Section 1 - understanding business activities (Chap 1 - 5) Flashcards
Why do businesses exist
-fame
-profit
-trade/ exchange (buy & sell)
-customer satisfaction
Define economic problem
-people wants are unlimited
-resources are limited; causes scarcity
Define value for money
-product/ service is worth the money
Define needs
-basic things needed for survival
Define wants
-things not needed for survival but for satisfaction
Define demand
-the need to satisfy wants and need
Define scarcity
-lack of sufficient resources to fulfil the total wants of the population
Define opportunity cost
-next best alternative given up by choosing another option
-sacrifice something
-try to make as low as possible
2 types of outputs of business
-physical goods
-service
How do businesses function
-input
-transformation process
-output
What does transformation process need
-factors of production
what are factors of production
-resources needed to produce goods
-land = natural resources
-Labor = people
-Capital = finance, equipment
-Enterprise = people who run the business
What do the Broad of Directors do
-controls business
-decide on major policies
-selects Chief executive officer (CEO)
what does Chief executive officer do (CEO)
-manage day-to-day business
Define specialisaiton
-people & businesses concentrate on what they are best at
-causes division of labor
define businesses
-combination of factors of production to make goods/ services which satisfy customers
define division of labor
-when production process is split into diff tasks for each worker
-form of specialisation
-increases production
advantages of division of labor
-increase efficiency & output
-less time wasted
-quicker and cheaper to train workers (less skills taught)
disadvantages of division of labor
-workers get bored = efficiency might fail
-productions stops if a worker is absent
what does the transformation process do
add value to input
define adding value
-difference btw selling price of a product & cost it is made from)
diff. economic sectors
-Primary
-Secondary
-Tertiary
Define primary sector
-industry that extracts natural resources (raw materials)
define secondary sector
-industry that manufactures raw materials into final products
define tertiary sector
-industry that provides service and distribution of goods
define industralisation
-moving from primary sector to secondary sector
define deindustralisation
-decline in primary & secondary sector
diff. ownership
-Public sector
-Private sector
Public sector:
-who owns
-objective
-funds
-gov.
-provide service to people
-taxes
Private sector:
-who owns
-objective
-funds
-individual owned
-profit
-savings/ loans
diff. economic systems
-Planned economy
-Mixed economy
-Free market economy
Define planned eocnomy
-economy is mostly led by public sector
-eg. health, electricity supply, education
-usually associated with communism
define mixed economy
-economy is led by public and pvt. sector
define free market economy
-economy is led mostly by pvt. sectors
define capital
money invested in business by owners
define enterprise
-actions of a person who takes initiative by taking a risk to start the business
-the business / company itself
define entrepreneur
-person who organizes, operates & takes risks for business opportunities
disadvantages of being an entrepreneur
-risk
-capital
-lack of knowledge
-opportunity cost form being a worker for another business
benefits of being an entrepreneur
-independence for choice
-can implement ideas on business
-may be famous
-may be higher pay than other workers
diff. btw inventor and entrepreneur
-inventor: make product
-entrepreneur: market the product
Define business plan
-doc containing important details of business and objectives created by entrepreneur
Define business idea
-what products/ service business will provide
What does business plan contain
-business description & objectives
-details of product/ services
-target market
revenue forecast
cash flow forecast
-finance
-location & distribution
-organizational structure
-business strategy
how does gov. help support starting businesses
-give loans
-grants businesses to train employees
-organizing training for entrepreneurs
Factors on size of business
-no. worker
-annual sales ( revenue/ turnover)
-capital employed
-value of output
How is no. of employees measured
-capital intensive = machinery & tech. more than worker
-labor intensive = more workers than machinery & tech.
How is annual sales measured
- Quantity sold x selling price
How is capital employed measured
-money used in business
(investments)
How is value of output measured
-how much produced converted into sales
what does profit measure
-efficiency
-not business size
define turnover
total value of sales over a period of time
define capital employed
total money used in business
4 diff business sizes
-micro
-small
-medium
-big
EU standard of micro:
-no. workers
-annual sales
-capital employed
-less than 10
-up to 2 mil
-2 mil
EU standard of small:
-no. workers
-annual sales
-capital employed
-10 - 15
-btw 2- 10 mil
-2 - 10 mil
EU standard of medium:
-no. workers
-annual sales
-capital employed
-51 - 250
-10 - 50 mil
-10 - 34 mil
EU standard of big:
-no. workers
-annual sales
-capital employed
-more then 250
-more then 50 mil
-more than 34 mil
ways for business growth
-internal
-external (vertical, horizontal & coagulometer integration)
define internal business growth
-business expands its existing operations
Ways for internal growth
-more products/ services
-expand branches
define external business growth (integration)
-business expands by taking over or merging with another business
define merging business
-2 businesses are combined mutually
define take over (acquisition)
-a business is bought over to be part of the business which bought it
types of integration
-horizontal
-vertical
-conglomerate (diversification)
define horizontal integration
-2 similar businesses from the same industry merge
Advantages of horizontal integration
-reduce competition
-bigger power
Disadvantages of horizontal integration
-people lose jobs
2 type of vertical integraiton
-vertical backward
-vertical forward
define vertical integration
-business mergers with a business in same industry but different production stage
Advantages of vertical integration
-better control of materials
-cheaper
-assure of supply
advantages of vertical backward integration
-better distribution of products
-cheaper
Define conglomerate integration (diversification)
-a businesses merges with a business from a diff industry
Advantages of conglomerate integration
-diverse customers
-if 1 business fails, still have another
Disadvantages of growth
-should be slow
-external is more expensive than internal
-risky
-management
-finance
why do business usually fail
-people change what they like
-financial issues
-lack management skills
-business expands too quickly
types of business org in pvt. sector
-sole trader
-partnership
-Pvt. Ltd company
-Pub. Ltd company
what do businesses in pvt. sector need to operate
-license which needs to be renewed every year by paying a fee
-needs a legal structure recognised by gov.
define sole trader
-business owned by 1 person
-simplest form of business
-usually small
advantages of sole trader
-you’re your own boss
-keep all money
-flexible work time
-less capital = less money to start business
-make all decisions
disadvantages of sole trader
-unlimited liability
-lack of continuity
define unlimited liability
-person is liable for company’s debts
define limited liability
-shareholder of company is liable for debt depending of how much they invested in business
define partnership
-business owned by 2 or more owners
-usually 2 - 20
advantages of partnership
-more capital to start business
-unlimited liability but debt is shared
-share work - specialisation - more efficient
-no need to work sometimes
disadvantages of partnership
-unlimited liability
-slow to decision making
-lack of continuity
-disagreements = lead to business fail
-share profit
-if one dies, partnership ends unless LLP
define unincorporated business
-business with no legal identity
-sole traders & partnerships
define incorporated business
define LLP
-Limited liability partnerships
-Partners have limited liability but shares cannot be bought & sold & still exist after the death of one partner
define Deed of partnership
-a legal written doc that contains agreements between partners to prevent future dispute
define Ltd company
-businesses that have a legal identity & owned by majority shareholder (51%)
-incorporated business
-continue existing if 1 owner dies
-company accounts are separated form owner’s accounts
-Pvt or Pub
define shareholder
-owners of a limited company who buy shares
define shares
represent part- ownership of company
how does shares of businesses work
-each businesses share is valued depending on how well they’re doing
-shareholders buy shares
-can sell shares for profit
-shares are traded trough stock exchange
-when business make profit, it’s divided among shareholders depending on no. shares they have
Why buy shares
-get divided profit
-share prices can change
what does a legal identity do for Ltd comapny
-company is recognised as a person
-can buy things in its name
-can be sued
diff btw Pvt and Pub. Ltd companny
-Pvt. - limited to who can buy shares
-Pub. - anyone can buy shares
benefits of pvt. Ltd company
-capital from shares
-limited liability form shareholders
-separate legal identity
-continuity even after owner death
disadvantages of pvt ltd company
-cannot sell shares to public
-legal formalities
-accounts are available for public to see
-not easy to transfer shares
benefits of pub. Ltd company
-can sell shares to public
-rapid expansion is possible
-limited liability
-continuity even after owner death
disadvantages of pub ltd company
-legal formalities
-divorce between ownership & control
-discloses accounts & info
define Annual General Meeting (AGM)
-a mandatory annual meeting where all shareholders of Pub. Ltd. company are invited to vote on next Board of Directors
define dividends
-division of profits among shareholder for investing in company
2 Business forms
-franchise
-joint venture
define franchise
-business that uses brand names and logo of an existing successful business
-needs to buy license from franchiser to operate
advantages of franchise
-guarantees success
-franchisor pays for advertising
-all supplies from franchisor
-staff training & management provided by franchisor
disadvantages of franchise
-dependent on franchisor
-no control over business
-have to pay franchise fee
-share profits
define public corporation
-business owned & controlled by gov. to provide service to people in a non- profit basis in public sector
advantages of public corporation
-can nationalize important businesses failing
-provides public services
disadvantages of public corporation
-no pvt. shareholder to insist efficiency
-no close competition = lack to increase efficiency/ consumer choices
-gov. control business for political reasons
types of businesses in pub & pvt sectors
pvt:
-sole trader
-partnership
-pvt/ pub limited company
-franchise
-joint venture
pub:
-public corporation
disadvantages of joint venture
-share of profits
-disagreements over important decisions
-they have different ways of running business
advantages of joint venture
-share of cost
-local knowledge if venture is based in country
-shares risks
define joint venture
-2 or more business start a new project tgt & share risks, capital & profit
define business objective
-aims the business works towards
what does a business objective do
-give a sense of purpose
-a target
for:
-profit maximization
-survival of business
-growth
-increase shareholder’s return
-increase market share
-service to community
define profit
revenue is more than total cost
define revenue
total income of business
define profit maximization
-to get max profits
define business survival
-make sure business doesn’t collapse from:
-competition
-new businesses
-recession = sales go down
Define market share
what % of market sales is held by the business
how to find market share
sales of business/ sales of entire industry x 100%
define stakeholder
-people who are affected by business decisions
-internal:
owners, workers, managers
-External:
customers, gov., community, banks
what must businesses try to make sure about stakeholders
-try to make them all happy, if not the most important ones = careful in decision making
define social enterprise
-social objectives & aim for profit
types of social enterprises
-social - provide jobs
-environmental - protect environment
-financial - make profit to invest in social enterprise
note: business objectives change over time
business objectives of pvt & pub sectors
pvt:
-profit
-growth
-increase shareholder’s return
-increase market share
-survival
-service to community
pub:
-stakeholders must be happy
