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Topic 2 Key Terms & Concepts

This document defines several key business terms and concepts: Costs include money spent on materials, labor, and other expenses. Total costs are all costs added together. Prices are what customers pay, and must be above total costs to make a profit. Revenue is money received from sales. Profit is revenue minus total costs. Stakeholders include customers, owners, government, workers and communities impacted by a business. Market share is a business's sales as a percentage of total industry sales. Purchasing economies of scale means per-unit costs decrease when buying materials in larger bulk quantities as a business grows.

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33 views8 pages

Topic 2 Key Terms & Concepts

This document defines several key business terms and concepts: Costs include money spent on materials, labor, and other expenses. Total costs are all costs added together. Prices are what customers pay, and must be above total costs to make a profit. Revenue is money received from sales. Profit is revenue minus total costs. Stakeholders include customers, owners, government, workers and communities impacted by a business. Market share is a business's sales as a percentage of total industry sales. Purchasing economies of scale means per-unit costs decrease when buying materials in larger bulk quantities as a business grows.

Uploaded by

mliswaj
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Topic 2 Key terms and concepts.

notebook

2. KEY TERMS AND CONCEPTS


2.1 Costs

• A cost is money that a business must pay for the purchase or use of
a good or service.
• Costs also include payment to workers i.e. wages,
and to managers, i.e. salaries.

• Examples of costs:

• Total costs = all the costs a business must pay, added together.
Total costs = materials costs + labour costs + all other costs.
OR Total cost = cost per unit × no. of units
• Example:
Joe makes and sells pens.
Materials for the pens (plastic, ink etc) cost $0.20 per pen.
Labour costs are $0.10 per pen.
Joe makes 200 pens.
Other costs like advertising; transport; electricity add up to $20.
What are Joe's total costs?

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Topic 2 Key terms and concepts.notebook

2.2 Prices

• A price is money that a customer pays to a business for the


purchase or use of a good or service.

• The price that a business charges must be higher than the total
cost of producing the product, otherwise the business won't
make any money.

• Example:
Joe sells each pen for a price of $1.

2.3 Revenue
• Revenue is all the money that a business receives from all the
products it sells.

• Revenue = price per unit x quantity sold.

• Example:
Joe sells pens.
Each pen is priced at $1.
Joe sells 200 pens.
How much revenue does Joe make?

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2.4 Profit
• Profit is all the money that a business receives from all the
products it sells MINUS its' total costs (all the money it must pay
out).
• Profit = Revenue ‐ Total Costs
• Example:
From making and selling 200 pens at $1 each, Joe's revenue is:
Revenue = Price x Quantity sold
=
=
The cost of materials to make the pens is $0.20 per pen. His total cost
of materials is .
The cost of labour to produce the pens is $0.10 per pen. His total cost
of labour is .
Other costs total $20.
Thus Joe's Total costs are:
Total materials cost:
+ Total labour cost:
+ Other costs:
= Total costs

What is Joe's profit?

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2.4 Profit

What can Joe do with his profit?

1. Keep it as a reward for his hard work, risk‐taking and decision‐


making.

2. Re‐invest it back into the business:

• Buy new machinery so he can make more pens.


• Expand to bigger premises.
• Send his staff for training to improve what they do and how they do
it.
• Spend money researching new ideas.

What would you do?

Note: A business that just covers its costs, but makes no profit is said to
break even.
At break even no profit is made, but no loss is made either.
At break even point, Revenue = Total Costs.

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Topic 2 Key terms and concepts.notebook

2.5 Stakeholders

• A stakeholder is any person, group of people, or


organisation that has an interest in or could be affected
by, the activities of a business.

• Stakeholders can be internal i.e. within the business or


external i.e. outside the business.

External Internal External


Stakeholders Stakeholders Stakeholders

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Topic 2 Key terms and concepts.notebook

2.5 Stakeholders

• Stakeholders have different objectives from each other and


from the business.

• Objectives of stakeholder groups:

Customers want:

Owners want:

Government wants:

Workers want:

The local community wants:

• Stakeholders can influence business activity, depending on


how strong they are, and the extent to which they can
influence others, e.g. the media, government, customers.

• It is important for businesses to consider the objectives of key


stakeholder groups, when making decisions.

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2.6 Market share

• Market share is the proportion of all sales in a market by all


businesses in that industry, that one business achieves.

• Market share = A business' sales x 100


All sales in the industry

Market share represented in a pie chart

• An increase in market share means that


.

Example: Ben sells $20 000 worth of artworks in a year.


Sales of all art in the country total $200 000 in that
year.
Ben's market share is: $20 000 x 100
$200 000
= 10%

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Topic 2 Key terms and concepts.notebook

2.7 Purchasing Economies of Scale

• As a business grows, it can buy materials and components in


greater bulk (i.e. more units at a time).

• This brings the cost per unit to produce each product down.
• Example:
1. Original scenario:
Joe sells 100 pens.
Materials for the pens (plastic, ink etc) cost $0.20 per pen.

2. New scenario:
Joe's business has grown. He now makes and sells 500 pens.
As he is buying more materials for the pens (plastic, ink etc), his supplier
has agreed a lower cost of $0.15 per pen.

• This may lead to higher profits.

• This is a benefit of a business operating on a larger scale and one of


the reasons that businesses often want to grow.

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