1. understanding business activity

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a **need**

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

a **want**

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

economic problem

there exists unlimited wants but limited resources to produce the goods and services to satisfy those wants, this creates scarcity.

cause of the economic problem

there are not enough factors of production to make all the goods and services that the population needs and wants.

factors of production

the r**esources needed to produce goods or services,** there are four factors of production and they are in limited supply.

four factors of production

* land
* labour
* capital
* enterprise

land

this term is used to cover **all of the natural resources** provided by nature and includes fields and forests, oil, gas, metals and other mineral resources.

labour

this is the **number of people available to make products**.

capital

this is the finance, machinery and equipment needed for the manufacture of goods

enterprise

this is the skill and risk-taking ability of the person who the other resources or factors of production together to produce a good or service.

opportunity cost

the next best alternative given up by choosing another item

specialisation

this is when people and business concentrate on what they are best at

division of labour

this is when the production process is split up into different tasks and each worker preforms one of these tasks. it is a form of specialisation

advantages of division labour

• workers are trained in one task and specialise in this - this increases efficiency and output

• less time is wasted moving from one workbench to another

• quicker and cheaper to train workers as few skills as they need to be taught

disadvantages of division labour

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

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

business

a combination of the factors of production to make goods and services which satisfy people’s wants.

added value

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

what happens when value is not added

• other costs cannot be paid for

• no other profit will be made

importance of added cost

• can pay other costs such as labour costs, management expenses and costs including advertising and power

• may be able to make profit if these other costs come to a total that is less than the added value

ways a business can add value

way 1:

• increase selling price but keep the cost of materials the same

  • this might be possible if the business tries to create a higher quality image for its product or service. if the consumers are convinced by this then they might be prepared to pay higher prices and buy the same quantity as before the price rise.

way 2:

• reduce cost of materials but keep the price the same

  • if the price charged to customers stays the same then a higher added value will be made

examples of adding value

• selling price less cost of bought-in material/components

• increase price

• reduce material cost

stages of economic activity

• primary

• secondary

• tertiary

primary sector

it is the sector that extracts and uses the natural resources of earth to produce raw materials used by other businesses.

secondary sector

it manufactures goods using the raw materials provided by the primary sect

tertiary secondary

it provides services to consumers and the other sectors of industry.

de-indutrialisation

a decline in the importance of the secondary, manufacturing sector of industry in a country.

reasons for changes in the relative importance of the three sectors over time

• sources of some primary products become depleted.

• most developed economies are losing competitiveness in manufacturing to newly industrialised countries.

• as a country’s total wealth increases and living standards rise, consumers tend to spend a higher portion of their income on services such as travel rather than on manufactured products produced from primary products.

mixed economy

an economy with both a private sector and a public sector.

private sector

business that are 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.

public sector

government owned and controlled businesses and organisations.

examples of business activity in the public sector

• health

• education

• defence

• public transport

• electricity supply

capital

the money invested into a business by the owners

advantages of private sector businesses

• they are more efficient than public sector businesses

• they might invest more capital in the business than the government can afford.

• competition between private sector businesses can help improve product quality.

disadvantages of private sector businesses

• make more workers unemployed than a public sector business in order to cut costs.

• less likely to focus on social objectives.

advantages of public sector businesses

• less like to make many workers unemployed in order to cut costs

• more likely to focus on social objective.

disadvantages of public sector businesses

• they are less efficient.

• might invest less capital because they cannot afford to do so.

• there is no competition between public sector businesses so there is no motivation to improve product quality.

privatisation

when governments have sold off businesses they previously owned to new owners in the private sector

entrepreneur

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

advantages of being an entrepreneur

• independence - able to choose how to use time and money.

• able to put own ideas into practice.

• may become famous 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 - many new entrepreneurs’ businesses fail especially when there is poor planning.

• capital - entrepreneurs have to put their own money into businesses 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 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 operations, finance and owners of the new business

contents of a business plan

1. description of the business

2. products and services

3. the market

4. business location and how products will reach customers

5. organisation structure and management

6. financial information

7. business strategy

description of the business

• provides a brief history and summary of the business, and the objectives of the business.

products and services in the business plan

• describes what the business sells or delivers and strategy for continuing or developing products/services in the future to remain competitive and and grow the business.

the market section of the business plan

• describes the market the business is targeting, the description should include:

  • total market size

  • predicted market growth

  • target market

  • analysis of competitors

  • predicted changes in the market in the future

  • forecast sales revenue from the product

business location and how products will reach customers

• describes the physical location if applicable, the internet sales or mail order. Also describes how the firm delivers products and services to customers.

organisation structure and management in business plan

describes the organisational structure, management and details of employees required. It usually includes the number and level of skills required for the employees.

financial information for business plan

• includes:

  • projected future financial accounting statements for the several years or more into the future; these should include income statements and statements of financial position.

  • sources of capital

  • predicted costs

  • forecast cash flow and working capital

  • projections of profitability and liquidity ratios

business strategy

• explains how the business intends to satisfy customer needs and gain brand loyalty. A summary should be included to bring together all the points from above that should demonstrate the business will be succesful.

why governments support business start-ups

• to reduce unemployment

• to increase competition

• to benefit society

• can grow further

how governments supporting businesses reduces unemployment

• new businesses will often create jobs to help reduce unemployment

how governments supporting businesses increases competition

• new businesses give consumers more choice and compete with already established businesses

how governments supporting businesses increases output

• the economy benefits from increased output of goods and services

how governments supporting businesses benefits society

entrepreneurs may create social enterprises which offer benefits to society other than jobs and profit.

how businesses being able to grow further from support of the government

all large businesses were small once, by supporting today’s new firms the government may be helping some firms that grow to become very large and important in the future

how governments support business start-ups

• business idea and help

• premises

• finance

• labour

• research

reasons to compare the size of businesses

• investors - before deciding which business to put their savings into

• governments - often there are different tax rates for small and large businesses.

• competitors - to compare their size and importance with other firms

• workers - to have some idea of how many people they might be working with

• banks - to see how important a loan to the business is compared to its overall size.

ways businesses

• number of people employed

• value of output

• value of sales

• value of capital employed

capital employed

the total value of capital used in the business

disadvantages of using people employed for measuring business size

• some firms use production methods which employ very few people