Business Economics - Key Terms

Key Terms

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  • Created on: 28-04-12 17:57


The rewards for risk taking

Total Revenue - Total Cost

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Increase Profit

Lower Costs

- Use cheaper materials

- Use more efficient manufacturing

- Economies of Scale

Lower Price

- Increase sales revenue

Increase Price

- Increase sales revenue

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Decrease Profit

Increase Cost

- Use more expensive materials

- Use less efficient manufacturing

- Diseconomies Of Scale

Increase Price

- Decrease sales revenue

Decrease Price

- Decrease sales revenue

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Economies Of Scale

Factors which cause the average cost of producing something to fall as output rises

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Diseconomies Of Scale

Factors which cause average costs of production to increase as output increases

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Cash Flow

Money coming into and going out of a business over a period of time.

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When the revenue a business earns, cannot cover the costs of production over a prolonged period of time

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Price Sensitivity

Where changing the price by a certain amount results in a bigger change in demand

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Raw materials or primary agricultural products that can be bought and sold.

;E.g�Copper or Coffee.

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Growth Domestic Product

Total value of output produced in an economy in a year

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GDP Per Capita

The value of output produced by a country in a year divided by the population of the country

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Standard of Living

Amount of goods and services a person can buy with their income in a year

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Quality of Life

An individual's overall sense of well being.

It can be measured by health and education as well as the amount of goods and services a person can buy

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Infant Mortality Rates

% of babies that don't survive past their 5th birthday

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Income Inequalities

Where there is a difference in income between different groups of people within a country

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Life Expectancy Rates

Average age which people are expected to live from birth

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Literacy Rates

% of adults who are able to read and write

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Economic Growth

% increase of GDP per year

It can be BOTH positive AND negative

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Causes of Economic Growth

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Consequences of Economic Growth





Use of Non-Renewable resources

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Human Capital Investment

Spending on training and education which allows workers to be able to produce more output in the future

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Physical Capital Investment

Spending on new assets such as factories or machinery, which allows a firm to produce more output in the future

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Effects of an economics decision on individuals and groups outside who are not directly involved in the decision

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Negative Externalities

Those costs arising from a buisiness activity which are paid by people or organisations outside the firm

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Postive Externalities

Benefits from a business activity for people or organisations outside the firm

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Economic Activity

Total amount of buying and selling that takes place in an economy over a period of time

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How to prevent Economic Activity

Increase Interest Rates

Increase Taxation

Government Spending

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E.U - Single European Market

Where all restrictions to trade including tariffs, quotas and other barriers have been abolished between countries who are member within the European Union.

This created free trade within the E.U

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Multinational/Transnational Corporation

A compant that is based in one country but manufactures and sells products in a variety of countries

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A general and sustained rise in the level of prices of goods and services over a period of time.

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Causes of Inflation

Cost Push

- Raw materials

- Cost/Price of imports increase

- Wages increase (e.g minimum wage increases)

Demand Pull

- Rise in demand for a good or service

Rise is cost of raw materials

Higher wages

Increase in demand

Increase in price of imports

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Consequences of Inflation

Effect on Shops

- Workers want higher wages

- May need to switch suppliers

- Fall in profits

- Rise prices


- The Bank of England's monetary policy objective is to deliver price stability (to lower inflation)

- The inflation target of 2% is expressed in terms of an annual rate of inflation based on the Consumer Price Index (CPI)

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A general and sustained fall in the general level of prices in the economy

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Runaway inflation during which prices rise at a phenomenal rate, and money becomes almost worthless.

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Interest Rates

The cost of borrowing money, or the returns received on savings.

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A payment made to the Govt. by consumers or firms.

It is usually based on spending or incomes.

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Impact of Taxation on Economic Activity

It doesn't affect products that are price insensitive, therefore demand isn't affected by�a change in price. This will lead to, the�Economic Activity staying where it is and not falling.

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Self Regulation

When an industry body made up of representatives from businesses within an industry monitors the actions of members to ensure rules and guidelines are followed.

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Pressure Groups

An organisation which aims to influence the decisions of businesses, govt. and individuals.

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Groups which are interested in the performance of a business

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The owners of a limited company.

They buy shares which represent part ownership of a company.

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Impact of Inflation on Businesses

Increase prices

Increase wages

Switch suppliers

Cut costs

Lower profits

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When 2 or more companies voluntarily join together

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Advantages of Govt. Spending

1. Stabilizes financial markets. The economy cannot function if banks are not lending money. They stopped lending money because they had such huge exposure to bad debt. Pouring money into the financial system insures that the bad debt can be managed, allowing banks to lend again.

2. Puts people to work. The government is responsible for the nation's infrastructure and defense, and the Industries that serve these needs employ large numbers of people. By accelerating already planned spending more people will go to work in these industries. Employed people spend more than unemployed and help drive the economy upward.

3. Gives money to people to spend. Direct rebates or tax reductions puts money in people's hands. If they spend it that will drive the economy.

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Conglomerate Integregation

When a business merges with an unrelated market.

E.g. A food store like McDonalds merging with a clothes store like River Island

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When a company takes control of another company, by buying over 50% of the other companies shares.

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Friendly Takeover

When a�large company takes over a smaller company to increase it growth.

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Hostile Takeover

When a company takes over another company to remove a rival or sell its assets to make a quick profit.

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Why do Businesses Fail?

Changes in demand

The marketing mix - getting it wrong

Poor Managing of

Fall in Productivity (the average cost per unit)

Businesses fail when the revenue they earn from sales cannot cover the cost of production. If this happens for a long period of time then the business will become insolvent, where the business does not have sufficient funds to pay expenses, and therefore cannot

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How do you judge a businesses success?

Increase Profit

Increase Market Share

Increased Social Success

Increased reputation

Increased revenue

Increased the value of shares

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What is demand?

Demand is the amount of goods/services that a customer is willing and is able to buy at a given price.

Demand Curve (

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Factors affecting demand

1. Quality

2. Seasonality

3. F.T.P - fashion, taste, preference

4. Distribution

5. Weather

6. Recession

7. Income

8. Advertising - marketing mix

9. Price of substitute good - example: from Ben and Jerry's to Haagen Dazs

10. Price of compliment good

11. Brand Loyalty

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What effects Price Sensitivity?

Number of substitutes



Brand Loyalty

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Absolute Poverty

Where a person cannot afford the basics of life, such as food, shelter and clothes.

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Poverty Line

A level of income usually defined by the govt. or international body.

If a person is below it, it shows that they�cannot afford many goods or services which are seen as essentials to a decent standard od living.

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Welfare State

The system of state benefits and free govt. services paid for through taxation.

Its aim is to reduce inequality between different groups of people in UK.

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Universal Benefits

Payments made by the govt. to people that are paid regardless of a person's level of income.

E.g Child Benefits for every parent of a child below 16, or a child who is still being educated until the age of 18.

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Means-Tested Benefits

Payments made by govt. to people which are determined by amount of income or savings a person has.

E.g Working Tax Credit

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What are the negative externalities associated with economic growth?




Use of non-renewable resources

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Fiscal Policy

The use of govt. spending and taxation to meet their objectives.

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Resources that are in limited supply

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Non Renewable Resources

These are resources that cannot be replaced when it is used up, such as oil, coal, or natural gas.

These non renewable resources will soon be in short supply, so there is a scarcity.

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Renewable Resources

These are resources that are not limited in supply and are naturally replaced in the environment.

E.g Solar Power and Wind Power

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Impact of using Non-Renewable Resources

Increase in price

Increase in cost

They become scarce. E.g Oil

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Corporate Social Responsibility

A measure of the impact that a business has on society and the environment, as a result of its operations.

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Where a business tries to give the impression that it is environmentally friendly when its claims may not be entirely true or justified.

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Ethical Responsibility

Where a business takes a moral standpoint and ensures that its behaviour doesn't impact stakeholder groups in a negative way.

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Environmentally Friendly

Where a business acts or produces products in a way that minimises damage to the environment.

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Where the selection of one choice results in the loss of another.

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Opportunity Cost

The loss of the next most desired alternative when choosing a particular course of action.

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Exchange Rates

The amount of one currency that has to be given up to acquire another currency.

E.g £1 = €1.30 This means that an individual or business has to give up £1 to get €1.30

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Benefits of Exchange Rates

1. Promotes International Trade

2. Necessary for Small Nations

3. Promotes International Investment

4. Removes Speculation

5. Necessary for Small Nations

6. Necessary for Developing Countries

7. Suitable for Currency

8. Economic Stabilization

9. Not Permanently Fixed

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Drawbacks of Exchange Rates

1. Outmoded System:

2. Discourage Foreign Investment:

3. Monetary Dependence:

4. Cost-Price Relationship not Reflected:

5. Not a Genuinely Fixed System:

6. Difficulties of IMF System

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What are LEDCs?

This stands for Less Economically Developed Countries. These are countries that have a low GDP and where the average standard of living is low.

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What is a multi-national?

A business based in one country but sells products in a variety of countries.

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What is Market Share?

This is the percentage of the total sales in a market, that belong to a business.

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What is a regulator?

Independant bodies set up by the government to monitor and regulate business activity.

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What is self-regulation?

Where an industry body made up of representatives from businesses within the industry monitors the actions of members to ensue rules and guidlines are followed.

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What is privatisation?

The tansfer of state owned businesses to the private sector.

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Internal Growth

This occurs when a business increases in size by selling more of its goods and services without taking over or merging with another business.

This is usually done through changing your marketing mix and developing new products. The profits are then re-investing in to your business to fund further expansion.

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External Growth

When a business grows in size through merger or takeover.

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Benefits of trading with LEDC's

Great profit margin, when we buy and sell these raw materials

It provides a living wage, that is a wage high enough to provide the basics in that community.

It ensures that the farmer gets decent working conditions, that children can not be used as child labour so can go to school.

It is protective towards the environment.

Producers get a guarenteed amount of money for the crop they produce, regardless of world market values

They establish a brand name, recognition

A way of telling consumers that by purchasing a slightly more expensive product they are bettering the world and helping out developing countries (who will tend to specialize in this one kind of specialised crop farming)

Drawbacks of trading with LEDC's

They depend on us to pay workers

In the long run no country had ever been economically benefited by producers getting more money

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Imposing a tax on the purchase of a good or service raising its price.

When price rises, demand falls.

Taxes can be used to reduce demand for products considered "bad".

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They're the opposite of tax.

They are the sum of money given to businesses and orgs. to help them reduce the cost of producing something considered "good".

If businesses get a subsidy there is an incentive for them to produce more.

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It refers to laws passed by the govt.

It can be used to ban or restrict the production of something considered "bad".

Those who break the law may risk fines, imprisonment and other sanctions.

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It refers to a set of rules that govern the way something is carried out.

A body may set up to monitor an industry with the powers to take action against businesses that break rules.

Some industries are allowed to self regulate (monitor their own behaviour)

If they don't do a proper job then the govt. can always step in and set up an independent body.

It's in the industries' interests, therefore to make sure they do regulate their own behaviour.

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Consumer Confidence

A measure of the extent to which consumers are prepared to spend money.

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External Shock

Unanticipated change in demand or inflation caused by factors beyond the control of the country.

E.g A rise in oil prices

A fall in the exchange rate

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Internal Shock

Unanticipated change in demand or inflation caused by factors within the country.

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Goods and services which are sold to other countries and which lead to payments to the UK.

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Goods and services bought from other countries which lead to money going out of the UK.

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Monetary Policy

The use of changes in interest rates to control inflation.

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The process of transforming an invention into a product that customers will buy. It is the commercial exploitation of an invention.

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