Theme 1

The Economic Problem


  • scarcity faces all scoieties and is known as the central problem, resources are limited both physcially and of what there is to use, this means choices have to be made between competing wants and decide how we use them
  • due to a free market the market forces of demand and supply determine the allocation of resources, this means customers decide between various available products to them and businesses create new products that appeal to them at a price theyre willing to pay, completely free market economies dont exist, most have a mixed economy, with varying degrees of government intervention and control.

Opportunity Cost

  • due to resources becoming scare, customers, businesses and governments must decide which of all the possible alternatives are desirable. resoures are finite 
  • every decision made by an economic agent, always carries a cost as something has to be sacrificed in order to do or have something else.


  • where having more of one thing leads to having less of another
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Business Objectives

Goals that the business sets out to achieve, they will create plans and strategies in order to reach them

Making a profit

  • profit maximisation - determines proce and output level that returns the greatest profit.
  • sales maximisation - when the firm sells as much as possible without making a loss.
  • satisficing - dont seek max profits but achieves a good enough level of profit.

Ethical Approaches

  • survival - long term, when firm is facing adverse or hostile conditions
  • market share - expand or gain to increase market power or maintain share
  • coat efficiency - can be main objective if firm is making loss or tough tradinf conditions
  • return on investment - how business use its assests to make profit or repay loans
  • employee welfare - adequate pay and good working conditions, increases productivity 
  • customer satisfaction - source of competitive advantage, crucial selling point
  • social objectives - creates benefits for society by pursuing goals
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Stakeholders (economic agents) and their objective

Stakeholders have an intrest in the actions of a business, these incluse; emplyees, owners, customers, suppliers, local community, creditors, the government and the enviroment.

Economic agents are those who take decisions to buy, sell or affect how resources are used.

Stakeholder conflict

  • not all stakeholders want the same outcome. owners and shareholders want maximum profits, employees want higher wages, customers want lower prices. 
  • if a business expands this may be good for owners and employees but not the local community due to increased pollution and traffic
  • there is a trade off between the needs and wants of differnt stakeholder groups 
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The Shareholder model

  • profit maximistation is the main priority of managers, managers should concentrate on the best intrests of the shareholders
  • if shareholders want short-run profit max at the expense of long-term growth, it is the managers responsibility to deliver this, managers are employeed to manage.
  • immediate pursuit of profit is not always in the best long-term intrestes of the business
  • UK businesses are prone to short-termism meaning decisions are based on short term profitability, this leads to missed opportinities .
  • sometimes a significant investment now will take some time to become profitable, but will over a long period of time be very profitable indeed. 

Shareholders are part-owners of the business. they have either played a part in financing the business directly, or have bought shares from someone or on the stock exchange. they will recieve a dividend in return for example a share of the profit each year.

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The Stakeholder model

the stakeholder approach to business decision making means managers have a responsibility to take account of the intrests of all stakeholder groups that are affected 

benefits include

  • improved image by customers, leads to greater sales and increased competitive advantage 
  • improved retention and increased motivation off staff
  • close relationships with suppliers, leading to a higher quality and more reliable service 
  • reduction in the disruption of commercial activities by pressure groups
  • reputation of reliability and stability such as paying creditiors on time 
  • improved public relations, more favourable media coverage
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Stakeholder conflicts

different stakeholders have different demands, the demands of one group can be completely opposed by another.

there are trade-offs between these competing interests;

  • shareholders want profit max
  • emplyees want better pay and conditions
  • customers want lower prices
  • government wants tax revenue
  • local community want minimum disruption 
  • the enviroment needs protecting from excessive business activity.

the attitudes of stakeholders depnds on the corporate culture that they have adopted. corporate culture is the set of important assumptions that are shared by the people working in a particular business and influence the ways decisions are taken there.

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Corporate Social Responsibility

is taking decisions in a way that takes into account all stakeholders intrests. treating emplyees, customers and suppliers fairly, avoiding polluting activities and contributing positvely to lives in the local community might be part of this.

nearly all businesses will have a CSR policy, but they will be varied and differnt reasons from them to be implemting 

  • a genuine desire to behave responsibily 
  • a wish to show a positive public image
  • positive marketing ploy
  • a smokescreen to hide behind
  • wantng to fit in with everyone else

CSR may have positive spin-offs such as;

  • fosters a good public image and reputation
  • increases sales
  • improves stakeholder relationships and reduce conflicts
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The role of an entrepreneur in the economy

Creative Destruction 

  • when businesses innovate to produce new products, with a wide market appeal, introducing strong competition. innovative businesses are reffered to as disrupters
  • new technologies-new products-new jobs created-competitors sales fall-jobs are lodt-standards of living rise

making decisions to operate, expand and develop a business

  • an entrepreneur is someone who organises the a business venture and is responsible for the risks involved. they will also decide what is to be produced and how it is created, they must also obtain finance to cover start-up costsand decide what price to be marketed at.

Adding Value

  • difference between the price of the finished good or service and the cost of the material inputs involved in making it, so it increases in value to the customer
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Entrepreneurial Motives

Profit as an incentive

  • profit is the difference between sales revenue and costs. 
  • entreprenuers run risks beacuse customers may not buy the products, tastes and fashion may change and new competing products may seem better.

Non-financial motives

  • ethical stance - want to do the right thing in a community
  • social entreprenuership - benefiting society 
  • independance - being your own boss, achieveing a dream
  • home working - saves time and money commuting and can fit in with family routines
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Factors of Production

Land - anything that can be classed as a natural resource, including raw materials and energy sources.

Labour - human imput in both physical and mental terms, this includes emplyees, managers, owners and the self-employed.

Capital - includes equipment used in the production process, ranging from simple tools to complex machinery, factories, telecommunications and infastructure.

Enterprise - the creative spark that organises and combines the first three factors of production to create output for consumption. The people who do this are entreprenuers. 

the central economic problem of scarcity arises because of unlimited wants and limited or finite resources.

the finite resources are commonly grouped into four categories known as the factors of production.

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