1.2 Enterprise, Business and the Economy

Question 1

What is dynamic innovation?

Answer 1

New tech
New products
New jobs
Competitor's sales fall
Jobs are lost
Standards of living rise due to innovation

ST: Negative LT: Positive

Question 2

What’s creative destruction?

Answer 2

Some businesses innovate in order to produce new, cheaper products with wide market appeal.

Question 3

What’s an entrepreneur?

Answer 3

Someone who organises a business venture and is responsible for the risks involved.

Question 4

What’s added value?

Answer 4

The difference between the price of the finished good/service and the cost of the materials needed to make it.

Question 5

What are the factors of production?

Answer 5

CELL - Capital, enterprise, land and labour

Question 6

What’s profit?

Answer 6

The difference between sales revenue and costs.

Question 7

Why do people need profit?

Answer 7

Make money

Improve their lifestyle

Question 8

Why do people continue in business even when they’re rich?

Answer 8

The need to produce a good/service for others to enjoy
Ethical stance
Social enterprise
Independence - not work for anyone/at home

Question 9

What’s the division of labour?

Answer 9

Individuals specialising in one area, they’re usually very good at it

Question 10

Advantages of the division of labour?

Answer 10

Productive
Profitable
Better quality

Question 11

Disadvantages of the division of labour?

Answer 11

Boring
Low motivation
May lead to a low productivity

Question 12

What’s specialisation?

Answer 12

The way people and organisation concentrate on a specific field as they have an advantage in that field.
E.g. bananas in Brazil

Question 13

What’s an interest rate?

Answer 13

The price of borrowed money. They vary depending on the level of risk involved.

Question 14

What is the interest rate based on and who is it set by?

Answer 14

The base rate, set by the Monetary Policy Committee (MPC)

Question 15

If the interest rate increases who does it affect and how?

Answer 15

Businesses - Less loans, less investment, fewer start up businesses, falling demand for products

Consumers - Less loans, less credit card spending, less disposable income as more is going on mortgages, lower standards of living

Question 16

If the interest rate decreases who does it affect and how?

Answer 16

Businesses- More investment, expansion, new businesses, higher demand.

Consumers - Consumer spending increases, more loans/credit cards, more disposable income from lower mortgages, higher standard of living

Question 17

What’s an exchange rate?

Answer 17

The price of one currency expressed in terms of another

Question 18

What is an appreciation?

Answer 18

The pound can now buy more ‘dollars’ than it could before.

before: £1 -> $1.75
after: £1 -> $2

Question 19

What’s a depreciation?

Answer 19

The pound can now buy less ‘dollars’ than it could before.

before: £1 -> $1.75
after: £1 -> $1.20

Question 20

What do exporting businesses want the pound to do?

Answer 20

Depreciate

Cheaper exports (more competitive)

Question 21

What do importing businesses want the pound to do?

Answer 21

Appreciate

Imports are cheap

Question 22

What’s the difference between direct and indirect taxation?

Answer 22

Direct is directly targeted to the consumer through a bill on their earnings such as NI, corporation tax or tax on earnings. Indirect is placed on goods and services such as cars or alcohol.

Question 23

Why does increased direct, indirect and corporation tax affect businesses negatively?

Answer 23

Direct taxes - reduce their customer’s disposable income so the demand for their product falls

Indirect tax - reduce the demand for their products also as it costs more to the consumer, especially if it’s business that sells alcohol or fuel as they change increases taxes a lot

Corporation tax - taxes the profits of a business. reduces the businesses profits. it may deter foreign companies locating here if too high.

Question 24

Define unemployment

Answer 24

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

Doesn’t include students, the retired or those ill

Question 25

How does a high level of unemployment affect businesses?

Answer 25

Inferior good businesses - positively, as people choose to shop for cheaper alternatives.

Luxury businesses - negatively, as there is a lower demand as consumers have lower disposable income.
(However, those in work may get a pay rise as there are less salaries to pay out)

Businesses in general - Wage rate isn’t likely to rise as there is already competition for jobs
Easier to recruit as there are more unemployed people to choose from.

Question 26

Define inflation

Answer 26

A sustained increase in the average price level in the economy, there is a fall in the value of money

Question 27

How is inflation measured?

Answer 27

The percentage change in the level of prices.

Question 28

What’s a sustained fall in the price level in the economy

Answer 28

Deflation

Question 29

What is the government’s target rate of inflation?

Answer 29

2%

Question 30

Who controls the rate of inflation?

Answer 30

The Monetary Policy Committee (MPC) adjusts the base rate of interest which has a knock-on effect to the average consumer’s spending and thus the value of money

Question 31

What does real data mean?

Answer 31

Data that has taken inflation into account. An accurate telling of consumer’s current financial situations

Question 32

How does a rising inflation rate affect businesses?

Answer 32

Wages and supplies are more expensive
Low profitability
UNLESS the increase prices
BUT this may lead to a lower demand

Consumers may have lower disposable income as pay may not rise, lower demand for a business’ products

Higher prices means less competitive advantage and less exports

Consumers may choose to import from other countries with lower rates of inflation

In order to try and reduce inflation interest rates are risen which causes less demand as consumers have lower disposable income and less investment from businesses