Entrepreneurs and Leaders
Unit 1: Marketing and People
Entrepreneurs and Leaders
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An entrepreneur takes the initiative to set up and run a business, bringing the resources together and carrying the financial risk of doing so.
The specification opens this topic with the role, at 1.3.5 · 1. It gives no form of words to learn — it lists what the person DOES, and the definition below is read off that list. An entrepreneur takes the initiative to set up and run a business, organising the resources it needs and bearing the financial risk that it may not work.
Two halves, both required. Taking the initiative means the business would not exist otherwise. Bearing the financial risk means that if it fails, the loss falls on them — their capital and their year.
Nothing in it requires the idea to be new. Altan Furniture, a small workshop making one design of wooden chair, makes a product that has existed for centuries; its founder is an entrepreneur because she committed her own money and her own year, not because she invented the chair.
Innovation appears later, at 1.3.5 · 1c, as one of the things entrepreneurs do — and as something that happens inside established firms too. It is part of the role, not a test of entry to it. A note on the title: this topic is called "Entrepreneurs and leaders", but the leadership a Unit 1 student needs sits at 1.3.4 and is taught in Managing People.
Real Example: Somebody who leaves salaried work, rents a unit and starts selling is an entrepreneur from the day the lease is signed, whatever the product is.
Exam Matters: Appendix 6 defines Define as requiring students to define a term or phrase, and in this subject it carries two marks. Two marks means two separate things to say, so a definition that names the initiative and stops has said one of them.
Setting up is a sequence, and the order is forced: the idea has to be tested against a market and costed before any money is committed to it.
1.3.5 · 1a is the first of the role's five requirements, and it has a shape. The steps below are not a recommended method; they are ordered by what each one needs from the step before it.
The second and third steps are where most of the failures sit, because they are the last at which the founder can still stop. Committing the capital is the point of no return: the lease is signed, the machinery is bought, and the alternatives that were open a week ago have closed.
At Altan Furniture, setting up meant fixed costs of $80,000 a year before a single chair was sold. That figure is the commitment: it is owed whether the founder sells 5,000 or none.
Real Example: A workshop that signs a five-year lease before testing whether anybody will buy has committed the capital before testing the idea, and cannot undo it.
Exam Matters: An Explain is glossed in Appendix 6 as a brief explanation of cause or effect, supported by details or an example. On this leaf the cause and the effect are two ADJACENT steps: what testing tells the founder, and what she does with it. Reciting all four steps supplies neither.
Running a business is a different job from starting one: it is repetition, and it is judged on whether the firm can do the same thing again next week.
1.3.5 · 1b puts running and expanding together, and this subsection takes the first half. Setting up ends with a sale; running is the work of making the next one happen, and the one after that, without the founder's attention being what holds it together.
It is a genuinely different job. Setting up rewards deciding quickly under uncertainty; running rewards doing the same thing reliably. The specification separates them because a person who is good at the first is not automatically good at the second.
What running actually consists of is short: buying materials before they are needed, getting the work out on time, collecting the money, and keeping enough cash to do it again. Altan Furniture sells 5,000 chairs in a year — 25 on each of 200 working days — and every one of those days is the running job rather than the setting-up one.
The test is whether the business survives the founder taking a fortnight off. If it does not, the firm has an owner but no system, and it cannot grow past what one person can personally supervise.
Real Example: A workshop where only the founder knows which supplier to call and what the discount is has not finished the running job, however well the products sell.
Exam Matters: Appendix 6 defines Analyse as requiring a brief chain of reasoning, and says it does not include evaluation. A chain here has to reach an effect on the firm — an order missed, cash short — rather than a judgement about whether the founder is any good at it.
Expanding changes what the founder does: past a certain size the founder stops making the product and starts deciding how it gets made.
The second half of 1.3.5 · 1b is expanding and developing, and the specification treats it as part of the role rather than as something that happens to a firm. Growth is chosen.
It is chosen because it costs something. A workshop selling 5,000 chairs can be supervised by one person; a workshop selling twice that cannot. Expansion buys more output with more fixed cost, more people and less direct control, and the founder has to decide whether the exchange is worth making.
Developing is the other half and is not the same as getting bigger. A firm develops when it changes what it does — a new design, a different customer, selling direct instead of through a retailer — and a firm can develop without growing at all.
What changes for the founder is the work itself. At 25 chairs a day the founder is at the bench; at four times that she is buying timber, hiring and pricing, and somebody else is at the bench. That is the same transition the objectives chapter measures in money.
Real Example: A workshop that adds a second product line for the same customers has developed; one that opens a second unit making the same chairs has grown. They are different decisions with different risks.
Exam Matters: Growth questions attract Discuss, which Appendix 6 glosses as chains of reasoning in context showing causes and effects, closing with a brief assessment of the competing arguments. The argument almost every answer omits is the one against: expansion buys output with fixed cost and control.
Intrapreneurship is entrepreneurial behaviour inside an established firm — the initiative without the personal financial risk, because the firm carries that.
1.3.5 · 1c is innovation within a business (intrapreneurship), and the specification's own bracket is the definition. An intrapreneur is an employee who behaves entrepreneurially inside a firm that already exists: spotting the opportunity, pressing for it and seeing it through.
Set it against the definition from the first subsection and exactly one of the two halves is missing. The initiative is there. The financial risk is not — it belongs to the firm, which pays the intrapreneur's salary whether or not the idea works.
That single difference explains most of what follows from it. An intrapreneur can be given resources far larger than they could ever raise personally, and can try things that would ruin an individual. They also cannot keep the gains: a successful idea belongs to the firm.
Firms want intrapreneurship because the alternative is losing the person. An employee with an idea and no route to it inside the firm is the employee who leaves and becomes a competitor.
Real Example: A machinist who works out that offcuts can be sold as a second product, persuades the owner and runs the line has behaved entrepreneurially with none of her own money at stake.
Exam Matters: Appendix 6 defines Define as requiring students to define a term or phrase. A definition of intrapreneurship has to say where it happens and what is absent from it, because the contrast with entrepreneurship is the meaning of the word.
Risk can be estimated and planned for; uncertainty cannot be estimated at all, so it is anticipated by keeping the firm able to absorb a surprise.
1.3.5 · 1e asks for something narrower than it looks: anticipating risk and uncertainty in the business environment. The distinction between the two terms is 1.3.1 · 1d and belongs to the market chapter; what this leaf wants is what a founder DOES about them.
The distinction in short, because the rest depends on it: a risk is something whose chance can be estimated — a proportion of chairs returned faulty, a proportion of customers paying late. An uncertainty cannot be given a figure at all: whether a competitor opens next year.
They are anticipated differently, and that is the leaf. A risk is anticipated by pricing it in: if one chair in fifty comes back, the cost of replacing it belongs in the $10 variable cost before the price is set.
An uncertainty cannot be priced in, because there is no figure to use. It is anticipated by keeping the firm able to survive one — cash in reserve, costs that can be cut, no commitment so large that a bad year ends the business.
Real Example: A workshop can budget for the chairs it will have to replace under guarantee. It cannot budget for whatever the next few years do to its trade, so it holds cash instead.
Exam Matters: Under Appendix 6 an Explain is a brief explanation of cause or effect, and it is carried by the DETAIL supporting it rather than by its length. Here that detail is the method: a risk is priced into the cost, an uncertainty is held against with cash. "The founder plans for it" names neither.
Both methods of anticipating cost money, which is why firms do not do all of it: pricing a risk in raises the price, and holding cash against an uncertainty leaves capital idle.
Anticipating is not free, and a subsection that says a founder "should plan for risk" has not said what the plan costs. Both methods have a price, and the price is why no firm anticipates everything.
Pricing a risk in raises the price. Suppose Altan Furniture finds that one chair in fifty comes back. Replacing it adds $0.20 to the $10 it costs to make one — and a higher variable cost moves the profit-maximising price up and the quantity down. The schedule in the objectives chapter shows the same effect when wages rise.
Holding cash against an uncertainty leaves capital idle. Money kept in reserve is money not spent on machinery that would have raised output. The reserve earns the firm nothing while it sits there; what it buys is the ability to still be trading after a surprise.
So the founder is choosing how much of each to buy, and a firm that anticipates nothing is cheaper and more fragile than one that anticipates everything. Neither end is right.
Real Example: A workshop holding three months of fixed costs in reserve has $20,000 doing nothing, which is the price of surviving a quarter with no orders.
Exam Matters: Assess carries ten marks in Units 1 and 2, and Appendix 6 asks for a balanced chain ending in a supported judgement. What is weighed here is a cost against a cost: the idle reserve, against the year that ends the business. Say which this firm can less afford.
A barrier to entrepreneurship is anything that stops a person starting a business, and each one obstructs a specific requirement of the role.
1.3.5 · 1d is one line long — barriers to entrepreneurship — and the specification names none of them. That is worth knowing rather than guessing at: the way to produce the list in an exam is to work back from the role, because a barrier is whatever prevents one of its requirements.
The last one is the barrier students never list, and it rises with how employable somebody is: a person who could earn $36,000 in salaried work faces a higher barrier than one who could earn half that, from exactly the same business.
Real Example: Two people with the same idea and the same savings face different barriers if one of them would be giving up a well-paid post and the other would not.
Exam Matters: Appendix 6 defines Analyse as requiring a brief chain of reasoning with interpretation where data is given, and says it excludes evaluation. A chain on barriers has to connect one barrier to one requirement of the role it obstructs.
Each barrier is lowered by a different thing, and the two that are lowered by information are lowered cheaply — which is why advice matters more than money to some founders.
A barrier that can be named can be worked on, and they are not all worked on the same way. This is the second half of 1.3.5 · 1d, and it is where the difference between the four starts to matter.
Capital is lowered from either end: finding money on terms a firm with no trading record can get, or needing less of it. A founder who hires equipment rather than buying it has cut what must be committed at the start, at a higher charge per chair. Which sources exist is a Unit 2 topic; the barrier is what matters here.
Skills and risk are both lowered by information, which is why they are the cheap ones. A founder who has costed the product knows which risks carry a figure; a founder who has worked in the trade has already made the mistakes at somebody else's expense.
Opportunity cost cannot be lowered, only made smaller — by starting part-time, or while still employed, so less of the alternative is given up at once. That is why so many businesses begin alongside a job.
Real Example: Somebody who keeps the salary until the order book justifies leaving it has cut the opportunity cost of the first year to almost nothing.
Exam Matters: Appendix 6 defines Evaluate as requiring fully developed chains of reasoning and a perceptive conclusion that proposes a solution or a recommendation. A twenty-mark answer on barriers is expected to end with which one to work on first, not with a list of all four.
The specification names no characteristics, so the reliable ones are read off the role: each requirement of the job implies the quality needed to do it.
1.3.5 · 2a asks for the characteristics and skills required and lists none. A student who has memorised somebody else's list of adjectives has nothing to fall back on when the question asks about a firm the list does not fit; a student who can read the qualities off the role always can.
Skills are the other half of the leaf and are not the same thing. A characteristic is a disposition — how somebody is. A skill is learned: costing, selling, organising the work. The distinction matters because skills can be acquired, which is why "lacks the skills" is a smaller obstacle than it sounds.
Real Example: A founder who can make the product but has never costed one has the characteristics and is missing a skill — and the skill is the half that can be bought in or learned.
Exam Matters: The trap here is that a list LOOKS like an answer. An Explain, as Appendix 6 words it, wants cause or effect with a supporting detail — so one characteristic tied to the requirement that makes it necessary does more than all four in a row.
Profit maximisation as a motive means the founder set the business up in order to earn as much as it can, and it predicts a specific price rather than a general ambition.
1.3.5 · 2b asks why people set up businesses, and names two financial motives. The first is profit maximisation: the business exists in order to earn as much profit as the market allows.
The useful thing about this motive is that it makes a prediction. It does not mean charging as much as possible, and it does not mean selling as much as possible — both of those earn less. It means one price, and the schedule finds it.
At Altan Furniture that price is $35, selling 5,000 chairs for a profit of $45,000. Charge more and the chairs lost cost more than the extra margin gains; charge less and the margin lost costs more than the extra chairs gain.
The motive and the objective share a name and are not the same leaf. Here it is a reason a PERSON began; at 1.3.5 · 3b it is a target the FIRM pursues. A founder may begin for the money and later run the firm for something else, and the specification separates them so that both can be said.
Real Example: A founder who works out the price that earns most and charges it is pursuing this motive; one who charges the highest price the market will bear is not, and will earn less.
Exam Matters: Appendix 6 defines Calculate as requiring a calculation based on given data, with workings shown. A question giving a schedule and asking for the profit-maximising price wants the profit at each price set out, not the highest price in the table.
Profit satisficing means taking a profit that is good enough rather than the largest available: the founder chooses the working year first and lets the profit follow.
The second financial motive at 1.3.5 · 2b is profit satisficing: earning enough rather than earning most. It is a financial motive because the test is still a figure — it is simply a floor rather than a maximum.
The clearest way to see the difference is to ask which thing the founder chooses FIRST. A maximiser chooses the price and accepts the working year that follows: $35 means 5,000 chairs, which is 25 a day across 200 working days.
A satisficer chooses the working year and accepts the profit that follows. 20 chairs a day is 4,000 a year, and the schedule says they must sell at $40, earning $40,000. That is $5,000 less than the maximum, and 1,000 fewer chairs to make.
It is a real decision rather than laziness, and it has a test: $40,000 still clears the $36,000 the founder could earn elsewhere. Satisficing below that figure would not be satisficing but a mistake.
Real Example: A founder who closes on Fridays and prices accordingly has chosen the year first. The profit is what the schedule gives her for that choice, and it is smaller on purpose.
Exam Matters: Where a question supplies a schedule, Appendix 6's Analyse expects it to be INTERPRETED rather than quoted. Two prices read off it, and a sentence saying what was given up for what, is the interpretation; restating the figures is not.
An ethical stance as a motive means the business was founded in order to trade in a particular way, so the constraint came before the firm rather than being added to it.
The specification names four non-financial motives at 1.3.5 · 2b, and this is the first: an ethical stance. The word "motive" is doing the work. This is not a firm that later adopts a policy; it is a firm that exists because somebody wanted to trade in a particular way.
The practical mark of it is that the stance is expensive and survives anyway. A founder who will only buy timber from a source she can trace pays more for it, and her variable cost is higher than a competitor's for the same chair.
Put that into the schedule and the consequence is exact: a higher cost of making one chair pushes the profit-maximising price up and the quantity down. The stance costs the founder profit, measurably, and she keeps it.
What distinguishes the motive from marketing is what happens when it stops paying. A firm that adopted the stance to attract customers drops it when the customers stop caring; a firm founded on it does not, because the stance is the reason the firm exists.
Real Example: A workshop that refuses a large order because the buyer wants a timber it will not use has paid for its stance in a way that shows up in the accounts.
Exam Matters: A ten-mark Assess ends, per Appendix 6, in a supported judgement. Here the judgement is not whether the stance is admirable but whether the case shows it is a MOTIVE: what has it cost, and did it predate the customers? Evidence of cost is the argument.
A social entrepreneur founds a trading business in order to meet a social need, so the surplus serves the purpose rather than the founder.
The second non-financial motive is social entrepreneurship. A social entrepreneur sets up a business to meet a social need — and it is a business, which is the half students drop.
It sells something, it covers its costs, and it has to survive. The difference is where the surplus goes: into the purpose rather than to the founder. The motive is what the surplus is FOR.
That makes the objectives different in a way the schedule can show. A workshop founded to train young people out of work does not want the $45,000 that $35 earns; it wants the largest output it can reach while still surviving, because output is training places. That is $20, 8,000 chairs and $0 of profit.
Notice that this is the market-share objective arrived at for a different reason, and that surviving is the binding constraint. A social business that runs out of money has stopped meeting the need entirely, which is why it must still be run as a business.
Real Example: A workshop that employs and trains people who have been out of work, sells the chairs at a price that just covers its costs and puts what is left into more training places.
Exam Matters: Appendix 6 closes a Discuss with a brief assessment showing awareness of the competing arguments. Here the competition is between the purpose and the constraint, and the constraint wins by arithmetic: an organisation that stops trading has stopped meeting the need it was founded for.
Independence and home working are motives about the shape of the founder's life, and both put a ceiling on how large the business can become.
The last two non-financial motives at 1.3.5 · 2b are independence and home working. They are grouped here because they share a consequence the other motives do not have: each one limits the firm's size by design.
Independence is founding a business in order to answer to nobody else's decisions about how the work is done. It explains why some founders refuse investment: outside money brings somebody with a view, and the motive was precisely to have no such person.
Home working is founding it so the work happens where the founder lives. The specification lists it as a reason people set businesses up, and the practical effect is a ceiling: a business run from a house can only grow to what the house holds.
Both therefore predict satisficing rather than maximising. A founder who will not take investment or leave the house has fixed the scale before the schedule is consulted, and takes whatever profit that scale allows — which is the previous subsection's decision arrived at for a different reason.
Real Example: A workshop in a converted garage that turns away an order it has no room to make has priced independence and space above the revenue, which is the motive showing itself.
Exam Matters: An Explain has to reach an EFFECT ON THE FIRM, which Appendix 6 words as cause or effect supported by a detail. The effect these two motives produce is a ceiling on output. An answer describing what the founder enjoys has described a preference and stopped short of the effect.
Survival is the objective that makes the others possible, and on a schedule it is a range of prices rather than a point.
1.3.5 · 3 lists the objectives a business pursues, and puts survival first. It is first because it is a precondition: a firm that does not survive pursues nothing else.
On the schedule survival is not a price but a range. Altan Furniture covers its costs at any price from $20 to $50. Below $20 the margin on each chair is too thin to cover $80,000 of fixed costs however many are sold; above $50 too few are sold to cover them at all.
Every other objective is a choice from inside that range. Profit maximisation takes $35, sales maximisation $30, market share $20 — and the last of those is the edge of the range, which is why it earns no profit.
Survival is the dominant objective in two situations the specification's other leaves imply: at the start, before the firm knows its own figures, and in a bad year. In both, a firm will accept a price it would refuse otherwise, because trading at a low profit beats not trading.
Real Example: A workshop with orders falling takes work at a price that only just covers its costs, because the alternative is standing the machinery idle and paying the rent anyway.
Exam Matters: Survival is a calculation, and Appendix 6 asks for workings on any Calculate. The thing to notice is that it has TWO answers: profit reaches zero twice, so a range needs both ends. One price is half an answer.
Profit maximisation as an objective is a single price found by comparing margin against volume, and it is neither the highest price nor the largest output.
1.3.5 · 3b is profit maximisation, now as something the firm pursues rather than a reason the founder began. The arithmetic is the same and the question it answers is different: not why this business exists, but what price it should charge.
The answer is a balance. Raising the price adds to the margin on every chair still sold and loses some sales; lowering it does the reverse. The profit-maximising price is where the next dollar of price stops being worth the chairs it costs.
For Altan Furniture that is $35: 5,000 chairs, $175,000 of revenue and $45,000 of profit. It sits between the sales-maximising price of $30 and the satisficing price of $40, which is worth noticing — the maximum is in the middle, not at an end.
And the profit is a hill rather than a slope. $30 and $40 both earn $40,000 — the same profit on opposite sides of the peak, one by selling 6,000 cheaply and the other 4,000 dearly.
Real Example: Two workshops earning the same profit can be doing opposite things: one selling a great many at a low margin, the other a few at a high one.
Exam Matters: Appendix 6 defines Analyse as requiring a brief chain of reasoning including interpretation of given data. Interpreting this schedule means saying what happens on BOTH sides of the peak, because a chain that only goes one way does not show it is a peak.
Sales maximisation aims at the largest revenue rather than the largest profit, and the two sit at different prices.
The first of the six other objectives at 1.3.5 · 3c is sales maximisation, and the name matters: the specification says sales maximisation, and an answer that calls it revenue maximisation has used a term the specification does not contain.
It aims at the largest revenue — price times quantity — rather than the largest profit. Because revenue ignores cost, it peaks at a lower price than profit does: selling more chairs always adds revenue, while it only adds profit until the margin runs thin.
Altan Furniture maximises sales at $30: 6,000 chairs and $180,000 of revenue, against $175,000 at the profit-maximising price. So the objective gains $5,000 of revenue and 1,000 chairs, and costs $5,000 of profit.
Firms choose it deliberately. A firm paying a sales force on commission, or trying to establish a product before a competitor does, may want the volume now and accept the smaller profit — which is a trade-off rather than a mistake.
Real Example: A workshop pricing to fill its order book for a year ahead has chosen revenue over margin, and can say exactly what the choice cost.
Exam Matters: Comparing two objectives on one schedule means running the arithmetic twice and then subtracting. A Calculate, per Appendix 6, wants the workings shown; here the subtraction IS the answer, because the question is what one objective costs against the other rather than what either earns.
Market share is pursued by selling as many as possible while still surviving, which puts the firm at the edge of its price range and earns it nothing.
Market share is the second objective at 1.3.5 · 3c, and it is the share of the market's total sales that this firm makes. A firm pursuing it wants volume, and the survival range sets the limit.
The most chairs Altan Furniture can sell while still covering its costs is 8,000, at $20. That is the bottom of the survival range, so the profit is exactly $0 — every dollar of margin has gone into volume.
Against profit maximisation the exchange is stark: 3,000 more chairs for $45,000 less profit. That is the whole of the profit given up, and it is the largest trade-off in the section.
A firm accepts it when share buys something later — a reputation, a customer who reorders, a competitor deterred. The objective is an investment made through the price, and like any investment it is only justified by what comes after.
Real Example: A new workshop pricing at cost for its first two years to become the supplier a retailer thinks of first has bought share with the profit it did not take.
Exam Matters: This is the leaf where a ten-mark Assess is hardest to finish, because the cost is certain and the gain is not. Appendix 6 requires the judgement anyway. Weigh a profit given up today against a customer who may reorder, and say what would have to be true for the exchange to be worth making.
Cost efficiency is producing the same output for less, and it does not only raise profit — it moves the price the firm should charge.
Cost efficiency is the third of the other objectives at 1.3.5 · 3c: producing the same output for a lower cost. It differs from the others in one way worth stating — it does not compete with them.
Suppose Altan Furniture cuts what a chair costs to make from $10 to $8 by reducing waste. At the old price of $35 the profit rises from $45,000 to $55,000 — $10,000 more, which is the $2 saved on each of 5,000 chairs.
But the price should also move. A lower cost of making one makes the extra chair worth more, so the profit-maximising price falls to $34, output rises to 5,200, and profit reaches $55,200.
That second step is the one students miss, and it is what makes cost efficiency an objective rather than housekeeping. It reaches the customer as well as the accounts: some of the saving goes into a lower price, and the firm sells more as a result.
Real Example: A workshop that cuts its offcuts can afford to charge slightly less and sell more, and ends up better off than if it had kept the price where it was.
Exam Matters: Two steps live inside one question here, and the instruction Appendix 6 attaches to Calculate — show the workings — is what makes the second visible: the saving at the old price, then the price that saving makes best. Most answers stop after the first and never notice the second.
These three cost profit at the moment they are pursued and are chosen anyway, because each buys something the profit figure does not show.
The last three objectives at 1.3.5 · 3c — employee welfare, customer satisfaction and social objectives — are grouped here because they share a structure. Each costs money now and returns something later or not at all.
Employee welfare is the clearest to price. If Altan Furniture raises what it spends on each chair from $10 to $12 by paying above the going rate, profit at $35 falls from $45,000 to $35,000 — a cost of $10,000.
Customer satisfaction costs in the same shape: a longer guarantee, a replacement given without argument, more time spent on an order. It buys the reorder, and the reorder does not appear in this year's figures.
Social objectives are what the firm sets out to do for the community it trades in. Like the ethical stance in the motives chapter, the test is whether it costs anything — and unlike the other two, it may never return in money at all.
Real Example: A workshop paying above the local rate keeps machinists who would otherwise leave, and spends nothing on replacing them — a saving that appears under recruitment rather than under wages.
Exam Matters: Appendix 6 defines Evaluate as requiring fully developed chains of reasoning and a perceptive conclusion proposing a solution or recommendation. A twenty-mark answer weighing these against profit has to end by naming the circumstances in which each wins, not by saying that firms should balance them.
The opportunity cost of a choice is the value of the next best alternative given up, and it is a real cost even though nobody pays it to anybody.
1.3.5 · 4a is opportunity cost, and it is the idea the whole of this topic has been leading to. Every decision so far — to start, to expand, to satisfice — gave something up, and this is what the thing given up is called.
The opportunity cost of a choice is the value of the next best alternative that was available and was not taken. Two words carry the definition: next and best.
The founder of Altan Furniture had one year and four ways to spend it. Running the workshop earns $45,000. The alternatives were worth $36,000, $24,000, $18,000. The opportunity cost of running the workshop is $36,000 — the best of the ones forgone.
And the comparison is the point of making it: $45,000 against $36,000 means the founder is $9,000 better off running the workshop than doing the best other thing. That figure, not the profit, is what says the decision was right.
Real Example: A founder earning less from her business than she could earn in salaried work is making a loss in the only sense that matters, even when the accounts show a profit.
Exam Matters: Appendix 6 defines Define as requiring students to define a term or phrase, worth two marks here. A definition of opportunity cost needs the alternative forgone and the word "next best", because without the second word the definition is wrong rather than incomplete.
Only one alternative can be taken, so only one is given up: adding the forgone options together overstates the cost and can reverse the decision.
The single commonest error on this leaf is worth its own subsection, because it changes the answer rather than losing a detail. The error is adding the alternatives up.
The founder's three forgone options were worth $36,000, $24,000, $18,000. Added together that is $78,000, and against a profit of $45,000 it says the workshop is a mistake by $33,000.
It is not a mistake, and the sum is meaningless. The options are mutually exclusive: they are three uses of the same single year. Taking the salaried post is not compatible with taking the agency. Only one could have been had, so only one was given up — $36,000, the best.
The test to apply is whether the alternatives could have been held at once. Where they could, they are not competing for the same resource and the question of opportunity cost does not arise between them. Where they could not, exactly one of them is the cost.
Real Example: A diner choosing one dish from four gives up the one they would have picked second, not all three — and would order differently if they believed otherwise.
Exam Matters: When a question lists several alternatives, the arithmetic a Calculate is asking for — Appendix 6 wants it based on the given data — is a SELECTION rather than a sum. Choosing the largest forgone is the whole of it, and adding them does not give an imprecise answer but the opposite recommendation.
A trade-off is giving up some of one thing to get more of another, and unlike opportunity cost it is a matter of degree rather than a choice between whole options.
1.3.5 · 4b is trade-offs, and it is the last leaf of the topic. A trade-off is an exchange: less of one thing for more of another, where the firm chooses how much rather than whether.
That is what separates it from opportunity cost, and the two are constantly confused. Opportunity cost is about whole options — the founder takes the workshop or the salaried post, not both. A trade-off is about degree — the workshop can have a little more volume and a little less profit, at any point along the schedule.
The objectives chapter is a list of trade-offs for that reason. Moving from $35 to $30 exchanges $5,000 of profit for 1,000 more chairs and $5,000 more revenue. Going further, to $20, exchanges the whole $45,000 for 3,000 chairs.
Notice that the rate gets worse. The first 1,000 chairs cost $5,000 of profit; the next 2,000 cost $40,000. A trade-off that is worth making in small amounts is not automatically worth making in large ones.
Real Example: A workshop deciding how much of a discount to offer is choosing a point on a trade-off, and a slightly bigger discount always costs more profit than the one before it.
Exam Matters: Appendix 6 is explicit that Analyse EXCLUDES evaluation, and a trade-off is where that line is easiest to cross. State the rate at which one thing exchanges for the other and stop; whether the firm ought to make the exchange belongs to a different command word.
The objectives conflict by arithmetic rather than by opinion, and one schedule prices every conflict between them.
The topic closes where it can be checked. "Objectives conflict" is the sentence every student writes; the schedule turns it into figures, and the figures are what an answer is built from.
Every one of these is read off the same line, Q = 12,000 − 200P:
The last line is the one worth carrying into an exam. Five of the six objectives at 1.3.5 · 3c compete with profit; cost efficiency does not, which is why it is the first thing a firm under pressure reaches for and the last thing it should have to defend.
Real Example: A workshop can say precisely what its decision to pay above the going rate costs, and decide with the figure in front of it rather than in the abstract.
Exam Matters: Appendix 6 defines Evaluate as requiring fully developed chains of reasoning showing a range of causes and effects, leading to a perceptive conclusion proposing a solution or recommendation. Quantifying a conflict is what makes a chain developed rather than asserted.
An entrepreneur takes the initiative to set up and run a business, bringing the resources together and carrying the financial risk of doing so.
Setting up is a sequence, and the order is forced: the idea has to be tested against a market and costed before any money is committed to it.