1.2: Business Economics - Paper 1 Flashcards
Explain the factors of production: (4)
- Land (1)
- Labour (1)
- Capital (1)
- Enterprise (1)
Land: An area that is used to produce and manufacture products (1)
Labour: People used on production (1)
Capital: An artificial resource because it is made by labour (1)
Enterprise: An entrepeneur organizes the factors of production and risk their own money (1)
Explain the sectors of the economy: (3)
- Primary (1)
- Secondary (1)
- Tertiary (1)
Primary: production involving the extraction of raw material from the earth (1)
Secondary: production involving the processing of raw materials into finished and semi-finished goods. (1)
Tertiary: Production of services in the economy (1)
Explain why there are changes in the importance of sectors: (5)
*For one of the points, there are 2 things that need to be said.
- People may prefer to spend their money on a certain sector. For example, people would prefer to spend their money on a service rather than a manufactured good. (2)
- There is fierce competition of manufactured goods in developing countries (1)
- The public sector may grow, which adds to the growth of the tertiary sectors (1)
- Advances in technology, this means that employment may fall in a certain sector. (1)
Define Productivity: (2)
The rate at which goods are produced (1), and the amount produced in relation to the work, time and money needed to produce them. (1)
Explain the factors effecting productivity: (3)
Land: Fertilizers, Drainage (improves the flow of water), Irrigation (redirecting water) (1)
Labour: Quality of Labour (improved training). Improved working practices, Migration (1)
Capital: Primary Sector (use of machinery to extract raw materials), Secondary Sector (use of complex plant and equipment to manufacture), Tertiary, (use of technology like machines at supermarket cashiers). (1)
Define Division of Labour: (2)
Breaking down of the production process into small parts (1) with each worker allocated to a specific task. (1)
Explain the Advantages and Disadvantages of division of labour:
Advantages: (4)
Disadvantages: (3)
Advantages:
- Efficiency is improved because the worker focuses on the same tasks whichallows them to be more skilled at that task (1)
- The more highly skilled workers are, the more likely they are going to get paid (1)
- Workers can learn new skills or improve their existing ones (1)
- The organization of production is easier because workers can fit in a structured system of production (1)
Disadvantages:
- Work may become boring because it is repetitive and demotivates workers (1)
- If workers are too specialized, they may be at risk of unemployment (1)
- If a problem occurs at one stage of the production process, it will have a knock-on effect. (1)
Define and state the formula for: (13)
- Total Revenue: (2) and (1)
- Total Costs: (1) and (1)
- Total Fixed Costs: (1) and (1)
- Total Variable Costs: (1) and (1)
- Average Costs: (1) and (1)
- Profit: (1) and (1)
Definitions:
Total Revenue: Amount of money generated from the sale of goods (1) calculated by multiplying price by quantity (1)
Total Costs: Fixed Costs and Variable Costs added together (1)
Total Fixed Costs: Costs that do not vary with the level of output (1)
Total Variable Costs: costs that change when output level changes (1)
Average Costs: The total cost per unit of output (1)
Profit: The money that is left over once all of the expenses in the business have been paid. (1)
Formula:
- Total Revenue = Price x Quantity (TR = PQ) (1)
- Total Cost = Fixed Cost + Variable Cost (TC = FC + TVC) (1)
- Total Fixed Cost = Total Cost - Variable Cost (FC = TC - TVC) (1)
Total Variable Cost = Variable Cost x Quantity (TVC = VC x Q) (1)
Average Cost = Total Cost/Quantity (TC/Q) (1)
Profit = Total Revenue - Total Cost (TR - TC) (1)
Define Economies of Scale: (1)
Falling average costs due to expansion (1)
Explain the types of internal economies of scale: (6)
Purchasing: Large firms that buy lots of resources get cheaper rates. Suppliers offer discounts to firms that buy raw materials. (1)
Marketing: For a large firm, with lots of deliveries to make, this would be cheaper than paying a distributor. The JESS canteen is catered by another company and it would be cheaper if they could cater their own food. (1)
Technical: They occur because larger factories are often more efficient than smaller ones. There can be more specialization and more investment in machinery. (1)
Financial: Large firms can get access to money more cheaply. They also have a wider variety of sources to choose from. (1)
Managerial: When a firm expands, they will be able to hire more specialized managers which can improve efficiency. Small firms have one general manager. (1)
Risk Bearing: Larger firms are more likely to have a wider product range and sell to a wider variety of markets. This reduces the risk in business. (1)
Define Internal Economies of scale (1)
Cost benefits that an individual firm can enjoy when it expands (1)
Define external economies of scale (1)
Cost benefits that all firms in an industry can enjoy when the industry expands. (1)
Explain the types of external economies of scale: (4)
Skilled Labour: If the industry is based in one area, there may be a build-up of labour with the skills and work experience required by that industry. (1)
Infanstructure: If a certain industry dominates the region, many modes of transportation and buildings will be directed to that area to meet the industries needs. (1)
Access to suppliers: An established industry in a region will encourage suppliers in that industry to set up close by. If this happens, all the firms in the industry will benefit. (1)
Similar businesses in the area: When firms in the same industry are located close to each other, they are likely to cooperate with each other so that they can all gain. (1)
Define Diseconomies of Scale: (1)
Rising average costs when a firm becomes too big. (1)
Explain the types of Diseconomies of Scale: (4)
Bureaucracy: If a business becomes too bureaucratic, it means to many resources are used in administration, this will cause average costs to rise. (1)
Communication Problems: Large organizations may have employees all over the world. Because they are all over the world, there are many different languages they speak. This will lead to problems in getting information across. (1)
Lack of control: If a business is too big, it will be difficult to control and coordinate, which may result in more layers of management needed but this will rise costs. (1)
Distance between senior staff and shop floor workers: If a firm becomes too big, relations between workers and managers may worsen. This can cause conflicts between them and resources being wasted resolving them. (1)
Explain the advantages of competition to a firm, consumer and the economy: (6)
- Firms: (2)
- Consumers: (2)
- Economy: (2)
Firm: - It pushes the firm to be more innovative which increases efficiency (1)
- It diversifies their products which increases productivity and lower business risks. (1)
Consumers: - Firms cannot overcharge consumers. If one firm tries to raise its prices. It will lose a lot of its business. This allows consumers to enjoy things at low prices. (1)
- Firms must be able to provide good quality products or else it will lose business. So consumers can enjoy good services. (1)
Economy: - Resources will be allocated effectively because firms need to operate efficiently to survive. (1)
- Because firms are more innovative, this benefits the economy because people will have a better standard of living. (1)
Explain the disadvantages of competition to a firm, consumer and the economy: (6)
- Firm (2)
- Consumer (2)
- Economy (2)
Firms: - There is more pressure to be more innovative and efficient where there is competition. (1)
- Resources may be wasted because businesses may not survive. (1)
Consumers: - Profitable firms might leave the market, due to market uncertainty, this means that some consumers may be inconvenienced. (1)
- There may be a lack of innovation because firms make less profit In the competitive market. This means that they don’t have the money to enhance their products which leaves consumers. (1)
Economy: - Resources may be wasted because some factors of production are immobile and it takes time for resources to be reallocated. (1)
- A competitive market may offer lower prices to stay competitive, however this decreases profit made. (1)
Explain the advantages and disadvantages of small firms: (9)
Advantages: (5)
Disadvantages: (4)
ADVANTAGES:
Flexibility: Small firms can adapt to change more quickly because the owners, who tend to be the decision makers, are actively involved in the business and can react to change (1)
Personal Service: Consumers may prefer to deal with the owner of the firm directly and are willing to pay a higher price for that. (1)
Lower Wage Costs: Many workers in small firms do not belong to trade unions. As a result, their negotiating power is weaker and owners are often to restrict pay to the legal minimum wage. (1)
Better Communication: Since small firms have a smaller workforce, communication tends to be informal and quick to get across which boosts the productivity of the business. (1)
Innovation: Because firms face competitive pressure to innovate, they will be more creative regardless of the resources they have. (1)
DISADVANTAGES:
Higher Costs: Small firms cannot exploit economies of scale because their output is limited. (1)
Lack of Finance: Small firms often struggle to raise finance, therefore their choice of sources is limited. (1)
Difficult attracting quality staff: Small firms may find it difficult to attract qualified and experienced staff because they lack resources. (1)
Vulnerability: When training conditions become challenging, small firms may find it more difficult to survive than their larger rivals because they don’t have resources for when economic conditions worsen. (1)
Explain the advantages and disadvantages of large firms: (6)
- Advantages: (3)
- Disadvantages: (3)
ADVANTAGES:
Economies of Scale: Average costs are likely to be lower than those of smaller rivals because they can operate in large-scale plants and exploit economies of scale (1)
Market Domination: Large firms can dominate a market because they have a higher profile than small firms and they benefit from this recognition. (1)
Large-scale contracts: For example in the construction industry, there are both small and large firms, however a small firm cannot compete with a large firm for a contract to build a motorway. Only large firms can win these. (1)
DISADVANTAGES:
Too bureaucratic: Large firms may be overwhelmed by the amount of administration in the firm. (1)
Coordination and control: A very large business may be difficult to control due to the high quantity of managers and employees. (1)
Poor motivation: Because the firm is so big, people may be demotivated because they might think that whatever they do is insignificant to the business since it is so big. (1)
Explain the factors influencing the growth of firms: (5)
Government Regulation: Governments will monitor business activity and ensure that individual markets are not dominated by one or a small number of firms. If this happens, the government may prevent businesses from becoming too big. (1)
Access to finance: Businesses need money to grow. They need it to open stores, build new factories or develop new products. (1)
Economies of Scale: When a firm expands, average costs will fall because they will be able to exploit economies of scale. (1)
The desire to spread risk: Risk can be reduced by diversifying their products, selling into new markets. So when one product fails, success in other products will keep going. (1)
The desire to take over competitors: By taking over rivals, it is a quick way of growing and therefore reduces competition. (1)
Explain why firms stay small: (4)
Size of market: Some of the markets are too small to sustain very large companies, like a luxury yacht business for example. (1)
Lack of finance: Some businesses would like to grow but are not able to do so because they are not able to raise the finance that is needed to expand. (1)
Nature of the market: In some markets, set-up costs are very low so there is little to discourage new businesses joining the government. (1)
Aims of the Entrepreneur: Some business owners may be happy with running a small business. This is because they are making profits they are satisfied with and would rather keep the business managable. (1)
Define Monopoly: (1)
A situation where there is one dominant seller in a market. (1)
Explain the features of a monopoly: (4)
- One product dominates the market (1)
- Unique Product (products are highly differentiated) (1)
- Price makers (can make the price go up or down) (1)
- Barriers to entry (prevents competition) (1)
Explain the barriers of entry: (5)
- Legal Barriers: It is possible to exclude competition legally (1)
- Patent: A license that grants permission to operate as a sole producer of a newly designed product. (1)
- Marketing budgets: Monopolies have strong brand names making it hard for other business to grow in that particular industry (1)
- Technology: If a dominant firm has up-to-date technology that another firm can’t obtain. This will act as a barrier of entry. (1)
- High start-up costs: In some markets, the cost of setting up a firm to compete with the existing operators is too high. (1)
Explain the advantages and disadvantages of monopolies: (7)
- Advantages: (3)
- Disadvantages: (4)
ADVANTAGES:
- Efficiency: For a market to be efficient, it could just have one dominant firm that supplies all the customers. (1)
- Innovation: Since monopolies make high profits, they can invest in research and development. This results to new products being developed which is a benefit for consumers. (1)
- Economies of Scale: Since monopolies are large, they can exploit economies of scale. This results in lower average costs and they can supply products at a lower price to customers. (1)
DISADVANTAGES:
- Higher prices: A firm that dominates the market is able to charge more for its products and they may restrict output to force prices to go up. (1)
- Restricted choice: There is only one supplier in the market, which means a lack of choice. (1)
- Lack of innovation: If monopolists dominate the market and is able to restrict entry, there is no need to develop new products. (1)
- Inefficiency: If a firm doesn’t face competition, there is no incentive to keep costs down. If they get too big, it could lead to diseconomies of scale. (1)
Define Oligopoly: (1)
A market that is dominated by few large firms. (1)
Explain the features of an oligopoly: (7)
- Few firms (1)
- A few Large firms dominate (1)
- Different products (they may all be offering the same thing, but there may be minor differences (1).
- Barriers to Entry (set-up costs are high and firms invest heavily in their brands). (1)
- Collusion: There are informal agreements between firms to restrict competition. (1)
- Non-price competition: Since firms are keen to avoid price wars, they compete using advertising, promotions and free offers. (1)
- Price Competition: The market leader sets the price and others follow. (1)
Explain the advantages and disadvantages of an oligopoly: (8)
- Advantages: (5)
- Disadvantages: (3)
ADVANTAGES:
- Choice: Competition in oligopolistic markets ensures that consumers are provided with some choice. (1)
- Quality: Since non-price competition is common in oligopolistic markets, one method firms can use to differentiate their product is to make it better, therefore the quality of products will improve. (1)
- Economies of Scale: If dominant firms can exploit economies of scale, their average costs will be lower. (1)
Innovation: Since large powerful firms dominate the market, they may have the resources to invest in research and development. (1)
Price Wars: Consumers will benefit from price wars because if one firm cuts its prices aggressively, the rest would have no choice but to follow. (1)
DISADVANTAGES:
- If firms agree to restrict competition, consumers may end up paying higher prices (1)
- If the market is shared out geographically, there will be a lack of choice because one firm will supply each area. (1)
- Cartels: Where a group of firms or countries join together and agree on pricing or output levels in the market. (1)
Explain the factors affecting the demand for labour: (3)
- Demand for the product: The demand from labour depends on the demand for the goods and services (1)
- Availability of Subsitutes: The demand for labour may be affected by the cost and availability of subsitutes of labour. For example, businesses may replace people with machines. (1).
- Productivity of Labour: If every worker is able to produce more output, demand for workers is likely to increase. (1)
Explain the factors affecting the supply of labour: (8)
- Population Size: As the population grows, there will be more people available for work. Therefore, supply of labour will increase.
- Migration: Many countries welcome immigrants to help increase the working population.
- Age distribution of population: In most developed countries there are more people that are 65 or above, which means they are going to be less able to work.
- Retirement Age: If the retirement age is high, people would have to work for longer.
- School leaving age: If children leave school early, they will be able to work and increase the working population.
- Female Participation: Nowadays, women are given more opportunities to work which increases the supply for labour.
- Skills and qualifications: If there are more people with qualifications, they will be eligible to work and will increase the supply for labour.
- Labour mobility: If workers are able to move from once place to another easily, they will be able to find work more easily
