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Edexcel Economics B > Theme 1 > Flashcards

Theme 1 Flashcards

1
Q

Opportunity cost

A

The next best alternative that’s been given up

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2
Q

What are the four factors of production?

A
  • Capital
  • Enterprise
  • Land
  • Labour
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3
Q

Profit Maximisation

A

A firm profit maximises when they are operating at the price and output which derives the greatest profit
- MC = MR

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4
Q

How do you work out Profit, and what is it?

A
  • Total Revenue - Total cost

- the reward for entrepreneurs to take risks

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5
Q

What is break-even?

A

When Total Revenue = Total Cost

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6
Q

What is Sales Maximisation, and how do you calculate it?

A
  • When the firm aims to sell as much of their goods and services as possible without making a loss.
  • AC = AR
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7
Q

What is Satisficing?

A

A firm is profit satisficing when it is earning enough profits to keep its shareholders happy.

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8
Q

What is the business aim of survival?

A

New firms entering competitive markets, or firms in periods of economic decline might aim to simply survive.

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9
Q

What is the business aim of gaining a large Market share?

A

This helps increase the chance of surviving in the market by gaining consumer loyalty through maximising sales.

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10
Q

What is the business aim of ‘Cost efficiency’?

A
  • 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
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11
Q

What is the business aim of ‘employee welfare’?

A
  • 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.
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12
Q

What is the business aim of ‘customer satisfaction’?

A
  • Firms might aim to increase their competitiveness by improving their quality or service.
  • This makes them more price inelastic
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13
Q

What may be some social objectives of some firms?

A
  • Some firms may focus on their CSR

- May aim to maximise social welfare and perform more ethically

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14
Q

What is a stakeholder?

A

Anyone affected or interested in the way a business is run

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15
Q

What is the definition of an entrepreneur?

A

A risk-taking individual who organises factors of production to set up an enterprise

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16
Q

What is ‘creative destruction’?

A

The process of how innovation leads to the destruction of an outdated product of system and creates a new one.

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17
Q

What is a plc.?

A

Public Limited Companies owned by their shareholder and have limited liability and raises finance by selling their shares to the general public.

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18
Q

What’s a private limited company?

A
  • 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
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19
Q

Why do private limited companies have ‘limited liability’?

A
  • Shareholders cannot be required to use their own personal assets to cover debts
  • Only use money they already put into business
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20
Q

What is a ‘sole trader’?

A

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.

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21
Q

What is the ‘price mechanism’?

A

An economic model that helps to explain the allocation of resources between different possible uses.

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22
Q

What are the functions of the price mechanism?

A
  • 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
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23
Q

What is the ‘stock exchange’?

A

an exchange where stock brokers and traders can buy and sell shares of stock and bonds and other financial instruments.

24
Q

How can you improve productivity?

A
  • Better training
  • Better management
  • Improved technology
  • Reduces cost of production
25
Q

What does the demand curve for a price-taker look like?

A

Perfectly elastic (the firm has no control of the price it sells at)

26
Q

What is break-even?

A

When Total Revenue = Total Cost

27
Q

What are the advantages of a firm’s growth?

A
  • Larger firms benefit from Economies of Scale (reduces average cost)
  • Combined creativity of new firms = superior products
28
Q

What are the disadvantages of a firm’s growth?

A
  • Consumers will have less choice if firms merge
  • Less competition = Higher Prices
  • Merged firms may mean less output = Higher prices
29
Q

What is contribution?

A

The profit made on each product and used to calculate the break-even point

30
Q

How do you calculate contribution?

A

Selling Price - Variable cost per unit

31
Q

What is the margin of safety?

A

The difference between the actual level of output and the break-even level of output

32
Q

What does the margin of safety show?

A
  • Indicates how much sales can fall by before the firm reaches break-even point
  • Falling margin of safety = bad for firms
33
Q

What is the total contribution?

A

Contribution per unit x no. of units sold

34
Q

What is the break-even point?

A

The point where the firms costs are covered

35
Q

What are the limitations of break-even analysis?

A

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
36
Q

What is the difference between profit and cash flow?

A
  • Profit = only considers income and expenses at one point in time
  • Cash flow = considers the movement of money into and out of the business
37
Q

What is the correlation between profit and cash flow?

A
  • There is no correlation between profit and cashflow

- A firm might have a negative cash flow even though profits are high

38
Q

How do you conduct primary market research?

A
  • Questionnaire/survey
  • Focus group
  • Observation
  • Test marketing (launching the product in only a small area and evaluating the response)
39
Q

How do you conduct secondary market research?

A
  • Market reports
  • Government data
  • Internet
40
Q

What are the sources of product differentiation?

A

Differences in:

  • quality and price
  • design and functionality
  • marketing
  • availability (timing and location)
41
Q

What is the process of adding value?

A

When the entrepreneur uses factors of production to transform the basic material inputs into something that can be sold.

42
Q

What are externalities?

A

Costs or benefits that affect a third party

43
Q

What is the difference between tax avoidance and tax evasion?

A

Tax avoidance is finding loopholes to avoid paying tax and Tax evasion is illegal.

44
Q

How can MNC’s avoid tax?

A

Offshoring

45
Q

Define specialisation

A

When a country or firm makes the most of their skills

46
Q

What is a product-orientated firm?

A

Apple

47
Q

What is a market-orientated firm?

A

When firms focus on the satisfaction of consumers

48
Q

What is market segmentation?

A
  • Demographic

- Geographic

49
Q

What are the sources of internal finance?

A
  • Personal savings
  • Retained profit
  • Working capital
  • Asset sales
50
Q

What are the sources of External finance?

A
  • Overdrafts
  • Bank loans
  • Share capital
  • Venture capital
  • Peer-to-peer lending
  • Trade credit
  • Leasing
51
Q

Why is market research conducted?

A

The process of gathering data in order to understand current and future customer needs.

52
Q

How can market research reduce risks?

A
  • 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
53
Q

What are the limitations of market research?

A
  • 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
54
Q

What is the purpose of break-even analysis?

A
  • Inform pricing decisions
  • Predict profit
  • Seek finance
55
Q

What are the limitations of break-even analysis?

A
  • Assumes fixed and variable costs are known
  • Time-lag between research and final decisions
  • Assumes business will generate sufficient demand
56
Q

What does cash flow forecasting aim to do?

A

Predict when cash outflows and inflows occur which enables businesses to identify times when extra finance will be needed to maintain liquidity.

Edexcel Economics B (5 decks)

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