1.1-1.8 Understanding Business Activity

Scarcity means there is a finite supply of goods and raw materials. Finite resources mean they are limited and can run out. Unlimited wants mean that there is no end to the quantity of goods and services people would like to consume.

Scarcity

The situation where humans wants are unlimited and resources are limited.

Wants

These are things people wish to have but are sufficient for living

Needs

These are things people wish to have which are essential for living

Factors of production

These are resources used to produce goods/services.

Land

all natural resources provided by nature used to produce goods/services

Labour

All humans effort; physical or mental used to produce goods/services

Capital

All manmade resources used to produce goods/services

Enterprise

The skill and risk-taking ability by combining the various factors of production

Opportunity Cost

the next best alternative that is given up by choosing another item

Specialisation

when people and businesses concentrate on what they are best at

Division of labour

When the production process is split up into different tasks. It is a form of specialisation

Advantages of division of labour

• Work is faster

• Work is easier

• Less time is wasted

Disadvantages of division of labour

• Work can become boring

• Production might be delayed due to a lack of workers

• Workers are distracted from other disclipines

Business

Any organisation that uses all factors of production to create goods/services to satsify human

Added value

the difference between the cost of bought-in materials and the selling price of the good.

Profit

profit = total revenue (price x quantity) - total cost

the importance of added value

allows businesses to pay for costs of maintenance and to pay workers with their wages

how to increase added value

1. increase the selling price but keep the cost of bought-in materials

2. reduce the cost of bought-in materials and keep selling price the same

3. add special features

4. provide premium services

5. branding

classification of businesses

1. ownership

2. size

3. activity

Activity

• primary

• secondary

• tertiary

primary sector

it involves the use and extraction of natural resources.

examples:

• mining

• fishing

• oil rigging

secondary sector

involves the manufacturing of goods into finished or semi-finished goods

examples:

• food processing

• car painting

tertiary sector

the service sector, it consists of all services produced in an economy

eg.

• teaching

• banking

• hotels

ownership

• private

• public

• mixed economy

private sector

a sector where the means of production, exchange and distribution are in the hands of private owners

public sector

the sector where the means of production, exchange, and distribution are in the hands of the government

size

• number of employees

• value of output

• value of sales

• value of capital invested

industry

a group of firms producing the sa

why does government support businesses

• reduce unemployment

• increases competition

• increases GDP

• benefits society

social enterprise

an enterprise with the main aim of social welfare

entrepreneur

a person who takes risks to organise a business by combining factors of production

business enterprise

an enterprise with the primary aim of maximising profit

sole trade

an organisation set up and run by one person

advantages of sole trade

• decision-making is fast

• few legal obligations

• flexibility of work

disadvantages of sole trade

• difficulty in making business choices

• unlimited liability

• insufficient capital

• lack of continuity is high

• lack of skills or experience

partnership

a business organisation set up and run by two or more people

deed of partnership

a document that binds all partners in a partnership

advantages of partnership

• easy to raise funds

• specialisation

• losses are shared

• the scale of production is expanded

disadvantages of partnership

• profits are shared

• disagreements

• unlimited liability

• partnerships are dissolved by the death of a partner

franchise

an arrangement whereby one company gives the right to another company to produce/sell their goods

franchisee

the organisation that buys the right from a franchisor

franchiser

the person granting a franchise

advantages of franchise

• revenue is usually a lot

• certain services are provided by the franchiser

• less risky

disadvantages of franchise

• start-up costs are high

• a percentage of sales is payed to franchisor

• strict control by franchisor

• the franchisor has the power to withdraw franchise agreement

limited company

a company that is legally independent from shareholders

shareholders

people that own part/shares of a business

stakeholders

individuals or groups that have a strong interest in a business

types of limited company

• publo

public limited company

a company which sells its shares to the public but requires a minimum amount to setup

private limited company

a company that cannot sell its shares to the general public but a minimum and maximum number of shareholder has to be set

advantages of limited company

• limited liability

• access to large capital

• professionalism and credibility

• private limited companies have secrecy on accounts

disadvantages of limited liability

• complex to form

• expensive to operate

• public limited companies required to disclose accounts

• private limited companies may not be able to generate much capital

• less flexibility

cooperative

a business organisation owned by its customers and its employees

types of cooperative

• consumer cooperative

• producer cooperative

consumer cooperative

made up by the customers of a particular group

producer cooperative

a cooperative owned by employees of a business organisation