Module 1 - Understanding Business Activity Flashcards
Needs
goods or services that we need in order to live
Wants
goods or services which people would like to have but are not essential for living
The basic economic problem is ________ due to unlimited _____ but limited _________
scarcity, wants, resources
Scarcity
there are not enough products to fulfill the wants of the population
Resources (factors of production) - there are 4
Land, labour, capital and enterprise
Land
any natural resource used in production
Labour
mental and physical efforts of a human
Capital
man-made goods used in production
Enterprise
the risk-taking ability of an entrepreneur
Opportunity cost
the next best alternative given up by choosing another item
Specialisation
when people and businesses focus on what they are best at
Division of labour is …
when production is split in different tasks and each worker performs one of these tasks
Advantages of specialisation (4)
workers specialized in certain task, increases efficiency
less time is wasted from one workbench to another, more efficiency
increased efficiency and so output and may lead to economies of scale
workers become more skilled and experienced reducing mistakes
Disadvantages of specialisation (3)
bored workers may lead to decreased efficiency
if a worker is absent, others can’t do their work, decreased efficiency
employees rely on each other for production, productivity may fall
Purposes of business activity (2)
combine scarce factors of production to produce goods or services to satisfy people’s wants
employs people as workers and pays them wages to allow them to consume products
Added value
the difference between the selling price and the cost of bought-in raw materials and components
ADDED VALUE = SELLING PRICE - TOTAL COST
Added value is not the same as ______ because added value doesn’t include the cost of labour, transport, etc.
profit
Ways to increase added value (put simply)
increase selling price / decrease cost of materials / increase the worth of the product or service being produced (eg. brand image, features, packaging, quality, etc.)
3 sectors of business
Primary, secondary and tertiary
Primary sector
extraction of natural resources
eg. farming, fishing
Secondary sector
manufacturing and production of goods
eg. car manufacturer
Tertiary sector
provides services
eg. hairdressing, banking
The relative importance of business sectors in an economy depends on 2 things:
the number of workers employed
value of output produced
Deindustrialisation occurs when …
there is a decline in the importance of the secondary sector of business
Causes of deindustrialisation (3)
depletion of primary resources in home country
cheaper goods by developing countries
ability to spend more income on services
Mixed economies have both a _______ ______ and a ______ ______
private sector, public sector
Private sector
businesses NOT owned by the government - will make own decisions on what and how to produce; the main aim is to make profit
Public sector
businesses owned by the government - the government will decide what and how to produce; the main aim is to offer a service to customers (eg. healthcare, education, public transport, defence)
Privatization
the selling of a public sector business to the private sector
Privatization may occur as _______ ______ is more _________, ___________ and will be able to make good quality goods leading to higher profits
private sector, efficient, competitive
A downside of privatization is that _______ sector businesses do not have ______ objectives, making their products ____________
private, social, unaffordable
Entrepreneur
a person who organises, operates and takes risk to make the business better
Characteristics of entrepreneurs (8)
Hard working, Risk Takers, Creative, Effective Communicators, Optimistic, Self-confident, Innovative, Independent
Advantages of being an entrepreneur (5)
Independent - able to choose how to use time and employment
Able to put own ideas into practice
May become successful and very profitable if business grows
Able to make use of personal interests and skills
Profits to themselves - no need to share them with anyone
Disadvantages of being an entrepreneur (5)
Expensive - have to invest their own savings into the business
Time consuming - searching for other sources of finance
Risky - many entrepreneurs’ businesses fail
Lack of knowledge and experience in starting and operating a business
Opportunity cost - not being paid to work for another business
Who needs to know the size of the business? (5)
Investors, government, competitors, workers and bank
Business plan
contains business objectives, important details about the operations, finance, and the owners
Ways business plans assist entrepreneurs (2)
It helps gain finance - banks will ask for a business plan before agreeing to a loan or overdraft for the business
It forces the entrepreneur to plan ahead carefully - reduces the risk of the business failing
Reasons why governments support business start-ups (4)
Reduce unemployment - new businesses create jobs
Increase competition - gives consumers more choice
Increase output - economy benefits from increased output
Can grow further and become large and important businesses - pay government more taxes
Ways governments support entrepreneurs (4)
Business ideas and help - trainings by experienced business people
Finance - loans with low interest rates or grants
Allow entrepreneurs the use of research facilities
Provide grants to train employees to increase efficiency/productivity
Measurements of business size (4)
Number of people employed
Value of output
Value of sales
Capital employed
Limitation of measuring business size by number of people employed
Some businesses employ few people but produce high output values
Limitation of measuring business size by value of output
High level of output does not mean business is big
Limitation of measuring business size by value of sales
Different businesses sell different products (expensive and cheap)
Limitation of measuring business size by capital employed
Some companies may use cheap labor giving high output with low-cost equipment
Reasons for business growth (4)
Higher profits
More status for owners and managers
Can benefit from Economies of Scale (lower costs)
Larger share of its market, ‘big names’
2 categories of business growth
Internal and external
Internal growth
when the business expands its existing operations
External growth
when the business takes over or merges with another business
3 types of external growth
Horizontal integration, vertical integration, conglomerate merger`
Horizontal integration (define + 2 benefits + 2 problems)
firm taking over/merging with another firm in the same industry
Benefits: economies of scale, higher market share
Problems: diseconomies of scale, difficulty controlling/managing
Vertical integration (define + 2 benefits)
firm taking over/merging with another firm in same industry but different stage of production (forwards or backwards)
Benefits: profits by supplier/retailer are absorbed and personal attention is given
Conglomerate merger (define + 2 benefits)
firm merging/taking over another firm in a different industry
Benefits: spread of risks and transfer of ideas
