER SPENDING (can’t afford => so consumers are uncertain/ cautious => cut back on spending => “save not spend mentality” ==> SLOWS ECONOMIC GROWTH + DECREASES BUSINESS PROFITS.
Give 2 positive impacts of inflation (on firms)?
- FALL IN DEBT/LOANS VALUE (inflation proportionally decreases debt real value - debt now less than was)
- ECONOMIC GROWTH (indicator of prospering economy as people WERE SPENDING MORE).
