1.2 enterprise, business and the economy

• creative destruction

  idea that new entrepreneurs are innovative and grow more productive than old, idle firms who are eventually forced out of the market
• example of creative destruction

  technological advancements have led to the creation of DVD's, to the introduction of Blu-ray, to the expansion of downloadable films, which has now triggered the downfall of DVD's
• main incentive for entrepreneurs

  taking risks for profit
• how do entrepreneurs make a profit

  By bringing together the 4 factors of production

  • land
  • labour
  • capital
  • enterprise
• 2 non-financial motives an entrepreneur might have

  • ethical stance and social entrepreneurship
  • independence and working from home
• define all 4 factors of production

  Land: natural resources

  Labour: human capital

  Capital: goods which can be used in the production process

  Enterprise: the innovator and risk taker
• Specialisation

  each worker completes a specific task in the production process, aimed at improving efficiency and thus the average costs of production
• Benefits and drawbacks of specialisation

  BENEFITS:

  • higher output
  • opportunities for greater economies of scale

  DRAWBACKS:

  • work becomes montonous and demotivating
  • give rise to structural unemployment, as skills may not be transferable
• why would higher interest rates be seen as a disadvantage to firms

  higher interest rates implies getting a loan is more expensive, which raises the cost of production for firms. It also encourages more saving and less spending for consumers which results in less profits for firms.
• tax diagram of supply and demand with a perfectly inelastic level of demand

  where the shaded area represents the level of tax.

  
• relationship between exchange rates and the level of imports/exports

  High exchange rate: imports cheaper, exports dearer

  Low exchange rate : imports dearer, exports cheaper
• how could a high rate of unemployment benefit firms

  means there is a larger supply of labour, which gives firms bargaining power and the ability to reduce wages, thus lowering overall costs of production
• what could unpredictable inflation imply for firms

  It reduces overall business confidence, as it is difficult to anticipate future interest rates, unemployment rates, economic growth. Therefore, firms cut down on their investment and wait for calmer economic conditions.