Topic 1: Understanding business activity

Need

A good or service which is essential for living.

Want

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

Scarcity

The lack of sufficient products to fulfil the total wants of the population.

Opportunity cost

The next best alternative given up when making a choice

Factors of production

Land, Labour, Capital, Enterprise

Land

All natural resources provided by nature e.g. forests, fisheries

Labour

The efforts and skills of people e.g. teachers, doctors

Capital

The finance, machinery and equipment used in production e.g. computer

Enterprise

The skill and risk-taking ability of entrepreneurs

Specialisation

When each worker specialises in what they are best at

Division of labour

The dividing up of the production process into different tasks

Importance of specialisation

Increases efficiency and output

Added value

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

Purpose of business activity

Combine the factors of production to make products which will satisfy people’s wants

How to increase added value

Increasing their selling price, while keeping the cost of materials the same OR reduce the cost of materials, while keeping the selling price the same

Primary sector

The extraction of raw materials from the earth e.g. mining, fishing

Secondary sector

The manufacturing of raw materials into products e.g. baking, carpentry

Tertiary sector

Goods and services are sold to customers e.g. teacher, lawyer

How the importance of economy are compared

Percentage of the country’s total number of workers employed in each sector OR value of output of goods and services and the proportion this is of national output

De-industrialisation

The decline of the secondary sector to move towards to tertiary sector

Industrialisation

Industries are developing and they move away from one sector to another. e.g. from primary to secondary

Changing importance of sectors in developing countries

Importance of secondary sector has increased

Changing importance of sectors in developed countries

Decline in the importance of the secondary sector

Private sector

Businesses not owned and controlled by the government e.g. Starbucks

Public sector

Businesses and organisations owned and controlled by the government e.g. post office

Privatisation

When a government sells a public business to a private group of investors or individuals

Why privatisation

Believe that that private sector can run them more efficiently, owners may invest more capital into the business that the government can’t afford, competition in the private sector can help improve quality

Objectives of private sector businesses

Generate profit, survive, efficiency, image and reputation

Objectives of public sector businesses

Access, quality, affordability, equity

Entrepreneur

A person who takes risks to start a new business

Characteristics of successful entrepreneurs

Hard working, risk taker, creative, self-confident, effective communicator

Business plan

A document containing the objectives of the business as well as details of its operations

A business plan is needed to:

Apply for finance from a bank/investors, force the entrepreneur to think ahead and plan carefully to reduce the risk of failure

How business plans assist entrepreneurs

Helps to set clear goals for the business and employees, helps you get loans

Why governments support start-up businesses

Businesses create jobs, customers get more choice of products and services, may grow into a large business one day and contribute to the country (pay taxes)

How governments support start-up businesses

Loans at low interest rates, grants (money) given to help pay employees, organise experienced entrepreneurs to offer advice to small business owners

Why business owners want to expand their business

Possibility of higher profits, more status, lower average costs, increased control of the market

Ways in which businesses can grow

Internal and external growth

Internal growth

The business grows from within itself

External growth

Either by a takeover or merger with another business

Mergers

Two businesses become one by agreeing to merge

Takeover

One business buys out the owners of another business which then become part of the business which took them over

Horizontal integration (external)

Firms in the same industry at the same stage of the production process combine and form a larger business

Vertical integration (external)

A firm expands by combining with an existing business in the same industry but at a different stage of production

Backward vertical integration

Merging with a firm involved in the previous stage of production

Forward vertical integration

Merging with a firm involved in the next stage of production

Conglomerate merger

Two firms in completely different industries combine to form a new business

Problems of business growth

Larger businesses are harder to control, lead to poorer communication, expansion puts a strain on finances,

Why some businesses stay small

Don’t have the capital to expand, type of industry, size of the market

Methods of measuring business size

Number of employees, size of output, value of sales, amount of capital invested

Who is interested in the size of a business

Investors, governments, competitors, banks

Capital intensive

Invested heavily in machinery

Labour intensive

Invested heavily in people/workers

Why some businesses fail

Run out of money, poor management, change in business environment, growing too quickly