UNIT 1. Chapter 2 (Part 1): Business structure

Question 1

Def. Primary sector

Answer 1

Firms engaged in farming, fishing, oil extraction and all other industries that extract natural resources so that they can be used and processed by other firms.

Question 2

Def. Secondary sector

Answer 2

Firms that manufacture and process products from natural resources, including computers, brewing, baking, clothes making and construction.

Question 3

Def. Tertiary sector

Answer 3

Firms that provide services to consumers and other businesses, such as retailing, transport, insurance, banking…

Question 4

What are the benefits of industrialisation (growing of secondary from primary)?

Answer 4

• Increase in Gross Domestic Product
• Increasing output of goods can result in lower imports and higher exports pf such products.
• More jobs created -More tax for the government

Question 5

What are the problems of industrialisation?

Answer 5

• People moving from countries to the towns leads to housing and social problems. - Imports of raw materials increase import costs

Question 6

Why is there an increase in the importance of tertiary sector in developed economies?

Answer 6

• Rising economies -> higher living standards -> people spend income on services more

Question 7

Def. Private sector

Answer 7

Comprises businesses owned and controlled by individuals or groups of individuals.

Question 8

Def. Public sector

Answer 8

Comprises organisations accountable to and controlled by central or local government.

Question 8

Def. Mixed economy

Answer 8

Economic resources are owned and controlled by both private and public sectors.

Question 9

Def. Free-market economy

Answer 9

Economic resources owned largely by the private sector with very little state intervention.

Question 10

Def. Command economy

Answer 10

Economic resources owned, planned and controlled by the state.

Question 11

Why are certain goods and services are provided by the governmental organisations?

Answer 11

• They may be too significant to be left to private businesses. Examples usually include health, education services, defence and public law and order (police force), or ‘strategic’ industries such public transport. - Public goods are owned by the government because they cannot be charged for for private businesses to make profit. Eg. Street lights.

Question 12

Local vs National vs International businesses.

Answer 12

• Local businesses: operate in a small part of the country with no objective to expand eg. hairdressing businesses.
• National businesses: have branches or operations across most of the country without expanding internationally. eg. national banking firms.
• International businesses: operate is many countries.

Question 13

Def. Sole traders

Answer 13

A business in which one person provides the permanent finance and in return has full control of the business.

Question 14

Advantages of sole traders.

Answer 14

Ad: -easy to set up -owner has complete control, no disagreements. -owner keeps all profits -business can be based on their interests or skills, rather then working as an employee for a larger firm.

Question 15

Disadvantage of sole traders

Answer 15

-Unlimited liability- all of owner’s assets are potentially at risk -Often faces intense competition form larger firms. -Difficult to raise additional capital -Long hours often necessary to make business pay.

Question 16

Def. Partnership

Answer 16

A business formed by two or more people to carry on a business together, with shared capital and share responsibilities.

Question 17

Partnership Advanatges (4)

Answer 17

• Partners may specialise in different areas of business management
• shared decision making, therefor shared less mistakes would be made
• Additional capital invested by each partner
• Losses are shared

Question 18

Partnership Disadvantages

Answer 18

• Unlimited liability
• Profits are shared
• Many disassgreements may occur which slows down the process of decision making

Question 19

Def. Limited liability

Answer 19

The only potential loss a shareholder has if the company fails is the amount invested in the company, and it does not spread to the shareholder’s personal assets.

Question 20

Def. Private limited companies (Ltd.)

Answer 20

To small to medium sized business that is owned by shreholders who are often members of the same family. This company cannot sell shares to the public.

Question 21

What’s the difference between companies and “unincorporated” businesses? (3)

Answer 21

• Limited liability
• Legal personality: A company is recognised in law as having a legal identity separate from its owners.
• Continuity: If the owner dies, the company is inherited.

Question 22

Advantages of Ltd.

Answer 22

• Limited liability
• Separate legal personality
• Continuity
• Able to raise capital from sale of shares to family, friends and employees.
• Higher status

Question 23

Diadvantages from Ltd. (3)

Answer 23

• Legal formalities involved in establishing the business
• Capital cannot be raised by selling shares to the public
• Less secrecy because end of year accounts can be availbale for public inspection

Question 24

Def. Public Limited Companies (Plc)

Answer 24

A limited company, often a large business, with legal rights to sell shares to the general public - share prices are quoted on the national stock exchange.

Question 25

Advantages of Plc

Answer 25

• limited liability
• separate legal identity
• continuity
• access to substantial capital sources due to the ability to issue a prospectus to the public and to offer shares for sale.

Question 26

Disadvantages of Plc (4)

Answer 26

• Legal formalities in formation
• Legal requirements concerning disclosure of information to shareholers and the public, eg. annual publication of reports and accounts
• risk of takeover due to availability of the shares on the stock exchange
• shareholders influenced by short term objectives (profits)

Question 27

What is “divorce between ownership and control”

Answer 27

This only happens in Plc, where original owners don’t own the majority of shares, therefore they can no longer have full control over the business. At the annual general meeting, shareholders vote for a board of directiors who control the management and decision making of the business. Major investors, however, are only interested in short term gains.