Distinguish between risk and uncertainty.

With risk the range of possible outcomes and their probabilities can be estimated, usually from past data, whereas with uncertainty the outcomes or their probabilities cannot be quantified at all.

Why can a risk be insured but an uncertainty cannot?

An insurer needs a probability in order to calculate an expected loss and set a premium, and where no probability can be estimated no premium can be priced.

Give one example of a business risk and one example of business uncertainty.

A fire at a warehouse is a risk because its likelihood can be estimated from records, while whether an unfamiliar technology will make the firm's product obsolete is an uncertainty because there is no basis for a probability.

What is meant by a risk-averse decision-maker?

A risk-averse decision-maker prefers a certain outcome to a gamble with the same expected value, and so requires additional expected return before accepting the gamble.

Define a risk premium.

A risk premium is the additional return an investor or lender requires in order to accept a riskier project or a less creditworthy borrower.

How is the expected value of a business decision calculated?

Each possible outcome is multiplied by its probability and the resulting figures are added together to give the average outcome the firm would obtain if the decision were repeated many times.

Edexcel A-Level Economics B 9EB0

Scarcity, Choice and Potential Conflicts

Topic overview Scarcity and the economic problem Choice, trade-offs and opportunity cost Profit maximisation, sales maximisation and satisficing Survival, market share and other business objectives Stakeholders and their objectives Stakeholder conflicts and corporate social responsibility

Enterprise, Business and the Economy

Topic overview The entrepreneur and creative destruction Adding value Entrepreneurial motives Factors of production Division of labour and specialisation The wider economic environment and the firm

Introducing the Market

Topic overview Consumer objectives and the demand curve Movements along and shifts of the demand curve Producer objectives and the supply curve Movements along and shifts of the supply curve Equilibrium price and quantity Excess demand, excess supply and market forces Shifts in demand and supply in real markets Limitations of the supply and demand model Functions of the price mechanism Mass markets, niche markets and market growth Market research and consumer insight Market segmentation Market mapping and competitive advantage Adding value, pricing decisions and dynamic markets

The Role of Credit in the Economy

Topic overview Banks and the channelling of savings into investment Bank lending, interest rates and collateral Risk in business decision-making Limited and unlimited liability Loans, overdrafts and trade credit Venture capital, share capital and leasing Owner's capital, retained profit and other sources of finance Challenges in obtaining credit and the impact of credit on the economy

Market Failure and Government Intervention

Topic overview Private, external and social costs Private, external and social benefits Externalities in production and consumption Strengths and weaknesses of the market economy The purpose and methods of government intervention Government failure

Revenue, Costs, Profits and Cash

Topic overview Sales volume and sales revenue Fixed, variable, total and average costs Percentage change in revenue, costs and profit Contribution and the break-even point Margin of safety and the limitations of break-even analysis Profit as an incentive: market entry and exit Gross, operating and net profit Profit margins and how firms increase profit Cash flow, cash-flow forecasting and business survival

Business Growth and Competitive Advantage

Topic overview Objectives of business growth Internal and external economies of scale Diseconomies of scale and the problems of growth Corporate culture in a growing business Organic and inorganic growth Horizontal, vertical and conglomerate integration Innovation, research and development and competitive advantage State funding for research and development The product life cycle and extension strategies Market information in the digital economy Digital technology and the supply side of business The long tail and wider geographical markets Costs, prices and firm survival in a digital market How small firms compete

Firms, Consumers and Elasticities of Demand

Topic overview Calculating and interpreting price elasticity of demand Factors influencing price elasticity of demand Price elasticity of demand and total revenue Price elasticity of demand in niche and mass markets Pricing strategies Choosing the right pricing strategy Online sales, price comparison and pricing decisions Non-price competition and the demand curve Devising a marketing approach Income elasticity of demand

Productive Efficiency

Topic overview Productivity, wages and competitiveness Labour intensive and capital intensive production Capacity utilisation Quality control, quality assurance and Total Quality Management Kaizen, just in time and lean production Average costs, waste and product development lead times

Life in a Global Economy

Topic overview Characteristics of globalisation Causes of globalisation over the last fifty years Growth in the UK and the BRIC economies Indicators of growth and development Developed, emerging and developing economies Mean and median incomes Specialisation and the gains from international trade Trading blocs Visible and invisible trade and the impact of cheap imports Exchange rate changes and their impact on firms Reading exchange rate and effective exchange rate data

The Economic Cycle

Topic overview The economic cycle: boom, slowdown, recession and recovery Implications of the economic cycle for firms The circular flow of income, injections and withdrawals Aggregate demand and its components Aggregate supply, input costs and productivity Inflation, deflation and disinflation Price indices and the rate of inflation Real and nominal values, constant and current prices Demand-pull and cost-push inflation The impact of inflation on firms and individuals Employment, underemployment and the measurement of unemployment The causes of unemployment The impact of unemployment on firms and individuals

Introduction to Macroeconomic Policy

Topic overview The main macroeconomic objectives Fiscal policy Monetary policy and interest rates Supply-side policies Exchange rate policy under a floating rate Conflicts between macroeconomic objectives Choosing policy instruments and their unintended consequences

Globalisation

Topic overview The growing economic power of China and India Africa and other emerging markets Rising incomes, firms and shifting employment patterns Nominal and real values Index numbers Trade liberalisation and economic growth Specialisation and comparative advantage Foreign direct investment and growth Trade creation and trade diversion Trading blocs and the single market Trading blocs, firms and growing interdependence Protectionism: tariffs, quotas and other trade barriers Trade negotiations and international institutions Exchange rate changes and the Eurozone

Economic Factors in Business Expansion

Topic overview Push factors: saturated markets and competition Pull factors: economies of scale and risk spreading Offshoring and outsourcing Extending the product life cycle through overseas markets Raising capacity utilisation Assessing a market: disposable income and exchange rates Ease of doing business, infrastructure and political stability Location of production: costs, labour and natural resources Location of production: trade blocs, incentives and return on investment

Impact of Globalisation on Global Companies

Topic overview Globalisation and glocalisation Ethnocentric, polycentric and geocentric approaches to global markets Price and non-price competition in global markets Branding and differentiation in global markets Cultural and language barriers in global markets Adapting marketing strategy for niche and mass markets

Impact of Globalisation on Local and National Economies

Topic overview Multinational corporations and local labour markets Multinational corporations and local firms Multinationals, the local community and the environment Foreign direct investment, growth and the balance of payments Technology transfer, skills and business culture Multinationals and consumers Tax revenues and transfer pricing Stakeholder conflicts, pay and working conditions Emissions, waste disposal and supply chain ethics Ethical marketing: labelling and promotion Controlling multinational corporations

Global Labour Markets

Topic overview Growth of the global labour force and structural change The demand for and supply of labour Skills, training and education Global competition, recession and redundancies Trade unions and professional bodies Minimum wage legislation, skill shortages and migration

Inequality and Re-Distribution

Topic overview Absolute and relative poverty and how they are measured Measuring inequality: the Lorenz curve and the Gini coefficient Reducing poverty: growth, development and international aid The impact of inequality on individuals, firms and the economy Re-distribution of income and wealth through taxation and services

Competition and Market Power

Topic overview Market structures across the spectrum of competition Perfect competition and what the model explains Market structure, pricing strategies and consumers Non-price competition and the limitations of perfect competition Contestability, ease of entry and barriers to entry Barriers to entry, market structure and economies of scale Concentration ratios, interdependence and tacit agreement Price discrimination Average and marginal cost, revenue and profit Contribution, business objectives and pricing strategies Productive and allocative efficiency Productivity, market orientation and interrelated markets

Market Power and Market Failure

Topic overview Cartels, collusion and restrictive practices Monopsony, natural monopoly and power in the labour market The implications of market failure for firms, consumers and government Promoting competition: anti-competitive practices, mergers and privatisation Regulating natural monopolies and protecting consumers and employees The Competition and Markets Authority and EU competition policy The benefits and costs of regulation

Market Failure Across the Economy

Topic overview Merit and demerit goods Factor immobility and information failure Externalities and social costs and benefits Environmental externalities and environmental change Policies to correct market failure

Macroeconomic Policies and Impact on Firms and Individuals

Topic overview Aggregate demand and its components Aggregate supply, full capacity output and the output gap The multiplier effect Shifts in AD and AS: inflation, unemployment and growth Fiscal policy: government spending and taxation Monetary policy: the Bank of England, interest rates and quantitative easing Demand-side policies on the AD/AS diagram: investment, jobs and prices Time lags, policy conflicts and the limits of demand-side policy Market-based supply-side policies Interventionist supply-side policies Supply-side policies on the AD/AS diagram: strengths and weaknesses Comparing macroeconomic policies and judging their success

Risk and the Financial Sector

Topic overview Risk and uncertainty in business decisions Economic shocks and their impact on firms Exchange rate risk and forward markets Insurance and the management of business risk Mobilising savings and lending for business investment Assessing creditor risk and lending to individuals Payments, equity markets and the exchange of goods and services The central bank: the MPC, monetary policy and financial regulation The Global Financial Crisis and banking regulation

Risk and the Financial Sector

Risk and uncertainty in business decisions

3 things to know
Papers 1 and 3

Overview

Risk against uncertainty and why only risk can be insured, examples of each, risk-averse decision-makers and risk premiums, expected value and calculating it, the entrepreneur as bearer of uncertainty, uncertainty and investment, reducing risk and diversification, higher borrowing costs for small firms, and uncertainty in overseas markets.

What you need to know

Answer each one before you reveal it.

Your recallNot started

Key term

Why is the entrepreneur described as the bearer of uncertainty?

Key term

How does diversification reduce the risk a firm faces?

Key term

Why does a lender usually charge a small firm more than a large established one?

Questions from this subtopic

Each one with the model answer underneath.

1
Distinguish between risk and uncertainty.
Model answer
With risk the range of possible outcomes and their probabilities can be estimated, usually from past data, whereas with uncertainty the outcomes or their probabilities cannot be quantified at all.
2
Why can a risk be insured but an uncertainty cannot?
Model answer
An insurer needs a probability in order to calculate an expected loss and set a premium, and where no probability can be estimated no premium can be priced.
3
Give one example of a business risk and one example of business uncertainty.
Model answer
A fire at a warehouse is a risk because its likelihood can be estimated from records, while whether an unfamiliar technology will make the firm's product obsolete is an uncertainty because there is no basis for a probability.
4
What is meant by a risk-averse decision-maker?
Model answer
A risk-averse decision-maker prefers a certain outcome to a gamble with the same expected value, and so requires additional expected return before accepting the gamble.
5
Define a risk premium.
Model answer
A risk premium is the additional return an investor or lender requires in order to accept a riskier project or a less creditworthy borrower.
6
How is the expected value of a business decision calculated?
Model answer
Each possible outcome is multiplied by its probability and the resulting figures are added together to give the average outcome the firm would obtain if the decision were repeated many times.

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Scarcity, Choice and Potential Conflicts

Enterprise, Business and the Economy

Introducing the Market

The Role of Credit in the Economy

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Brazil, , India and China.

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ABorrowing becomes dearer and saving more rewarding.

BMortgage holders have less disposable income left.

CSpending on credit-financed items falls.

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Wage rate means the amount an employer pays for one hour of work.

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