Flashcards · 7115 · Topic 1

Understanding business activity flashcards

37 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

Needs and wants: A need is something essential for survival, such as food and shelter. A want is something desired but not essential, such as a particular brand or a luxury item.
Scarcity: The basic economic condition that resources are limited compared with unlimited wants. It is why every choice has an opportunity cost.
Opportunity cost: The next best alternative given up when a choice is made. Only the single next best alternative counts.
Specialisation, and one drawback: An individual, business or region concentrates on a narrow range of goods or services. Output and efficiency tend to rise, but it creates interdependence: the producer relies on others for everything it does not make.
Added value: Added value = selling price − cost of bought-in inputs. It is not profit, because rent, wages and other costs still have to be paid from it.
A loaf sells for $2.10 and its ingredients cost $0.60. What is the added value?: 2.10 − 0.60 = $1.50 per loaf.
Ways to add value without simply raising the price: Branding, better quality, convenience, design, after-sales service, speed, attractive packaging.

1.2 Classification of businesses

Primary, secondary and tertiary sectors: Primary: extracting natural resources (farming, mining, fishing). Secondary: making goods from raw materials (manufacturing, construction). Tertiary: providing services (retail, banking, transport).
Classify an oil refinery, a fishing boat and a call centre: Oil refinery: secondary. Fishing boat: primary. Call centre: tertiary.
How does the balance of sectors change as an economy develops?: It shifts from primary towards secondary and then tertiary. Developed economies have a large tertiary sector; a decline in the secondary sector is called deindustrialisation.
Private sector: Owned by individuals, with a profit motive.
Public sector: Owned by government; provides essential services and may run at a loss for social benefit.
Is the public sector the same as a public limited company?: No. The public sector is owned by the government. A public limited company is a private sector business owned by shareholders.

1.3 Enterprise, business growth and size

Characteristics of successful entrepreneurs: Willing to take calculated risks, self-motivated and determined, creative or innovative, organised and able to decide under pressure, good with people, and resilient.
How does a business plan help an entrepreneur?: It helps raise finance, gives targets to compare results against, shows up weaknesses early, and reduces the chance of costly surprises.
Why and how do governments support business start-ups?: Why: more jobs, more output, more tax revenue and more competition. How: grants, training schemes, advice and cheaper loans.
Methods of measuring business size, and what is not one: Number of people employed, value of output, and capital employed. Profit is not a measure of size: it shows performance.
Internal (organic) and external growth: Internal: using the business’s own resources (new products, outlets, selling online); slower, lower risk, easier to control. External: merger (two firms agree to combine) or takeover (one firm buys control of another); faster but costly.
Why do some businesses remain small?: Demand is limited to a small or local niche, the owner wants a manageable workload and full control, finance is hard to get, the owner wants to avoid risk, or personal service would be lost.
Business failure cause: lack of management skills: Poor decisions on pricing, stock or hiring, and weak financial control.
Business failure cause: liquidity problems: Not enough cash to pay bills when due, even if the business makes a profit on paper.
Business failure cause: changes in the business environment: New competitors, changing tastes, higher costs, recession and new technology.

1.4 Types of business organisation

Limited and unlimited liability: Limited liability: an owner can lose only the amount invested in the business. Unlimited liability: an owner is personally responsible for all the business’s debts.
Unincorporated business and limited company: Unincorporated (sole traders, partnerships): the business and owner are treated as one, with unlimited liability. Limited company: a separate legal entity owned by shareholders, with limited liability.
Sole trader and partnership: main strengths and weaknesses: Sole trader: full control and all the profit, but unlimited liability, little capital and a heavy workload. Partnership: more capital and skills and a shared workload, but unlimited liability, disputes and shared profit.
Private and public limited company: the key difference: A public limited company can sell shares to the general public through a stock exchange; a private limited company cannot.
Public limited company: strengths and weaknesses: For: very large capital, shares easy to trade, limited liability. Against: costly to run, more must be published, takeover risk, control spread widely.
Franchise and joint venture: Franchise: the franchisee buys the right to use one brand and its methods, paying fees and royalties and following rules. Joint venture: two or more businesses combine for a project, sharing cost, risk and profit.
Public corporation: A public sector organisation owned by the government and run by appointed managers, mainly to provide a service to the public.
A trader owes $160,000 and selling the assets raises $95,000. What happens to the shortfall?: Shortfall = $65,000. As a sole trader, the owner could have to pay it from personal assets. A limited company owner who invested $30,000 loses only that $30,000.

1.5 Business objectives and stakeholder objectives

Business objectives: examples and why they matter: Examples: survival, growth, profit and market share. They give direction, allow results to be compared with targets, help managers choose between options and motivate staff.
Market share formula: Market share (%) = business sales ÷ total market sales × 100
A firm’s sales rise from 54,000 to 63,000 while the market grows from 360,000 to 420,000. What happens to its market share?: It stays at 15% (54,000 ÷ 360,000 and 63,000 ÷ 420,000), even though sales grew by 16.7%.
Social enterprise: A business whose main aim is social or environmental, with most profit reinvested in that aim. It still sells goods or services to cover its costs.
Internal and external stakeholders: Internal: owners and shareholders, managers, employees. External: customers, suppliers, lenders, government, the local community.
Give two pairs of stakeholders whose objectives conflict: Shareholders (higher profit) and employees (higher pay). The local community (quiet, clean surroundings) and managers (a bigger factory).
Private and public sector objectives: Private sector: profit, growth, survival, market share. Public sector: a service for all, affordable prices, jobs and social aims; losses may be covered by government.