1.2: Enterprise, business and the economy

Question 1

Creative destruction

Answer 1

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’

Question 2

Entrepreneur

Answer 2

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.

Question 3

Added value

Answer 3

The difference between the price of the finished good or service and the cost of the material inputs involved in making it.

Question 4

Profit

Answer 4

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

Question 5

Risk

Answer 5

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.

Question 6

Ethical stance

Answer 6

An increasing number of entrepreneurs want to do the ‘right’ thing
Their businesses focus on providing ethical and/or environmentally friendly products

Question 7

Social entrepreneurship

Answer 7

Social entrepreneurs use their entrepreneurial skills to achieve benefits for society.
The main aim of social entrepreneurship is to further social and environmental goals.

Question 8

Independence

Answer 8

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.

Question 9

Home working

Answer 9

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.

Question 10

Land

Answer 10

Anything that can be classed as a natural resource, including raw materials and energy sources.

Question 11

Labour

Answer 11

The human input in both physical and mental terms.
This includes employees, managers, owners and the self employed

Question 12

Capital

Answer 12

Includes equipment used in the production process, ranging from simple tools to complex machinery, factories, telecommunications and infrastructure.

Question 13

Enterprise

Answer 13

The creative spark that organises and combines the first three factors of production to create output for consumption.

Question 14

Efficiency

Answer 14

If the factors of production have not been used efficiently, costs will be higher than they should be

Question 15

Division of labour

Answer 15

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.

Question 16

Advantages of division of labour

Answer 16

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.

Question 17

Disadvantages of division of labour

Answer 17

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.

Question 18

Specialisation

Answer 18

Refers to the way in which people, organisations and economies concentrate on specific economic activities, often because they have some advantage in that field.

Question 19

Disadvantages of specialisation

Answer 19

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.

Question 20

Interest rates

Answer 20

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.

Question 21

Why do interest rates change?

Answer 21

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.

Question 22

Interest rate increase effect on businesses

Answer 22

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.

Question 23

Interest rates increase: effect on consumers

Answer 23

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.

Question 24

Interest rates decrease: effect on businesses

Answer 24

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.

Question 25

Interest rate decrease: effect on consumers

Answer 25

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.

Question 26

Exchange rate

Answer 26

The price of one currency in terms of another.

Question 27

What happens when the exchange rate of the pound rises?

Answer 27

It appreciates.
Each pound can now buy more dollars than it did before,

Question 28

What happens when the exchange rate of the pound falls?

Answer 28

It depreciates.
Each pound can now buy fewer dollars than it did before.

Question 29

Will a business that exports want a appreciating or depreciating pound?

Answer 29

Depreciating.
Makes them more competitive.

Question 30

Will a business that imports want an appreciating or depreciating pound?

Answer 30

Appreciating.
Costs will fall –> can reduce prices or make more profit.

Question 31

Describe what happens when the pound appreciates?

Answer 31

SPICED

Question 32

Describe what happens when the pound depreciates?

Answer 32

WPIDEC

Question 33

Direct taxation

Answer 33

Direct taxes are charged on earnings.

Question 34

Indirect taxation

Answer 34

VAT, car tax etc

Question 35

How does direct tax affect businesses?

Answer 35

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

Question 36

How does indirect tax affect businesses?

Answer 36

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

Question 37

What is corporation tax?

Answer 37

Tax on profits that a business makes

Question 38

The effect of changing corporation tax on businesses

Answer 38

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

Question 39

What is unemployment?

Answer 39

The number of people able and willing to work but not able to find a paying job

Question 40

Impact of rising unemployment on spending (for businesses)

Answer 40

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

Question 41

Impact of rising unemployment on recruitment

Answer 41

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

Question 42

Impact of falling unemployment on spending

Answer 42

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?

Question 43

Inflation

Answer 43

Sustained increase in average price level in economy - fall in value of money
Target rate of +- 2%

Question 44

Rate of inflation causing uncertainty for businesses

Answer 44

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

Question 45

Rate of inflation affecting competitiveness

Answer 45

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