Theme 1 Flashcards
Scarcity
Unlimited wants, not enough resources available to supply.
Economic Problem
Unlimited wants, not enough resources available to supply therefore choices have to be made how to use scarce resources.
Economic Activity
Purpose is to satisfy needs and wants of the society.
Opportunity Cost
Cost of the next best alternative foregone.
Trade Offs
Range of alternatives that have been given up.
Economic Agents
Firms, government, individuals that partake in the economic activity.
Free market economy
Firms decide what goods and services to produce with limited intervention from the government.
Business objectives
Quantifiable target or goal to be achieved withing a specific timeframe.
Stakeholders
Anyone with an interest in the action of the business.
Corporate Social Responsibility
Commitment by business to behave ethically and contribute to economic developments while improving quality of life of workforce, community and society.
Entrepreneur
Someone who spots an opportunity and is willing to take risks in order to benefit form the potential reward.
Creative destruction
When something new kills something old.
Factors of production
Capital - machinery to produce
Enterprise - ideas
Land - resources, space to produce
Labor - right people to produce
Added value
Value of the output is higher than the sum value of all inputs.
Cand add value by: USP, customer experience, marketing, brand
Entrepreneurial motives
Financial motives:
- Profit maximization
- Profit satisficing
Non-financial motives
- Ethical stance
To behave in a manner deemed to be morally correct
- Independence
Be own boss
- Homeworking
Work life balance
Specialization
Occurs when economic units such as firms, governments, individuals focus on producing specific goods or services.
Division of Labor
Specialized use of workers within an organization
The wider economic environment
Key economic factors that influence the behavior of businesses and their customers
Interest rates
Price of money, cost of borrowing or reward for saving.
Exchange rates
Price of one currency in terms of the other.
SPICED
WPIDEC
Taxation
Charges placed on firms and individuals, government uses to finance their spendings.
Unemployment
Number of people who are looking for work but can’t find a job at a point in time.
Inflation
General rise in prices or fall in the value of money.
Business cycle
Boom
Recession
Slump
Recovery
Normal goods
Price increases demand falls.
Demand
Amount of good or service that consumers are willing and able to buy at any given price.
Substitute products
Act as an alternative.
Complementary products
Bought together.
Inferior good
As income increases demand decreases.
Supply
Amount of a good or service that producers are willing and able to sell at any given price.
Direct taxes
Placed on individuals, firms.
Indirect taxes
Placed on goods and services made by firms and individuals.
Subsidies
Finances provided to producers to encourage them to produce goods and services.
External shocks
Unexpected events that are outside of the businesses control but have a direct impact on the level of supply.
Economic incentives
Reasons for economic agents to provide goods and services.
Rationing
Signaling
Incentive
Price mechanism
Method by which prices for goods and services are achieved
Rationing function
Increased demand or reduced supply of a product will lead to a price rise.
Signaling function
Occurs because changing prices give a signal to consumers and producers as to whether to leave or enter a market.
Incentive function
Occurs because a consumer or producer is motivated to a course of action e.g. higher prices will incentivize a producer to supply more
Allocative efficiency
Occurs when society is producing goods to match the needs of consumers.
Mass market
Targets all customers, market not segmented.
Niche market
Identifies small gaps in the market, segmented.
Market research
Collection and analysis of data and information to inform a business about its market.
- Primary research - new
- Secondary research - already exists
- Quantitative research - data, statistics
- Qualitative research - non statistical
Types of sampling techniques
Random
- Individual is chosen randomly
Quota
- Population segmented into subgroups, then judgement is made
Stratified
- Population segmented into subgroups, then randomly selected
Market segmentation
Market is split into subgroups of consumers with similar characteristics.
- Demographic
- Geographic
- Income
- Behavioral
Positioning
Where a product is placed in the market relative to its competitors.
Market mapping
Diagrammatic technique that enables businesses to display the perceptions of customers.
Competitive advantage
Feature of a business that allows it to perform more successfully than others in the market.
Product differentiation
Having a unique feature that makes a product stand out from other products in the marketplace.
Unique selling point (USP)
Feature that distinguishes a firm’s product from those of its competitors.
Dynamic markets
Markets are always changing.
Online retailing
Process of buying and selling goods and services over the internet.
Risks
Possible to add a probability to find a degree of risk, is measurable.
Uncertainties
It is not measurable.
Credit
Legal agreement between a borrower and a lender.
Types of credit: Loans
Set amount of money provided for a specific purpose, to be repaid with interest, over a set period of time.
Types of credit: Overdrafts
Facility to overspend on a current account up to an agreed sum.
Types of credit: Trade credit
Paying suppliers a period of time after the goods or services have been received.
Other types of finance: Venture capital
Investment from an established business into another business in return for a percentage equity in the business.
Other types of finance: Share capital
Finance raised from the sale of shares.
Other types of finance: Leasing
Allows a business to benefit from the use of an asset without owning it or buying it outright.
Other sources of finance: Owner’s capital, personal savings
When an entrepreneur invests their own money in a business.
Other sources of finance: Retained profit
Profit kept within a business from profit for the year to help finance future activities.
Other sources of finance: Sale of assets
Assets are items of value owned by a business
- Current assets change in value in the short run
- Fixed assets will stay in the business for more than a year e.g. machinery and vehicles
Market failure
Occurs when the market is unable to efficiently allocate scarce resources to meet the needs of society
Externalities
Costs and benefits to a third party created by economic agents when undertaking their activities.
Negative externalities
Costs to a third party that are not included in the price of the economic activity
- Private costs are costs of consuming or producing goods or services that have to be paid by 3rd parties
- Social costs are paid by society
Positive externalities
Benefits to a third party that are not included in the price of the economic activity
- Private benefits are benefits of consuming or producing goods or services that are received by 3rd parties
- Social benefits are received by society
Purpose of government intervention in markets
- To reduce market failure to
- To reduce income inequalities in the distribution of income and wealth
- To support UK industry
Ways in which governments intervene
- Regulation
- Legislation
- Indirect taxation
- Grants and subsidies
- Voluntary agreements
Government failure
Occurs when government intervention leads to worsening of market failure.
Sales Revenue formula
Sales Revenue / Selling Price * Selling Volume
Contribution per unit
Difference between selling price per unit and variable cost per unit.
Break even formula
Contribution = selling price – variable costs
Fixed cost / contribution = break-even point
Gross profit
Sales revenue – cost of sales.
Operating profit
Gross profit – expenses.
Profit Margins calculations
Gross, operating, year profit / Sales revenue * 100
