1.2 Enterprise, business and the economy

Question 1

Describe the creative destruction process

Answer 1

Following a period in which large established firms become very powerful, the free market economy may go through periods of dynamic technological innovation changing products and markets drastically, This innovation is brought about by new entrants, enhancing competition with new ideas and efficient strategies.

Question 2

What are 3 long-term benefits of creative destruction?

Answer 2

GDP growth increases, standards of living rise, better products for consumers, better working conditions and jobs, better infrastructure

Question 3

What are innovative businesses sometimes called?

Answer 3

Disrupters

Question 4

What is the main job of an Entrepreneur

Answer 4

Organises a business venture and is responsible for risks involved. Gather factors of production and obtain finance to cover costs, and oversee production

Question 5

What is adding value

Answer 5

Difference between the price of a good or service and the cost of the material input involved. Altering the product to add value to the buyer

Question 6

What is profit

Answer 6

Total sales revenue- total costs
- The reward for the hard work and risks taken by an entrepreneur

Question 7

Name 3 non-financial motives for businesses

Answer 7

• Ethical stance
• Social entrepreneurship
• Independence
• Home working

Question 8

Name and define the 4 factors of labour

Answer 8

• Land: Natural resources and energy sources which are turned into products
• Labour: Human input and skill used to turn natural resources into products
• Capital: Tools and equipment used to turn primary products into goods
• Enterprise: Organises and combines the other factors of production to create output for consumption

Question 9

What is the division of labour

Answer 9

Individuals in the workplace specialising in a particular type of activity or task.

Question 10

Explain 2 advantages of the division of labour

Answer 10

• By repeating the same task, workers become skilled and efficient. Increased productivity
• Specialist expertise can be used to develop better products

Question 11

Explain 2 disadvantages of the division of labour

Answer 11

• Endless repetition can become monotonous and decrease morale
• More likely to be automated so workers can be made redundant

Question 12

Define specialisation

Answer 12

Refers to when people, organisations or economies concentrate on specific economic activities often due to a natural advantage

Question 13

Explain 3 advantages of specialisation

Answer 13

• Acquire greater skills and knowledge in a given area
• Taken advantage of access to material, more profit
• Assess economies of scale- managerial

Question 14

Explain a disadvantage of specialisation

Answer 14

Vulnerable to external shocks e.g. weather, creative destruction

Question 15

What is an interest rate?

Answer 15

Price of borrowing money and benefit of saving

Question 16

Define the base rate

Answer 16

The level of interest set by a country’s central bank e.g. Bank of England

Question 17

Possible impacts of increased interest rates on businesses

Answer 17

• Less likely to borrow money
• Investment falls
• Fewer start-ups and growth slows
• Demand from consumers may fall

Question 18

Possible impacts of increased interest rates on consumers

Answer 18

• Less likely to borrow money for larger purchases
• Less spending on credit cards
• Increased mortgage repayments
• Disposable income and SOLs fall

Question 19

Possible impacts of decreased interest rates on businesses

Answer 19

• Increased investment
• More business expansion
• More start up due to lower cost of borrowing
• Rise in demand for consumers

Question 20

What is an exchange rate?

Answer 20

The value of one currency expressed in terms of another

Question 21

What exchange rate do exporting businesses want?

Answer 21

Weaker currency for their home currency so their goods are more internationally competitive

Question 22

What exchange rate do importing firms want

Answer 22

Stronger currency for their home currency so costs are lower

Question 23

Explain 2 impacts of the appreciation of currency

Answer 23

SPICED
- Exports become more expensive so demand falls
- Imports become cheaper, lower costs for domestic firms

Question 24

Explain 2 impacts of the depreciation of currency

Answer 24

WPIDEC
- Exports become cheaper, exporting firms become more competitive
- Imports become more expensive, so domestic firms have higher costs

Question 25

Define taxation

Answer 25

A percentage or set amount on purchases and earnings by the Govt.

Question 26

What is the difference between direct and indirect taxes?

Answer 26

Direct taxation is levied on earnings and shifts demand whereas indirect taxation is levied on goods and shifts supply

Question 27

Which form of tax shifts supply and which shifts demand

Answer 27

Indirect tax shifts supply. Direct taxes shift demand

Question 28

Define corporation tax

Answer 28

Direct tax on a business’s profit e.g. 20% in the UK

Question 29

What is unemployment in an economy

Answer 29

The number of people willing and able to work but cannot find a job. This excludes full-time students, the retired, children and those not looking for a paid job

Question 30

Name 3 impacts of rising unemployment on businesses

Answer 30

Consumers spend less on luxury goods, businesses that sell cheap substitutes e.g. Aldi and Lidl experience more demand, and wage rates may stagnate or decline as there is more competition for jobs/ supply of high-skilled labour.

Question 31

What is inflation?

Answer 31

Sustained increase in the average price level in the economy. This causes a fall in the value of money

Question 32

What is real data?

Answer 32

Data that takes inflation into account, removing its effects

Question 33

Impact of increased inflation rate on businesses

Answer 33

• Uncertainty regarding future costs so investment reduces
• Inflation increases the cost of supplies and potentially wages
• Higher prices may cause demand to fall on the curve
• Consumers have less disposable income
• Imports prices increase so costs may increase
• Depreciation caused by inflation makes exports more competitive