Theme 1.2 - Enterprise, business and the economy

Question 1

What is an entrepreneur?

Answer 1

A person who spots an opportunity and shows initiative and a willingness to take risks in order to benefit from the potential awards.

Question 2

Enterprise is another word for?

Answer 2

A business

Question 3

Define creative destruction.

Answer 3

The idea that new entrepreneurs are innovative, which challenges existing firms. The more productive firms then grow, whilst the least productive are forced to leave the market. This results in an expansion of the economy’s productive potential.
E.g. digital transformation, automative industry, e-commerce.

Question 4

What are the benefits of creative destruction?

Answer 4

Despite the short term pain of businesses failing and people losing their jobs, there will be new and better products, better working conditions, better jobs and higher living standards.

Question 5

What is adding value?

Answer 5

Altering a product to increase the value to the customer, by either improving it or providing it in locations where customers want it.

Question 6

What are the 4 factors of production? What are the rewards/incentives that come with these?

Answer 6

• Land: Natural resources, it can also be the physical space for fixed capital. Reward = rent.
• Labour: Human capital (value = how much they earn, education and training are likely to increase this) e.g. managers and employees. Reward: Wages.
• Capital: Physical includes goods used in production process, fixed includes machines and buildings (offices), and working includes finished/semi-finished goods. Rewards: interest from the investment.

Question 7

How do these contribute to innovation?

Answer 7

• Land provides raw materials.
• Labour transforms these raw materials.
• Capital improves efficiency.
• Entrepreneurs transform these into innovative solutions.

Question 8

What are the key steps to creating and setting up a business?

Answer 8

• Generating an idea.
• Asking if it can add value (does ot solve a specific problem? is it unique or an improvement over existing solutions? what is the value proposition?)
• Conducting market research.
• Business plan
• Deciding on legal structure
• Raising finance.

Question 9

List 2 financial motives

Answer 9

• Making money
• Necessity

Question 10

List at least 3 non-finanacial motives

Answer 10

• Fulfilling a dream
• In charge of own destiny
• Be own boss
• Work-life balance/ working from home
• To prove you can
• Support a community
• Social responsibility
• Providing a service
• Leaving a personal legacy

Question 11

What is competence motivation?

Answer 11

A theory of achievement motivation based on a person’s feelings of personal competence.

Question 12

List 3 types of competence motivation?

Answer 12

• High need for achievement: always want to improve, these people believe success or failure are determined by their own efforts, can have good businesses.
• High need for power: seek leadership, can be good managers, executives or supervisors.
• High need for affiliation: people whose desire in life is to establish, maintain or renew affective relationship with others, can be good social workers, maintaining effective business networking.

Question 13

Define division of labour

Answer 13

Specialised use of workers within an organisation. It leads to productivity as workers better understand their roles, helping the problem of scarcity. It can be achieved by individuals, businesses, regions or countries.

Question 14

Give 2 advantages of specialisation to an employee.

Answer 14

• Workers do the same task and become more competent.
• Time saving (not switching tasks).
• Workers can choose the task for which it is their best best ability (best allocation of human resources).
• Can use machinery for some tasks.

Question 15

Give 2 disadvantages of specialisation to an employee.

Answer 15

• Work’s repetitive
• Specialised workers find it hard to do a different job.
• Loss of pride on end product (workers only work on one part).
• If one task is delayed, the entire process is delayed.

Question 16

Give 2 advantages of specialisation to an employer

Answer 16

• Higher output, potentially higher quality (USP) due to better training.
• Lower costs (economies of scale)
• Machinery increases speed and accuracy.
• Enable firms/individuals to trade.

Question 17

Give 2 disadvantages of specialisation to an employer

Answer 17

• At risk of losing their markets as another firm can outcompete them.
• Differentiated products -> new industry (however old ones may become obsolete).

Question 18

Give 2 advantages of specialisation to a country

Answer 18

• Increased efficiency and productivity
• Economics growth as more goods are produced (increased GDP).
• Lower costs & cheaper goods.
• Enhanced trade as countries trade what they’re specialised in.

Question 19

Give 2 disadvantages of specialisation to a country

Answer 19

• Over reliance on one good/service, making the country vulnerable to changes in supply and price fluctuations.
• Threat of external factors (political unrest)
• Less developed countries may be discouraged from moving into new industries.
• Specialisation in resource-intensive industries can lead to environmental concern.

Question 20

What is economic activity measured by and give its definition.

Answer 20

Gross Domestic Product - the total value of a country’s output in a year.

Question 21

What is the business cycle? List all 6 stages.

Answer 21

• Expansion (economy grows)
• Peak (economy reaches maximum output)
• Recession (economic growth slows. Spending decreases and unemployment increases)
• Depression (confidence decreases)
• Trough (the lowest point, end of contraction and start of recovery)
• Recovery

Question 22

What’s the difference between nominal and real GDP?

Answer 22

• Nominal GDP is GDP without any effect of inflation.
• Real GDP inflation adjusted GDP e.g. if GDP growth if 5% and inflation is 2%, then real GDP growth is 3%.

Question 23

Define interest rate.

Answer 23

The price of borrowing money.

Question 24

What are the effects of high interest rates on a business and the level of demand by consumers?

Answer 24

Business:
- Increased interest of loans and overdrafts.
- Investments become more expensive (may not choose to grow by investing in new capital equipment or larger premises.

Demand by consumers:
- Saving is more attractive than spending
- Less disposable income as mortgages and rents are higher.
- Foreign investors will invest in UK banks for higher returns so higher demand in £ will see its value appreciate.

Question 25

What are the effects of low interest rates on a business and the level of demand by consumers?

Answer 25

Business:
- Loans and overdrafts are cheaper.
- Investments are cheaper (e.g. more jobs created).

Demand by consumers:
- More disposable income leading to higher demand

Question 26

How can low interest rates lead to inflation?

Answer 26

People will spend more, leading to increased demand so businesses have to put their prices up which results in inflation.

Question 27

What is the difference between fixed and variable interest on loans?

Answer 27

Fixed - where the interest stays the same for a set number of years, usually between 2 and 10 years.
Variable - where the interest can change (ideal for when interest rates are decreasing).

Question 28

What are exchange rates?

Answer 28

The price of a currency.

Question 29

What happens with imports and exports if the pound appreciates?

Answer 29

• Imports become cheaper.
• Businesses that export will see less demand.

Question 30

What happens with imports and exports if the pound deppreciates?

Answer 30

• Imports become more expensive.
• Exports are cheaper so business that export will experience an increase in demand.

Question 31

What is the difference between direct and indirect tax?

Answer 31

• Direct taxes are charged on earnings e.g. income tax, national insurance and corporation tax.
• Indirect tax includes VAT, excise duties (on petrol and alcohol), car tax, insurance tax and others.

Question 32

What is corporation tax? What happens if this decreases?

Answer 32

• Tax on a business’ profits.
• Businesses will be more likely to invest.

Question 33

What is the effect of increased direct and indirect taxes?

Answer 33

Consumer demand and consumption will decrease.

Question 34

What is unemployment?

Answer 34

The number of people able and willing to work but not able to find a paying job.

Question 35

What are the effects of rising unemployment on businesses?

Answer 35

• Demand for luxury products will fall whereas the demand for inferior goods will increase.
• Recruitment will be easier as firms can also offer minimum wage.
• However there may be a mismatch between the skills of the unemployed people and the skills required for vacancies.
• Businesses need to invest in training, raising hiring costs and productivity is affected in the short term.

Question 36

What are the effects of decreasing unemployment on businesses?

Answer 36

• Demand for luxury products will increase whereas demand for inferior goods will decrease.
• There’s an increased competition for talent and businesses need to compete for workers, driving up wages and benefit packages so labour costs increase.
• It may be harder to find people with the right skills.

Question 37

What is inflation?

Answer 37

The sustained increase in the average price of level in the economy: there is a fall in the value of the money.

Question 38

What are the impacts of inflation on a business?

Answer 38

• Harder to plan as there’s uncertainty regarding future costs so businesses may be less likely to invest.
• Costs of supplies and wages are increasing.
• UK businesses may have to put up their prices, affecting competitiveness internationally.
• Imports from countries with lower rates of inflation may increase so domestic businesses can’t compete.

Question 39

How can inflation be reduced? How does this affect a business?

Answer 39

• By increasing interest rates.
• Businesses will be less likely to invest and grow.
• Sales will fall.