Miss Hira Saeed

UNIT ONE- Understanding business activity

Business Activity

The economic problem

• What are needs? What

are wants? What is the
basic economic problem?

• Scarcity, Resources,
Limited resources,
unlimited wants

Limited resources- the need to choose

➢ Choices lead to opportunity costs

➢ Choosing one thing and not the other OR the next best alternative forgone

➢ Governments and businesses make choices too

Factors of production

• Land- all natural resources

provided by nature e.g.
agriculture, mining, forestry,
fishing

• Labour- number of people

• Limited resources available to make products

• Capital- finance, machinery

• Economic problem
and equipment needed for
the production of goods
• Unlimited wants
• Enterprise- risk taking
• Scarcity ability of a person to
combine all factors of
• Choice is necessary production. People who run
the business are called
entrepreneurs
• Leads to opportunity cost

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 Miss Hira Saeed
UNIT ONE- Understanding business activity

The importance of specialization: the best use of limited resources

Specialization is common because:
• Factors of production are in limited supply
✓ Specialized machinery and

• Importance of efficient ways of production technologies are widely

available

• All workers specialize these days ✓ Costs have to be kept low due
to increasing competition
Specialization and division of labour
✓ Most people recognize that
Advantages: higher living standards can
result from being specialized

❑ Workers are trained in one task and specialize in this- this increases efficiency and
output
Division of labour is dividing the job into different tasks and making
❑ Less time is wasted each worker specialize at just one task

❑ Quicker and cheaper to train workers as fewer skills need to be taught

Disadvantages

❑ Workers can become bored doing just one job

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

The purpose of business activity

Business activity therefore:
• People have unlimited wants
➢ Combines factors of production
• The four factors of production are
➢ Produces goods and services which in limited supply
are needed to satisfy the needs and
wants • Scarcity results from limited
resources and unlimited wants
➢ Employs people as workers and pays
• Choice is necessary when resources
them wages to allow them to
are scarce- this leads to
consume products made by other opportunity cost
people
• Specialization improves the
efficient use of resources
Added value

Difference between the selling price of a product and the cost of bought in materials and
components
Why is adding value important?
Two main ways of how a business can increase added value
EXAM PRACTICE QUESTIONS • Business needs to pay other costs
1. Increase selling price but keep the cost of materials the same. They can do
like advertising, labour costs etc
this by improved packaging, well decorated outlet, skilled staff, advertising,
• They need to make profits as well
after sales service etc. 2

2. Reduce the cost of materials but keep the price the same.
Miss Hira Saeed
UNIT ONE- Understanding business activity

June 2021- Identify two ways a business can increase added value. 2marks

Ans. Increase (selling) price • Reduce input costs / reduce cost of materials • Branding / marketing /
packaging • Excellent service quality / efficiency • (Additional) product features / change design/ unique
selling point • Convenience

Identify two characteristics of a successful entrepreneur. 2marks

Define ‘specialisation’. 2marks

Ans. Way in which work is divided so each worker concentrates on a specific task so become expert at it
[2]

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Miss Hira Saeed
UNIT ONE- Understanding business activity

Classification of businesses

Stages of economic activity

• Primary sector

• Earth’s natural resources

• Farming, fishing, forestry,

extraction of natural
materials like oil

• Secondary sector

• Converting the raw

materials into finished
goods

• Building and construction,

aircraft, car manufacturing

• Tertiary sector

• Providing service to
consumers and businesses
Relative importance of economic sectors
• Transport, insurance,
hotels, banking, retail
How is importance determined?

• 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 total national
output

• Most developed economies are losing competitiveness in manufacturing to newly

industrialized economies

• People spend more on services when country’s total wealth increases and living
standards rise
Changes in sector importance

• The decline in the manufacturing or

secondary sector of industry is called
deindustrialization

• Sources of some primary products become

depleted

• Primary sector- low value addition

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 Mixed economy
Miss Hira Saeed
UNIT ONE- Understanding business activity
Private sector + Public sector= Mixed
economy
Private sector

• Businesses not owned by the government

• These businesses will make their own decisions about what to produce, how it should
be produced, and what price to be charged for it

• They aim to make a profit

• Some government controls

Public sector

❑ Government owned and controlled businesses and organizations

❑ The government will decide what, how and for whom to produce

❑ Some goods provided free of charge/at affordable rates

❑ Money for these comes from taxes

❑ Objective is social welfare

❑ Important government owned industries are health, education, defence, public

transport, water supply, electricity supply

Mixed economies- Recent changes

• Some public sector businesses have been sold off to the private sector
(privatization)

• private sector businesses are more efficient

• They invest more capital in the business as compared to the government

• Competition helps to improve product quality

HOWEVER

a) Private sector businesses don’t focus on social objectives

b) A private sector business can make its workers unemployed to cut costs

Define ‘mixed economy’.

Business Growth and Size
Ans. An economy where the resources are owned
and controlled by both the private and the public
sectors [2] 5
Miss Hira Saeed
UNIT ONE- Understanding business activity

Entreprenuer

A person who takes the risk of setting up his own business

Benefits Disadvantages

Independence Risk

Able to put own ideas into practice Capital required

May become famous and successful if the Lack of knowledge and experience in
business grows starting and operating a business
May be profitable- business/job Opportunity cost- salary from a job
comparison
Utilizes his own personal interests and
skills

Characteristics of a successful
entrepreneur

✓ Hardworking
✓ innovative
✓ optimistic
✓ Effective
communicator
✓ Independent
✓ Self confidence
✓ Creative
✓ RISK taker
Business plan

• A business plan is a document containing the business objectives and important

details about the operations, finance and owners of the new business

• What products/services will be produced?

• Where will the firm be located?

• What machinery/labour will be required?

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 Miss Hira Saeed
UNIT ONE- Understanding business activity Organization structure and
management- Details of the
Contents of a business plan organizational structure

Description of the business- Business location and how products will

Details of employees and the skills
reach customers- Physical location
Brief history, summary, objectives required from them
of the business ➢ Online sales/outlet/both?
The market- Describes the market the
Products and services- What ➢ How the firm is going to deliver the business is targeting
the business sells or delivers goods/services
➢ Total market size

➢ Strategies for Business strategy-

➢ Predicted market growth
continuing
How to satisfy customer needs and gain brand
loyalty ➢ Target market
➢ Developing
products/services in A summary of the points mentioned in the business ➢ Analysis of competitors
the future to remain plan
➢ Predicted changes in the future
competitive
Financial information- Projected future
financial statements ➢ Forecasted revenue from the
➢ Details of the products product
being manufactured Sources of capital
➢ Marketing strategy and market
Predicted costs
research

Forecasted cash flow and working capital

Projections of profitability and liquidity

Government support for business start-ups

• To reduce unemployment

• To increase competition

• To increase output

• To benefit society

• Make them grow further

How governments support business start-ups?

• Business idea and help- training, advice, support provided to entreprenuers

• Premises- Low cost premises provision

• Labour- Grants to small businesses to train their workers

• Research- Encouraging universities to make their research facilities available for

new entrepreneurs

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 Miss Hira Saeed
UNIT ONE- Understanding business activity

• Finance- Loans, grants with low interest rates

Number of people employed
Methods of measuring business size
Adv: Easy to calculate and compare
Value of capital employed Value of capital employed
Disadv: Depends on the type of
Number of people employed Total value of capital invested in the
business
business

Value of output Depends on what production method Value of output

will be used
Value of sales Output of firms in the same industry

Depends on what production method is

Why do businesses want to grow?
being used

❖ Possibility of higher profits Value of sales

❖ More status and prestige Used when comparing size of retailing

firms selling similar products
❖ Lower average costs
Misleading to use if two firms are
❖ Larger share of the market selling different products in retail
market
Ways of growth

• Internal growth

• Opening up more branches, outlets, offices

• Increasing variety of products, buying more machinery, hiring more

employees
Conglomerate integration

• External growth Two completely different businesses merge

together
• Horizontal integration
More variety, diversification, exchange of ideas
• Vertical integration and spread of risk

• Conglomerate
Vertical (backward)

Horizontal integration
Vertical (forward) Merger gives an assured supply of

When one firm merges or takes over components

An assured outlet for its product
in the same industry at the same stage
Profit margin of the supplier absorbed by
of production Profit margin made by the retailer is
the whole business
absorbed by the expanded business
The merger reduces the number of
Supplier could be prevented from
competitors in the industry The retailer would now not sell other
supplying to another business
brands products
Opportunities for economies of scale 8
Cost of raw material will be controlled
Consumer info quickly obtained by the
Combined business will now have a
manufacturer
larger market share
Miss Hira Saeed
UNIT ONE- Understanding business activity

Vertical integration

When one business merges with or takes over another one in the same industry but at a
different stage of production

Forward vertical integration is when a business integrates with another business which is
at a later stage of production (closer to consumer)

Backward vertical integration is when a business integrates with another business at an

earlier stage of production (closer to raw material)

Why some businesses remain small?

➢ The type of industry the business operates in (usually are the ones offering one to
one services)

➢ Market size (total number of customers in this market are in small number)

➢ Owner’s objectives

Causes of business failure

Why new businesses are at a
Lack of management skills
greater risk of failing
Changes in the business environment
❖ Lack of finance
Liquidity problems or poor financial
❖ Poor planning management

❖ Inadequate research Over expansion

❖ Lack of experience of the

manager

❖ Poor decision making skills

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Miss Hira Saeed
UNIT ONE- Understanding business activity

Problems resulting from Possible ways to overcome them

expansion

Larger businesses are difficult Operate the business in small units

to control (diseconomies of
scale)
Larger business leads to poor Operate the business in small units
communication Use latest IT equipment and
telecommunication
Expansion costs so much that Expand slowly
the business is short of finance Ensure sufficient long term finance is
available
Integrating with another Introduce a different style of
business is more difficult than management after good
expected communication with the workforce

EXAM PRACTICE QUESTIONS

Explain two reasons why Rishi might want his business to remain small. 6marks

Ans. Owner’s objectives / owner does not want the responsibility for managing a larger business / wants
to keep (total) control of business decisions [k] as only sells in his local area [app] so better able to
achieve a better work life balance [an] • Want to keep control of business finances/ want to keep
overheads to a minimum / want to avoid increased financial risk [k] • Limited access to finance/ limited
availability of capital [k] particularly as sales have fallen [app] so cannot afford to expand [an] • Market
size/ amount of customers / level of demand [k] for hot drinks [app] limiting potential revenue [an] •
Market domination / a few large businesses control the market [k] which makes it difficult for small
businesses to compete / so customers may be brand loyal to these competitors [an] • Lacks knowledge /
skills to expand [k] • Wants to maintain close relationship with its customers/ provide a personal service
[k] to help maintain consumer loyalty [an] • Remain flexible / able to respond quickly to changes in
consumer tastes [k]

State two problems of using the number of employees to measure the size of a business. 2marks

Might use a lot of machines, Difficult to count part-time employees

Do you think being creative is the most important characteristic of being a successful entrepreneur?
Justify your answer. 6marks

Ans Creative: • New/unique ideas [k] to help gain sales/attract customers/maintain customer loyalty
[an] • Can open up new opportunities [k] • Customers may not like the products [k]

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Miss Hira Saeed
UNIT ONE- Understanding business activity

Other characteristics include: • Risk taker [k] as needs to be able to make decisions that might fail [an]
otherwise will not know whether an idea is good or not [an] • Perseverance/determination [k] as will
need to be prepared to keep going when faced with problems/issues that any new business is likely to
have [an] • Effective communicator [k] as will need to convince to supplies/finance providers/customers
to provide supplies/finance/buy goods otherwise business will not succeed [an] • Good decision-
maker/management skills [k] as increases in costs/or reduction prices charged by rivals will require a
response from the business [an] otherwise sales/profits may fall [an] • Hard-working [k] as must be
ready to do everything themselves [an] • Optimistic [k] • Self-confident [k] • Independent

Being creative can result in ideas that make a business stand out from its competitors [k] leading to
increased sales [an]. But it is also important to be a risk taker [k] as they need to be willing to make
decisions that might fail [an]. Creativity is important but not the most important characteristic. A
creative but risk averse entrepreneur may miss the opportunity to be first to market [eval] so losing the
chance to gain a competitive advantage so reducing their chances of success.

Identify two characteristics of a successful entrepreneur. 2marks

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Miss Hira Saeed
UNIT ONE- Understanding business activity

Types of business organizations

Business organizations- the private sector

• Sole traders

• Partnerships

• Private limited companies

• Public limited companies

• Franchises

• Joint ventures
Sole traders

A business owned and controlled by just

one person

Owner- the sole proprietor

Few legal requirements

The owner must register with, and send

accounts to the Government Tax office

Name of the business is significant

Must observe laws which apply to other

businesses as well for example health
and safety laws

Partnerships

A group or association of atleast TWO people who agree to own and run a
business together

Partners will bring in capital to the business

They will have a say in the running of the business

Profits and losses will be shared

Partnership agreement will be formed (amount of capital, responsibilities, 12

way in which profits will be shared, how long the partnership would last,
agreements for absence and how new partners will be admitted
 Miss Hira Saeed
UNIT ONE- Understanding business activity

Limited companies

• An incorporated business- separate legal unit from its owners

• A company exists separately from the owners and will continue to exist if one of
the owner dies

• A company can make contracts or legal agreements

• Company accounts are kept separate from the accounts of the owners

• Companies are jointly owned by the people who have invested in the business

• These people buy shares in the company and therefore are called shareholders

• Shareholders appoint board of directors to run the business

Private limited company

• These are businesses owned by shareholders but they cannot sell shares to the
public
Disadvantages
Advantages
Legal matters have to be dealt with when forming the company (articles of
Shares could be sold to a large number of association and memorandum of association). After these are submitted to the
people (only to friends/relatives, shares cannot registrar of companies, a certificate of incorporation is issued
be advertised to the general public)
The shares in a private limited company cannot be transferred or sold to anyone
All shareholders have limited liability (liability else without the consent of other shareholders
Public limited companies
only limited to the investment made by the
shareholder) The accounts of a company are less secret than for a sole trader or a partnership

The people who started the company can still The company cannot raise large sums of money as they cannot sell shares to
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retain control over the company general public
 Miss Hira Saeed
UNIT ONE- Understanding business activity

• These companies are owned by shareholders but they can sell shares to the public
and shares are tradeable on the stock exchange

Advantages Disadvantages

Limited liability Legal formalities are complicated

Incorporated business and continuity More regulations and control over public limited
companies in order to protect the interests of
Very large sums of capital can be
shareholders
raised
Selling shares to the public is expensive
No restriction on buying, selling or
transfer of shares Original owners of the business might lose
control over the business
Higher status/reliability of the
Control and ownership in a public limited company
business
❖ In sole tradership and partnerships, the owners have control over
how their business is run

❖ In private limited companies, the owners are still the majority

shareholders so they make the major decisions

❖ In public limited companies, there are thousands of shareholders.

Board of directors are selected at the Annual General Meeting

❖ Board of directors take all important decisions while they appoint

managers who take day to day business decisions

❖ Shareholders OWN while board of directors and managers

CONTROL

❖ This means that shareholders and board of directors have

different objectives for the business

❖ Shareholders are interested in high profits so that they get high

dividends

❖ Board of directors will be more interested in expanding the

business, paying

❖ higher salaries to managers etc

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Miss Hira Saeed
UNIT ONE- Understanding business activity

Joint ventures

• A joint venture is when two or more businesses agree to start a new project
together, sharing the capital, the risks and the profits

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Miss Hira Saeed
UNIT ONE- Understanding business activity

Advantages Disadvantages

Sharing of costs Profits are shared if business is successful

Local knowledge Disagreements might occur

Risks are shared Different cultures of businesses

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Miss Hira Saeed
UNIT ONE- Understanding business activity

Exam style questions

Explain two advantages to Pamela of operating as a sole trader. 6 marks

• Keeps all the profit [k] from photography business [app] so has an incentive to
(continue to) work hard [an] • Has complete control / makes all the decisions / does
not need to consult with anyone [k] such as the 2 employees [app] so able to take
decisions more quickly [an] • Own boss [k] • Freedom to choose her own holidays /
schedule / work time [k] so can choose time off when the business is less busy so
does not miss out on sales [an] • Able to keep (financial) information private / do
not need to produce annual accounts [k] so competitors cannot use information to
take away her customers / market share [an] which can help her stay successful
[app] • Has close contact with customers / able to offer a more personal service [k]
as it’s a niche market [app] which can help encourage customer loyalty [an]

• Explain two advantages and two disadvantages of setting up a business as a private

limited company. 8 marks paper two

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Miss Hira Saeed
UNIT ONE- Understanding business activity

• Outline two advantages to DSY of being a private limited company. 4 marks

Ans. Access to more capital (than unlimited company)/can raise capital by selling
shares [k] to start making cars [app] • Control over who buys shares/less risk of
takeover (than public limited company) [k] which may be important as there is a lot
of competition [app] • Continuity of existence [k] • Separate legal identity [k] • (Its
shareholders benefit from) limited liability/incorporated

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Miss Hira Saeed
UNIT ONE- Understanding business activity

Business objectives and stakeholder objectives

Importance of setting objectives They give workers/managers a clear target to

work towards
• Objective- an aim or target to work towards
Motivates people
Different business objectives
Taking decisions will be focused on these
❑ Business survival
Clear and measurable objectives
❑ Profit
Business performance can be compared
❑ Return to shareholders

❑ Growth of the business

❑ Market share

❑ Service to the community

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Miss Hira Saeed
UNIT ONE- Understanding business activity

Why business objectives could

change?

A business has survived and now it

aims for growth

It has achieved high market share

Main external and internal stakeholders
and now aims to increase returns to
• Owners- internal shareholders

• Workers- internal A profit making business is

operating in a country which is
• Managers- internal facing recession

• Consumers- external

• Government- external

• The whole community- external

• Banks- external

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Miss Hira Saeed
UNIT ONE- Understanding business activity

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Miss Hira Saeed
UNIT ONE- Understanding business activity

Objectives of public sector

businesses

• Financial

• Service

• Social
Conflicts of stakeholder objectives

• For example managers want the business to grow while shareholders want higher
dividends

• Managers want to cut costs while employees want higher wages

• Owners want to earn higher profits by using production methods harm the
environment while the local community wants a cleaner environment

Exam style questions

• Do you think the shareholders are the most important stakeholder group to the success of a limited
company? Justify your answer. 6marks

Ans. Shareholders/owners • Provide finance / invest money / capital in business [k] which can help the
business expand / buy more equipment [an] so can increase output [an] • Influence the aims of the business
[k] • Have the power to vote out the directors [k] • They have little / no influence over day-to-day
decisions

Other stakeholders can include: • Customers [k] as they buy the products [an] and if ignores their needs
the business will lose sales/revenue [an] • Directors/managers [k] are responsible for day-to-day decision-
making [an] • Employees [k] make the products [an] so if they become demotivated quality may fall [an] •
Suppliers [k] provide materials/inventory [an] • Local community [k] provide the workers [an] • Government
[k] provide the legal framework in which the business operates [an] • Bank [k] provide finance/loans [an]

• Explain one objective of each of the following stakeholder groups of DWT. 6 marks june 2020

Ans. Customers • would want high quality products [k] to achieve value for money [an] which is why quality
production is important [app] • may want affordable prices [k]

• Pressure groups • encourage the use of sustainable methods [k] such as solar panels [app] to protect
the environment [an] • reduce/limit amount of pollution/environmental damage [k]

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