Theme 1 definitions

Trade off
Involves choice. 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.
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Scarce resource
Any resource not available in unlimited quantities
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Opportunity cost
The best alternative given up in range of potentially chosen products is called the opportunity costs
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Normative and positive statements
Normative statements are a matter of opinion and judgement, whereas positive statements are testable as factual or false due to evidence.
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Means reaching a good enough profit level, without maximising.
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Market share
The proportion of a specific market that is supplied by one business. Its calculated as total sales by the business as a percentage of total sales in the market.
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Economic agents
Groups of people and organisations involved in economic activity and take decisions that affect how resources are used.
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The legal owners of the business, they may have helped to set up the business or they may have bought shares on the stock exchange.
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Suppliers and creditors
Suppliers are firms from which the business can buy the material inputs or services that are needed in the production process, and creditors are those who the business owes money to.
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Corporate social responsibility (CSR)
Involves a business in behaving in an ethical way and accepting responsibility for its effects on all its stakeholders, including the wider community and the environment.
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Tax evasion & avoidance
Tax evasion means illegally failing to pay taxes that are due, whereas tax avoidance is finding legal ways to reduce tax liability.
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Zero-hours contract
Mean that employees work only when they're needed, often at short notice. Their pay depends on hours worked. Some contracts oblige workers to take shifts that are offered, others dont.
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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, prices will have the same effect.
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Involves developing an idea that will generate new or improved products or production techniques.
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Added value
Represents the difference between the costs of material inputs and the eventual value of the product in terms of the price that can be charged for it.
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Means spending now in order to generate income in the future, ie investing in premises, capital equipment and training key employees
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Financial and other rewards that can induce people to behave in a certain way. The prospect of profit acts as an incentive that encourages businesses to produce more or develop a new products etc.
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Means that people make the most of their skills by concentrating their expertise in a particular field. As a skilled person produces more, output per head will rise and across the economy living standards can improve
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The 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. People specialise in the type of work to which they're best suited.
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Means using the resources in the most economical way possible. As efficiency increases, output per person employed will be higher.
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Working capital
Refers to the finance needed by a business to cover production costs - rent, wages and the cost of other inputs needed - until payment is received.
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Interest rates
Specify the amount that has to be paid by the borrower to the lender. Where there is a risk that the lender wont be repaid, the interest rate will be higher.
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Income Tax
Levied on the incomes of individuals. There is a personal allowance which is tax free, which is generally increased by at least the rate of inflation, in the budget each year.
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The exchange rate
The rate at which one currency is exchanged for another. Usually exchange rates change continuously, but by small amounts. An economy which is struggling to compete may find its exchange rate falling.
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Corporation tax and VAT
Corporation tax is paid by business; the level will be a percentage of profit made. VAT - Value added tax - is collected by businesses and takes 20% of the value of sales.
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Skill shortages
Occur when people available for work dont have the skills that employers are seeking. This is particularly likely to happen when the economy is growing, unemployment is relatively low and new technologies are becoming widely adopted
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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 that suppliers are offering
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Excess Demand
occurs when the quantity demanded overtakes the quantity supplied. There is a shortage of the product. Raising the price will cause the customers to buy less and therefore restore equillibrium.
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Equilibrium price
The price at which quantity supplied and quantity demanded are equal in a market, leaving neither excess supply or demand.
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Market clearing
Obtaining a balance between quantity supplied and quantity demanded, normally by arriving t the equilibrium price.
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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.
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Price mechanism functions: Signalling
Prices give signals to consumers and producers
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Price mechanism functions: Rationing
only those willing and able to pay the price get the products or resources
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Price mechanism functions: Incentives
Profitability motivates firms; value for money motivates consumers
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The price mechanism
an economic model that helps to explain the allocation of resources between possible uses. It shows how the invisible hand guides resources towards production of what consumers want to buy.
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The allocation of resources
Reflects the way in which economic agents take decisions about what to buy, what to produce and how best to use the available land, labour and capital.
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Market research
The process of gathering data in order to understand current and future customer needs and the nature of the market place. This reduces risks in developing a new business idea.
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Primary market research
Obtained first hand by the firm that is interested in the results. It involves field work and can be directly related to the needs of the individual business
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Secondary research
Uses data that has been gathered previously by another organisation. Often freely available.
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Quantitative market research
Market research conducted where the results are numerical and can be analysed statistically
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Qualitative market research
Market research to examine opinions and feelings
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Involves collecting data from a number of people to represent the target market or the population as a whole.
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Occurs when information is collected from a sample that doesn't accurately reflect variations in the total population
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Random and quota samples
A random sample is one in which everyone has an equal chance of getting selected, whereas a quota sample involves dividing the target market into groups according to their consumer characteristics
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Statisfied samples
Similar to quota samples but can select participants within the target groups on a random basis, to gain greater accuracy
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Market segmentation
means 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.
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Market positioning
refers to the way a product is seen in comparison with rival products. Market research helps to position products so that businesses can match customer preferences of appeal to different market segments.
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Means targeting a different market segment, one with more potential sales revenue and/or profit
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Market map
A market map is a tool that plots brands in the market according to how they meet consumers needs. Its allows businesses to position individual products effectively.
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Take deposits from people and businesses that wish to save and lend to people, businesses and governments that wish to borrow.
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Working capital
Refers to the finance needed to keep the companies day-today business going. There must be enough working capital to cover short-term debts.
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Collateral on a loan means that there's no damage to the lender. If they can't be repaid, the collateral assets can be sold off to pay off debt.
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Unlimited liability
Means that an individual has no legal separation from their businesses and is therefore personally responsible for the debts of their business.
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Limited liability
Protects the shareholders in that as individuals they'e legally separate from the business. The most that shareholders contribute towards business debt is the original amount they invested in buying shares
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Private limited companies
The owners have limited liability for business debts but can't raise finance from the general public.
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Public limited companies
Are owned by shareholders, who have limited liability. The companies can raise finance through selling shares to the general public and large organisations such as pension funds.
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Venture capital
Money invested in a new business by one or more individuals who believe that the business will succeed and therefore increase in value.
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Ordinary share capital
long-term finance raised by selling shares in a business. Share capital doesn't have to be repaid.
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An amount of money borrowed for a fixed period at a fixed interest rate. The loan is paid back in regular instalments until the amount plus interest is repaid.
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A short-term flexible loan where a bank allows a business to operate with a negative bank balance. Interest is paid on the amount overdrawn, usually at a higher rate than is charged for a loan. Useful for covering short-term debt
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Used by businesses that need land, buildings or equipment which they're unable to buy outright. Its the name given to 'renting' an asset.
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Trade credit
short-term source of finance offered when suppliers allow a time period before payment for supplies must be made. The credit period will vary between suppliers and may be changed by the supplier at any time.
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Market failure
Occurs when markets allocate resources inefficiently, often because market prices are distorted.
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Mixed economies
have both a private sector and a public sector. They are market economies with significant public sector activity, where decisions are based on public interest.
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Government failure
Occurs when a public sector activity or government intervention, intended to correct market failure, makes the situation worse rather than better.
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Command economy
Relies heavily on public sector provision of goods and services
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Means applying rules to businesses and other organisations. They may be imposed by governments or by trade associations that want to maintain the reputation of the industry.
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A subsidy is a payment per unit sold which effectively shifts a supply curve downwards. Usually, the price falls and the quantity increases.
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Operating costs
paid regularly by a business in the course of operating. They include fixed and variable costs and correspond to total costs.
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Fixed costs
Costs the aren't directly linked to the level of output of the business. They don't change when output increases or decreases
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Variable costs
Directly linked to the level of output of the business. They change as output increases or decreases.
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Break even point/ analysis
Break even point is the volume of sales at which a business breaks even, so total revenue matches total costs exactly - break even analysis is the calculation and interpretation of information about the break even sales level
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Margin of safety
The volume by which sales are above the break even point. Calculated as expected sales - break even sales level.
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Barriers to entry
Obstacles to new entrants which effect some industries, particularly where competing businesses are large.
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Occurs when a business fails because of a lack of working capital means that debts cannot be paid
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Cash flow forecast
A month by month prediction of the timing of expected cash inflows and outflows for a business
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Having sufficient cash available, sometimes also having assets which can quickly be converted to cash,
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Other cards in this set

Card 2


Any resource not available in unlimited quantities


Scarce resource

Card 3


The best alternative given up in range of potentially chosen products is called the opportunity costs


Preview of the back of card 3

Card 4


Normative statements are a matter of opinion and judgement, whereas positive statements are testable as factual or false due to evidence.


Preview of the back of card 4

Card 5


Means reaching a good enough profit level, without maximising.


Preview of the back of card 5
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