CSEC Principles of Business - Section A - Unit One: Nature of Business

Organization

a group of persons coming together to achieve a particular goal. There is a degree of permanence in the unit. The organization is characterized by division of labour and specialization

Enterprise

an initiative or business activity

Barter

a system of exchange without the use of money

Profit

the excess of total revenue gained from sale of the good or service after deducting the total cost of producing the good or service

Loss

the excess of total cost incurred in producing the good or service after deducting the total revenue from sale of the good or service

Break-even

a position of zero profits; total cost incurred in producing the product is equal to total revenue gained from the sale of the product

Trade

the activity of exchange involving buyers and sellers

Economy

the network of economic agents and trading activities in a country, involving producers, consumers, households and firms

Exchange

the giving up of one thing for another with or without the use of money

Producer

the economic agent that makes the good or generates the service

Consumer

the economic agent that buys or uses the good or service

Product

the concept of a good or service

Good

a tangible product that can be touched and stored for use at a later date

Service

an intangible product or series of related activities. The service and the provider are inseparable and the service is consumed at one point in time

Market

a physical or virtual situation where buyers and sellers interact to trade

Commodity

a good traded in bulk

Capital

physical inputs into the production process. (machinery, equipment, financial inputs and human capital inputs)

Labour

the effort of animals or specifically the physical or mental output of humans. (human capital input)

Specialization

the focus of effort on a particular task leading to expertise in the area

Division Of Labour

the dividing of a job into different tasks or specializations to be performed by different persons

Globalization

the opening up of markets internationally, leading to a reduction of trading barriers among countries and greater access to goods and services

Human Resources

the citizens of a country who are available, willing and capable to work. All categories of professional, skilled, semi-skilled and unskilled workers in a country

Direct Production

the method of satisfying basic needs (Subsistence Economy)

Surplus Production

the production of excess

Double Coincidence Of Wants

the drawback of the barter system where you have to find someone who both has what you want and wants what you have

Exchange Rate

both traders must agree on how much of Item A would be exchanged for given quantity of Item B

Divisibility Of The Commodity

some goods are difficult to divide into smaller quantities

Storage Of Wealth

given the perishable nature of some commodities, storage for long periods of time became relatively impossible

Characteristics Of Money

Durability, Acceptability, Divisibility, Portability

Functions Of Money

medium of exchange, measure of value, store of value, standard of deferred payment

Legal Tender

by law, the commodity must be accepted when exchanged for a good or service or to pay a debt

Reasons For Establishing A Business

to realise a dream, satisfy a need, utilize a skill or take advantage of new opportunities in the market

Incorporated

the business is registered as a separate legal identity from its owners, the company can enter into contracts and shareholders have limited liability

Unincorporated

the business and the owners are one and the same

Liability

the obligation to be borne by the owners or shareholders (debts)

Limited Liability

the liability of the owners or shareholders extends only to their investment in the business

Unlimited Liability

the liability of the owners or shareholders can extend beyond their investment in the business to their personal wealth and assets

Nationalization

a situation where the state or government assumes the assets of a business entity to ensure that the products are available to citizens (water, electricity)

Privatization

a situation whereby the state sells the assets in a public sector entity to the private sector

Public Corporation

state owned organizations that may be profit oriented

Memorandum Of Association

a document that outlines the external relationship of the company and gives details of its existence like the name, objects of the company and company type

Articles Of Association

a document stating the firm's internal relationships including voting rights, conduct of meetings, election methods, management's powers and how profits will be shared

Prospectus

a document prepared by a public company intended to provide details of new issues of shares and it outlines the intention of the company

Economic System

an economic system describes the organization of a country's resources to decide on the basic economic questions

Merit Goods

products funded by the state because of the potential benefits to society (health care, education, medicines)

Demerit Goods

products which produce negative externalities, where the social costs are borne by the society (gambling, cigarettes, alcohol)

Public Goods

goods provided to the public or society. these goods are non-excludable in that all members of society stand to benefit from production of these products (roads, streetlights, defence)

Sole Trader

one owner, allows you to make decisions quickly, be flexible, no legal requirements to start, all profits belong to you. Unfortunately you assume unlimited liability, growth is difficult and the owner and business are the same

Partnership

consists of 2-20 partners who contribute capital and expertise, may contain a deed of partnership outlining the relationship between partners, may have a silent partner and may be a limited partnership where some partners have limited liability but at least one has unlimited liability. Benefits include simple tax accounting, profits divided among partners, greater access to capital, sharing of workload, more access to expertise and partners pay taxes as individuals. Disadvantages include long hours of work, unlimited liability, growth may be difficult and decision making can be time consumer.

Co-operatives

institutions owned and operated by members. A credit union is an example of a financial cooperative. Benefits include employment for members, democratic management, benefit from economies of scale and profits shared among members. Disadvantages include limited capital input and potential lack of managerial expertise.

Public Companies

a public limited company has shares traded on the stock exchange with a minimum of two shareholders. Administration includes: a Memorandum of Association, Articles of Association, Prospectus and Financial Reports Incorporated. Benefits include limited liability and enjoying economies of scale. Disadvantages include subject to public scrutiny of financial records, increased expansion may lead to diseconomies of scale and there is conflict in stakeholder expectation

Private Companies

consists of 2-50 shareholders, usually owned by families and administration includes: a Memorandum of Association, Articles of Association and Financial Reports Incorporated. Advantages include limited liability, control is maintained within a small group of shareholders. Disadvantages include capital still being limited and limited managerial expertise.

Conglomerate

a group of companies involved in diversified sectors, where a parent company controls the other subsidiaries. The risk is spread over multiple businesses, they enjoy economies of scale and it's easier to access financing due to asset base. Disadvantages include difficult management and some businesses may increase the risk of the conglomerate.

Multinational

an organization operating in several countries, which has headquarters in a home country. Provides transfer of technology and investment in developing countries as well as capitalizing on host country advantages such as lower taxation, cheap labour and access to raw materials. Disadvantages include transfer profit to home country, exploitation of the host country's natural resources and it may negatively influence local culture.

Franchise

a legal agreement in which the franchisor allows the franchisee to use the established name of the business and to produce products to the franchisor's standards. Benefits include access to new markets, source of revenue, the franchisor training the franchisee and the franchisee bearing some of the risk. Disadvantages include royalties borne by the franchisee, franchisee under supervision.

Public Sector

government control of factors of production, benefits include government provision of products the private sector won't provide, welfare services to poorer members of society. Disadvantages include raised taxes, inefficient use of state resources and political interference

Private Sector

private individuals or businesses own the factors of production, motive being to maximize profits. It brings more competition and product diversity, increased use of technology, provides investment and employment but will only provide paid products and engages in the production of demerit goods.