Theme 1 Flashcards
Scarcity
- Insufficient resources to supply everyone’s needs and wants.
Opportunity Cost
- Cost of an opportunity that has been forgone when a choice is made.
Business Objectives
- A goal or target that the business wishes to reach
- Allows businesses to measure their progress
Examples:
- Profit Maximisation
- Sales Maximisation
- Survival
- Market Share
- Cost Efficiency
- Employee Welfare
- Customer Satisfaction
- Social Objectives (CSR)
Stakeholders
Someone who has an interest or concern or is affected by the operations and objectives of a business.
Possible stakeholders include:
– Employees - want high wages and good working condition
– Shareholders - want high profits so they get high dividends
– Consumers - want high quality goods with low prices
- Managers - want high salaries and bonuses and other personal benefits
– The Government - want to earn corporation tax from the business’s profits
– Suppliers - want businesses to stay successful so they still have customers
- Different stakeholders have different objectives depending on how the business will affect them, this leads to conflicting objectives.
Corporate Social Responsibility (CSR)
- Refers to the companies taking responsibility for their impact on the local area and beyond society, even including the environment
- CSR can be shown by making decisions that benefits all stakeholders or takes them all into account (rather than just shareholders).
- Treating customers, employees, local community and suppliers well.
- Examples of this would be avoiding polluting activities and contributing positively to lives in the local community.
Business Ethics
- Goes beyond CSR
- A moral code of ethics that a business follows e.g not investing in countries which have human rights issues.
- Being moral despite the finance (cost) e.g. The Body Shop does not use ingredients tested on animals.
Entrepreneur
- Someone who has a business idea and develops it. They take the risk and the profits that come with success and the losses that come with failure
- Entrepreneurs organise the factors of production in order to set up and create an enterprise
- They also make decisions to operate, expand and develop a business.
- To add value by selling the output by more than the cost of the input.
- Be innovative.
Innovation
- Developing a product which is an improvement on an existing one or is changed/altered to fit a new market.
- They also use creative destruction which involves organising factors of production to create and set up an enterprise.
- Creativity leads to new ideas, inventions, and products which means that consumers switch to these newer products whilst the old ones become outdated.
- Creative destruction is linked to technological change which allows new developments to be made in products.
Non-Financial Motives
o Ethical stance and social entrepreneurship - this means that they might be motivated by their want to make an impact in the world and perhaps increase others standard of living. They may also wish to leave a personal legacy behind.
o Independence and working from home - being an entrepreneur allows people to have flexibility in their lives and have more freedom in their lives which can be very important. It can also allow people to have a more consistent home life.
Factors of Production
- capital, enterprise, land and labour
Division of Labour
Employees are organised so that they specialise in one part of the production process
- Specialisation is when each worker is given a specific task in the production process.
- It makes individual workers more productive as they improve at the task they are given and are able to excel at this task.
- Output increases due to higher worker productivity which causes the firms costs to lower and then they can offer lower prices to customers.
- Then they can either reinvest and expand the branches or pay higher dividends to shareholders.
Interest Rates
- the percentage rate charged on a loan and paid on savings (price charged for borrowing money)
- Cost of borrowing, Reward for saving
Rising Interest Rates
o When interest rates go up, it means that for consumers who have a variable mortgage, their monthly repayments will increase, reducing their disposable income. They will cut back on luxury or unnecessary goods. Also house prices fall.
o It also discourages borrowers as the interest paid back on the loans becomes quite expensive, and it becomes riskier to take out a loan as it is harder to pay back. This is detrimental to small businesses trying to start up as they may not be able to pay back the lender.
o The positives of rising interest rates are for the savers. They will get more money from their savings’ as increasing interest rates encourage saving.
o The overall impact of this will be reduced economic growth due to lower consumer demand and lower inflation as prices will go down and consequently the value of money will increase. It will also cause a fall in investment.
Falling Interest Rates
o When interest rates fall, it causes monthly mortgage payments to be lower and consumers will have a higher disposable income, meaning that they are more likely to spend more, especially large purchases like cars or holidays. This increases net consumer spending and therefore there is higher consumption.
o On the other hand, savers are discouraged, as they gain less from their savings and are now more likely to go out and spend what they would have saved, on large purchases such as cars or holidays.
o Larger businesses will see an increase in sales and are also more likely to take out loans in order to expand, as low interest rates encourage businesses to invest, expand and create jobs with their raised profits.
o Overall, lower interest rates increase inflation but also cause increased economic growth as well as increased consumption causing a higher GDP.
Unemployment
The number of people able and willing to work but no table to find a paid job.
Employment
Being financially active
Underemployment
- When people who want to work full time can only find part time work, or people who work in a job that doesn’t use all their skills
- For example someone with a law degree that works in Tesco
High Rates of unemployment
- With higher rates of unemployment, there is a larger supply of labour to employ from. This also means that as people are more desperate for jobs, it means the firms can pay lower wages.
- Also with high levels of unemployment, it means there is less consumer spending due to consumers having less disposable income leading to firms losing profits.
- With lower rates of unemployment, there is pressure on firms from employees to get higher wages.
Problems of unemployment
o It is an opportunity cost (the alternative being employment)
o There is a loss of output, growth and income.
o Retraining for the unemployed to find a job is very expensive.
o Negative multiplier effects - the loss of jobs in one area can lead to less spending and cause others to also lose out.
o Social costs as rising unemployment is linked to social deprivation,
o Fiscal costs as the government earns less tax revenue as people are earning less.
Rising unemployment on firms
Less overall spending as consumers have less disposable income to buy goods with.
Less demand due to less spending, so they have less output, so they don’t need as many workers causing unemployment to continue to rise.
There is a larger supply of labour, so wages will fall as people are willing to work for less (not competitive wages). This means costs decrease and therefore profit margins increase.
It will cost firms money to retrain unskilled workers which can be expensive causing costs to increase.
Businesses that sell cheaper goods/inferior goods, will see a rise in sales.
Falling unemployment on firms
More overall spending as more consumers have disposable income to buy goods with.
As demand rises, output will also have to increase therefore workers will either get more hours or more jobs will be created, continuing the fall in unemployment.
Lower supply of workers means that businesses need to pay higher wages to workers (competitive wages) in order to gain new workers.
As the firm’s profits increase, they will be able to pay higher wages to the workers, increasing their disposable income.
Businesses that sell luxury/superior goods, will see a rise in sales.
Inflation
A rise in the average price level of goods and services
-GOV target is 2%
Deflation
when there is no inflation and average price level is decreasing
Disinflation
A reduction in the rate of inflation
How is inflation measured
- uses a weighted average of price changes over a range of 700 goods and services (based on a basket of goods a typical family would buy)
- Starts with a base year of 100, the following years the % change is compared to the base year.
CPI: the headline rate and is the one used to measure general inflation, but it excludes certain items.
RPI: this also includes house costs such as mortgage repayments, council tax as well as petrol costs.
Demand Pull Inflation
– This is caused by a rise in aggregate demand (overall demand) that is slower that the increase in aggregate supply.
– This is when consumers compete to buy limited amounts of goods and services causing the prices to be driven.
This can be known as “too much money chasing too few goods”.
Cost Push Inflation
– Prices have been pushed up due to increases in any of the factors of production and when companies are already running at maximum.
– To maintain their profit margins, companies will pass on their higher prices to their customers.
– This may also cause them to attempt to cut costs or search for cheaper suppliers if that is where the increased price has come from.
Exchange Rates
the price of one currency expressed in terms of another
Causes of change in exchange rates
- Due to demand and supply (market forces) which causes a floating exchange rate (constant fluctuations).
- The more the currency is demanded, the more the price of it rises and vice versa.
Appreciation
When one currency rises in value against another. E.g. The pound becomes stronger or buys more dollars
Depreciation
When one currency falls in value against another. E.g. The pound becomes weaker or buys less dollars
How are interest Rates and Exchange Rates linked?
Interest rates and exchange rates are linked, as changing interest rates changes demand for certain currencies as it draws more or less foreign investors who take advantage of changing interest rates.
Effects of exchange rate on businesses
- Causes uncertainty as if money is not exchanged before exchange rates change, it causes the profit margins to change completely.
- They cannot be certain of their revenue for their exports.
- Thousands of pounds can be lost if the exchange rate changes.
- Businesses that export will want a depreciating/weaker pound as it will make them more competitive in foreign markets.
- Businesses that import will want an appreciating/stronger pound as their costs will fall and they can reduce prices and make more profit.
(Both above points are summarised in the acronym below)
SPICED
Stronger Pound Imports Cheaper Exports Dearer
Direct Taxation
tax which is charged on earnings, such as corporation tax or income tax
Indirect Taxation
Tax which is charged on things other than income or profits, for example VAT, car tax, insurance tax and others
Government expenditure needs to be paid for, most of the money for which comes from tax revenue. The remainder for this comes from borrowing from other countries and/or the Bank of England.
