1.2: Enterprise, business and the economy Flashcards
Creative destruction
It occurs when some businesses innovate in order to produce new, cheaper or better products with wide market appeal, introducing strong competition.
This threatens established producers that have failed to adapt to changing tastes or new technologies.
Innovative businesses are sometimes referred to as ‘disrupters’
Entrepreneur
Someone who organises a business venture and is responsible for the risks involved.
The entrepreneur will decide what will be produced and how it will be created, obtain the finance to cover start-up costs and decide the price at which it will be marketed.
Added value
The difference between the price of the finished good or service and the cost of the material inputs involved in making it.
Profit
The difference between sales revenue and costs.
In a competitive market, profit acts as a signal, encouraging businesses to create products that customers want to buy
Risk
Profit rewards entrepreneurs for taking a risk and for matching their products to the needs of the buyer
The riskier the business, the greater the prospect of profit has to be to create an incentive to go ahead.
Ethical stance
An increasing number of entrepreneurs want to do the ‘right’ thing
Their businesses focus on providing ethical and/or environmentally friendly products
Social entrepreneurship
Social entrepreneurs use their entrepreneurial skills to achieve benefits for society.
The main aim of social entrepreneurship is to further social and environmental goals.
Independence
Being your own boss is a strong motivating factor for some, knowing that their own decisions determine the success of the business.
Being able to achieve a dream or an ambition may be reward enough.
Home working
Many people now choose to become self-employed and work from home
Digital technology means that finding office space is no longer necessary.
It saves time and money in commuting and can fit with family routines.
Land
Anything that can be classed as a natural resource, including raw materials and energy sources.
Labour
The human input in both physical and mental terms.
This includes employees, managers, owners and the self employed
Capital
Includes equipment used in the production process, ranging from simple tools to complex machinery, factories, telecommunications and infrastructure.
Enterprise
The creative spark that organises and combines the first three factors of production to create output for consumption.
Efficiency
If the factors of production have not been used efficiently, costs will be higher than they should be
Division of labour
Involves individuals in specialising in one particular type of activity in the workplace.
Each employee will have a specific task; repeating this task will help them to do it fast and well.
Advantages of division of labour
The workplace becomes more productive and profitable. Each worker repeats the same task and becomes speedy and efficient. Total output is greater and productivity increases.
Specialist expertise can be used to deliver a better product.
Disadvantages of division of labour
Repetition of tasks becomes boring and repetitive leading to job dissatisfaction and loss of motivation
To avoid this problem, many modern organisations place their workers in teams so that each person can perform a variety of tasks.
Specialisation
Refers to the way in which people, organisations and economies concentrate on specific economic activities, often because they have some advantage in that field.
Disadvantages of specialisation
Too much specialisation can lead to inflexibility. It may be difficult to work as normal when there is a need to cover for workers who are not present. A specialised worker with a narrow skill set may become unemployed and fail to find other work. Repeated retraining may be needed.
Interest rates
The price of borrowed money. Getting a loan will mean repaying with interest.
Interest rates vary depending on the level of risk involved in the loan.
Why do interest rates change?
All interest rates charged by banks, building societies and other financial institutions are linked to the base rate of interest set by the Bank of England’s Monetary Policy Committee, who meet once a mouth to decide whether to increase, maintain or decrease the base rate.
Interest rate increase effect on businesses
Less likely to borrow Money to expand.
Investment may slow; maybe fewer new businesses starting up and slower growth in existing ones.
Many businesses will face falling demand.
Interest rates increase: effect on consumers
Less likely to borrow money for larger items.
Credit card spending may be reduced.
Mortgage repayments will increase leaving less disposable income for other spending.
Standards of living may fill.
Interest rates decrease: effect on businesses
Investment may increase and existing businesses may expand.
New businesses may be encouraged to start up due to the lower cost of borrowing.
Many businesses will experience rising demand.
Interest rate decrease: effect on consumers
Consumer spending may increase: it is now cheaper to borrow money with loans or credit cards.
Mortgage payments may decrease leaving more disposable income for other spending.
Many people will feel better off.
Exchange rate
The price of one currency in terms of another.
What happens when the exchange rate of the pound rises?
It appreciates.
Each pound can now buy more dollars than it did before,
What happens when the exchange rate of the pound falls?
It depreciates.
Each pound can now buy fewer dollars than it did before.
Will a business that exports want a appreciating or depreciating pound?
Depreciating.
Makes them more competitive.
Will a business that imports want an appreciating or depreciating pound?
Appreciating.
Costs will fall –> can reduce prices or make more profit.
Describe what happens when the pound appreciates?
SPICED
Describe what happens when the pound depreciates?
WPIDEC
Direct taxation
Direct taxes are charged on earnings.
Indirect taxation
VAT, car tax etc
How does direct tax affect businesses?
Change in level of income tax will alter the level of consumer’s disposable income.
Increase in tax will decrease demand for many products and services
Exceptions - inferior goods
How does indirect tax affect businesses?
Increase in VAT, increase in price of many goods and services
Decreased consumer spending.
Businesses that produce goods and services that carry particular taxes may see demand fall if govt increases tax
What is corporation tax?
Tax on profits that a business makes
The effect of changing corporation tax on businesses
Decrease in corporation tax will increase the amount of profit a business can keep - may encourage it to inveswt into UK economy
Too high a corporation tax may deter foreign companies from investing in Uk
What is unemployment?
The number of people able and willing to work but not able to find a paying job
Impact of rising unemployment on spending (for businesses)
More people become unemployed - less income - spend less
Dd for normal or luxury goods falls
Some businesses see increase in sales - people switch to cheaper substitutes
Impact of rising unemployment on recruitment
Wage rates less likely to rise - more competition for jobs
Easier to recruit people - more people to choose from
Easier to find highly skilled labour - normally scarce
Impact of falling unemployment on spending
Less unemployed - more income to spend - increase Dd for normal and luxury goods
Businesses that sell inferior goods may see fall in Dd
Wages likely to rise to attract skilled labour
Harder to recruit - fewer unemployed people to choose from - skills mismatch?
Inflation
Sustained increase in average price level in economy - fall in value of money
Target rate of +- 2%
Rate of inflation causing uncertainty for businesses
Hard to plan for the future - uncertainty regarding future costs - less likely to invest
Costs of supplies and wages increase - can reduce profitability - unless prices increases - higher prices may mean less quantity Dded
Pensioners etc have less real income - Dd less
Rate of inflation affecting competitiveness
UK businesses have higher roi than foreign competitors - costs rise faster - prices increase - lose competitiveness - falling exports - imports may also decrease
increasing interest rate to tackle inflation - increases cost of borowing - less likely to invest and grow
Consumers have higher mortgages - may reduce sales
