1.2 Enterprise, business and the economy Flashcards
Describe the creative destruction process
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.
What are 3 long-term benefits of creative destruction?
GDP growth increases, standards of living rise, better products for consumers, better working conditions and jobs, better infrastructure
What are innovative businesses sometimes called?
Disrupters
What is the main job of an Entrepreneur
Organises a business venture and is responsible for risks involved. Gather factors of production and obtain finance to cover costs, and oversee production
What is adding value
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
What is profit
Total sales revenue- total costs
- The reward for the hard work and risks taken by an entrepreneur
Name 3 non-financial motives for businesses
- Ethical stance
- Social entrepreneurship
- Independence
- Home working
Name and define the 4 factors of labour
- 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
What is the division of labour
Individuals in the workplace specialising in a particular type of activity or task.
Explain 2 advantages of the division of labour
- By repeating the same task, workers become skilled and efficient. Increased productivity
- Specialist expertise can be used to develop better products
Explain 2 disadvantages of the division of labour
- Endless repetition can become monotonous and decrease morale
- More likely to be automated so workers can be made redundant
Define specialisation
Refers to when people, organisations or economies concentrate on specific economic activities often due to a natural advantage
Explain 3 advantages of specialisation
- Acquire greater skills and knowledge in a given area
- Taken advantage of access to material, more profit
- Assess economies of scale- managerial
Explain a disadvantage of specialisation
Vulnerable to external shocks e.g. weather, creative destruction
What is an interest rate?
Price of borrowing money and benefit of saving
Define the base rate
The level of interest set by a country’s central bank e.g. Bank of England
Possible impacts of increased interest rates on businesses
- Less likely to borrow money
- Investment falls
- Fewer start-ups and growth slows
- Demand from consumers may fall
Possible impacts of increased interest rates on consumers
- Less likely to borrow money for larger purchases
- Less spending on credit cards
- Increased mortgage repayments
- Disposable income and SOLs fall
Possible impacts of decreased interest rates on businesses
- Increased investment
- More business expansion
- More start up due to lower cost of borrowing
- Rise in demand for consumers
What is an exchange rate?
The value of one currency expressed in terms of another
What exchange rate do exporting businesses want?
Weaker currency for their home currency so their goods are more internationally competitive
What exchange rate do importing firms want
Stronger currency for their home currency so costs are lower
Explain 2 impacts of the appreciation of currency
SPICED
- Exports become more expensive so demand falls
- Imports become cheaper, lower costs for domestic firms
Explain 2 impacts of the depreciation of currency
WPIDEC
- Exports become cheaper, exporting firms become more competitive
- Imports become more expensive, so domestic firms have higher costs
Define taxation
A percentage or set amount on purchases and earnings by the Govt.
What is the difference between direct and indirect taxes?
Direct taxation is levied on earnings and shifts demand whereas indirect taxation is levied on goods and shifts supply
Which form of tax shifts supply and which shifts demand
Indirect tax shifts supply. Direct taxes shift demand
Define corporation tax
Direct tax on a business’s profit e.g. 20% in the UK
What is unemployment in an economy
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
Name 3 impacts of rising unemployment on businesses
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.
What is inflation?
Sustained increase in the average price level in the economy. This causes a fall in the value of money
What is real data?
Data that takes inflation into account, removing its effects
Impact of increased inflation rate on businesses
- 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
