Unit 1: Understanding Business Activity
1.1: Business Activity
Wants Vs Needs:
Need - A good or service essential for living.
Ex: Clean Water, Shelter
Want - A good or service which people would like to have, but which is not essential for living. People's
wants are unlimited.
Ex: Luxury House, Sports Car
Scarcity and Economic Problems:
Economic problem - there exist unlimited wants but limited resources to produce the goods and services
to satisfy those wants. This creates scarcity.
Ex: You want 3 toys but only have enough for 1, so you are forced to choose.
Due to not having enough factors of production, there is a scarcity/shortage of goods and services.
Factors of Production: Those resources needed to produce goods or services. There are four factors of
production, and they are in limited supply.
Scarcity - the lack of sufficient products to fulfill the total wants of the population.
For Example: 15 candies but 20 friends, each friend won't get a piece of candy.
Four Factors of Production:
Factors of Production: Those resources needed to produce goods or services. There are four factors of
production, and they are in limited supply.
Land - all of the natural resources provided by nature.
Ex: Oil, Gas, Metal, Fishing
Labour - the number of people available to make products.
Ex: Factory Workers, Farmers, Teachers, Construction Workers.
Capital - the finance, machinery, and equipment needed to manufacture goods.
Ex: Factories, Computers, Trucks, Tools.
Enterprise - the skill and risk-taking ability of the person who brings factors of production together to
produce a good service.
Ex: Business Owners, Entrepreneurs, Startup Founders.
Added Value and Opportunity Cost
Added Value - The difference between the selling price of a product and the cost of the inputs used to
produce it. Being able to increase the value of a product.
- Formula:
Selling Price - Cost of materials/inputs = Added Value
- Example:
If a company makes a wooden chair, the materials required (wood, nails, etc) cost $30, and the
chair is sold on the market for $70.
- Added Value [Of Example]:
70(selling price) - 30(cost of materials) = 40(added value)
Opportunity Cost: - The next best alternative is given up by choosing another item.
Ex: You have 50 dollars, you can buy a video with that or invest it. If you choose to invest it you will get
$10 of internet next year. If you buy the game the opportunity cost is the $10 you would have earned by
investing.
Note: With limited resources, we have to make choices, as there are so many wants but not enough
resources. This leads to the usage of opportunity cost.
Specialization and Division of Labour
Specialization: occurs when people and businesses concentrate on what they are best at.
- They do this to create a good or service as quickly as possible.
Division of labour - when the production process is split up into different tasks, and each worker
performs one of these tasks. It is a form of specialization.
Advantages of Division of Labour:
● Workers are trained in one task and specialize in this - it increases efficiency and output
● Less time is wasted moving from one workbench to another
Disadvantages of Division of Labour:
● Workers can become bored doing one job, and efficiency might fall
● If one worker is absent and no one else does the job, production might be stopped
1.2: Classification of Business
Stages of Economic Activity:
Primary Sector - uses the natural resources of the earth to produce raw materials used by other
businesses.
Ex: A farmer grows cotton.
Secondary Sector - manufactures goods using raw materials provided by the primary sector.
Ex: A factory makes clothes from cotton.
Tertiary Sector - provides services to consumers and other sectors of industry.
Ex: A store sells the clothes made by the factory to customers.
Other Terms:
De-industrialisation - occurs when there is a decline in the importance of the secondary, manufacturing
sector of industry in a country.
Mixed Economy - has both a private sector and a public sector.
- Private sector - business not owned by the government.
- Public sector - business owned by the government.
Capital: The money invested in a business by the owners.
Privatization: A company goes from the public sector to the private.
1.3: Enterprise, Business Growth, and size
Entrepreneur:
Entrepreneur - a person who organizes, operates, and takes the risk for a new business venture.
Advantages of an Entrepreneur:
- Independence - able to choose how to use time and money
- Able to put their own ideas into practice
- May become famous and successful if the business grows
- It may be profitable, and the income might be higher than working as an employee for another
business
- Able to make use of personal interests and skills
Disadvantages of an Entrepreneur:
- Risk - many new entrepreneurs' businesses fail, especially if there is poor planning
- Capital - entrepreneurs will have to put their own money into the business and, possibly, find
other sources of capital
- Lack of knowledge and experience in starting and operating a business
- Opportunity cost - lost income from not being an employee of another business
Characteristics of a Successful Entrepreneur:
- Hard working
- Risk taker
- Creative
- Optimistic
- Self-Confident
- Innovative
- Independent
- Effective Communicator
Why Governments Support Business Startups:
- Reduce Unemployment - A new business will often create jobs to help reduce unemployment.
- Increase Competition - new businesses give consumers more choice and compete with already
established businesses.
- Increase Output - the economy benefits from increased output of goods and services
- Benefit Society - Entrepreneurs may create social enterprises which offer benefits to society other
than jobs and profit (for example, supporting disadvantaged groups in society)
- Can Grow Further - All large businesses were small once, and by supporting them, some firms
will grow to become very large and important in the future
Business Plan:
Business Plan - a document containing the business objectives and important details about the operations,
finance, and owners of the new business.
Comparing the Size of Businesses:
- Number of employees
- Values of output
- Value of sales
- Value of capital employed
Capital Employed: The total value of capital used in the business
Business Growth:
Internal Growth: Occurs when a business expands its existing operations.
External Growth: When a business takes over or merges with another business, it is often called
integration, as one firm is integrated into another one.
Merger: When the owner of two businesses agrees to join their firms together to make one business.
Takeover/Acquisition: When one business buys out the owners of another business (51% shares) which
then becomes part of the ‘predator’ business(the firm that has taken it over).
3 Types of External Growth:
Horizontal Integration - when one firm merges with or takes over another one in the same industry at the
same stage of production.
Benefits of Horizontal Integration:
- The merger reduces the number of competitors in the industry.
- There are opportunities for economies of scale.
Vertical Integration - when one firm merges with or takes over another one in the same industry but at a
different stage of production. Vertical integration can be forward or backward.
- Forward - Merges in the same industry but at a later stage of production.
- Backward - Merges in the same industry but at an earlier stage of production.
Benefits of Forward:
- The merger gives an assured outlet for their product.
- Information about consumer needs and preferences can now be obtained directly by the
manufacturer.
Benefits of Backward:
- The merger gives an assured supply of important components.
- The cost of components and supplies for the manufacturer could be controlled.
Conglomerate integration - when one firm merges with or takes over a firm in a completely different
industry. This is also known as diversification.
Benefits of a Conglomerate:
- The business now has activities in more than one industry.
- There might be a transfer of ideas between the different sections of the business even
though they operate in different industries.
Why Some Businesses Stay Small:
- The type of industry the business operates in
- Market size
- Owner’s objectives
Why Some Businesses Fail:
- Poor management
- Failure to plan for change
- Poor financial management
- Over-expansion
- Risks of new business start-ups
1.4: Types of Business Organizations
Unincorporated Businesses:
- It doesn’t have a separate legal identity. Sole traders and partnerships are unincorporated
businesses.
Sole trader - a business owned by one person.
Partnership - a form of business in which two or more people agree to jointly own a business.
- Partnership agreement - a written and legal agreement between business partners. It is not
essential for partners to have such an agreement, but it is always recommended.
Note:
Limited Liability - the liability of shareholders in a company is limited only to the amount they invested.
Unlimited liability - the owners of a business can be held responsible for the debts of the business they
own. Their liability is not limited to the investment they made in the business.
Advantages of a Sole Trader Disadvantages of a Sole Trader
- Only a few legal regulations when setting up - Nobody to discuss business matters with.
the business. - Unlimited liability
- Being their own boss. - Unlikely to benefit from economies of scale.
- Having the freedom to choose his holidays, - No continuation of the business after the
hours of work, and whom to employ. death of the owner.
- Doesn’t have to share profits after taxes.
- Complete secrecy in business matters.
- Close contact with customers.
Advantages of a Partnership Disadvantages of a Partnership
- Responsible for running the business are now - Unlimited liability
shared. - Partners can disagree on business decisions
- Both partners are motivated to work hard and agreeing on one can take some time.
because they both will benefit from the
profits.
- More capital could now be invested into the
business.
Incorporated Businesses:
- Companies that have separate legal status from their owners.
Private Limited Company - a company which is only owned by a few people who invest in it. The
company is not open for anyone to join, only specific people can be a part of it.
Public Limited Company - a company that is open to the public to buy shares of, the company’s
ownership is based on the amount of shares people have. Anyone can join this company as you can buy
shares on the stock market.
Shareholders - the owners of a limited company. They buy shares which represent part ownership of a
company.
Advantages of a Private Limited Company Disadvantages of a Private Limited Company
- Shares can be sold to a large number of - Significant legal matters have to be dealt with
people before the company can be formed.
- All shareholders have limited liability. - The shares in a private limited company
- The people who start the company are able to cannot be sold or transferred without the
keep control of it as long as they do not sell to agreement of other shareholders.
many shares to other people. - The accounts of a company are less secret.
- The company cannot offer its share to the
general public.
Advantages of a Public Limited Company Disadvantages of a Public Limited Company
- Limited Liability - The legal formalities of forming the company
- Separate legal units and accounts are kept are quite complicated and take time.
separately from the owners. - More regulations and control to protect the
- The company will continue if one of the interests of the shareholders.
shareholders dies/passes away. - Difficult to control and manage if the
- There is no restriction in buying, selling, or company grows too large.
transfer of shares. - Selling shares to the public is expensive.
Other Forms of Ownership:
Joint Venture - When two or more businesses agree to start a new project together, sharing the capital,
the risks, and the profits.
Franchising:
- Franchise - a business based upon the use of the brand names, promotional logos, and trading
methods of an existing successful business. The franchisee buys the license to operate this
business from the franchisor.
- Franchisor - The original or existing business that sells the right to use its name and idea.
- Franchisee - The individual who purchases the right to sell the franchisor’s goods or services
while using its existing model and trademark.
Advantages of Joint Ventures Disadvantages of Joint Ventures
- Sharing of costs - very important for - The profits have to be shared if the new
expensive projects. project is successful.
- Risks are shared - Disagreements over important decisions
- Local knowledge when the company is might occur.
already based in the country. - Two different styles of running a business.
Advantages to Franchisor Disadvantages to Advantages to Franchisee Disadvantages to
Franchisor Franchisee
- Expansion of the - Poor management - Low chances of - May be unable to
businesses of one outlet can business failure. make decisions that
- All products sold create a reputation - The franchisor pays will suit the local
must be obtained for the entire for advertising. area.
from the franchisor. business. - Supplies obtained - A licence fee must
- Management of the - The franchisee by the franchisor. be paid to the
outlet and keeps the profits - Banks often give franchisor and
responsibility is the from the outlet. loans to possibly a cut of
franchisee's. franchisees. annual turnover.
- Expansion occurs
much faster.
1.5: Business and Stakeholder Objectives
Business objectives - aims or targets that a business works towards.
Common Business Objectives:
- Business Survival
- Service to the community
- Return to shareholders
- Growth of the business
- Market share
- Profit
Profit - the total income of a business (sales revenue) less total costs.
Market Share - the proportion of total market sales achieved by one business.
Providing a Service to Society:
Social Enterprise: Social objectives as well as an aim to make a profit to reinvest back into the business.
Objectives:
- Social: To provide jobs and support for disadvantaged groups in society, such as the disabled or
homeless
- Environmental: To protect the environment
- Financial: To make a profit to invest back into the social enterprise to expand the social work that
it performs.
Stakeholder: External and Internal:
Stakeholder - Any person or group with a direct interest in the performance and activities of a business
Internal Stakeholders - People whose interest in a company comes from direct relationships, such as
employment, ownership, or investment.
- Workers
- Managers
- Shareholders
External Stakeholders - Those who do not directly work with a company but are affected by the actions
and outcomes of a business.
- Customers
- Supplies
- Government
- Competitors
- Local Community
- Banks
Summary
All Key Terms in Unit 1:
Stakeholder - Any person or group with a direct interest in the performance and activities of a business
Internal Stakeholders - People whose interest in a company comes from direct relationships, such as
employment, ownership, or investment.
- Workers
- Managers
- Shareholders
