Chapter 1 Flashcards
Who do businesses sell too?
Customers
What are goods ?
Physical item likes books or furniture
What is a service ?
Actions performed by other people to aid customer eg. Barbers and plumbers
What are needs ?
Products or service somebody cannot live without
What is a want?
A good or service that a person can survive without.
Why would a person set up a business?
- think they can provide a good or service
- see a business opportunity
- distributes good , have supplier
- set up to benefit other people
What is the primary sector?
- Produces raw material which are used to make goods or services
- can be extracted from the ground (mining)
- can be grown, for example farming
- can be collected , for example fishing
What is the secondary sector ?
- manufactures goods, turn raw materials into finished goods
- building and construction industries are also secondary sector
What is the tertiary sector?
- provides services
- firms provide services for consumers, like hairdressers, shops and restaurants
- some firms provide services for other businesses , like warehousing and advertising
- financial services like banking and insurance
What is enterprise?
- enterprise involves identifying new business opportunities and taking advantage of them
- enterprise involves starting a new business or helping an existing one expand with new ideas
- entrepreneur takes the risk
What is always there when starting a business?
Risk and potential failure, but the rewards is profit
Why might someone become an entrepreneur?
- financial reasons
- identifying a gap in the market
- independence, being own boss , working flexible hours
- dissatisfied with current job
What qualities must an entrepreneur have?
- hardworking
- organised
- innovative
- willingness to take risks
What are the four factors of production?
Land
Labour
Capital
Enterpise
What is land as a factor of production?
- territory and all of earths natural resources
- non renewable resources such as gas , oil and coal
- renewable resources like wind or tidal power
- material from mining
- water
- animals found in area
- all of these are scarce resources , cant satisfy demand of everyone
What is labour as a factor of production?
- the work done by people who contribute to the production process
- education, experience and training effect labour
What is capital as a factor of production
-equipment , factories and school that help produce goods or services
What is enterprise as a factor of production?
Refers to the people who take risks and create things
What is opportunity costs?
Benefit thats given up in order to do something else, the cost of the choice thats made. Businesses must adapt to put scarce resources in the right places
What are sole traders ?
- one owner
- most small businesses are sole traders
Advantages of being a sole trader?
- easy to set up
- get to be own boss
- decide what happens to profit
Disadvantages of a sole trader?
- might have to work longer hours
- unlimited liability
- unincorporated
- hard to raise money
What is unlimited liability?
You are liable for all money owed by the business
What does unincorporated mean?
Business doesn’t have its own legal structure , so if anyone sues the business they are suing the owner
What is a partnership ?
- between 2 -20 people starting business
- each partner has equal say and equal share of profit , unless they have a deed of partnership that says different
Advantages of partnerships ?
- more owners means more ideas and a greater range of skills and expertise
- more people can share work
- more owners means more capital can be put into the business , so it can grow faster
Disadvantages of partnerships ?
- each partner is legally responsible for what all the other partners do -unlimited liability -more owners means more disagreement -profits are shared between partners
What is a limited company ?
- can be private or public
- incorporated, separate legal identity from owners. Companies name is liable for money , property and tax
- limited liability
- shareholders own company
What is limited liability?
If anything goes wrong the company is liable not the owners
What is a private limited company ?
- shares are owned by shareholders and can only be sold if all shareholders agree
- have Ltd in there name
- sell up to 50 shares
Advantages of private limited companies ?
- limited liability
- incorporated, continue if shareholders died
- easier to get loan or mortgage
- owners have lots of controls as all shareholders have to agree to sell shares
Disadvantages of a private limited company?
- more expensive to set up than partnerships because of all the legal paperwork
- legally obliged to publish accounts every year (doesn’t have to be public )
What is a public limited company?
Companies shares are sold on the stock exchange.
Plc after name
Advantages of public limited companies ?
- much more capital can be raised
- helps company expand and diversify
- limited liability and incorporated
Disadvantages of public limited companies ?
- hard to get shareholders to agree how to run the business
- easy to buy shares, shareholders have lack of control and could be taken over.
- accounts have to be made public
- more shareholders means more profit sold
How to choose a business structure
- small businesses tend to have unlimited liability while larger businesses have limited liability
- if you want more control , Ltds and sole traders are easier to control than plc and partnerhsips
Can you change the structure of business ?
Yes
What happens usually if a business grows ?
Sole trader or partnership may decide to change to a limited company
What is a not for profit business?
- owners dont make a profit and the main goal is not profit
- they still need to be able to cover costs though but surplus cash is put into projects
- many have charitable status , get tax relief. Get donations. social entreprises
- can be hard to manage, due to financial uncertainty so most workers are volunteers
What is a social enterprise ?
-make money by selling products , but use profits to better society
What legal structures do not for profit businesses have?
- can be unincorporated. Have unlimited liability and easy to set
- bigger organisations tend to be incorporated so people running have limited liability
What aims do businesses have?
- growth
- increase market share
- survival
- maximise profit
- increase shareholder value
- Achieve customer satisfaction
- do what is right socially
What are objectives?
A specific aim, can be used to measure a firms success and are targets for a business
What should objectives be?
Smart Measurable Achievable Realistic Time
How does the size of the business effect the objectives?
- smaller businesses probably depend on word of mouth to survive so an objective would be customer satisfaction . Also growth and survival would be important
- larger businesses get more attention so may try to act ethically
How the level of competition effects the objectives ?
In a highly competitive market , you might focus on customer satisfaction to give an edge or to gain a greater market share.
Firms not facing much competition will want to grow or make a profit
How the type of business effects the objectives?
-not for profit will have different objectives to a normal business
How new legislation will effect a businesses objectives?
Companies may need to adjust objectives if laws are introduced. For example living wage.
How change sin the economy effect objectives ?
-recession, companies growth may be put on hold
Changes in technology, how it changes objectives?
Keep up to date with technology , to stay with competitors , change objectives so staff can use equipment
How environmental expectations affects the businesses objectives?
Adapt ethical policy
How a business can use objectives to measure success?
- once they have set objectives they can check if they have met them.
- for example you could measure the business by it profit.
What is a stakeholder?
Anyone effected by the business
Do stakeholders all want the business to achieve in the same way?
No , the stakeholders will have different opinions and different objectives for the firm
How the owners of a business are a stakeholder?
- most important stakeholder
- make a profit if business is successful
- in a ltd company the share holders are the owners. They will be looking for high dividends and high share prices
How employees are stakeholders?
- interested in job security and promotions. Improved if the firm grows
- want a decent wage and good working conditions, objectives are ethics , growth , profit
How the local community are stakeholders ?
- will suffer from noise and pollution
- may gain good jobs and money for local activities
- local economy may improve
- main objectives are environmental impacts , ethics , profit and growth
How are the suppliers stakeholders?
- firm buys raw materials from suppliers.
- if a firms profit increases more materials will be needed which will be good for the supplier
- suppliers benefit most from profit , growth
How the government is a stakeholder?
- receive taxes if the firm makes profit
- may benefit from profit , growth or job creation
How the customers are stakeholders ?
- want high quality products for low prices
- benefit when objectives are based on customer satisfaction
How to work out revenue ?
Sales x price
How stakeholders effect the business?
- owners make decisions , most influential
- need to consider interests of other stakeholders when setting objectives
- stakeholders will often have conflicting opinions
- stakeholders will often be ignored
Most important stakeholder for a business?
Customers
Why the workers are important stakeholders?
If not happy may be unproductive
Stakeholders that can be ignored?
Local community if selling products elsewhere
What is revenue
Income earned by a business
What is equal to total costs ?
Variable costs +fixed costs
What are fixed costs ?
Fixed costs dont vary with output. They have to be paid even if a firm produces nothing. Examples , rent , insurance and fixed salaries. Only fixed for a short period of time, expanding firms foxed costs will go up.
What are variable costs ?
Costs that will increase as firm expands output. Example, factory labour, raw materials , running machinery.
How to work out average unit cost ?
Total costs/output
What is the average unit costs ?
-how much each product costs to make
How to work out profit ?
Revenue - costs
What is a business plan?
Outline of what a business wants to do and how to do it
What should everyone do before starting a business?
Make a business plan
Why business plans are useful?
- if a firm wants to make big changes
- forces owner to think carefully and helps them organise and find out what resources
- can convince banks
- if business is bad idea , you will see it earlier .
What sections are on a business plan?
- personal details
- mission statement
- objectives
- product description
- production details
- staffing requirements
- finance
Drawbacks of a business plan ?
- writing one can take lots of time and money
- being too optimistic may end up with problems in the end
- managers may stick too tightly to the plan
What to take in mind when choosing the locations of a business?
- location of raw materials
- locations of market
- labour supply
- competition
- cost
Why the locations of raw materials should be taken into account when choosing a location for the business?
-raw materials being near locations will decrease transport costs
Why labour supply is important when choosing a location?
- close to an area of high unemployment , this will keep wages low
- also good selection of people to choose from
- close to quality places that provide training lie colleges
Why competition is important when deciding the location of a business ?
- being near competitors could be an advantages as it is easy to find skilled labour , already local suppliers and customers will know where to come
- other businesses may want to stay away from competitors to maintain sales
Why location of market is important when deciding the location?
- some firms pay more to transport finished products than raw materials, far from customers
- services locate where people can find them
- firms sell products across the world may set up production sites in other countries
Why the cost is important when deciding the location?
- cost of labour varies per country. India and china have low wages
- some areas will have more expensive property prices
- government can give tax breaks and grants to firms who locate in specific areas
What is internal expansion?
Organic growth , when a business grows by expanding its own activities
Why internal expansion is good?
- relatively inexpensive, firm carries on doing what it is good at
- easier to make sure quality is maintained and new staff are well trained
Disadvantages of internal growth ?
-can take a long time
E-commerce as a Method of internal growth?
- sell via the internet
- larger market access to greater number of people
- cheaper than setting up and running new store
- technology has to be regularly updated and fixed
Opening new stores , as a method of internal expansion?
- low risk
- lots of extra costs , rent, wages
Outsourcing , as a method of internal expansion?
- business could pay another firm to do a task for them that they could do(outsourcing)
- outsourcing firm may be able to do tasks more quickly , cheaply or to high standard
- business does lose control and could get a bad reputation
What is franchising?
Where a company expands by giving other firms the right to sell its product and use trademarks, in return for a fee or a percentage of profit.
Who are the franchisors ?
Product manufacturers
Who are the franchisees ?
Firm selling product
What is external expansion ?
Expanding by working with other businesses
What is a merger?
When two firms join together to form a new larger firm
What is a take over?
When an existing firm expands by buying more than half the shares of another firm
Why external expansion is good?
Firms can grow much more quickly
Four ways a firm can merge or takeover ?
- firm joins with a supplier. Allows the firm to control supply, cost and quality of raw materials
- firm joins or takes over a competitor. Creates more economies of scale and a greater market share
- two un related firms join together. Firm will expand by diversifying into new markets, no over reliance on one product or market
Are mergers and takeovers usually successful?
- less than half are successful. Difficult to get 2 businesses to work as 1. Management style differs , employees culture will be different.
- takeovers usually are hostile and unpopular , which can create a bad feeling
- mergers and takeovers usually lead to cost cutting , people made redundant.
What is economies of scale?
Being a larger firm means that the average unit cost of each product falls, the reduction of costs is called the economies of scale.
What is purchasing economies of scale?
When a large firm buy its supplies in bulk and so gets them at a cheaper unit price than a small firm
What is technical economies of scale ?
- occur because larger firms can afford to buy and operate more advanced machinery than smaller firms
- also law of increased dimensions means that for example a facotry thats ten times as big will be less than ten times expensive
Advantages of economies of scale?
- lower average unit cost , more profit
- also lower average unit costs means larger firms can afford to charge customers less for products than smaller firms can. So customers will be more likely to buy their products , leading to increased sales and profits
- business can expand as can reinvest profits.
What is diseconomies of scale ?
Where large firms average unit cost per product increases
How diseconomies of scale can come about ?
- bigger the firm , the harder and more expensive it is to run properly
- big firms make communication harder, so decisions can take time to reach everybody. This can demotivate workers, they feel insignificant.
- production processes may become more complex and difficult to coordinate
