Enterprise, Business And The Economy 1.2

Question 1

What is the theory of Creative Destruction?

Answer 1

Proposed by Schumpeter

New entrepreneurs grow more productive than old firms and eventually get forced out

Question 2

Example of creative destruction

Answer 2

DVDs to Blu-Ray to downloading films

Question 3

What is the main incentive for entrepreneurs?

Answer 3

Taking risks for profit

Question 4

How do entrepreneurs make a profit

Answer 4

They do this by bringing together all 4 factors of production:
Land
Labour
Capital
Enterprise

Question 5

Recall two non-financial motives an entrepreneur might have

Answer 5

1. Ethical and social entrepreneurship
2. Independence and working from home

Question 6

Define all 4 factors of production

Answer 6

Land: natural resources such as oil and coal
Labour: human capital
Capital: good used in production process
Enterprise: the innovator and risk taker

Question 7

What is specialisation?

Answer 7

Occurs when each worker completes a specific task in a process to improve efficiency

Question 8

Give benefits and drawbacks of specialisation

Answer 8

B- higher output
B- opportunities for greater economies of scale
D- work becomes monotonous and demotivating
D- give rise to structural unemployment

Question 9

Why would higher interest rates be seen as a disadvantage to firms?

Answer 9

Higher interest rates implies getting a loan is more expensive, raises the cost of production.

Encourages saving.

Question 10

What is the relationship between exchange rates and the level of imports/exports?

Answer 10

Higher exchange rate: imports cheap, exports dear

Low exchange: imports dear: exports cheap

Question 11

How could a high rate of unemployment benefit firms?

Answer 11

Larger supply of labour- bargaining power- reduce wage

Question 12

What could unpredictable inflation imply for firms?

Answer 12

Reduces business confidence, as difficult to predict interest rates, unemployment rates, economic growth etc.
Investment cut down