Business Studies - Unit 1: Understanding business activity

needs

a good or service essential for living

wants

a good or service which people would like to have, but which is not essential for living.

economic problem

there exists unlimited wants but limited resources to produce the goods and services to produce those wants which creates scarcity

factors of production

those resources needed to produce goods and services. there are 4 factors of production and they are in limited supply

what are the 4 factors of production

• capital

• enterprise

• land

• labour

scarcity

the lack of sufficient products to fulfill the total wants of the population

opportunity cost

the next best alternative given up by choosing another item

specialisation

occurs when people and businesses concentrate on what they are best at

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 specialisation

businesses

combine the factors of production to make products (goods and services) which satisfy people’s wants

advantages of division of labour

• workers are trained in one task and specialise in it which increases efficiency and output

• less time is wasted moving from one workbench to another

• quicker and cheaper to train workers as fewer skill need to be taught

disadvantages of division of labour

• workers can become bored doing just one job - efficiency might fail

• if one worker is absent and no one else can do the job, production might be stopped

added value

the difference between the selling price of a product and the cost of bought-in materials and components

why is added value important?

• can pay expenses

• may be able to make a profit

how to increase added value?

• increase selling price but keeping cost of materials the same

• reducing the cost of materials but keeping the selling price the same

primary sector

extracts and uses the natural resources of Earth to produce raw materials used by other businesses

secondary sector

manufactures goods using the raw materials provided by the primary sector

tertiary sector

provides services to consumers and the other sectors of industry

de-industrialisation

occurs when there is a decline in importance of the secondary, manufacturing sector of industry in a country

private sector

businesses not owned by the government. these businesses will make their own decisions about what to produce, how it should be produced and what price should be charged for it. they aim to make a profit

public sector

government (or state) owned and controlled businesses and organisations

mixed economy

has both a private sector and a public (state) sector

capital

the money invested into a business by the owners

entrepeneur

a person who organises, operates and takes the risk for a new business venture

benefits of being an entrepeneur

• independence

• able to put own ideas into practice

• may become famous and successful if the business grows

• 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 being an entrepreneur?

• risk

• capital

• lack of knowledge and experience in starting and operating a business

• opportunity cost

characteristics of successful entrepreneurs?

• hard working

• risk taker

• creative

• optimistic

• self-confident

• innovative

• independent

• effective communicator

business plan

a document containing the business objectives and important details about the operations, finance and owners of the new business

why governments support business start-ups

• reduce unemployment

• contribute to growth of country’s GDP

• contribute to country’s exports

• introduce fresh ideas and technologies

how governments support business start-ups?

• organise advice

• provide low cost premises

• provide loans at low interest rates

• give grants for capital

• give grants for training

• give tax breaks/holidays

how to measure business size?

• number of employees

• value of output

• value of capital employed

internal growth

occurs when a business expands its existing operations

external growth/integration

when a business takes over or merges with another business

takeover/acquisition

when one business buys out the owners of another business

merger

when owners of 2 businesses agree to join their businesses together to make one business

horizontal integration

when one business mergers with or takes over another one in the same industry at the same stage of production

vertical integration

when one business merges with or takes over another one in the same industry but at a different stage of production

conglomerate integration/diversification

when one business merges with or takes over a business in a completely different industry

drawbacks of growth

• difficult to control staff

• lack of funds

• lack of expertise

• diseconomies of scale

why businesses stay small

• type of industry

• market size

• owner’s objectives

why businesses fail

• poor management

• over-expansion

• failure to plan for change

• poor financial management

why new businesses are at a greater risk of failure

• less experience

• new to the market

• dont have a lot of sales yet

• dont have a lot of money to support the business yet

sole trader

business owned by one person

advantages and disadvantages of sole trader

advantages:

• easy to set up

• full control

• sole trader receives all profit

• personal

disadvantages:

• unlimited liability

• full responsibility

• lack of capital

• lack of continuity

limited liability

the liability of the shareholders in a company is limited to only the amount they invested

unlimited liability

the owners of a business can be held responsible for the debts of the business they own.

partnership

a form of business in which two or more people agree to jointly own a business

partnership agreement

the written and legal agreement between business partners

advantages and disadvantages of a partnership

advantages

• easy to set up

• partner can provide new skills and ideas

• more capital investments

disadvantages

• conflicts

• unlimited liability

• lack of capital

• no continuity

unincorporated business

one that does not have a separate legal identity

incorporated business

companies that have a separate legal status from their owners

shareholders

the owners of a limited company

private limited companies

businesses owned by shareholders but they cannot sell shares to the public

public limited companies

businesses owned by shareholders but they can sell shares to the public and their shares are tradeable on the Stock Exchange

annual general meeting

a legal requirement for all companies

dividends

payments made to shareholders from the profits (after tax) of a company.

advantages and disadvantages of a limited company

advantages

• limited liability

• raise huge amounts of capital

• public ltd. companies can advertise their shares in the form of a prospectus

disadvantages

• required to disclose financial information

• private ltd. companies cannot sell shares to public

• must hold an annual general meeting

• public ltd. companies may have managerial problems

• in public ltd. companies, there may be a divorce of ownership and control

franchises

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

advantages and disadvantages of franchise to the franchisor

advantages

• low cost method of business expansion

• gets income from franchisee in the form of franchisee fees and royalties

• franchisee will better understand the local tastes so can advertise and sell appropriately

• can access ideas and suggestions from franchisee

• franchisee will run the operations

disadvantages

• profits from franchise needs to be shared with the franchisee

• loss of control over running of business

• if one franchise fails, it can affect the brand reputation

• franchisee may not be as skilled

• need to supply raw material/product and provide support and training

advantages and disadvantages of franchise to franchisee

advantages

• An established brand and trademark, so chance of business failing is low

• Franchisor will give technical and managerial support

• Franchisor will supply the raw materials/products

disadvantages

• Cost of setting up business

• No full control over business- need to strictly follow franchisor’s standards and rules

• Profits have to be shared with franchisor

• Need to pay franchisor franchise fees and royalties

• Need to advertise and promote the business in the region themselves

joint venture

where 2 or more businesses start a new project together, sharing capital, risks and profits.

advantages and disadvantages of joint ventures

advantages:

• sharing of costs

• local knowledge when joint venture company is already based in the country

• risks are shared

disadvantages:

• if the new joint venture is successful, the profits will have to be shared with the joint venture partner

• disagreements over important decisions may occur

• the 2 joint venture partners might have different ways of running a business

public corporation

a business in the public sector that is owned and controlled by the state