iGCSE Economics (Edexcel) 1.2 (Business Economics)

the four factors of production are...

land, labour, capital and enterprise

in terms of the four factors of production, land consists of...

the physical land that businesses operate on, as well as the land they use, which could have either non-renewable resources (such as coal or diamonds) or renewable resources (such as rivers, fish or forests)

in terms of the four factors of production, labour consists of...

the workforce

in terms of the four factors of production, capital consists of...

all of the physical assets of the business; it is divided into circulating capital and fixed capital

in terms of the four factors of production, enterprise consists of...

entrepreneurs and their roles, such as coming up with business ideas, owning businesses, taking risks and taking responsibility for organisation of the other three factors of production

the definition of factors of production is...

resources used to produce goods and services, which include land, labour, capital and enterprise

define production

process that involves converting resources into goods or services

define human capital

value of the workforce or an individual worker

define labour

people used in production

define working capital or circulating capital

resources used up in production such as raw materials and components

define fixed capital

stock of 'man-made' resources, such as machines and tools, used to help make goods and services

define entrepreneur

an individual who organises land, labour and capital and risks their own money in a business venture

production is labour-intensive if...

it relies more heavily on labour relative to machinery

labour-intensive production may take place in countries like China because...

the minimum wage is very low, so businesses are able to pay many people very little money to produce a good or service

production is capital-intensive if...

it relies more heavily on machinery relative to labour

firms in Western economies often favour capital-intensive production methods because...

labour is expensive and harder to manage in these economies

define primary sector

production involving the extraction of raw materials from the Earth

examples of primary sector businesses are...

agriculture, fishing, forestry, mining and quarrying

define secondary sector

production involving the processing of raw materials into finished and semi-finished goods

define assembly plant

factory where parts are put together to make a final product

a semi-finished good is...

a good that has been processed, but is not sold on its own; instead, it will be sold in or with another good (e.g. car seats in cars)

a finished good is...

a good that has been processed and assembled (if needed) and can be sold

define tertiary sector

production of services in the economy

the tertiary sector involves production of services such as...

commercial services, financial services, household services, leisure services, professional services and transport

define de-industrialisation

decline in manufacturing

less developed countries mainly produce \_____ sector goods

primary

fairly developed countries mainly produce \_____ sector goods

secondary

highly developed countries mainly produce \_____ sector goods

tertiary

in developed countries, manufacturing declines and services grow because...

people may prefer to spend more of their income on services than goods, there is too much competition on manufacturing from less developed countries, they have a larger public sector and employment in manufacturing declines because people can be replaced by machines

the factors that affect productivity are...

land, labour and capital

land affects productivity by...

having a useful/not useful structure; dry, mountainous land is not as productive as fertile, flat land; land may also need fertilisers, pesticides and irrigation

define productivity

rate at which goods are produced and the amount produced in relation to the work, time, and money needed to produce them

raising productivity in an economy is highly desirable because...

it allows more goods to be produced with the same, or fewer resources

productivity of labour can be calculated by...

dividing total output by number of workers employed

labour affects productivity by...

training, motivation, working practices (such as having an organised layout in a workplace) and migration (by attracting skilled workers from other countries)

capital affects productivity by...

development of new technology which may be more efficient than labour

define division of labour

the breaking down of the production process into small parts with each worker allocated to a specific task

define specialisation

production of a limited range of goods by individuals, firms, regions or countries

division of labour causes specialisation because...

when different people are all given different jobs, they specialise in their individual jobs; this makes the whole process more efficient

advantages of division of labour to workers are...

workers become more skilled at their tasks; workers with well practised skills may be able to find employment more easily; workers can learn new skills; workers may enjoy more job satisfaction if they are highly skilled in a specialised task

disadvantages of division of labour to workers are...

work can become boring because it is repetitive, especially if a task requires very little skill; this may lead to job dissatisfaction and low motivation, and the repetitive tasks may also have health implications for workers such as joint wear; workers may also become too specialised and become labour immobile

advantages of division of labour to businesses are...

improved efficiency, better use of specialist tools and machinery, reduced production time, easier organisation of production

disadvantages of division of labour to businesses are...

workers may become dissatisfied and poorly motivated, leading to poor-quality work and high staff turnover; interdependence (problems at one stage of production affect the whole production line); there is a loss of flexibility in the workplace

define costs

expense that must be met when setting up and running a business

define fixed costs (overheads)

costs that do not vary with the level of output

define variable costs

costs that change when output levels change

define total cost

fixed sots and variable costs added together

examples of fixed costs include...

rent, business rates, advertising, insurance premiums, interest payments and research and development costs

examples of variable costs are...

raw materials, packaging, fuel and labour

total costs are calculated by...

adding total fixed costs and total variable costs together

define average cost

the cost of producing a single unit of output

the formula for calculating average cost is...

average cost \= total cost ÷ quantity produced

average cost curves show...

the average cost to a business at a range of different production rates

average cost curves are in a \_____ shape

U

define total revenue

the amount of money a firm receives form selling its output

total revenue is calculated by...

multiplying the price of each unit by the number of units sold (price × quantity)

define profit

the difference between total revenue and total costs

profit is calculated by...

subtracting total costs from total revenue

define diseconomies of scale

rising average costs when a firm becomes too big

define economies of scale

falling average costs due to expansion

define internal economies of scale

cost benefits that an individual firm can enjoy when it expands

examples of internal economies of scale are...

marketing economies, technical economies, financial economies, risk-bearing economies, managerial economies and purchasing economies

purchasing economies consist of...

better rates when large firms buy goods compared to small firms; this is the effect of being able to buy goods in bulk

marketing economies consist of...

lowered marketing costs per unit (such as advertising; in a large business, advertising may cost roughly the same as in a small one, but a large business produces many more products, making the average cost lower)

technical economies consist of...

efficiency gains of large factories; for example, the way a larger firm makes better use of an essential resource than a smaller firm because it is used more for the same cost to the business

financial economies consist of...

larger businesses getting cheaper loans than small businesses (this is because there is a higher chance of a small firm not being able to repay a loan than a large firm)

managerial economies consist of...

large firms being able to afford employing specialist managers for different areas of the business

risk-bearing economies consist of...

larger firms having wider product ranges so that if one product does not do well, the firm still has other products that are selling; in other terms, there is a lower chance of the business having low demand

define external economies of scale

cost benefits that all firms in an industry can enjoy when the industry expands

examples of external economies of scale are...

skilled labour, infrastructure, access to suppliers and similar businesses in the area

skilled labour is an external economy of scale because...

if an industry is concentrated in one area, there may be a build-up of labour with the skills and work experience required by that industry, which causes training costs to be lower

infrastructure is an external economy of scale because...

if a particular industry is dominant in a region, the infrastructure in that region will be suited to that industry's needs (e.g. an area that has lots of shipping companies may have many docks and freight transport infrastructure)

access to suppliers is an external economy of scale because...

an established industry in a region will attract specialist marketing, cleaning, banking, waste disposal, distribution, maintenance and components suppliers to the area around it

similar business in the area is an external economy of scale because...

firms that are close to each other are likely to cooperate to they can all gain; this happens in Silicon Valley, where firms work together to share the costs and benefits of research and development

diseconomies of scale happen because...

aspects of production start to become inefficient

bureaucracy is a diseconomy of scale because...

as businesses become larger, they get more bureaucratic, and eventually too many resources are used in administration; it also makes decision making and communication slower

communication problems are a diseconomy of scale because...

large organisations have too much hierarchy in them, making it very difficult for workers to be able to talk to everyone else; this is especially the case if a business is multinational

lack of control is a diseconomy of scale because...

a very large business can quickly become difficult to control and coordinate; this means there is need for more management, which increases cost without necessarily increasing production

distance between senior staff and shop floor workers is a diseconomy of scale because...

large businesses have large amounts of hierarchy, making it almost impossible for the senior staff to talk directly to shop floor workers, and vice versa

a competitive market consists of...

a large number of buyers and sellers; many close substitutes from different firms; low barriers to entry, making it easy for new firms to join the market; firms with very little control over pricing; a free flow of information about the nature of products, availability, prices, methods of production and the cost and availability of production factors

when faced with competition, firms must...

operate efficiently by keeping costs as low as possible, provide good quality products with high levels of customer service, charge prices that are acceptable to customers and innovate by constantly reviewing and improving the product

firms generally do not welcome competition because...

it usually means that they must charge lower prices and it puts them under pressure to be efficient and innovative

the main disadvantage to a firm operating with competition is...

the amount of profit made is limited

competition is usually desirable for consumers because...

it produces lower prices, more choice and better quality

consumers may be disadvantaged by a highly competitive market because...

there is market uncertainty, which could inconvenience some consumers; there could be a lack of innovation if firms do not profit enough to reinvest in product development

the economy may benefit from competitive markets because...

firms may be more innovative (and if not they have lower prices), giving consumers a better standard of living

the economy may be negatively affected by competitive markets because...

resources may often be wasted

the three main methods to measure the size of a firm are...

turnover, number of employees and balance sheet total (a number based on the amount of money invested in the business buy the owners)

in the EU, a micro firm is defined as one with...

a turnover of under €2 million, under 10 employees and a balance sheet total of under €2 million

in the EU, a small firm is defined as one with...

a turnover of under €10 million, under 50 employees and a balance sheet total of under €10 million

in the EU, a medium firm is defined as one with...

a turnover of under €50 million, under 250 employees and a balance sheet total of under €43 million

in the EU, a large firm is defined as one with...

a turnover of over €50 million, over 250 employees and a balance sheet total of over €43 million

advantages of small firms are...

they are flexible (and can adapt to change quickly), they can offer personal service, the owners are often able to restrict pay to minimum wage, there is better communication, there is more innovation

disadvantages of small firms are...

they cannot exploit economies of scale, they may struggle to raise finance, they may find it hard to attract good staff, they are vulnerable and could easily collapse when trading conditions become challenging

advantages of large firms are...

they are able to exploit economies of scale, they may be able to dominate markets, they can carry out large-scale contracts

disadvantages of large firms are...

they can quickly become too bureaucratic, they may have poor coordination and control and many workers may be poorly motivated

the growth of firms is influenced by...

government regulation (for healthy competition), access to finance, economies of scale, the desire to spread risk and the desire to take over competitors

firms may stay small because...

the market is too small for growth (e.g. luxury goods won't sell in huge number), the nature of the competition in the market, lack of finance, diseconomies of scale and the aim of the entrepreneur that set up the business

define monopoly

situation where there is one dominant seller in a market

a legal monopoly is defined as...

a firm with over 25% market share