Subject: Business | Level: GCSE | Exam Board: AQA
Master the fundamentals of how businesses operate in the real world. This core topic underpins your entire GCSE, covering everything from legal structures to stakeholder conflicts and the critical role of the entrepreneur.
Revision Notes & Key Concepts
Key Terms & Definitions
- Entrepreneur
- An individual who takes the financial risk of starting and managing a new business.
- Opportunity Cost
- The benefit lost from the next best alternative when a choice is made.
- Limited Liability
- The legal protection that ensures owners (shareholders) only lose the amount they invested in the business if it fails.
- Stakeholder
- Any individual or group that is affected by or has an interest in the activities of a business.
- Economies of Scale
- The reduction in average unit costs that occurs as a business increases its scale of production.
- Franchise
- An agreement where one business (franchisor) allows another (franchisee) to trade under its brand name in return for a fee.
Worked Examples
Worked Example
Question: Explain one advantage and one disadvantage to a new business of operating as a sole trader. (4 marks)
Solution: **Advantage**: One advantage is that the owner keeps all the profit. *Explanation*: This acts as a strong incentive for the entrepreneur to work hard and make the business successful, as they do not have to share the financial rewards with anyone else. **Disadvantage**: A major disadvantage is unlimited liability. *Explanation*: This means if the business fails and owes money, the owner is personally responsible for the debts and could lose personal assets, such as their house, to pay them off.
Worked Example
Question: Evaluate whether a successful private limited company (Ltd) should become a public limited company (plc) to fund major expansion. (12 marks)
Solution: **Introduction**: Becoming a plc involves floating shares on the stock exchange, which fundamentally changes the ownership and funding structure of the business. **Argument For (Benefits of plc)**: The primary advantage of becoming a plc is access to significant capital. By selling shares to the general public, the business can raise millions of pounds. This is crucial for 'major expansion', such as opening new factories or entering international markets, which an Ltd might struggle to fund through retained profit or bank loans alone. Furthermore, being a plc often increases a company's prestige and profile, which can attract better staff and larger contracts. **Argument Against (Drawbacks of plc)**: However, floating on the stock exchange carries significant risks. The original owners will lose absolute control as anyone can buy shares, potentially leading to a hostile takeover if a rival buys a majority stake. Additionally, plcs face intense scrutiny; their financial accounts are public, and they are pressured by institutional investors to deliver short-term dividends, which might conflict with long-term expansion plans. The legal costs of converting to a plc are also very high. **Conclusion/Judgement**: In conclusion, whether the Ltd should become a plc depends on the scale of the expansion. If the expansion requires capital far beyond the capacity of bank loans, becoming a plc is likely the best option despite the loss of control. However, if the owners wish to retain strict strategic control and avoid short-term shareholder pressure, they should seek alternative finance (like venture capital) and remain an Ltd. Overall, the need for massive capital usually outweighs the drawbacks for a truly ambitious expansion.
Worked Example
Question: Calculate the average unit cost if a business has total costs of £50,000 and produces 10,000 units. Show your working. (2 marks)
Solution: Average Unit Cost = Total Costs / Total Output Average Unit Cost = £50,000 / 10,000 Average Unit Cost = £5
Practice Questions
Question: State two factors of production. (2 marks)
Answer:
Question: Explain how the objectives of a start-up business might differ from those of an established multinational corporation. (4 marks)
Answer:
Question: Analyse how a decision to increase prices to maximise profit might cause conflict between two stakeholder groups. (6 marks)
Answer:
Question: A sole trader is considering expanding by opening a second shop. Recommend whether they should use a bank loan or take on a partner to finance this. (9 marks)
Answer:
Question: Explain two reasons why a business plan is important for an entrepreneur starting a new business. (4 marks)
Answer:
