Theme 1 Flashcards
Opportunity cost
The next best alternative that’s been given up
What are the four factors of production?
- Capital
- Enterprise
- Land
- Labour
Profit Maximisation
A firm profit maximises when they are operating at the price and output which derives the greatest profit
- MC = MR
How do you work out Profit, and what is it?
- Total Revenue - Total cost
- the reward for entrepreneurs to take risks
What is break-even?
When Total Revenue = Total Cost
What is Sales Maximisation, and how do you calculate it?
- When the firm aims to sell as much of their goods and services as possible without making a loss.
- AC = AR
What is Satisficing?
A firm is profit satisficing when it is earning enough profits to keep its shareholders happy.
What is the business aim of survival?
New firms entering competitive markets, or firms in periods of economic decline might aim to simply survive.
What is the business aim of gaining a large Market share?
This helps increase the chance of surviving in the market by gaining consumer loyalty through maximising sales.
What is the business aim of ‘Cost efficiency’?
- The more cost efficient a firm is, the lower their average costs.
- A firm gets a competitive advantage if they can afford to charge consumers lower prices
What is the business aim of ‘employee welfare’?
- When employees are happy, they are likely to be productive and do a good job.
- Also increases loyalty to employer so they are less likely to leave.
What is the business aim of ‘customer satisfaction’?
- Firms might aim to increase their competitiveness by improving their quality or service.
- This makes them more price inelastic
What may be some social objectives of some firms?
- Some firms may focus on their CSR
- May aim to maximise social welfare and perform more ethically
What is a stakeholder?
Anyone affected or interested in the way a business is run
What is the definition of an entrepreneur?
A risk-taking individual who organises factors of production to set up an enterprise
What is ‘creative destruction’?
The process of how innovation leads to the destruction of an outdated product of system and creates a new one.
What is a plc.?
Public Limited Companies owned by their shareholder and have limited liability and raises finance by selling their shares to the general public.
What’s a private limited company?
- Have Ltd. after the company name
- Have limited liability for business debts and find it easier to receive bank loans
- Get more regulation and involve shareholders
Why do private limited companies have ‘limited liability’?
- Shareholders cannot be required to use their own personal assets to cover debts
- Only use money they already put into business
What is a ‘sole trader’?
A person who is the exclusive owner of a business and receives all the profit but had unlimited liability and may struggle to raise finance.
What is the ‘price mechanism’?
An economic model that helps to explain the allocation of resources between different possible uses.
What are the functions of the price mechanism?
- Signalling: prices give signals to producers and consumers
- Rationing: only those willing and able to pay
- Incentives: profitability motivates firms, and value for money motivates consumers
What is the ‘stock exchange’?
an exchange where stock brokers and traders can buy and sell shares of stock and bonds and other financial instruments.
How can you improve productivity?
- Better training
- Better management
- Improved technology
- Reduces cost of production
What does the demand curve for a price-taker look like?
Perfectly elastic (the firm has no control of the price it sells at)
What is break-even?
When Total Revenue = Total Cost
What are the advantages of a firm’s growth?
- Larger firms benefit from Economies of Scale (reduces average cost)
- Combined creativity of new firms = superior products
What are the disadvantages of a firm’s growth?
- Consumers will have less choice if firms merge
- Less competition = Higher Prices
- Merged firms may mean less output = Higher prices
What is contribution?
The profit made on each product and used to calculate the break-even point
How do you calculate contribution?
Selling Price - Variable cost per unit
What is the margin of safety?
The difference between the actual level of output and the break-even level of output
What does the margin of safety show?
- Indicates how much sales can fall by before the firm reaches break-even point
- Falling margin of safety = bad for firms
What is the total contribution?
Contribution per unit x no. of units sold
What is the break-even point?
The point where the firms costs are covered
What are the limitations of break-even analysis?
Assumes that
- Selling price per unit is constant and does not change with quantity produced
- Variable cost per unit is the same
- Fixed costs do not change with output
- Everything produced is sold
What is the difference between profit and cash flow?
- Profit = only considers income and expenses at one point in time
- Cash flow = considers the movement of money into and out of the business
What is the correlation between profit and cash flow?
- There is no correlation between profit and cashflow
- A firm might have a negative cash flow even though profits are high
How do you conduct primary market research?
- Questionnaire/survey
- Focus group
- Observation
- Test marketing (launching the product in only a small area and evaluating the response)
How do you conduct secondary market research?
- Market reports
- Government data
- Internet
What are the sources of product differentiation?
Differences in:
- quality and price
- design and functionality
- marketing
- availability (timing and location)
What is the process of adding value?
When the entrepreneur uses factors of production to transform the basic material inputs into something that can be sold.
What are externalities?
Costs or benefits that affect a third party
What is the difference between tax avoidance and tax evasion?
Tax avoidance is finding loopholes to avoid paying tax and Tax evasion is illegal.
How can MNC’s avoid tax?
Offshoring
Define specialisation
When a country or firm makes the most of their skills
What is a product-orientated firm?
Apple
What is a market-orientated firm?
When firms focus on the satisfaction of consumers
What is market segmentation?
- Demographic
- Geographic
What are the sources of internal finance?
- Personal savings
- Retained profit
- Working capital
- Asset sales
What are the sources of External finance?
- Overdrafts
- Bank loans
- Share capital
- Venture capital
- Peer-to-peer lending
- Trade credit
- Leasing
Why is market research conducted?
The process of gathering data in order to understand current and future customer needs.
How can market research reduce risks?
- Find out who the product appeals to so firms know to sell in the right places
- Study competitors and their USP’s
- Understand how much customers are willing to pay
What are the limitations of market research?
- difficult in foreign markets (need well-trained local people which can be costly)
- some markets change so rapidly that it’s impossible for market research to keep up with current trends
What is the purpose of break-even analysis?
- Inform pricing decisions
- Predict profit
- Seek finance
What are the limitations of break-even analysis?
- Assumes fixed and variable costs are known
- Time-lag between research and final decisions
- Assumes business will generate sufficient demand
What does cash flow forecasting aim to do?
Predict when cash outflows and inflows occur which enables businesses to identify times when extra finance will be needed to maintain liquidity.
