Principles of Business: Key Terms, Factors of Production, and Trade

Comprehensive practice flashcards covering key business terms, factors of production, specialization and division of labour, labour supply determinants, barter, and the functions of money from Week 1 Principles of Business lecture notes.

What is the definition of a business?

An organization or economic system where goods and services are exchanged for one another or for money, requiring investment and sufficient customers to sell output consistently to make a profit.

How is entrepreneurship defined in the context of business initiative?

A process where a person takes the initiative to 'make things happen', decisively identifies a business opportunity, and acts boldly by taking decisions.

What does risk represent in business investments?

The chance or probability that things will go wrong, which at worst can cause an investor to lose all their money or become personally liable for the debts of the business.

What is meant by taking 'calculated risks' in an enterprise?

Ensuring that the likely returns from taking a risk are sufficient to make the gamble worthwhile.

What is profit?

A financial benefit realized when the amount of revenue gained from a business activity exceeds the expenses, costs, and taxes needed to sustain that activity.

What is a loss in business?

The result that occurs when expenses exceed the income or total revenue produced for a given period of time.

What is trade?

A basic economic concept involving the buying and selling of goods and services, with compensation paid by a buyer to a seller, or the exchange of goods or services between parties.

What is a business organization?

An individual or group of people that collaborate to achieve certain commercial goals, either to earn income for owners or formed as nonprofits for public purposes.

What is an economy?

The large set of interrelated production and consumption activities that aid in determining how scarce resources are allocated, also known as an economic system.

Why are no two economies identical?

Because each economy is governed by its unique culture, laws, history, and geography, and evolves due to necessity.

What is a commodity?

A reasonably interchangeable good or material bought and sold freely as an article of commerce, such as agricultural products, fuels, and metals traded on commodity exchanges or spot markets.

What is a producer?

Someone who creates and supplies goods or services by combining labor and capital (factor inputs or factors of production).

What types of services and goods can governments produce?

Services such as police services, defense, public schools, and mail delivery, and goods such as oil when the government owns oil fields and production.

What is a consumer?

A person or organization that uses economic services or commodities, essential for a firm's survival.

What is an exchange in the financial system?

A marketplace where securities, commodities, derivatives, and other financial instruments are traded, ensuring fair trading and efficient dissemination of price information.

What is the difference between goods and services?

Goods are physical, tangible items that satisfy human wants or needs, whereas services are intangible products consisting of work performed in an expert manner for the benefit of customers.

What is capital as a factor of production?

Financial assets or the financial value of assets (such as deposit accounts), as well as tangible machinery and production equipment used in manufacturing facilities and factories.

What is fixed capital?

The portion of total capital outlay invested in fixed assets (such as land, buildings, vehicles, plant, and equipment) that stay in the business permanently or for more than one accounting period.

What is circulating capital?

The portion of an organization's investment that is continually used and replenished in ongoing operations, such as operating expenses, raw material stock, and inventories of finished goods.

What are the four factors of production and their respective factor rewards?

Land earns rent; Labour earns wages; Capital earns interest; Enterprise earns profit.

What does the factor of production 'land' encompass?

All natural resources, such as timber and gold, used in the production of a good.

What role does the entrepreneur play among the factors of production?

The entrepreneur takes an idea and combines all other factors of production to make an economic profit, while assuming all risks and rewards of the business.

What is specialization?

A method of production where a business, area, or economy focuses on a limited scope of products or services to achieve greater productive efficiency, placing different persons in jobs they are best suited for.

What is division of labour?

The separation of a work process into a number of tasks, with each individual task performed by a separate person or group of persons, commonly applied in mass production and assembly lines.

What three factors must be considered before implementing specialization and division of labour?

1. Extent or size of the market; 2. The cost of capital equipment; 3. Nature of the product.

What are the advantages of specialization and division of labour?

Increase in productivity, the right man in the right place, dexterity and skill, inventions are facilitated, saving in time, economy in the use of tools, and encouragement of machinery use.

What are the disadvantages of specialization and division of labour?

Monotony, lack of responsibility, lack of job pride, too much interdependence, and a limited market.

How do substitute occupations affect the supply of labour to an industry?

The wage differentials between competing occupations can cause workers to switch jobs if earnings in alternative trades (such as plumbing or electrical work) increase.

How do barriers to entry influence labour supply and pay levels?

Artificial limits such as minimum entry requirements or strict criteria (e.g., in legal services and medicine) restrict the supply of labour and force pay levels higher.

What non-monetary characteristics can influence the supply of labour?

Job risks, anti-social working hours, job security, working conditions, promotion opportunities, overseas placement, employer training, and health or pension benefits.

How does net migration affect a nation's supply of labour?

A rising flow of people leaving a country to live abroad significantly reduces the overall supply of labour in that country.

What is barter?

The exchange of goods and services for other goods and services without the use of money.

What were the advantages of the barter system?

It facilitated trade without money, allowed people to acquire items they desired but did not produce, and enabled the utilization of surplus goods.

What is the problem of 'double coincidence of wants' in barter?

A situation where an individual must locate a trade partner who possesses the specific item desired and is simultaneously willing to accept what is being offered in return.

Why were indivisibility and valuation major drawbacks of barter?

It was difficult to establish a common exchange value between disparate goods (e.g., corn versus sheep), and many goods could not be broken into smaller units without destroying their value.

How does money resolve the primary drawbacks of the barter system?

Money eliminates double coincidence of wants by acting as a medium of exchange, facilitates the storage of value, and enables transactions in smaller units.