Chapter 1: The purpose of Business Activity

A business is an organization or enterprising entity which combines factors of production to make

products which satisfy needs and wants. Business activity refers to any activity related to the
purpose of making a profit.

The economics problem: needs and wants.

Basically, all humans have needs and wants. Needs are things we can't live without, while wants are
simply our desires that we can live without. We all have unlimited wants, which is true, since all of
us want a new PC, a car, new graphics card, etc. that we actually do not need to live.

Although we have unlimited wants, there are not enough resources for everyone. Resources can be
split into 4 factors of production, which are:
• Land: All natural resources used to make a product or service.
• Labour: The effort of workers required to make a product or service.
• Capital: Finance, machinery and equipment required to make a product or service.
• Enterprise: Skill and risk-taking ability of the entrepreneur.

Entrepreneurs are people who combine these factors of production to make a product. Shortage of
resources turns into an economic problem which makes us choose between options. "Opportunity
cost: the next best alternative given up by choosing another item."

Division of labour/Specialisation
Because there are limited resources, we need to use them the most efficient way possible.
Therefore, we now use production methods that are as fast as possible and as efficient (costs less,
earns more) as possible. The main production method that we are using nowadays is known as
specialization, or division of labour.

"Division of Labour/Specialisation is when the production process is split up into different

tasks and each specialized worker/ machine performs one of these tasks."

Advantages
• Specialized workers are good at one task and increases efficiency and output.
• Less time is wasted switching jobs by the individual.
• Machinery also helps all jobs and can be operated 24/7.

Disadvantages
• Boredom from doing the same job lowers efficiency.
• No flexibility because workers can only do one job and cannot do others well if needed.
• If one worker is absent and no-one can replace him, the production process stops.
Business Objectives
All businesses have aims or objectives to achieve. Their aims can vary depending on their type of
business or these can change depending on situations. The most common objectives are:
1. Profit: Profit is what keeps a company going and is the main aim of most businesses.
Normally a business will try to obtain a satisfactory level of profits so they do not have to
work long hours or pay too much tax.
2. Increase added value: Value added is the difference between the price and material costs of
a product. E.g. If the price when selling a pen is $3 and it costs $1 in material, the value
added would be $2. However, this does not take into account overheads and taxes. Added
value could be increased by working on products so that they become more expensive
finished products. One easy example of this is a mobile phone with a camera would sell for
much more than one without it. Of course, you will need to pay for the extra camera but as
long as prices rise more than costs, you get more profit.
3. Growth: Growth can only be achieved when customers are satisfied with a business. When
businesses grow they create more jobs and make them more secure when a business is
larger. The status and salary of managers are increased. Growth also means that a business is
able to spread risks by moving to other markets, or it is gaining a larger market share.
Bigger businesses also gain cost advantages, called economies of scale.
4. Survival: If a business do not survive, its owners lose everything. Therefore, businesses
need to focus on this objective the most when they are: starting up, competing with other
businesses, or in an economic recession.
5. Service to the community: This is the primary goal for most government owned
businesses. They plan to produce essential products to everybody who need them. These
business objectives can conflict because different people in a business want different things
at different times.

Entrepreneurship
An entrepreneur is a person who organizes, operates and takes the risk for a new business venture.
Benefits of being an entrepreneur
• Independence: One is able to choose how to use time and money
• One is able to put his own ideas into practice
• One may become famous and successful if the business grows may become profitable and
the income might be higher than working as an employee for another business
• One is able to make use of personal interests and skills
Disadvantages of being an entrepreneur
• There is a lot of risk meaning new entrepreneur’s businesses fail especially if there is poor
planning.
• Entrepreneurs have to put their own money into the business 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 enterpreneurs

• hard working • optimistic • independent
• risk taker • self confident • effective communicator
• creative • innovative
Chapter 2: Classification of Businesses
Levels of economic activity
In order for products to be made and sold to the people, it must undergo 3 different production
processes. Each process is done by a different business sector and they are:
• Primary sector: The natural resources extraction sector. E.g. farming, forestry, mining...
(earns the least money)
• Secondary sector: The manufacturing sector. E.g. construction, car manufacturing,
baking... (earns a medium amount of money)
• Tertiary sector: The service sector. e.g. banks, transport, insurance... (earns the most
money)

Types of economies
1. Free market economy
All businesses are owned by the private sector there is no government intervention.
Advantages
• Consumers have a lot of choice
• High motivation for workers
• Competition keeps prices low
• Incentive for other businesses to set up and make profits
Disadvantages
• Not all products will be available for everybody, especially the poor
• No government intervention means uncontrollable economic booms or recessions
• Monopolies could be set up limiting consumer choice and exploiting them
2. Command/Planned economy
All businesses are owned by the public sector. Total government intervention. Fixed wages for
everyone. Private property is not allowed.
Advantages
• Eliminates any waste from competition between businesses (e.g. advertising the same
product)
• Employment for everybody
• All needs are met (although no luxury goods)
Disadvantages
• Little motivation for workers
• The government might produce things people don't want to buy
• Low incentive for firms (no profit) leads to low efficiency
3. Mixed economy
Businesses belong to both the private and public sector. Government controls part of the
economy.
Chapter 3: Forms of business organisation
Almost every country consists of two business sectors, the private sector and the public sector.
Private sector businesses are operated and run by individuals, while public sector businesses are
operated by the government. The types of businesses present in a sector can vary, so lets take a look
at them.

1. Private Sector
a) Sole Traders
Sole traders are the most common form of business in the world, and take up as much as 90% of all
businesses in a country. The business is owned and run by one person only. Even though he can
employ people, he is still the sole proprietor of the business. These businesses are so common since
there are so little legal requirements to set up:

Advantages
• There are so few legal formalities are required to operate the business.
• The owner is his own boss, and has total control over the business.
• The owner gets 100% of profits.
• Motivation because he gets all the profits.
• The owner has freedom to change working hours or whom to employ, etc.
• He has personal contact with customers.
• He does not have to share information with anyone but the tax office, thus he enjoys
complete secrecy.
Disadvantages
• Nobody to discuss problems with.
• Unlimited liability.
• Limited finance/capital, business will remain small.
• The owner normally spends long hours working.
• Some parts of the business can be inefficient because of lack of specialists.
b) Partnership
A partnership is a group consisting of 2 to 20 people who run and own a business together. They
require a Deed of Partnership or Partnership Agreement, which is a document that states that all
partners agree to work with each other, and issues such as who put the most capital into the business
or who is entitled to the most profit. Other legal regulations are similar to that of a sole trader.
Advantages
• More capital than a sole trader.
• Responsibilities are split.
• Any losses are shared between partners.
Disadvantages
• Unlimited liability.
• Partners can disagree on decisions, slowing down decision making.
• If one partner is inefficient or dishonest, everybody loses.
• Limited capital, there is a limit of 20 people for any partnership.
c) Private Limited Companies
Private Limited Companies have separate legal identities to their owners, and thus their owners
have limited liability. The company has continuity, and can sell shares to friends or family, although
with the consent of all shareholders.
Advantages
• The sale of shares make raising finance a lot easier.
• Shareholders have limited liability, therefore it is safer for people to invest but creditors
must be cautious because if the business fails they will not get their money back.
• Original owners are still able to keep control of the business by restricting share distribution.
Disadvantages
• Owners need to deal with many legal formalities before forming a private limited company
d) Public Limited Companies
Public limited companies are similar to private limited companies, but they are able to sell shares to
the public. A private limited company can be converted into a public limited company by:
1. A statement in the Memorandum of Association must be made so that it says this company is
a public limited company.
2. All accounts must be made public.
3. The company has to apply for a listing in the Stock Exchange.
Advantages
• Limited liability.
• Continuity.
• Potential to raise limitless capital.
• No restrictions on transfer of shares.
• High status will attract investors and customers.
Disadvantages
• Many legal formalities required to form the business.
• Many rules and regulations to protect shareholders, including the publishing of annual
• accounts.
• Selling shares is expensive, because of the commission paid to banks to aid in selling
• shares and costs of printing the prospectus.
• Difficult to control since it is so large.
• Owners lose control, when the original owners hold less than 51% of shares.
e) Co-operatives
Cooperatives are a group of people who agree to work together and pool their money together to
buy "bulk". Their features are:
• All members have equal rights, no matter how much capital they invested.
• All workload and decision making is equally shared, a manager maybe appointed for bigger
cooperatives
• Profits are shared equally.
f) Joint ventures
Two businesses agree to start a new project together, sharing capital, risks and profits.
Advantages
• Shared costs are good for tackling expensive projects. (e.g. aircraft)
• Pooled knowledge. (e.g. foreign and local business)
• Risks are shared.
Disadvantages
• Profits have to be shared.
• Disagreements might occur.
• The two partners might run the joint venture differently.
g) Franchising
The franchisor is a business with a successful brand name that recruits franchisees (individual
businesses) to sell for them. (e.g. McDonald, Burger King)
Advantages for the franchisor
• The franchisee has to pay to use the brand name.
• Expansion is much faster because the franchisor does not have to finance all new outlets.
• The franchisee manages outlets
• All products sold must be bought from the franchisor.
Disadvantages for the franchisor:
• The failure of one franchise could lead to a bad reputation of the whole business.
• The franchisee keeps the profits.
Advantages for the franchisee:
• The chance of failure is much reduced due to the well know brand image.
• The franchisor pays for advertising.
• All supplies can be obtained from the franchisor.
• Many business decisions will be made by the franchisor (prices, store layout, products).
• Training for staff and management is provide by the franchisor.
• Banks are more willing to lend to franchisees because of lower risks.
Disadvantages for the franchisee:
• Less independence
• May be unable to make decisions that would suit the local area.
• Licence fee must be paid annually and a percentage of the turnover must be paid.
2. Public Sector
Public corporations
A business owned by the government and run by Directors appointed by the government.
Advantages
• Some businesses are considered too important to be owned by an individual. (electricity,
• water, airline)
• Other businesses, considered natural monopolies, are controlled by the government.
• (electricity, water)
• Reduces waste in an industry. (e.g. two railway lines in one city)
• Rescue important businesses when they are failing.
• Provide essential services to the people (e.g. the BTV)
Disadvantages
• Motivation might not be as high because profit is not an objective.
• Subsidies lead to inefficiency. It is also considered unfair for private businesses.
• There is normally no competition to public corporations, so there is no incentive to improve.
• Businesses could be run for government popularity.
Chapter 4: Multinational businesses
Multinationals are businesses that have factories, services, or operations in more than one country.
It is important to note that, for a business to become multinationals, they must produce goods in
more than one country. Why do firms become multinationals
• To cut labour costs or raw material costs.
• To extract raw materials not found elsewhere.
• To produce goods nearer to the market.
• To bypass trade barriers.
• To expand and spread risks.

Advantages of multinationals operating in a country

• Jobs are created.
• New investment increases national output.
• Imports are reduced since there are more goods in the country. More exports.
• More taxes are paid to the government.

Disadvantages of multinationals operating in a country

• Jobs created are usually unskilled jobs.
• Local firms are forced out of business since they can't compete with multinationals.
• Profits flow out of the country.
• Multinationals use up scarce resources.
• May influence the government