CAIE IGCSE Business Studies - Summarized Notes

Business Activity

• Needs: Essential for survival (goods and services).
• Wants: Desired but not essential goods and services.
• Economic Problem: Unlimited wants, limited resources.
• Scarcity: Insufficient products to fulfill total population wants.
• Factors of Production:
  • Land: Natural resources.
  • Labour: Mental and physical effort.
  • Capital: Finance, machinery, equipment.
  • Enterprise: Management, decision-making, risk-taking.
• Opportunity Cost: Next best alternative given up.

Specialisation

• Specialisation: Focusing on what people/businesses do best.
• Division of Labour: Production split into different tasks.

Advantages

• Increased productivity and efficiency.
• Better quality output.
• Economies of scale.
• Workers become more skilled.

Disadvantages

• Repetitive tasks leading to boredom and burnout.
• Production disruption if a worker is absent.
• Higher wages and training costs.

Purpose of Business Activity

• Combine scarce factors to produce goods/services to satisfy needs and wants.
• Business activity combines scarce factors, produces goods/services, and employs people.

Added Value

• Difference between the cost of materials and the selling price of finished goods.
• $Added Value = selling price – total cost$
• Example: Transforming cotton into a T-shirt.
• Not profit, as it doesn't include all production expenses.

Advantages

• Potential profit if other costs are less than added value.
• Covers other expenses.

Disadvantages

• Increasing price may lower sales.

To increase added value

• Increase selling price by improving quality.
• Reduce material costs while maintaining price.

Classification of Businesses

Primary Sector

• Extracts and uses natural resources.

Secondary Sector

• Manufactures goods using raw materials.

Tertiary Sector

• Provides services to consumers and other industries.

Developing Countries

• Primary sector is most important.

Developed Countries

• Tertiary sector output is higher.
• De-industrialisation: Decline in the secondary sector.

Reasons for sector changes over time

• Depletion of primary products.
• Developed economies losing competitiveness.
• Increased spending on services due to higher living standards.

Mixed Economy

• Both private and public sectors.

Private Sector

• Businesses not owned by the government.
• Aim: Make profits.

Public Sector

• Owned by the government.
• Aim: Provide services (healthcare, education).
• Privatisation: Selling public sector businesses to the private sector.

Arguments for Privatisation

• Controlled costs due to profit motive.
• Efficient use of capital.
• Increased competition and improved quality.

Arguments against Privatisation

• Increased unemployment.
• Less focus on social objectives.

Enterprise, Business Growth and Size

• Entrepreneur: Organizes, operates, and takes risks.

Characteristics

• Hard-working, risk-takers, creative, effective communicators, optimistic, self-confident, innovative, independent.

Advantages of being an Entrepreneur

• Independence.
• Putting own ideas into practice.
• Potential for success and profit.
• Using personal interests and skills.
• Profits to themselves.
• Higher income.

Disadvantages of being an Entrepreneur

• Personal money at risk.
• Business failure risk.
• Lack of knowledge and experience.
• Lost income from alternative employment.
• Time-consuming and expensive to find finance.

Business Plans

• Document with objectives and essential details.

Contents

• Product description
• Market Analysis
• Business location and distribution
• Organisation structure and management
• Financial information
• Business strategy

Benefits of Business Plans

• Helps gain finance.
• Forces careful planning, reducing failure risk.

Government Support for Start-Ups

• Governments encourage start-ups to:
  • Reduce unemployment.
  • Increase competition.
  • Increase output.
  • Benefit society.
  • Grow the economy.

Support Methods

• Business ideas and help, training, support sessions.
• Finance (low-interest loans, grants, low-cost premises).
• Grants for employee training.
• Access to university research facilities.

Business Size

Why Compare Business Size?

• Investors: decide where to invest.
• Government: different tax rates.
• Competitors: compare size.
• Workers: understand number of employees.
• Banks: assess loan importance.

Measurements and Limitations

• Number of Employees: Accessible, but capital-intensive firms employ fewer.
• Value of Output: Useful for same industry, but doesn't account for sales value.
• Value of Sales: Useful for retail, but different products have different prices.
• Total Value of Capital Employed: Accounts for all capital, but labor-intensive methods need less capital.

Capital Employed

• Total value of capital used.
• No single correct method exists; businesses choose the best fit, using multiple methods.

Business Growth

Ways to Measure

• Number of employees
• Capital employed
• Output or sales
• Market share

Benefits of Expansion

• Higher profits.
• More status and prestige.
• Lower average costs.
• A larger market share.

Disadvantages

• Control and management become harder.
• Poor communication.
• High expansion costs.
• Conflicts integrating with another business.

Why small businesses remain small

• Small market size.
• Limited access to capital.
• Owner's personal choice.
• Technology size and cost.

Why Businesses Fail

• Lack of management skills.
• Failure to plan for change.
• Over-expansion (diseconomies of scale).
• Poor financial management and liquidity issues.
• Competition with other businesses.

Legal Identity

Unincorporated Business

• No separate legal identity from owner.
• Unlimited Liability: Owner responsible for business debts.

Incorporated Business

• Separate legal identity.
• Private/Public limited companies.
• Limited Liability: Shareholders' liability limited to investment amount.

Sole Trader

• Owned and controlled by one person.
• Unincorporated.

Advantages

• Few legal regulations.
• Complete control.
• Flexible working time.
• Quick response to customer needs.
• All profit goes to the owner.
• Complete secrecy.

Disadvantages

• Decisions can be hard to make
• No separate legal identity, unlimited liability.
• May not be able to raise funds to expand business
• Difficult to compete with large firms
• May not have the proper skills to run a business

Partnerships

• Two or more people jointly own a business.
• Unincorporated.
• Deal of Partnership: Written agreement (recommended).

Contents of Partnership Agreement

• Capital invested by partners.
• Tasks for each partner.
• Profit-sharing method.
• Duration of partnership.
• Arrangements for absence, retirement.

Advantages

• Easy setup.
• Greater access to funds.
• Shared decision-making.
• Shared management and workload.

Disadvantages

• Unlimited liability.
• Profit sharing.
• Business ceases if one partner leaves.
• Difficult to raise finance.

Private Limited Company (LTD)

• Owned by shareholders; shares not sold to the public.

Shareholders

• Owners of limited companies; shares represent ownership.

Advantages

• Raise capital from share sales.
• Limited liability for shareholders.
• Separate legal identity.
• Continuity.

Disadvantages

• Cannot sell shares to the public.
• Legal formalities.
• Accounts are public.
• Not easy to transfer shares.

Articles of Association

• Rules for managing the company.

Memorandum of Association

• Information about company and directors.

Public Limited Company (PLC)

• Owned by shareholders; shares traded on the stock exchange.

Advantages

• Can sell shares to the public.
• Rapid expansion possible.
• Specialist managers appointed.
• Limited liability.
• Continuity.

Disadvantages

• Legal Formalities
• Disclosure of accounts and other information
• Divorce between ownership and control
• Expensive to ‘go public‘

Annual General Meeting (AGM)

• Yearly meeting for shareholders to vote for the Board of Directors.

Dividends

• Payments to shareholders from company profit.
• Return for investment.

Franchise

• Agreement based on an existing brand/business.
  *

Franchisee

• Receives permission to use company’s name and brand.
• Pays fee and percentage of profit.

Franchisor

• Allows business operation under its name.

Advantages to Franchisor

• Another source of finance
• Expansion is faster
• Management is the responsibility of the franchisee
• Training and some administration and advertising are paid by the franchisor.

Disadvantage to Franchisor

• Bad reputation if one branch has poor management
• The franchisee keeps some profit
• Percentage of sale revenue is given to the franchisor every year

Advantages to Franchisee

• Chances of business failure are reduced
• The franchisor pays for advertising
• Fewer decisions to make
• The franchisor provides training for staff and management

Disadvantages to Franchisee

• Less independence
• Unable to make decisions that would suit the local area
• The franchisor has the power to withdraw the agreement and can prevent the use of the premises

Joint Venture

• Two or more businesses create a new business.

Advantages

• Sharing of costs.
• Knowledge and experience shared.
• Risks shared.

Disadvantages

• Profits have to be shared if the project is successful
• Conflict in decision-making
• Different methods of running a business can create conflict

Public Corporations

• Public sector business owned and controlled by the government.

Advantages

• Essential to some countries' industries (water, electricity).
• Ensures consumers are not taken advantage of.
• Reduce wasteful competitors
• Can help stabilize failing businesses to create job opportunities
• Important public services

Disadvantages

• The profit objective is not as powerful or important as in private-sector industries.
• Inefficiency because managers rely too much on the government
• It can be unfair to the private sector if subsidies are provided to the public sector.
• Lack of close competition can decrease many activities
• It can be used for political reasons, preventing the business from opportunities like other profit-making businesses.

Business Objectives

• Aims or targets a business works towards.

Benefits

• Clear target, improving motivation.
• Helps in decision-making.
• Unites business toward the same goal.
• Used to compare business performance.

Private Sector Business Objectives

• Business Survival: Adjust to the business environment.
• Generating Profit: Providing returns to owners for further investment.
• Returns to shareholders: Discourages shareholders from selling shares by increasing profit or share price.
• Growth of Business: Achieved with customer satisfaction, increased salaries, and economies of scale..
• Market Share: Good publicity and more influence over suppliers and customers. $Market Share = 100 × \frac{Company Sales}{Total market Sales}$

Why Objectives Change

• Profit after being set up and stable.
• After high market share,