Flashcards · 0264 · Topic 1

Understanding business activity flashcards

39 cards on Topic 1, subtopics 1.1 to 1.5. Pick a subtopic or study them all.

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1.1 Business activity

The four factors of production: Land: natural resources and space used in production. Labour: human effort, physical or mental. Capital: man-made resources used to produce other goods and services. Enterprise: willingness to take risks and organise the other factors.
Is capital (as a factor of production) the same as money?: No. Capital is man-made equipment and buildings, such as machinery, vehicles and tools. Money is not a factor of production.
Added value: The difference between the selling price of a product and the cost of the bought-in materials or inputs used to make it. Added value per unit = selling price per unit − cost of bought-in inputs per unit.
A chopping board sells for $12.00 and its bought-in inputs cost $7.50. 250 are sold a month. Calculate the added value per board and per month.: Per board: 12.00 − 7.50 = $4.50. Per month: 4.50 × 250 = $1,125.
Two ways to increase added value, and the risk of each: Raise the selling price (stronger brand, better quality or service): sales may fall. Cut the cost of bought-in inputs (cheaper suppliers, less waste): quality may fall.
Why is added value not the same as profit?: Wages, rent and the other costs of the business still have to be paid out of added value.
Opportunity cost: The benefit of the next best alternative that is given up when a choice is made. Only the next best alternative counts, not every option rejected.
A business chooses a project worth $5,000 over others worth $4,200 and $3,700. What is the opportunity cost?: $4,200, the benefit of the next best alternative.

1.2 Economic sectors

Primary, secondary and tertiary sectors: Primary: extracting or growing natural resources (farming, fishing, mining). Secondary: making, processing or building (manufacturing, construction). Tertiary: providing services (retail, banking, transport).
Private sector and public sector: Private sector: owned and controlled by individuals or groups of individuals; usually aims mainly for profit. Public sector: owned and controlled by government (national or local); usually aims mainly to provide a service.
Classify a state-run railway and a privately owned quarry by both kinds of sector: State-run railway: tertiary and public. Privately owned quarry: primary and private.
Give a chain of production from wheat to bread, naming each sector: Wheat grown on a farm: primary. Flour milled and bread baked: secondary. Bread sold in a shop: tertiary. Value is added at each stage.
What is the difference between the primary/secondary/tertiary grouping and the private/public grouping?: Primary/secondary/tertiary groups businesses by type of activity. Private/public groups them by who owns and controls them.

1.3 Enterprise, business growth and size

Entrepreneur: A person who takes the risk of starting and running a business.
Characteristics of a successful entrepreneur: Risk-taking, innovation, determination, hard work, self-confidence, leadership and good decision-making.
Why does a business plan matter?: It makes the owner think problems through before spending money, helps persuade lenders and investors, and sets targets to measure progress. But it relies on forecasts, so it cannot guarantee success.
Why and how do governments support business start-ups?: Why: to create jobs, reduce unemployment, raise tax revenue, increase competition, encourage innovation and support economic growth. How: grants, advice, low-cost loans and training schemes.
Four ways of measuring business size: Number of people employed, value of output or sales, volume of output or sales, and capital employed. Profit is not a measure of business size.
Internal growth and external growth: Internal growth: using the firm’s own resources, such as new products, markets or outlets. Slower, but control is kept. External growth: joining with another business by merger or takeover. Faster, but costs more and brings problems joining the two.
Horizontal and vertical integration: Horizontal: joining firms at the same stage of the same industry (for example, buying a rival). Vertical: joining firms at different stages of the supply chain, backward towards suppliers or forward towards retailers.
Why do some businesses stay small?: The market is small or niche, the owner wants to keep control, finance is lacking, the owner wants to avoid risk, customers value personal service, or the owner is content with the lifestyle.
Why do new businesses fail?: Poor management skills, shortage of finance (cash runs out), an unsuitable product, falling demand, changes in the economy such as a recession, and strong competition.

1.4 Types of business organisation

Unlimited liability and limited liability: Unlimited liability: owners can be made to pay business debts from their personal assets. Limited liability: owners can lose only the money they invested.
Sole trader: advantages and disadvantages: For: simple and cheap to set up, full control, the owner keeps all the profit. Against: unlimited liability, little capital, the owner carries all the work and risk.
Partnership: advantages and disadvantages: For: shared capital, skills and workload; more than one decision-maker. Against: unlimited liability (the usual position), shared profit, possible disputes.
Main difference between a private limited company (Ltd) and a public limited company (plc): A plc may offer its shares to the general public; a private limited company cannot.
Public limited company: advantages and disadvantages: For: large capital, limited liability, shares easy to trade, easier borrowing. Against: high costs, strict regulation, accounts widely available, risk of takeover, pressure for short-term results.
Franchise, franchisor, franchisee and royalty: Franchise: the right to use another business’s brand, products and methods in return for payment. Franchisor: grants the franchise. Franchisee: buys it and runs the outlet. Royalty: a regular payment by the franchisee, often a percentage of sales.
Franchise: one advantage and one disadvantage for the franchisee: Advantage: a known brand, with support and training, so lower risk than starting alone. Disadvantage: pays a fee and royalties and must follow the franchisor’s rules.
Joint venture: what it is, and one advantage and one disadvantage: Two or more businesses cooperating on a project or in a market, sharing costs, risks and rewards. For: shared costs and risk, combined skills, faster entry to a new market. Against: shared profit, possible disagreement, slower decisions.
Social enterprise: A business that trades mainly to achieve social or environmental aims, reinvesting most of its profit in those aims.
A partnership’s profit of $45,000 is shared 2:1. How much does each partner get?: Total parts = 3. 2/3 × 45,000 = $30,000 and 1/3 × 45,000 = $15,000.

1.5 Business objectives and stakeholder objectives

Business objective, with four examples: A target the business aims to reach. Examples: survival, growth, profit and market share.
Market share formula: Market share (%) = (sales revenue of the business ÷ total sales revenue of the whole market) × 100
A firm has sales of $90,000 in a market worth $750,000. Calculate its market share.: 90,000 ÷ 750,000 × 100 = 12%
Why are objectives important?: They give direction, guide decisions, set a target to measure success against, help to motivate and co-ordinate staff, and tell stakeholders such as lenders what the business is trying to do.
Internal and external stakeholder groups: Internal: owners, managers and employees. External: customers, suppliers, lenders/banks, government and the local community.
Give one example of a conflict between stakeholder objectives: For example, shareholders want profit paid out as dividends while managers want it kept to fund growth; or owners want profit while employees want higher wages.
How a business’s objectives change: A new business usually puts survival first. Once secure, it may aim for growth, profit or market share. A recession or a new rival can push it back to survival.