Business Risk Economics LAP 3 Objectives Explain types

Business Risk Economics LAP 3

Objectives Explain types of business risk. Explain how businesses deal with risk.

Objective Explain types of business risk.

• You face risk every day. • You try to prevent bad things from happening. • That’s the same thing businesses do!

What Is Business Risk? • The possibility of loss, failure, or even gain • A business can lose it all or make a fortune.

Classifications of Business Risk • Economic risks—chances of loss due to changes in the market • Natural risks—chances of loss resulting from natural causes • Human risks—chances of loss caused by human weakness and unpredictability

Types of Economic Risks • Competition • Shifts in customer demand • Obsolescence • Government intervention • Business conditions • Choice of business location

Natural Risk • Weather conditions—floods, tornadoes, fires, lightning, earthquakes • Certain geographic areas are more likely to experience specific weather conditions. • Perishability—natural spoiling of food, etc.

Human Risks • Dishonesty • Carelessness • Incompetence • Possibility of accident or illness

Pure Risks vs. Speculative Risks • All business risks are pure or speculative. • Pure risk—possibility of loss or no loss • Speculative risk—possibility of loss, no change, or gain

Objective Explain how businesses deal with risk.

Ways to Handle Risk • Avoiding • Preventing/Controlling • Transferring • Retaining

Avoiding Risk • Not participating in the risky activity • If no risk, no danger!

Preventing/Controlling Risk • Identifying a risk • Taking measures to prevent or reduce it

Transferring Risk • Contractual agreements • Business organization • Insurance

Retaining Risk • When a business: Ø Is unaware of the risk Ø Underestimates the risk Ø Feels that the risk is small Ø Believes there is a chance of return

• Consider the risks of operating a theme park. • Identify risks, and recommend how to handle them.

• Responsibility for risk is not always clear. • Construction company takes reasonable precautions. • But, worker still falls. • Whose fault is it?

Mark. ED Acknowledgments Original Developers Christopher C. Burke, Mary C. Hollaway, Mark. ED Version

Digital-based photography sources: DIGITAL STOCK CORP. ; Business & Industry Obj. A: #009 Photos copyright 1998 Corbis Corp. 750 Second Street, Encinitas, CA 92024 DIGITAL VISION; Teenager Today Obj. B: #130271 Photos copyright Digital Vision Ltd. , all rights reserved. 833 Fourth Ave. SW, Suite 800 Calgary, AB, Canada T 2 P 3 T 5

Digital-based photography sources: GAZELLE TECHNOLOGIES, INC. ; Earth & Space Photos Obj. A: #IMG 0005 Photos copyright Gazelle Technologies Inc. PHOTODISC, INC. Business & Industry Vol. 7 Obj. A: #69169 Photos copyright Photo. Disc, Inc. 2013 Fourth Ave. , Seattle, WA 98121

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