Topic 2 Key terms and concepts.
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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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Topic 2 Key terms and concepts.notebook
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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Topic 2 Key terms and concepts.notebook
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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Topic 2 Key terms and concepts.notebook
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.
