Business in the real world flashcards

Topic 1: Business in the real world

Needs, wants and opportunity cost

Needs are essential; wants are desirable but not essential. Opportunity cost is the next best alternative given up when a choice is made.

Added value

Added value = selling price − cost of bought-in materials. It is not profit: wages, rent and overheads still have to be paid from it.

The three business sectors and how they depend on each other

Primary (extraction), secondary (manufacturing), tertiary (services). They are interdependent: a manufacturer needs primary raw materials and tertiary transport, retail and finance.

Unlimited and limited liability

Unlimited liability: the owner’s personal assets can be taken to pay business debts. Limited liability: the owner can lose only the amount invested.

Sole trader

Unlimited liability. For: easy to set up, all the profit, full control, privacy. Against: all the risk, limited capital, long hours, no continuity.

Private limited company (Ltd)

Limited liability. For: separate legal identity, easier to raise capital, continuity. Against: formation costs, accounts must be filed, shares not publicly traded.

Public limited company (plc)

Limited liability. For: large capital via the stock exchange, prestige. Against: expensive, public accounts, takeover risk, divorce of ownership from control.

Is franchising a form of ownership?

No. It is a way of setting up or growing. The franchisee trades as a sole trader, partnership or company, and that choice decides liability. The franchisee gets a proven brand and support but pays fees and royalties.

Horizontal and conglomerate integration

Horizontal: same industry, same stage, such as buying a competitor. Conglomerate: an unrelated industry, which spreads risk.

Vertical forward and vertical backward integration

Forward: towards the customer, such as buying a retailer. Backward: towards the supplier, securing inputs.

Economies and diseconomies of scale

Economies of scale reduce average cost as output rises (purchasing, technical, financial, marketing, managerial). Diseconomies raise average cost when a firm grows too large (poor communication, weak coordination, falling motivation).

Why do weight-losing industries locate near raw materials?

The finished product is lighter than its inputs, so it is cheaper to transport the product than the raw materials. Weight-gaining and service industries locate near the market.