1.2.1 Role of an Entrepreneur in the Economy

Entrepreneur-Someone who sports a gap in the market and takes a risk to launch a business that may receive profit or end up losing.

a) Creative Destruction

CD - When new products replace other due to new technology and innovation

Eg: Floppy Disk → USB

Patent - A legal ownership of an idea which prevents your idea from being copied.

b) Making decisions to operate expand and develop a business

• Organise Factors of production to create an enterprise

• Develop a business

• Add value by selling the output by more than input

• Being innovative

c) Selling the output for more than the cost of the inputs

• Making sure to gain a return on their investment

1.2.2 Entreprenerial Motives

a) Profit as an incentive

• Profit – the incentive to take risks is for profit and avoiding loss. This is by being innovative and reducing the production costs to maximise profits.

b)Non-Financial Motives

• Ethical stance and social entrepreneurship – motivated by the will to make an impact in the world and leave a legacy. This is also to increase are the standard of living.

• Independence and working from home – this allows them to have flexibility and independent, living a more consistent home life to work at there will.

• Social entrepreneurship – entrepreneurs who set up a business that will address social issues. For example: nonprofit organisations that are run by donations and grants by the government or the private sector. Known for looking for innovative ways of taking social and environmental issues to music and solutions.

1.2.3 Factors of Production

Resources needed to make a provide goods and services.

1. Land (natural resources)

   Fertile Land, Oil, Timber, Water.

2. Labour (people)

   Physical work + Effort Eg: Jobs.

3. Capital (money)

   Human created resources.

   Physical - Eg. Machines (Man made equipment0

   Human - Eg. Knowledge

4. Entrepreneurship (process are running a business)

   Launching a business by making investments + Managing other factors of production + Ideas and Risks

1.2.4 Specialisation

Division of Labour - Separation of a work process into a No. of tasks.

Specialisation - Concentrating on a specific process or product (expertise)

1.2.5 The Wider Economic Environment

Implications for firms of changes in:

Interest Rates:

Interest Rates - An interest rate is the reward for saving and the cost of borrowing expressed as a percentage of the money saved or borrowed.

Bank of England - Uses policy interest rates to help regulate the economy by setting a bank rate and lending money to high street banks who hold an account there.

Using Interest Rates to control the economy is called Monetary Policy

→ Currently 3%

Effects of Lower interest rates:

Businesses→ Lower Costs as there is less interest to pay so profit is higher→More likely to expand and take new loans→More Business→More Employment

People with Mortgages and Loans→ Higher Disposable Income→ Increased Spending → More Loans

Savers→ Less Savings

Effects of Higher interest rates:

Businesses→ Higher Costs as there is more interest to pay so profit is less→Less likely to expand and less likely to take new loans→Less Business→Less Employment

People with Mortgages and Loans→ Lower Disposable Income→ Decreased Spending → Less Loans

Savers→ More Savings

Mortgage→ A loan from a bank to a person/s in order to fund the purchase of a house.

Fixed Rate Mortgage→ Interest Rate is paid fixed for a fixed time.

Collateral→ Something pledged as security for repayment for a loan.

A Variable Rate Mortgage→ Mortgage Repayments rise and falls with the base rate.

Inflation:

→ A persistent rise in the average price level and a corresponding fall in the value of money.

How inflation is measured?

Uses an average of price changes over changes over a range of 600 goods and services → Basket of Goods

The use of the word average is important as some fall and some rise.

CPI→ Consumer Price Index (headline rate but excludes some items)

RPI→ Retail Price Index (Includes more goods)

Hyper-Inflation → Very high, uncontrolled inflation eg: Germany 1923

Deflation→ Falling prices

Effects of Inflation on Businesses:

• Menu Costs

• Supply prices increases→ Maintain profit margin

• Prices Rise

• Consumer uncertainty→Cautious behaviour when spending

• Business uncertainty→Can’t make accurate cask flow

• Employees demand higher wages

• Loan Debt worth less

• Exports are uncompetitive

• Business don’t invest

Exchange Rates:

The value of one currency expressed in terms of another.

Who are affected?

Tourists

Businesses who import and export

Why do exchange rates change?

Due to market force (supply and demand)

How are Interest and Exchange Rates linked?

Bank of England Increases Base Rate→Makes Savings more attractive→ Overseas Investors look to save their money in an Economy that pays the highest Interest Rate→Increases the level of demand and so rushes up the price of currency.

SPICED

Strong Pound Imports, Cheaper Exports Dearer

Effect on British Exports:

If the pound’s value increase (appreciates) → Exporting becomes more expensive as more of the other currency has to be paid for the pound → Exporter sells for a high price and so people bare less likely to buy it→Fall in Sales Revenue = Can lower the price

If the pounds’s value decreases (depreciates) → Importing becomes more expensive as more is paid for less→ The fund becomes cheaper for other countries to export from→Rise in Sales Revenue

Effect on British Imports:

If the pound’s value increases (appreciates)→ Importing becomes cheaper as less is paid from more→Results in an increase in Demand

If the pound’s value decrease (depreciation)→ Importing becomes more expensive as more is paid fore less→Decrease in demand

Fluctuations in exchange rates causes uncertainty for businesses as they cannot be certain of their revenues for their exports.

Unemployment:

The number or people able and willing to work but not able to find a job.

Employment: Means being economically active.

Underemployment: When people who want to work full time can only work part time.