Theme 1 Flashcards
(151 cards)
1
Q
Scarce resource
A
Anything useful which is not available in unlimited quantities
2
Q
Opportunity cost
A
Using a scarce resource in one way means we sacrifice alternative uses. The best alternative given up
3
Q
Trade - off
A
Involves choice, often used when looking at a balance between two choices, choosing more of one and less of the other, rather than making a simple either/or choice
4
Q
Positive statements
A
Testable as factual or false, usually on the basis of observation and evidence
5
Q
Normative statements
A
Statements about the economy that depend on opinion and judgement, often involve ideas on what should be done. VALUE JUDGEMENTS
6
Q
Profit
A
Surplus of sales revenue over costs, profit maximisation is a possible business objective, short or long term
Compensates the entrepreneur for carrying the risks associated with running a business
7
Q
Entrepreneurs
A
Individuals who set up a business, accepting the risks involved, taking the decisions about what to produce and how, as well as working out how to market the product
8
Q
Sales maximisation
A
Make the most sales revenue possible without the business making a loss
9
Q
Satisficing
A
Reaching a good enough profit level without maximising
10
Q
Market share
A
The proportion of a specific market that is supplied by one business. Calculated as total sales by the business as a percentage of total sales in the market. A large share = some market power, degree of security and reduced risk
11
Q
Return on investment
A
Prioritised by owners and others who provide finance, would come from interest on loans or dividends for shareholders
12
Q
Cost efficiency
A
Helps the compete effectively, greater efficiency in use of resources cuts production costs
13
Q
Social objectives
A
May include employee welfare, especially where some employees are likely to be poorly paid. For businesses with environmental concerns, sustainability may be an important objective. An ethical business takes account of its impact on employees, local environment and customers
14
Q
Customer satisfaction
A
Can be an objective that ensures repeat purchases, or an outcome of fair and responsible business behaviour that builds a good reputation for the business. Can be pursued to ensure good profits or as a matter of principle based on concern for the customer
15
Q
Economic agents
A
All those groups of people and organisations that are involved in economic activity and take decisions that affect how resources are used
16
Q
Stakeholder
A
Anyone with an interest in a business, or feeling an impact from it
17
Q
Shareholders
A
Legal owners of a business, may have helped to finance the start up or they may have bought shares in the stock exchange
18
Q
Suppliers
A
Firms from which the business can buy the material inputs or services that are needed in the production process
19
Q
Creditors
A
Those to whom the business owes some money
20
Q
Corporate social responsibility
A
A business behaving ethically and accepting responsibility for its effects on its stakeholders, including the wider community and environembt
21
Q
Tax evasion
A
Illegally failing to pay taxes due to
22
Q
Tax avoidance
A
Finding legal ways to reduce tax liability
23
Q
Transnational or multinational corporations
A
Business with operations in more than one country. Some TNCs are effectively global
24
Q
Zero-hours contracts
A
Employees work only when they are needed, often at short notice, their pay depends on hours worked, some contracts oblige workers to take shifts that are offered
25
Creative destruction
Refers to the way in which quality-improving innovations lead to economic growth. Customers switch to new products and old products become obsolete. Innovations that cut costs and eventually proves, will have the same effect
26
Innovation
Developing an idea that will generate new or improved products or production techniques
27
Added value
Represents the difference between the cost of material inputs and the eventual value of the product in terms of the price that can be charged for it
28
Costs of production
All the payments that have to be made in order to get a product into the market place. Include wages, premises and all other input costs - raw materials, components, inputs bought from wholesalers, business rates, interest, energy bills
29
Investment
Spending now in order to generate income. Examples: premises, capital equipment, researching and developing the product, training employees
30
Incentives
Financial and other rewards that can induce people to behave in a certain way. Prospect of profit is an incentive that encourages businesses to produce more or to develop a new or different product
31
Social entrepreneurs
Use business methods and strategies to achieve social objectives, seek innovative solutions to difficult social problems
32
Factors of production
Land, labour and capital. Essential inputs into the production process, together they contribute the value added to the output, making it saleable in the market place
33
Enterprise
Sometimes called the fourth factor of production because it is fundamental to the organisation of the economic activity and willingness to take risks in return for profit
34
Labour
Human effort contributing to production, wages and salaries earned in return
35
Land
Space where production can be located but it also refers to the natural resources that are inputs to the production process. Landowners receive rent
36
Capital
Includes premises and equipment that are used repeatedly in production. Owners of capital receive interest or dividends
37
Specialisation
People make the most of their skills by concentrating their expertise in a particular task. Skilled person produces more, output per head will rise, standards of living will improve across the economy
38
Exchange
Allows us to trade our own products for those of others, giving us a range of goods and services that we want or need. Money makes the exchange of products easy, enabling us each to specialise and so become more skilled and productive
39
Division of labour
Involves organising employees so that individuals specialise in one part of the production process. As they become quicker and more proficient at specific tasks, output increases. Ideally, people specialise in the type of work to which they are best suited
40
Efficiency
Using resources in the most economical way possible. As efficiency increases, output put per person will be higher. Specialising brings skills and understanding that speed up production and may also lead to new or better products. Value added may increase as know-how develops
41
Working capital
Refers to the finance needed by a business to cover production costs - rent, wages and the costs of other inputs needed - until payment is recieved
42
Interest rates
Specify the amount that has to be paid by the borrower to the lender. Where there is a risk that the lender will not be repaid, the interest rates will be higher
43
Income tax
Levied on the incomes of individuals. There is a personal allowance which is tax free. This allowance is often increased in the annual budget, sometimes by the rate of inflation
44
Corporation tax
Paid by businesses, the level will be a percentage of the profit made. Currently 25%, risen from 19% last year
45
VAT
Value added tax, collected by businesses and adds 20% of the prices of most goods and services
46
Skill shortages
Occur when people available for work do not have the skills that employers need. This is most likely when the economy grows, unemployment is low and technology chsnges
47
Effective demand
Combination of desire for a product or service with the ability and readiness to pay
48
Consumer sovereignty
Suggests that consumers control resource use by deciding what to buy
49
Income
Flow of money received by an individual or household over time, often a reward for economic activity
50
Demand schedule and demand curve
Schedule - table showing the quantities demanded at different price levels
Curve - graph of the relationship between quantity demanded and price
51
Supply curve
Graphical representation of the relationship between quantity supplied and price, for all suppliers in the market
52
Short run and long run
Short - time period in which the quantity of at least one component in production cannot be changed
Long - the time period in which the quantities of all factors of production can be changed Long
53
Excess supply
Occurs when the quantity supplied is greater than the quantity demanded. This disequilibrium would usually be caused by setting a price that is too high to attract enough customers to buy the quantity suppliers are offering
54
Excess demand
Quantity demanded outstrips the quantity supplied. Shortage of the product. Raising the price will cause customers to buy less and restore equilibrium
55
Equilibrium price
The price at which quantity supplied and quantity demanded are equal in a market, leaving neither excess supply nor excess demand
56
Market clearing
Getting a balance between quantity supplies and quantity demanded, normally by arriving at the equilibrium price
57
Profit signalling mechanism
Refers to the way that potential profits will attract entrepreneurs to a growing market, losses will lead businesses to consider leaving a market. This process shifts resource use towards the products that are most in demand
58
Ceteris paribus
This assumption freezes all variables other than the one being studied, avoiding complications and allowing us to examine individual changes. ‘Other things being equal’
59
Economic models
Use simplified assumptions to describe economic relationships. Allowing us to isolate changes and analyse their consequences, avoiding complications that occur when several change at once. Their success depends on how realistic the assumptions are. Supply and demand theory gives us a model for analysing the effects of any change that will alter the price or quantity sold
60
Allocation of resources
Reflects decisions people take about what to buy, what to produce and how best to us the available land, labour and capital
61
Price mechanism
An economic model that helps explain the allocation of resources between different possible uses. It shows how the invisible hand guides resources towards production of what consumers will buy
62
Homogenous and differentiated products
Homogenous - uniform, identical whatever their origin
Differentiated - distinctive, with different design features and/or branding
63
Oligopoly
A market structure with a few large firms dominating the market, often smaller firms competing as well. Oligopolists are present in many mass markets
64
Niche market
A small segment of a market with a distinctive, specialised requirements. They may be associated with subcultures - groups of people with common interests
65
Market research
The process of gathering data in order to understand current and future customer needs and the nature of the marketplace. Reduces the risk in developing a new business idea
66
Market segmentation
Identifying different groups of consumers in a market where each group has distinctive preferences. Products and marketing strategies can be differentiated to suit individual segments
67
Market positioning
The way a product is seen in comparison with rival products. Market research helps to position products to match customer preferences or appeal to different market segments
68
Repositioning
Changing the target market segment, seeking more sales revenue and profit
69
Market map
Tool that plots brands in the market according to how they meet customers’ needs. Allows a business to position individual products effectively
70
Competitive advantage
Means having an edge over rival products. There are many ways of making the perception of a product positive, depending on the nature of the market and its consumers
71
Product differentiation
Entails unique features which distinguish a product from its rivals. This may be based on special characteristics or a distinct image which has been developed
72
Adding value
When factors of production are used to make material inputs more valuable to potential customers. It is the difference between the price paid and the total cost of other inputs needed to create the product
73
Competitive pricing
Takes account of prices charged for a similar products competing in the same market. Prices will usually be the same or a little below the closest rival
74
Banks
Take deposits from people to businesses that wish to save, then lend to people, businesses and governments wish to borrow. Banks can expand their lending over and above the total amount they receive from savers, relying on the fact that not all customers will withdraw their deposits at once. Encourages economic growth and helps to raise standard of living
75
Working capital
The finance needed to keep the company’s day-to-day business going. There must be enough working capital to cover short-term debts
76
Collateral
On a loan, means there is no risk to the lender. If they can’t be repaid the collateral assets can be sold to pay off the debt
77
Risk
The possibility that events will not turn out as expected. Probability of some risks can be calculated, by referring to past experience, but mistakes are made and uncertainty may make calculation impossible
78
Financial intermediaries
Include retail and investment banks, building societies, pension funds and insurance companies. Internet has enabled ‘peer to peer’ lending businesses to grow. Offer a link between savers and borrowers
79
Unlimited liability
Individual as no legal separation from their business and is therefore personally responsible for the debts of the business. Their personal assets could be used to pay business debts. If they business is not able to cover them
80
Limited liability
Protects shareholders, as individuals they are legally separate from the business. Most that shareholders have to contribute towards business debts is the amount of capital originally invested in buying shares
81
Private limited companies
Owners have limited liability for business debts but cannot rise finance from the general pubic. Often family businesses and shareholders are members of the family or personal friends
82
Public limited companies
Owned by the shareholders, who have limited liability. Companies can raise finance by selling shares to the general public and large organisations, such as pension funds. Can raise substantial finance in order to expand
83
Internal finance
Comes from within the business. Can be retained profit or cash raised from the sale of assets
84
Personal savings
Important source of finance for new or small businesses. Before getting started, entrepreneur will save to fund the early expenses associated with the production process. Savings may also contribute to the purchase of capital equipment
85
Retained profit
Profit that is being reinvested in the business rather than being given to the owner of the business as dividend payments. Does not incur interest payments or dilute ownership of the business. Long term source of finance.
86
Sales of assets
Refer to physical assets such as machinery or property, or to intangible assets such as the patent to a particular product. Long-term source of finance
87
Working capital
Cash held by the business, used to keep the business going in the short run
88
External finance
From banks or investors that have no direct connection with the company
89
Ordinary share capital
Long-term finance raised by selling shares in a business. Does not have to be repaid. Investors receive part-ownership of the business and a share of profits in the form of dividends
90
Equities
Another name for shares
91
Stock exchange
A market where a share of PLCs can be bought and sold. Investors can sell if for some reason they wish to turn their shares into cash
92
Venture capital
Money invested in a business by individuals or groups who feel that the business can succeed and therefore increase in value, and will take the risk that it might fail. Venture capital is long-term and normally exchanged for a share of ownership
93
Bank loans
One of the most common forms of external finance
94
Loan
Amount borrowed for a fixed period at a fixed interest rate. Paid back in regular instalments until the amount is repaid with interest. Medium to long-term finance
95
Overdraft
Short-term flexible loan where a bank allows a business to operate with a negative balance. Interest is paid on the amount overdrawn, usually at a higher rate than is charged for a fixed sum loan. Useful for covering short-term debt
96
Leasing
Used by businesses needing land, buildings or equipment which they are unable or unwilling to buy. It is the name given to ‘renting’ an asset. Many businesses lease vehicles, office equipment. Initially cheaper than buying
97
Leasing
Allows a business to use an asset without owning it,by making regular payments to the owner. Over time the total paid for leasing may be more than the cost of buying the asset
98
Trade credit
Short-term source of finance offered when suppliers allow a time period before augment must be made. Credit provided will vary between suppliers and may be changed by the supplier. Small suppliers can struggle to get large firms to pay on time
99
Third party
Someone other than the buyer or seller who experiences the consequences of others economic activity
100
Externalities
Costs and benefits affecting anyone other than the buyer or seller
101
External costs
Costs that impact on third parties
102
External benefits
Gains which impact on third parties
103
Private benefits
Buyer’s gains from consumption of goods and services
104
Private costs
Costs paid by a supplier of a good or service
105
Social costs
Total of private costs and any external costs
106
Social benefits
Total of private benefits and any external benefits
107
Overproduction or overconsumption
Occur when prices reflect only the private costs of production, ignoring any external costs
108
Underproduction or underconsumption
Occur when less is produced than would be optimal for society as a whole, given thee external benefits of the product
109
Market failure
Occurs when markets allocate resources inefficiently, often because. Market prices are distorted. Governments may intervene to correct market failure, using anti-monopoly legislation or provision of public services or regulating industries
110
Command economy
Relies predominantly on public sector provision of goods and services
111
Mixed economies
Have a private sector and a public sector. They are market economies it significant public sector activity, where decisions are based on the public interest
112
Government failure
When a public sector activity Orr government intervention,intended to correct a market failure, makes the situation worse rather than better
113
Regulation
Applying rules to businesses and other organisations. May be imposed by governments or by trade associations that want to maintain the reputation of the industry. Example - caps on vehicle emissions and rules governing the way financial advice is given
114
Subsidy
A payment per unit sold which effectively increases supply. Usually the price falls and quantity increases
115
Sales volume
Total physical quantity of products sold
116
Sales revenue
The total incoming payments for products sold
117
Sales revenue equation
Price x quantity sold
118
Start-up costs
Incurred in setting up a business organisation
119
Capital spending
Occurs when a business invests in premises or equipment or something else of long term benefit to the business
120
Investment
Involves spending now which generates income in the future, eg buying capital equipment or spending on research or training
121
Operating costs or running costs
Paid regularly by a business in the course of operating. Include fixed and variable costs and correspond to total costs
122
Fixed costs
Not directly linked to the level of output of the business. Do not change when output increases or decreases. Sometimes called indirect costs or overheads. Fixed costs include all capital spending but also some regulator costs such as staff salaries and leasing
123
Variable costs
Directly linked to the level of output of the business. They change as output increases or decreases. Sometimes called indirect costs direct costs. Include materials and the cost of paying any employees paid solely according to their contribution to actual production
124
Depreciation
The loss in value of capital equipment over time, often due to wear and tear or technology becoming dated
125
Law of diminishing returns
If one or more factors of production is fixed, adding more and more of a variable factor will eventually add less output
126
Average variable costs
The total of variable costs divided by output
127
Profit equation
Sales revenue - cost
128
Sales revenue equation
Sales volume x selling price
129
Loss
Business will make a loss when revenue earned is less than total costs
130
Contribution
The amount each sales raises towards fixed costs or profit
131
Contribution equation
Selling price - variable costs include all
132
Breakeven point
Total fixed costs + Total variable costs = Total sales revenue
133
Number of contributions needed to reach breakeven
Fixed costs / contribution
134
Breakeven point
The volume of sales at which a business breaks even, so total revenue matches cost exactly
135
Breakeven analysis
The calculation and interpretation of information about the breakeven sales level
136
Margin of safety
The volume by which sales are above the breakeven point
Expected sales (or actual sales) - breakeven sales level
137
Barriers to entry
Obstacles to new entrants which affect some industries, particularly where competing businesses are very large
138
Sunk costs
Heavy start-up costs which cannot be recovered, increase the risk of entry, acting as a deterrent or barrier
139
Market entry and exit
Market entry refers to businesses that set up in, or move into, a new market. Exit occurs if they cannot make a profit and can find no way of competing effectively
140
Turnover and and revenue
Names for the sum of payments received, normally for a year
141
Statement of comprehensive income / profit and loss account
Starts with a figure for sales revenue and deducts each different group of costs to arrive at measures of profit
142
Variable costs, Costs of goods sold (COGS)
Costs of inputs to the production process, e.g labour, components, raw materials. This excludes overheads and will vary directly with the amount produced
143
Profit of the year / net profit
What remains from sales revenue after the deduction of all operating costs, including overheads, tax and interest payable. If a loss has been made figures are shown in brackets. Net profit is a revealing measure of performance which can be used to make comparisons over a number of years
144
Gross profit equation
Sales revenue - variable costs, Gross profit margin = (Gross profit x 100) / sales revenue and
145
Operating profit equation
Gross profit - fixed costs, operating profit margin = (operating profit x 100) / sales revenue
146
Net profit
Operating profit - tax and interest, net profit margin = (net profit x 100) / sales revenue
147
Insolvency
Occurs when a business fails because a lack of cash means that debt cannot be paid
148
Cash flow forecast
A month by month prediction of the timing of expected cash inflows and outflows for a business
149
Cash inflows
Money received by a business, this includes revenue, investment and borrowing
150
Cash outflows
Money leaving a business. This includes fixed and variable costs as well as cash withdrawals by the business owner
151
Liquidity
Having sufficient cash available, sometimes also having assets which can quickly be converted to cash
