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Economics Theme 1 (Markets, Consumers & Firms) > 1.2 (Enterprise, Business & The Economy) > Flashcards

1.2 (Enterprise, Business & The Economy) Flashcards

1
Q

1.2.1 What is an entrepreneur? (e.gs?)

+ what is the difference between uncertainty & risk?

A

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.

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2
Q

What is creative destruction?

+ what does this lead to?

A

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

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3
Q

Examples of creative destruction

+ what is a catalyst of creative destruction?

A

newspapers vs online media
CDs vs records

+ the internet

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4
Q

Who created the phrase creative destruction & when?

+ example of a company who encourages this

A

Joseph Schumpeter in 1949

+ Google gives its employees 20% of their time to explore their areas of interest. This encourages internal entrepreneurship and innovation.

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5
Q

What is adding value?

+ how is this done?

A

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

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6
Q

1.2.2 What are the two types of entrepreneurial motives?

+ what are examples of each?

A

1) financial & 2) non financial

financial= profit

non financial=
+ ethical stance
+ social entrepreneurship
+ independence
+ home working

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7
Q

What is profit?

+ what does it act as?

A

the financial benefit realized when revenue generated from a business activity exceeds the costs involved

+ an incentive & a signal to enter a market

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8
Q

What is social entrepreneurship?

+ what is philanthropy?

A

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

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9
Q

1.2.3 What are factors of production?

A

The inputs needed for creating a good or service

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10
Q

Name the 4 factors of production

+ are they active or passive?

A

Enterprise
Capital (P)
Land (P)
Labour (A)

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11
Q

What is enterprise?

+reward

A

-The process of launching and running a business.
- Management of the other FOP to combine them into a product or service.

+ profits

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12
Q

What is land? (e.g?)

+reward

A

Natural resources available for production (e.g premises and raw materials)

+ rental income to owners of the land

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13
Q

How is the use of land maximised?

A

Using technology

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14
Q

What is labour? (+e.g)

+reward

A

The human input into the production process (managers and employees)

+ wages and salaries from employment

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15
Q

What is capital? (+e.g)

+ reward

A

Goods used in the supply of other products (e.g equipment)
- an investment

+ interest from savings and dividends from shares

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16
Q

What are the two types of capital?

A

Physical = tangible assets
Financial = legal ownership of assets/money

(Financial is used to buy physical)

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17
Q

What is human capital?

+what is this represented by?
+ how can this be improved?

A

The economic value of a worker’s experience and skills

+labour
+ through training and education

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18
Q

What is primary production?

A

Extracting resources from the earth

19
Q

1.2.4 What is specialisation?

+ what is division of labour?

A

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

20
Q

Who coined the term specialisation?

+ what did he say this led to

A

Adam Smith in his book The Wealth of Nations

+ society as a whole would benefit from higher incomes & standards of living

21
Q

What is geographic-specialisation?

+ Why do people specialise?

A

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.

22
Q

Example of division of labour

A

Henry Ford creating the assembly line to mass produce cars. This allowed him to sell them for a lower price.

23
Q

Advantages of division of labour

A

+ 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

24
Q

Disadvantages of division of labour

A
  • 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
25
Q

1.2.5 Why was money developed?

+ What is the base rate?

A

as a ‘Medium of Exchange’ to make buying and selling easier

+ the interest rate set by the Bank of England

26
Q

What are interest rates?

+ Why are interest rates important for businesses?

A

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

27
Q

Factors which affect how much a loan costs

+ what is a secure loan?

A
  • how long money is borrowed for
  • how much money is borrowed
  • whether secured or unsecured
  • interest rate charged

+ a loan backed by collateral

28
Q

What does money supply consist of?

A
  • notes and coins in circulation
  • bank deposits are money
  • cards and cheques are not money only a means of transferring it
29
Q

Why do companies borrow money?

+ what are fixed and variable interest rates?

A

+ 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

30
Q

What are the impacts of interest rates changing?

A
  • 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
31
Q

What will happen for businesses if interest rates are lowered?

+ and if they are raised?
(are all businesses affected the same by this?)

A
  • 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)

32
Q

What are taxes and why are they needed?

+ what does an increase in taxation mean for consumers and also for businesses?

A

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

33
Q

What is direct tax?

+ examples of direct taxation?

A

Imposed on income and paid directly to the government

+ income tax
+ National Insurance
+ corporation tax
+ capital gains tax

34
Q

What is indirect tax?

+ examples of indirect tax and which goods/services they would apply to?

A

Taxation on spending & collected by Customs & Excise

+ VAT (general goods)
+ Excise duty (cigarettes & alcohol)
+ Airport tax (flights)

35
Q

What is inflation?

+ how is it calculated?

(what does high inflation mean?)

A

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)

36
Q

What is the impact of inflation?

A
  • uncertainty for businesses
  • rising production costs
  • reducing demand
  • workers strive for wage increases
  • redistributive effects & altered consumer spending patterns
  • reduced competitiveness w other countries
37
Q

What happens to consumers if unemployment increases?

+ and for businesses?

A

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

38
Q

1.2.6 What are exchange rates?

What does the anagram SPICED mean?

+ what does this mean for firms?

A

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

39
Q

What are the 6 factors that influence exchange rates?

A

Inflation
Interest rates
Speculators
Relative strength of other currencies
Government debts
Economic growth/recession

40
Q

How does _____influence exchange rates?

1) inflation
2) interest rates
3) speculators

A

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

41
Q

How does___ influence exchange rates?

4) relative strength of other currencies
5) government debt
6) economic growth/recession

A

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

42
Q

What is the forex market?

+ in this market what are demand and supply?

A
  • 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)

43
Q

What is hot money?

A

Flow of funds from financial institutions all over the world that chase returns (interest)

Economics Theme 1 (Markets, Consumers & Firms) (5 decks)

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