1.2 (Enterprise, Business & The Economy)

Question 1

1.2.1 What is an entrepreneur? (e.gs?)

+ what is the difference between uncertainty & risk?

Answer 1

A person who sets up a business or businesses taking on financial risks in the hope of profit (Richard Branson & Anita Roddick)

+ risk means you know the range if possible outcomes and you can assess the probability of each. But with uncertainty you can’t guess this.

Question 2

What is creative destruction?

+ what does this lead to?

Answer 2

the process of economic change that results from the introduction of new technologies or products that render existing ones obsolete

+ every archaic business model will depreciate in value and lose market leverage ultimately disappearing

Question 3

Examples of creative destruction

+ what is a catalyst of creative destruction?

Answer 3

newspapers vs online media
CDs vs records

+ the internet

Question 4

Who created the phrase creative destruction & when?

+ example of a company who encourages this

Answer 4

Joseph Schumpeter in 1949

+ Google gives its employees 20% of their time to explore their areas of interest. This encourages internal entrepreneurship and innovation.

Question 5

What is adding value?

+ how is this done?

Answer 5

the difference between what a business pays its suppliers and the price that it is able to charge for the product/service

+ adding extras in the manufacturing process or by tacking on extra products/services

Question 6

1.2.2 What are the two types of entrepreneurial motives?

+ what are examples of each?

Answer 6

1) financial & 2) non financial

financial= profit

non financial=
+ ethical stance
+ social entrepreneurship
+ independence
+ home working

Question 7

What is profit?

+ what does it act as?

Answer 7

the financial benefit realized when revenue generated from a business activity exceeds the costs involved

+ an incentive & a signal to enter a market

Question 8

What is social entrepreneurship?

+ what is philanthropy?

Answer 8

an approach by individuals, groups, start-ups or entrepreneurs in which they develop, fund & implement solutions to social, cultural or environmental issues

+ doing charitable things to make a long lasting impact

Question 9

1.2.3 What are factors of production?

Answer 9

The inputs needed for creating a good or service

Question 10

Name the 4 factors of production

+ are they active or passive?

Answer 10

Enterprise
Capital (P)
Land (P)
Labour (A)

Question 11

What is enterprise?

+reward

Answer 11

-The process of launching and running a business.
- Management of the other FOP to combine them into a product or service.

+ profits

Question 12

What is land? (e.g?)

+reward

Answer 12

Natural resources available for production (e.g premises and raw materials)

+ rental income to owners of the land

Question 13

How is the use of land maximised?

Answer 13

Using technology

Question 14

What is labour? (+e.g)

+reward

Answer 14

The human input into the production process (managers and employees)

+ wages and salaries from employment

Question 15

What is capital? (+e.g)

+ reward

Answer 15

Goods used in the supply of other products (e.g equipment)
- an investment

+ interest from savings and dividends from shares

Question 16

What are the two types of capital?

Answer 16

Physical = tangible assets
Financial = legal ownership of assets/money

(Financial is used to buy physical)

Question 17

What is human capital?

+what is this represented by?
+ how can this be improved?

Answer 17

The economic value of a worker’s experience and skills

+labour
+ through training and education

Question 18

What is primary production?

Answer 18

Extracting resources from the earth

Question 19

1.2.4 What is specialisation?

+ what is division of labour?

Answer 19

process by which individuals, firms and economies concentrate on producing those goods & services in which they have an advantage

+ assignment of different parts of a manufacturing process or task to different people in order to improve efficiency

Question 20

Who coined the term specialisation?

+ what did he say this led to

Answer 20

Adam Smith in his book The Wealth of Nations

+ society as a whole would benefit from higher incomes & standards of living

Question 21

What is geographic-specialisation?

+ Why do people specialise?

Answer 21

When regions and countries specialist in producing goods & services and then trade with other countries to fill the gaps

As it increases productivity leading to a lower cost per unit. This means a lower price can be charged and more can be sold.

Question 22

Example of division of labour

Answer 22

Henry Ford creating the assembly line to mass produce cars. This allowed him to sell them for a lower price.

Question 23

Advantages of division of labour

Answer 23

+ higher productivity & lower cost per unit
+ aids economic growth & living standards
+more jobs available allowing for specialisation
+ workers should become more skilled over time
+ less time and effort wasted
+ capital machinery can be used continuously during production
+ time and money is saved training workers
+ allows for wage increases
+ lower prices give consumers greater real purchasing power
+ leads to GDP growth

Question 24

Disadvantages of division of labour

Answer 24

• monotony of work
• possible lower quality of work
• increased staff turnover (increased cost for recruitment)
• chance of structural unemployment
• greater interdependence & higher risk
• doesn’t encourage innovation
• absenteeism increase
• increases administrative expenses

Question 25

1.2.5 Why was money developed? + What is the base rate?

Answer 25

as a 'Medium of Exchange' to make buying and selling easier + the interest rate set by the Bank of England

Question 26

What are interest rates? + Why are interest rates important for businesses?

Answer 26

the amount you are charged for taking out a loan– shown as a percentage of the total amount of the loan + impact in terms of cost of borrowing & impact on demand + impact level of of borrowing & investment that a business is willing to undertake

Question 27

Factors which affect how much a loan costs + what is a secure loan?

Answer 27

- how long money is borrowed for - how much money is borrowed - whether secured or unsecured - interest rate charged + a loan backed by collateral

Question 28

What does money supply consist of?

Answer 28

- notes and coins in circulation - bank deposits are money - cards and cheques are not money only a means of transferring it

Question 29

Why do companies borrow money? + what are fixed and variable interest rates?

Answer 29

+ to help start up a business + to help expand a business (e.g fund merger/takeover) + to help cash flow management + (F)= interest rate stays same (V)= interest rate changes

Question 30

What are the impacts of interest rates changing?

Answer 30

- will decrease profits - firms may struggle to afford extra interest payable if rates increase - amount of money borrowed may be too much to afford monthly repayments and business goes bust

Question 31

What will happen for businesses if interest rates are lowered? + and if they are raised? (are all businesses affected the same by this?)

Answer 31

- business repayments will be less (allows for expansion) - customers will spend more (increased profit) + business repayments will be more + customers will spend less (decreased profit) (No, necessities will be less affected and luxury goods bought on credit will be the hardest hit)

Question 32

What are taxes and why are they needed? + what does an increase in taxation mean for consumers and also for businesses?

Answer 32

Mandatory contributions levied on individuals or corporations by a government entity (finance government activities incl public works & services) + reduce disposable income & alters demand + affects retained profit & may even discourage investment in certain locations

Question 33

What is direct tax? + examples of direct taxation?

Answer 33

Imposed on income and paid directly to the government + income tax + National Insurance + corporation tax + capital gains tax

Question 34

What is indirect tax? + examples of indirect tax and which goods/services they would apply to?

Answer 34

Taxation on spending & collected by Customs & Excise + VAT (general goods) + Excise duty (cigarettes & alcohol) + Airport tax (flights)

Question 35

What is inflation? + how is it calculated? (what does high inflation mean?)

Answer 35

gradual loss of purchasing power that is reflected in a broad rise in prices for goods & services over time +average price increase of a basket if selected goods & services over one year (prices are increasing quickly)

Question 36

What is the impact of inflation?

Answer 36

- uncertainty for businesses - rising production costs - reducing demand - workers strive for wage increases - redistributive effects & altered consumer spending patterns - reduced competitiveness w other countries

Question 37

What happens to consumers if unemployment increases? + and for businesses?

Answer 37

1) fall in consumer income 2) fall in consumer confidence 3) reduction in demand + wider pool of labour to choose from for recruitment & less upwards pressure on wages

Question 38

1.2.6 What are exchange rates? What does the anagram SPICED mean? + what does this mean for firms?

Answer 38

the value of one currency for the purpose of conversion to another Strong Pound Imports Cheaper Exports Dearer + firms that import will be able to buy cheaper raw materials & finished goods + firms that export will see less demand

Question 39

What are the 6 factors that influence exchange rates?

Answer 39

Inflation Interest rates Speculators Relative strength of other currencies Government debts Economic growth/recession

Question 40

How does _____influence exchange rates? 1) inflation 2) interest rates 3) speculators

Answer 40

1) + if levels are relatively low here, UK exports will become more competitive, increasing demand for the pound to buy UK goods. + foreign goods less competitive so UK people will buy less imports 2) + if higher here more people will deposit money here as it has a higher rate of return 3) + if they believe the pound will rise, they will demand more now to be able to make a profit. increase in demand will cause value to rise

Question 41

How does___ influence exchange rates? 4) relative strength of other currencies 5) government debt 6) economic growth/recession

Answer 41

4) + money will flow to stronger economies 5) + if markets fear a government may default on its debt, investors will sell their bonds causing a fall in value of exchange rate 6) + recession may cause a depreciation in the exchange rate because during a recession interest rates usually fall

Question 42

What is the forex market? + in this market what are demand and supply?

Answer 42

- The foreign exchange market is where currencies are bought and sold - exchange rate determined by market forces + D= foreign nationals buying pound S= British nationals selling pound (buying foreign currency)

Question 43

What is hot money?

Answer 43

Flow of funds from financial institutions all over the world that chase returns (interest)