BA1 Fundamentals of Business Economics - The goals and decisions of organisations

Question 1

What are the two main sectors of organisations?

Answer 1

Public sector and Private sector

These sectors define who owns the organisations.

Question 2

What are the two main categories of objectives of organisations?

Answer 2

Non profit and For profit

These categories represent the goals that organisations aim to achieve.

Question 3

True or False: Non profit and for profit enterprises can be found in both public and private sectors.

Answer 3

True

This indicates that the sectors and categories may overlap.

Question 4

What does the public sector refer to?

Answer 4

Organisations involved in the provision of goods or services by and for the government at various levels

Includes national, regional, or local levels.

Question 5

Name three common areas where public sector services operate.

Answer 5

• Hospitals
• Schools
• Defence
• Police

These areas have traditionally been serviced by public sector organisations.

Question 6

What are publicly owned corporations sometimes referred to as?

Answer 6

State Owned Enterprises

These are entities owned by the government.

Question 7

True or False: The public sector only includes services at the national level.

Answer 7

False

The public sector operates at national, regional, and local levels.

Question 8

Fill in the blank: Public sector organisations provide goods or services by and for the _______.

Answer 8

government

This highlights the role of government in the public sector.

Question 9

What is the principal goal of a public organisation?

Answer 9

To provide services deemed important by society

Unlike most social organisations, which are generally profit-driven.

Question 10

How are public organisations funded?

Answer 10

Through taxation revenues

This funding model necessitates accountability in resource allocation.

Question 11

What are the key responsibilities of public organisations in terms of resource usage?

Answer 11

Demonstrate efficiency in allocation and use of resources

This includes maximizing quality and quantity of services.

Question 12

What must public organisations balance to ensure financial stability?

Answer 12

The financial budget

Balancing the budget is crucial for sustainability.

Question 13

True or False: State Owned Enterprises can have a profit motive.

Answer 13

True

They may have more commercial freedom than typical public organisations.

Question 14

What may influence the decision-making of a State Owned Enterprise?

Answer 14

Certain goals set by the Government

Despite having a profit motive, government goals can guide decisions.

Question 15

Fill in the blank: The efficiency of public organisations is measured by maximizing the _______ and _______ of services.

Answer 15

quality; quantity

These are critical factors in assessing public service performance.

Question 16

What are public-private partnerships?

Answer 16

Collaborations between the Government and the private sector

These partnerships are often formed to manage public services or infrastructure projects.

Question 17

What is the rationale behind involving the private sector in public services?

Answer 17

To run more efficiently with better allocation of resources

This rationale emphasizes the belief that private expertise can improve public sector performance.

Question 18

True or False: Public-private partnerships are solely focused on profit generation.

Answer 18

False

While profit is a factor, these partnerships also aim to enhance public service delivery.

Question 19

What are the two examples of organizations that exist to bring benefits to society without being owned by the government?

Answer 19

Mutuals and cooperatives

These organizations are typically formed for non-profit making objectives.

Question 20

What is the primary purpose of a mutual?

Answer 20

To raise funds from its members to provide common services

Members are collectively called its members.

Question 21

Who owns a mutual?

Answer 21

Its members

It is run for the benefit of its members and has no external shareholders.

Question 22

Give an example of a well-known mutual.

Answer 22

Nationwide Building Society

This is a notable example of a mutual organization.

Question 23

How do cooperatives operate?

Answer 23

Member-owned, democratically controlled, and on a non-profit basis

They return any margins or profits to members based on usage.

Question 24

What is the main distinction between mutuals and cooperatives?

Answer 24

Operating principles: ‘to each according to use’ for co-ops and ‘to each according to need’ for mutuals

This reflects their different goals and member interactions.

Question 25

What is the goal of a mutual?

Answer 25

To create a fund for members in times of need ## Footnote Members purchase insurance policies and pay premiums, hoping never to need them.

Question 26

What do members of a cooperative aim to do?

Answer 26

Use the services offered as often as possible ## Footnote This maximizes the benefit of being a co-op member.

Question 27

What is a mutual organization’s approach to surplus?

Answer 27

Mutuals aim to make a surplus, but it is used to benefit members, such as offering better interest rates on borrowings and deposits.

Question 28

What is the main goal of charities?

Answer 28

Charities aim to provide a service to society as a whole or to a specific target group within society.

Question 29

What are QUANGOs?

Answer 29

QUANGOs (Quasi Autonomous Non-Governmental Organisations) are non-departmental public bodies that perform tasks on behalf of the Government.

Question 30

What is the general goal of non-profit organizations?

Answer 30

To provide value for money, ensuring resources are used effectively and efficiently.

Question 31

What are the 3 Es used to measure value for money in non-profits?

Answer 31

Economy – Acquiring resources cheaply Efficiency – Minimizing resource wastage Effectiveness – Aligning operations with objectives

Question 32

What are the advantages and disadvantages of sole traders and partnerships?

Answer 32

Advantage: Least administration and red tape Disadvantage: Owners have unlimited liability, meaning personal assets can be seized to pay business debts

Question 33

What is a key benefit of a limited company?

Answer 33

The owner’s liability is limited to the nominal value of the shares they own.

Question 34

What is the key difference between a private limited company (Ltd) and a public limited company (plc)?

Answer 34

A private limited company (Ltd) cannot offer shares to the public. A public limited company (plc) can sell shares/securities to the public.

Question 35

How does Mendelow’s stakeholder mapping help businesses?

Answer 35

It helps organizations prioritize stakeholders based on their power and level of interest in the business.

Question 36

What are the four categories in Mendelow’s stakeholder mapping?

Answer 36

Minimal effort required (Low Power, Low Interest) Keep informed (Low Power, High Interest) Keep satisfied (High Power, Low Interest) Key player (High Power, High Interest)

Question 37

What are alternative goals for profit-making businesses?

Answer 37

Revenue maximization (Baumol's theory) Long-term survival Satisficing – Achieving just enough to keep shareholders happy while benefiting management

Question 38

What two main returns do shareholders expect when investing in a limited company?

Answer 38

Dividends (regular income) Growth in share value (capital appreciation)

Question 39

What is another term for "required rate of return"?

Answer 39

Cost of capital – the minimum acceptable return on an investment made by a business.

Question 40

Why is the concept of ‘cost of capital’ important?

Answer 40

It helps businesses determine whether an investment is worthwhile by setting a minimum acceptable return.

Question 41

What does ROCE measure?

Answer 41

ROCE (Return on Capital Employed) measures how efficiently capital (equity and debt) has been used to generate profit before finance costs.

Question 41

What is the formula for ROCE?

Answer 41

ROCE = (Profit from operations) ÷ (Total assets - Current liabilities)

Question 42

What is another term for "Profit from operations"?

Answer 42

Profit before interest and tax

Question 43

What does Earnings Per Share (EPS) measure?

Answer 43

EPS is used to monitor the short-term performance of listed companies, with an emphasis on year-on-year growth.

Question 44

What is the formula for Earnings Per Share (EPS)?

Answer 44

Profit available for ordinary shareholders) ÷ (Number of equity shares in issue)

Question 45

How is "profit available for ordinary shareholders" calculated?

Answer 45

Profit after tax minus preference dividends

Question 46

What does the P/E ratio indicate?

Answer 46

The P/E ratio (Price-to-Earnings ratio) provides insight into the market’s perception of a company’s future growth potential.

Question 47

How can the P/E ratio be used to compare companies?

Answer 47

If two companies have the same EPS but one has a higher share price, investors believe it has better future potential or that the other company is higher risk.

Question 48

What does a rising P/E ratio suggest?

Answer 48

A higher P/E ratio indicates greater investor confidence in the company’s ability to generate future profits.

Question 49

What is P/E Ratio formula?

Answer 49

P/E Ratio = Share price / Earnings per share

Question 50

What is corporate governance?

Answer 50

Corporate governance refers to how an organization is managed and controlled, ensuring directors act in shareholders’ best interests.

Question 51

How can conflicts between shareholders and directors be managed?

Answer 51

Through reward schemes such as: - Profit-related pay - Share option schemes - Corporate governance regulations (e.g., UK Corporate Governance Code)

Question 52

What does Baumol’s Sales Maximization theory suggest?

Answer 52

Managers focus on expanding sales to increase prestige, bonuses, and job security.

Question 53

What is Williamson’s Management Discretion theory?

Answer 53

Managers act in self-interest but ensure they achieve minimum profit acceptability to satisfy shareholders.

Question 54

What does Cyert & March’s Organizational Coalition theory propose?

Answer 54

Stakeholders must compromise to maintain political balance within the organization.

Question 55

What is an example of a market for factors of production?

Answer 55

The labour market, which determines the market wage for a particular group of employees.

Question 56

What is the "price mechanism"?

Answer 56

The price mechanism determines how scarce resources are allocated based on changes in supply and demand.

Question 57

How does a price change affect consumers and producers?

Answer 57

A price change acts as a signal, influencing how much buyers purchase and sellers produce.

Question 58

What is a Free Market Economy?

Answer 58

An economy where market forces (supply and demand) determine what is produced, how much, and who gets it, with minimal government intervention.

Question 59

What is a Mixed Economy?

Answer 59

An economy where both market forces and the government determine resource allocation. In Western Europe, up to half of economic activity is government-driven.

Question 60

What is a Planned (Command) Economy?

Answer 60

An economy where the state owns and controls production, making central decisions on what to produce and how to distribute it.

Question 61

What are the two main methods of business expansion?

Answer 61

Organic growth – Expanding internally by developing products or acquiring resources. Mergers & Acquisitions – Combining with or taking control of another business.

Question 62

What is the difference between a merger and an acquisition?

Answer 62

Merger: Two firms join with balanced control (rare in practice). Acquisition: One business takes control of another.

Question 63

What is a connected stakeholder?

Answer 63

A connected stakeholder is a person or group that has a direct relationship with an organization. e.g customers, suppliers

Question 64

What is an internal stakeholder?

Answer 64

An internal stakeholder is someone who is within the organization and has a direct interest in its success or failure. e.g Managers, employees

Question 65

What is an external stakeholder?

Answer 65

An external stakeholder is someone outside the organization who is affected by or can affect its activities but is not directly involved in its internal operations. e.g government