1.2 (Enterprise, Business & The Economy) Flashcards
1.2.1 What is an entrepreneur? (e.gs?)
+ what is the difference between uncertainty & risk?
A person who sets up a business or businesses taking on financial risks in the hope of profit (Richard Branson & Anita Roddick)
+ risk means you know the range if possible outcomes and you can assess the probability of each. But with uncertainty you can’t guess this.
What is creative destruction?
+ what does this lead to?
the process of economic change that results from the introduction of new technologies or products that render existing ones obsolete
+ every archaic business model will depreciate in value and lose market leverage ultimately disappearing
Examples of creative destruction
+ what is a catalyst of creative destruction?
newspapers vs online media
CDs vs records
+ the internet
Who created the phrase creative destruction & when?
+ example of a company who encourages this
Joseph Schumpeter in 1949
+ Google gives its employees 20% of their time to explore their areas of interest. This encourages internal entrepreneurship and innovation.
What is adding value?
+ how is this done?
the difference between what a business pays its suppliers and the price that it is able to charge for the product/service
+ adding extras in the manufacturing process or by tacking on extra products/services
1.2.2 What are the two types of entrepreneurial motives?
+ what are examples of each?
1) financial & 2) non financial
financial= profit
non financial=
+ ethical stance
+ social entrepreneurship
+ independence
+ home working
What is profit?
+ what does it act as?
the financial benefit realized when revenue generated from a business activity exceeds the costs involved
+ an incentive & a signal to enter a market
What is social entrepreneurship?
+ what is philanthropy?
an approach by individuals, groups, start-ups or entrepreneurs in which they develop, fund & implement solutions to social, cultural or environmental issues
+ doing charitable things to make a long lasting impact
1.2.3 What are factors of production?
The inputs needed for creating a good or service
Name the 4 factors of production
+ are they active or passive?
Enterprise
Capital (P)
Land (P)
Labour (A)
What is enterprise?
+reward
-The process of launching and running a business.
- Management of the other FOP to combine them into a product or service.
+ profits
What is land? (e.g?)
+reward
Natural resources available for production (e.g premises and raw materials)
+ rental income to owners of the land
How is the use of land maximised?
Using technology
What is labour? (+e.g)
+reward
The human input into the production process (managers and employees)
+ wages and salaries from employment
What is capital? (+e.g)
+ reward
Goods used in the supply of other products (e.g equipment)
- an investment
+ interest from savings and dividends from shares
What are the two types of capital?
Physical = tangible assets
Financial = legal ownership of assets/money
(Financial is used to buy physical)
What is human capital?
+what is this represented by?
+ how can this be improved?
The economic value of a worker’s experience and skills
+labour
+ through training and education
What is primary production?
Extracting resources from the earth
1.2.4 What is specialisation?
+ what is division of labour?
process by which individuals, firms and economies concentrate on producing those goods & services in which they have an advantage
+ assignment of different parts of a manufacturing process or task to different people in order to improve efficiency
Who coined the term specialisation?
+ what did he say this led to
Adam Smith in his book The Wealth of Nations
+ society as a whole would benefit from higher incomes & standards of living
What is geographic-specialisation?
+ Why do people specialise?
When regions and countries specialist in producing goods & services and then trade with other countries to fill the gaps
As it increases productivity leading to a lower cost per unit. This means a lower price can be charged and more can be sold.
Example of division of labour
Henry Ford creating the assembly line to mass produce cars. This allowed him to sell them for a lower price.
Advantages of division of labour
+ higher productivity & lower cost per unit
+ aids economic growth & living standards
+more jobs available allowing for specialisation
+ workers should become more skilled over time
+ less time and effort wasted
+ capital machinery can be used continuously during production
+ time and money is saved training workers
+ allows for wage increases
+ lower prices give consumers greater real purchasing power
+ leads to GDP growth
Disadvantages of division of labour
- monotony of work
- possible lower quality of work
- increased staff turnover (increased cost for recruitment)
- chance of structural unemployment
- greater interdependence & higher risk
- doesn’t encourage innovation
- absenteeism increase
- increases administrative expenses
1.2.5 Why was money developed?
+ What is the base rate?
as a ‘Medium of Exchange’ to make buying and selling easier
+ the interest rate set by the Bank of England
What are interest rates?
+ Why are interest rates important for businesses?
the amount you are charged for taking out a loan– shown as a percentage of the total amount of the loan
+ impact in terms of cost of borrowing & impact on demand
+ impact level of of borrowing & investment that a business is willing to undertake
Factors which affect how much a loan costs
+ what is a secure loan?
- how long money is borrowed for
- how much money is borrowed
- whether secured or unsecured
- interest rate charged
+ a loan backed by collateral
What does money supply consist of?
- notes and coins in circulation
- bank deposits are money
- cards and cheques are not money only a means of transferring it
Why do companies borrow money?
+ what are fixed and variable interest rates?
+ to help start up a business
+ to help expand a business (e.g fund merger/takeover)
+ to help cash flow management
+ (F)= interest rate stays same
(V)= interest rate changes
What are the impacts of interest rates changing?
- will decrease profits
- firms may struggle to afford extra interest payable if rates increase
- amount of money borrowed may be too much to afford monthly repayments and business goes bust
What will happen for businesses if interest rates are lowered?
+ and if they are raised?
(are all businesses affected the same by this?)
- business repayments will be less (allows for expansion)
- customers will spend more
(increased profit) - business repayments will be more
- customers will spend less
(decreased profit)
(No, necessities will be less affected and luxury goods bought on credit will be the hardest hit)
What are taxes and why are they needed?
+ what does an increase in taxation mean for consumers and also for businesses?
Mandatory contributions levied on individuals or corporations by a government entity (finance government activities incl public works & services)
+ reduce disposable income & alters demand
+ affects retained profit & may even discourage investment in certain locations
What is direct tax?
+ examples of direct taxation?
Imposed on income and paid directly to the government
+ income tax
+ National Insurance
+ corporation tax
+ capital gains tax
What is indirect tax?
+ examples of indirect tax and which goods/services they would apply to?
Taxation on spending & collected by Customs & Excise
+ VAT (general goods)
+ Excise duty (cigarettes & alcohol)
+ Airport tax (flights)
What is inflation?
+ how is it calculated?
(what does high inflation mean?)
gradual loss of purchasing power that is reflected in a broad rise in prices for goods & services over time
+average price increase of a basket if selected goods & services over one year
(prices are increasing quickly)
What is the impact of inflation?
- uncertainty for businesses
- rising production costs
- reducing demand
- workers strive for wage increases
- redistributive effects & altered consumer spending patterns
- reduced competitiveness w other countries
What happens to consumers if unemployment increases?
+ and for businesses?
1) fall in consumer income
2) fall in consumer confidence
3) reduction in demand
+ wider pool of labour to choose from for recruitment & less upwards pressure on wages
1.2.6 What are exchange rates?
What does the anagram SPICED mean?
+ what does this mean for firms?
the value of one currency for the purpose of conversion to another
Strong Pound Imports Cheaper Exports Dearer
+ firms that import will be able to buy cheaper raw materials & finished goods
+ firms that export will see less demand
What are the 6 factors that influence exchange rates?
Inflation
Interest rates
Speculators
Relative strength of other currencies
Government debts
Economic growth/recession
How does _____influence exchange rates?
1) inflation
2) interest rates
3) speculators
1) + if levels are relatively low here, UK exports will become more competitive, increasing demand for the pound to buy UK goods.
+ foreign goods less competitive so UK people will buy less imports
2) + if higher here more people will deposit money here as it has a higher rate of return
3) + if they believe the pound will rise, they will demand more now to be able to make a profit. increase in demand will cause value to rise
How does___ influence exchange rates?
4) relative strength of other currencies
5) government debt
6) economic growth/recession
4) + money will flow to stronger economies
5) + if markets fear a government may default on its debt, investors will sell their bonds causing a fall in value of exchange rate
6) + recession may cause a depreciation in the exchange rate because during a recession interest rates usually fall
What is the forex market?
+ in this market what are demand and supply?
- The foreign exchange market is where currencies are bought and sold
- exchange rate determined by market forces
+ D= foreign nationals buying pound
S= British nationals selling pound (buying foreign currency)
What is hot money?
Flow of funds from financial institutions all over the world that chase returns (interest)
