Topic 2: The role of business in the economy Flashcards
define industry
the collection of firms involved in making similar range of items that usually compete with each other
What are the factors that may influence a business operator’s decisions?
- The skills and experience of the business operator
- industries where there is strong consumer demand
- specific business opportunities
- the amount of capital required to start the business
how does the skills and experience of a business operator influence their decisions?
the operator is more likely to be successful if they are very familiar with the industry they are trying to enter
how does strong consumer demand influence business operators’ decisions
a business operator will be more attracted to an industry that is experiencing rapid growth since there is a lot of room to expand business.
how does specific business opportunities influence business operators’ decisions?
An individual may find gaps in businesses (business opportunities) that seem appealing since there is room for improvement and expansion of business
They may also find a niche market to expand business in.
what is a niche market?
a segment of the mass market for a G or S that can be defined by the specific tastes or characteristics of the target customers.
how does the amount of capital required to start a business influence an operator’s decisions
an entrepreneur will be more attracted to starting up a business that has cheaper capital due to its lower risk.
negative side effect of land
natural resources can diminish if its overused and not properly replaced.
negative side effect of labour
labour may decline if there is a decline in birth rate, a reduction in migration will reduce the Q of people available to work, therefore decreasing labour
negative side effect of capital
capital will wear out over time and become obsolete (out of date/no longer in use). the discarded component of capital is called ‘depreciation’
negative side effect of enterprise
an uncertain environment will generally reduce entrepreneurship due to the increase risk it has to start a business
what do businesses contribute to the economy?
a growing private sector generates higher economic growth and stronger revenue (total amount of income generated by the sale of G&S) base for the government to fund it provided services
growing businesses decreases unemployment
contributes to regional development - which includes better infrastructure, improved liveability, and population attraction and retention
growth in businesses increase productive capacity over time, resulting in greater economic output –> lower inflation and improved living standards
what is the private sector?
the part of the economy that is not owned by the government
privately owned businesses and firms
How do government support the growth of new businesses?
they fund them to help them get international recognition so that they may create brand recognition and form relationships with potential customers
define profit motive
the process by which a business strives to maximise profit by producing products at its lowest possible price and selling those products at the highest possible price
What are firms’ other objectives other than maximising profit?
- meeting shareholder expectations: a legal responsibility - firms need to meet the interests of their shareholders (represented by the company director) despite the conflict in interests between them and the business manager
- increasing mkt share: this means that businesses may want to focus on increasing the percentage of sales that business has in the overall mkt
- maximising growth: maximise growth of business assets for the long run as it would lead to higher profits. (change of leading to business failure)
- satisficing behaviour: when a business would rather strive for satisfactory outcomes in all areas rather than just prioritising maximising profits
define production
The Q of G&S produced with a given Q or resources, per unit of time
what are the benefits of increased productivity?
increased productivity allows a firm to satisfy a greater number of wants using the same amount of resources
it also increases living standards since firms are able to satisfy more wants than before :))
how does productivity contribute to the improvement of our standard of living?
- less wastage of scarce resources: efficient use of resources allows for more production for the same amount of resources
- lower prod’n costs and higher profit for the business firms: because each factor of prod’n can produce more in any given time period, it costs firms LESS to produce the same amount of G&S
- a lower inflation rate: since there is an increase of prod’n of G&S, firms dont need to increase prices (may even make stuff cheaper)
- higher incomes: since labour is more productive, firms are able to provide better wages without the need to increase prices (crazy)
- improved international competitiveness: compared with foreign businesses, this will make Aust’n goods more competitive on local and international mkts
What is the specialisation of labour?
DIVISION OF LABOUR
when businesses break down the prod’n process into sub-processes, allowing for workers to become a pro (specialise) in a particular part of prod’n leading to less time and effort wasted on moving from one process of prod’n to another.
what is the specialisation of natural resources?
LOCATION OF INDUSTRY
(sharing is caring) when multiple businesses that are producing similar G&S congregate in the same area to reduce prod’n cost by sharing common infrastructure requirements
what is the specialisation of capital?
LARGE-SCALE PRODUCTION
when businesses get so large, they can use capital that is highly specialised for whatever G&S they produce (like damn)
What are internal economies of scale?
the COST SAVING ADVANTAGES that come from a firm expanding its scale of operations
when the firm’s output level is BELOW the technical optimum
What are internal diseconomies of scale?
the COST DISADVANTAGES (specifically the increased marginal cost) that come from a firm expanding its scale of operations beyond a certain point (basically, their plan just backfired on them lol)
define average cost
the per-unit cost of prod’n
divide the total cost of producing a certain level of output by the quantity produced
What is the long-run average cost curve (LRAC)?
the relationship between costs and internal economies and diseconomies of scale
define technical optimum
the most efficient level of prod’n for a firm. avrg cost of prod’n are at its lowest possible level
What causes a downward shift in the LRAC curve?
LEARNING BY DOING
as a firm continuously repeats the prod’n process, they will be able to become more efficient at completing the same task over time
what are external economies of scale?
the advantages that a firm gains because of the industry in which they operate in
what are external diseconomies of scale?
the disadvantages that a firm gain because of the industry in which they operate in
(that sad bro like damn, its not even their fault yet they get absolutely trashed)
what is ethical decision making?
decisions that take into account the impacts on broader society and the environment, and not simply to maximize profits
