Section 1 - Business Activity Flashcards
Want
A good or service which people like to have, but which is not essential for living
Need
A good or service essential for living
Scarcity
When there exists more wants than resources to produce the goods or services to satisfy the wants.
Factors of production
Resources needed to produce goods or services. Land (natural resources), labour (people), capital (finance, equipment), enterprise (entrepreneur).
Opportunity cost
The next best alternative given up by choosing another item
Specialisation
Occurs when people and businesses concentrate on what they are best at.
Division of labour
When the production process is split up into different tasks and each worker performs one of these tasks. It is a form of specialisation.
+increased efficiency +eliminate waste of time -unmotivated employees -all workers must be present
Business
Combines factors of production to make goods or services which satisfy people’s wants
Added value
The difference between the selling price of a product and the cost of bought in materials and components
Primary sector
The primary sector of industry extracts and uses the natural resources of the earth to produce raw materials used by other businesses.
Secondary sector
The secondary sector of industry manufactures goods using the raw materials provided by the primary sector
Tertiary sector
The tertiary sector of industry provides services to consumers and the other sectors of industry
De-industrialisation
Occurs when there is a decline in the importance of the secondary, manufacturing sector of industry
Private sector
Businesses not owned by the government
Public sector
Government- or state-owned and controlled businesses and organisations
Mixed economy
A mixed economy has both a private sector and a public (state) sector
Capital
Money invested into the business by the owners
Privatisation
When a public sector business is sold by the government to a private sector business
Entrepreneur
A person who organises, operates and take the risk for a new business venture.
Advantages of being an entrpreneur
Independence, ability to utilise personal skills, fame and success, chance of higher income, ability to carry out ideas
Disadvantages of being an entrepreneur
Risk, capital, lack of knowledge, opportunity cost
Why do governments support business start-ups?
Reduce unemployment, increase competition, increase output, benefit society, the small businesses may grow into big ones!
Business plan
A document containing the business objectives and important details about the operations, finance and owners of the new business.
Capital employed
The total value of capital used in the business
Who would find it useful to compare the size of a business?
Investors, governments, competitors, competitors, workers, banks
How to measure the size of a business
number of employees, value of output, value of sales, value of capital employed.
Advantages and disadvantages of measuring a business with number of employees
+easy to calculate -capital intensive production methods may not give an accurate picture -what do part time workers count as? 0.5 employees?
Advantages and disadvantages of measuring a business with value of output
+common in similar industries -small companies selling expensive products may appear larger than they are
Advantages and disadvantages of measuring a business with value of sales
+used when comparing size of retail businesses -hard to compare businesses selling different products
Advantages and disadvantages of measuring a business with value of capital employed
-Companies using labour intensive production may appear small
Why do businesses want to grow?
higher profits, status and prestige, lower average costs, larger share of market
Internal growth
When a business expands its existing operations
External growth
When a business takes over or merges with another business
Integration
when one business integrates with another one
Merger
when owners of two businesses agree to join their firms together to make one business
Takeover
when one business buys out the owners of another business which then becomes part of the ‘predator’ business. Also called acquisition.
Horizontal integration
When one firms merges with or takes over another one in the same industry at the same stage of production.
+merger reduces competition
+economies of scale
+bigger market share
Vertical integration
when one firm merges with another one in the same industry but at a different stage in production.
Forwards vertical integration: +assured outlet +bigger profit margin +retailer won’t sell competitors products +better information on consumer preferences can be obtained.
Backwards vertical integration: +assured supplier +bigger profit margin
+supplier won’t sell to competitors +controlled costs
Conglomerate integration
when one firm merges with or takes over a firm in a completely different industry. Also called diversification. +Spread of risk +transfer of ideas
What to do if business is too large to control?
operate the business in small units, this is called decentralisation
What to do if business is too large to communicate effectively?
Operate the business in smaller units. Use the latest IT equipment and telecommunications
What to do if expansion is too expensive
Expand more slowly. Ensure sufficient long-term finance is available
Integrating with another business more difficult than expected
Improve communication and be more understanding
Why do businesses want to stay small?
Type of industry (eg very specialised services), market size (not a lot of customers), owners’ objectives (preference!)
Why do businesses fail?
Poor management (lack of experience/bad decisions), failure to plan for change (new technology, trends and competitors require constant evolving), poor financial management (lack of liquidity), over expansion (when a business expands too quickly, diseconomies of scale), risks of new business start-ups (inadequate research, poor planning, lack of finance, lack of experience)
Sole trader
An enterprise made of one person (unlimited liability)
+Easy to start +get to keep all profits +complete control
-long hours -lack of specialisation -unlimited liability
Partnership (unlimited liability)
An enterprise owned by 2-20 people
+Spread of risk +more skills
-disagreements
Limited companies
An enterprise owned by shareholders. There are two types: private (ltd) and public (plc)
+Limited liability +easy to raise finance +tend to be large/well recognizes
-More regulations -more tax
Franchise
a sole trader pays an existing business to use their name and sell their product
+88% of franchises are profitable +support from franchisor +already well known
-you have to pay royalties -high start-up fee -lack of autonomy
Cooperatives
enterprises owned by the workers
+high employee motivation
-slow decision making -lack of enterprise skills
Joint venture
Two or more businesses agree to start a project together, sharing risks, capital and profti
+Local knowledge +shared costs +shared risks
-shared profits -disagreements -different business cultures
Limited liability
the liability of the shareholders is only limited to the amount they invested
Unlimited liability
owners of business can be held responsible for the debts of the business they own. Their liability is not limited to the investment they made in the business
Unincorporated business
a business that does not have a separate legal identity. eg sole trader or partnership
Incorporated business
companies hat have separate legal statuses from their owners
Annual general meeting
A legal requirement for all companies. Shareholders may attend and vote on who they want to be on the Board of Directors for the coming year.
Public limited company advantages and disadvantages
+limited liability +incorporated business +ability to raise very large capital sums +no restriction on buying/selling/transfer of shares +high status
-lots of legal formalities -many more regulations/controls -selling shares to the public is expensive -original owners may lose control
Dividends
payments made to the shareholders from the profits (after tax) of a company. They are the return to the shareholders for investing in the business.
Advantages and disadvantages to public corporations
+Ensures that every receives goods or services +no monopolies +save a failing business/ secure jobs -no profit motivation -managers may be inefficient due to government subsidies -lack of incentive to increase consumer choice -used politically
Business objectives
Aims or targets that a business works towards
+give employees/managers a clear target +more focused decisions +united business efforts +easy to measure progress
profit
the total income of a business (sales revenue) minus costs
What are some business objectives
Survival (for when a business is just set up), profit (owners want money!), returns to shareholders (discourages shareholders from selling their shares), growth (secure jobs, increase salaries, increase oppurtunites, higher market share, economies of scale), market share (good publicity, increased influence over suppliers and customers), provide a service to society (social, environmental, financial)
Market share
the proportion of total market sales achieved by one business
Market share% =Company sales / Total market sales * 100
Social enterprise
a social enterprise has social objectives as well as an aim to make a profit and reinvest back into the business
Stakeholder
any person or group with a direct interest in the performance and activities of a business
How are owners affected by business acitivity?
They put in capital; take a share of profits; risk taker
>growth of business, increase of value of investment
>share of profits
How are workers affected by business acitivity?
employed by business, must follow instruction, on contract, they may have to be made redundant >regular payment for work >contract of employment >job security >life satisfaction and motivation
How are manager affected by business acitivity?
employed by business; make important decisions; lots of responsibility
>high salaries
>job security
>growth of business
How are customers affected by business acitivity?
Important to business; important to do market research
>a good product or service
>a good value
How is the government affected by business acitivity?
responsible for economy; pass laws
>want businesses to succeed for more jobs and bigger economy
>expect firms to stay within the law
How are banks affected by business acitivity?
Provide finance
>expect businesses to pay back interest
What is conflict of stakeholders’ objectives?
When stakeholders of a business all have different objectives which may contradict each other. eg parking lot owner wants to expand business but the local community hates parking lots
