EconomicsLAP 3

Business Risk

ObjectivesObjectives

Explain types of business risk.Explain types of business risk.

Explain how businesses deal with risk.Explain how businesses deal with risk.

Explain types of business risk.Explain types of business risk.

ObjectivObjectivee

• You face risk every day.You face risk every day.

• You try to prevent bad You try to prevent bad things from happening.things from happening.

• That’s the same thing That’s the same thing businesses do!businesses do!

• The possibility of loss, The possibility of loss, failure, or even gainfailure, or even gain

• A business can lose it all A business can lose it all or make a fortune.or make a fortune.

What Is Business Risk?What Is Business Risk?

• Economic risks—chances of loss Economic risks—chances of loss due to changes in the marketdue to changes in the market

• Natural risks—chances of loss Natural risks—chances of loss resulting from natural causesresulting from natural causes

• Human risks—chances of loss Human risks—chances of loss caused by human weakness and caused by human weakness and unpredictabilityunpredictability

ClassificationsClassificationsof Business Riskof Business Risk

• CompetitionCompetition

• Shifts in customer demandShifts in customer demand

• ObsolescenceObsolescence

• Government interventionGovernment intervention

• Business conditionsBusiness conditions

• Choice of business locationChoice of business location

Types of Economic RisksTypes of Economic Risks

• Weather conditions—floods, Weather conditions—floods, tornadoes, fires, lightning, tornadoes, fires, lightning, earthquakesearthquakes

Natural RiskNatural Risk

• Certain geographic areas are Certain geographic areas are more likely to experience more likely to experience specific weather conditions.specific weather conditions.

• Perishability—natural spoiling Perishability—natural spoiling of food, etc.of food, etc.

Human RisksHuman Risks

• DishonestyDishonesty

• CarelessnessCarelessness

• IncompetenceIncompetence

• Possibility of Possibility of accident or illnessaccident or illness

• All business risks are pure or All business risks are pure or speculative.speculative.

• Pure risk—possibility of loss Pure risk—possibility of loss or no lossor no loss

• Speculative risk—possibility Speculative risk—possibility of loss, no change, or gainof loss, no change, or gain

Pure Risks vs.Pure Risks vs.Speculative RisksSpeculative Risks

Explain how businessesExplain how businessesdeal with risk.deal with risk.

ObjectivObjectivee

• AvoidingAvoiding

• Preventing/ControllingPreventing/Controlling

• TransferringTransferring

• RetainingRetaining

Ways to Handle RiskWays to Handle Risk

• Not participating in Not participating in the risky activitythe risky activity

• If no risk, no danger!If no risk, no danger!

Avoiding RiskAvoiding Risk

• Identifying a risk

• Taking measures to prevent or reduce it

Preventing/Controlling Preventing/Controlling RiskRisk

• Contractual agreementsContractual agreements

• Business organizationBusiness organization

• InsuranceInsurance

Transferring RiskTransferring Risk

• When a business:When a business:

Is unaware of the riskIs unaware of the risk

Underestimates the riskUnderestimates the risk

Feels that the risk is Feels that the risk is smallsmall

Believes there is a Believes there is a chance of returnchance of return

Retaining RiskRetaining Risk

• 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?

MarkED

Acknowledgments

Original DevelopersChristopher C. Burke,

Mary C. Hollaway, MarkED

Version 1.0

Copyright © 2007MarkED Resource Center

Digital-based photography sources:

DIGITAL STOCK CORP.;Business & IndustryObj. A: #009Photos copyright 1998 Corbis Corp.750 Second Street, Encinitas, CA 92024

DIGITAL VISION; Teenager TodayObj. B: #130271Photos copyright Digital Vision Ltd., all rights reserved. 833 Fourth Ave. SW, Suite 800 Calgary, AB, Canada T2P 3T5

Digital-based photography sources:

GAZELLE TECHNOLOGIES, INC.; Earth & Space PhotosObj. A: #IMG0005Photos copyright Gazelle Technologies Inc.

PHOTODISC, INC.Business & Industry Vol. 7Obj. A: #69169Photos copyright PhotoDisc, Inc. 2013 Fourth Ave., Seattle, WA 98121

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