Section 1

Understanding busi-
ness activity

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Chapter 1
Business activity:

Objectives:
 Needs, wants, scarcity & opportunity cost.
 The importance of specialisation to businesses & consumers.
 The purpose of business activity.
 Added value.
 How a business adds value.
Business activity: the process of producing goods & ser-
vices to satisfy consumer demand.
Need: a good or service which is essential to living.
Want: a good or service which people would like, but is not
essential for living.
Economic problem: unlimited wants can’t be met because
there are limited factors of production. This creates scarcity.
Scarcity: there are not enough goods & services to meet
the wants of population.
Opportunity cost: the benefit that could have been gained
from an alternative use of the same resource.
• Factors of production: the resources needed to pro-
duce goods & services – land, labour, capital & enter-
prise.
 Land: all natural resources such as minerals, oil, fields
& forests.
 Labour: is the number of people available to work.
 Capital: is machinery, equipment & finance needed for
production of goods & services.
 Enterprise: the risk taking of starting up businesses.
Sspecialisation: people & businesses concentrate on what
they are best at.
Division of labour: production is divided into separate
tasks and each employee does just one of those tasks.
Advantages:
1. High efficiency (low waste).
2. High quality.
Disadvantages:
3. Boredom.
4. No flexibility, if a worker is absent then the production
may stop.
There are different types of goods & services. They are as follows:
1. Consumer goods: products which are sold to the final consumer. They
can be seen & touched like computers, food and so on.
2. Consumer services: non-tangible products such as insurance services,
transport and so on.
3. Capital goods: physical goods, such as machinery and delivery
vehicles, used by other businesses to help produce other goods & ser-
vices.
Durable consumer goods can be used over & over again unlike
non-durable consumer goods they can only be used once.
Adding value: added value is the difference between the
selling price and the cost of bought in materials.
Added value = selling price – cost of materials.
Any business must add value to it’s product, otherwise the
business can’t pay it’s expenses therefore a business may
run at a loss.
To increase the added value a business may increase it’s
selling price or decrease its cost of materials but its always
recommended to work on the cost because increasing the
price may cause customers to shift their custom to another
business.
• Branding: includes having a distinguishable business
name which attracts a lot of customers.
• Businesses that provide excellent and personalised service
quality have a better chance of attracting customers and
also they have a good chance of charging high prices.
• Products with more features and more functions are more
likely to be charged with higher prices.
• People nowadays are more ready to pay for goods or
services that save their time, e.g. ready meals.
Exam-style questions:
Company X is a manufacturer of pottery products, such as plates
& bowls, which are mainly sold to hotels & restaurants. The com-
pany employs 50 workers. Each employee receives a good wage
and this helps them to meet their needs. Production is broken
down into nine processes. Employees specialise in just one pro-
cess. The marketing manager of company X has been asked
by the directors to look at ways of adding value to the company’s
products.
a Identify two factors of production [2]
b Define ‘needs’. [2]
c Outline how company X benefits from specialisation. [4]
d Explain two stages of company X’s production process. [6]
e Suggest two ways the marketing manager might increase
company X’s added value. Justify your answer. [6]
CHAPTER 2:
Classification of businesses:
Objectives:
• Primary, secondary and tertiary sector business activity.
• The changing importance of the classification of business activity
by sector for developing and developed countries.
• How business enterprises are classified in the private sector and
the public sector.
Chapter 4
Types of business organisations:
Objectives:
• The main forms of business organisation in the private & public
sector.
• The advantages & disadvantages of each of these forms of
business organisation.
• How appropriate each of these forms in different circumstances.
• Business organisations in the public sector.
Sole trader:

Definition: is a business owned by one person.

Legal formalities:
1. The business name must be registered.
2. Annual accounts records must be sent to the tax office.
3. Laws, rules & regulations must be complied with.
Advantages of sole trader:
4. Few legal formalities.
5. The owner is his/her own boss.
6. Total freedom to choose holidays, working hours & whom to hire.
7. Close contact with customers.
8. Motivation due to getting all the profit.
9. Complete secrecy in business matters.
Disadvantages of sole trader:
1. No one to discuss business matters with.
2. Unlimited liability (full responsibility regarding paying back business
loans).
3. Possibly remains small due to lack of capital.
4. No continuity and no legal identity.
5. Can’t benefit from specialisation.
6. Can’t benefit from economies of scale.
Sole trader is recommended for people who:
 Setting up a new business.
 Do not need much capital.
 Want to have direct contact with customers.
Partnership:

Definition: when two or more people agree to jointly own a business,

commonly the maximum limit of partners is 20 people.
Partnership agreement: the written and legal agreement between
business partners.
Advantages of partnership:
1. More capital than that of sole trader.
2. Tasks & responsibilities are shared between partners.
3. Losses are shared out between partners.
Disadvantages of partnership:
4. Unlimited liability.
5. No continuity and no separate legal identity (unincorporated
business).
6. Disagreement & conflict might occur between partners.
7. If one partner is inefficient or dishonest, everyone loses.
8. Limited number of partners, limited capital.
Partnership is suitable for:
 People who want to expand their business without facing
complicated legal formalities.
 Professionals such as doctors and lawyers.
 Family members.
 Private limited companies:
Incorporated businesses: are companies that have separate legal status from
their owners.
Shareholders: are the owners of a limited company. They buy shares which
represent part ownership of a company.
Features of companies:
• A company exists separately from the owners and will continue to exist if one
of the owners dies.
• A company can make contracts or legal agreements.
• Company accounts are kept separate from the accounts of the owners.
Advantages disadvantages

• Shares can be sold to many people. • Complicated legal formalities.

• Limited liability (responsibility). • The articles of association (rules).
• Original founders of the company are • The memorandum of association
able to keep control of it as long as (company’s information).
they do not sell too many shares to • Certificate of incorporation has to be
other people. issued.
• Restrictions on selling shares.
• Accounts are less secret.
Public limited companies:

Definition: companies with no restrictions on selling, buying or

exchanging shares, able to raise capital to expand nationally or even
internationally.
Advantages Disadvantages
• Limited liability. • Complicated legal formalities.
• Incorporated business. • Difficult to control & manage.
• Can raise very large capital sums. • Selling shares to the public is
• No restrictions on selling, buying & expensive.
exchanging of shares. • Original owners of the business may
• High status. lose control.
Annual General Meeting (AGM): is a legal requirement for all
companies. Shareholders may attend and vote on who they want to be
on the board of directors for the coming year.
Dividends: are payments made to shareholders from the profits
(after tax) of the company. They are the return to shareholders for
investing in the company.
Joint venture:

Definition: is when two or more businesses start a new project

together sharing capital, risks & profits.
s
Advantages Disadvantages
• Sharing of costs. • Profits have to be shared.
• Local knowledge when joint • Disagreements might occur.
venture is already based in the • The two joint venture partners
country. might have different ways of
• Risks are shared. running a business.
 Franchising:

Definition: a franchise is a business based upon the use of the brand names,
promotional logos and trading methods of an existing successful business. The
franchise buys the license to operate this business from the franchisor.

To the franchisor To the franchisee

advantages • Source of income. • Less risk of failure.

• Faster expansion. • The franchisor pays for advertising.
• The management of the • All supplies are obtained from the
outlet is the responsibility franchisor.
of the franchisee. • Fewer decision to make.
• All products sold must be • Training is provided by the
obtained from the franchisor.
franchisor. • Banks are often willing to lend to
franchisees due to relatively low risk

disadvantages • Poor management of one • Less independence.

franchised outlet could • May be unable to take decisions
lead to a bad reputation that would suit the local area.
for the whole business. • License fee must be paid to the
Business organisations in the public sector

Public corporations:

They are wholly owned by the state or central government.

Advantages disadvantages
• Some industries are con- • No high profits and no
sidered to be so important efficiency.
that government ownership • Governments subsidies can
is thought to be essential. lead to inefficiency.
• Reduces waste of • There is no close competition
competition. to the public corporations;
• If an important business is therefore less choice.
failing the government can • Governments can use these
step in to nationalise it. This businesses for political
will keep the business open reasons.
and secure jobs.
• Very important
non-profitable businesses
are in the public sector such
as TV & radio broadcasting.
Exam-style questions:
When Khidir lost his job with a fruit & vegetable shop that closed down
he decided to open his own store. He had good contacts with suppliers.
They said they would give him one month’s credit before he paid for
supplies. Khidir had $ 5000 in savings to invest in the shop. He thought
this would be sufficient to start the business. He is an independent man
– he never liked taking the manager’s orders in the food shop! He
wanted to operate his new business as a sole trader.
a) What is meant by ‘sole trader?
b) Identify two other types of business organisation.
c) Identify and explain two benefits to Khidir of operating his business
as a sole trader.
d) Identify and explain two drawbacks to Khidir of operating his
business as a sole trader.
e) Do you think Khidir should open new branches of his business
by selling franchises? Justify your answer.
Chapter 5
Business objectives & stakeholder objectives:

Objectives:
• The need for & importance of business objectives.
• Objectives that can be set for a business in the private sector
including social enterprises.
• Business objectives in the public sector.
• Factors that influence which objectives are set.
• Different stakeholder groups with an interest in a business.
• Objectives of stakeholder groups.
• Potential conflict between objectives.
Business objectives: are the aims or targets that a business work
towards.
Why to set them:
1. To have clear targets.
2. Taking decisions will be focused on.
3. Clear & measurable objectives help unite the whole business
towards the same goal.
4. Compare the current situation with the set goals.
Possible objectives for businesses are:

1. Survival: staying a live, it has to be the main objective in three

cases:
• Starting up.
• Severe competition.
• Economic recession.
2. profit: the total income of a business (sales revenues) less total
costs. Is the main objective for most of private businesses.
3. Returns to shareholders: increasing returns to shareholders is
an objective for limited companies, it can be increased in two
ways:
 Increasing profit.
 Increasing share price.
4. Growth: growth of the business may be measured by value of
sales or output, its one of the objectives for that:
 To make jobs more secure if the business is larger.
 To increase the salaries & status of managers as the business
expands.
 To open up new possibilities and help to spread the risks of
the business by moving into new products & new markets.
 To obtain a higher market share from growth in sales.
 To benefit from economies of scale (lower the cost).
5. Market share: is the proportion of the total market sales
achieved by one business.
Market share % = company sales *100
total market sales
Increased market share would give a business good publicity, also
that increases its influence over supplies, moreover it increases its
influence on customers.
6. Providing service to society:
like in social enterprises (businesses that have social objectives as
well as an aim to make a profit to reinvest back into the business.
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