Business Activity

Purpose of business activity

A business is any organisation that uses resources to meet the needs of customers by providing a product
or service that they demand. Without business activity, we would all still be entirely dependent on the
goods that we could make or grow ourselves. Business activity allow us to enjoy a very much higher
standard of living that would be possible if we remained entirely self-sufficient.
The goods and services can be classified in several ways:
Consumer goods the physical and tangible goods sold to the general public - they can be durable and
non-durable.
Consumer services the non-tangible products sold to the general public.
Capital goods the physical goods used by industry to aid in the production of other goods and
services, such as machines and commercial vehicles.
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How do businesses grow?

A business might seek to grow because of this likely benefits:
possibility of higher profits for the owners.
more status and prestige for the owners and managers - higher salaries are often paid to

managers who control the bigger firms.

lower average costs.
growth of the business often means that it controls a larger share of the market.

There are two main ways a business can expand:

INTERNAL GROWTH - occurs when a business expands its existing operations.
EXTERNAL GROWTH - is when a business takes over or merges with another business. It is often called
integration.
Merger when the owners of two businesses agree to join their firms together to make one business.
Takeover when one business buys out the owners of another business which then becomes part of the
predator business.
Three examples of mergers are shown below:
1. Horizontal merger: when a firm merges with another of the same industry.
2. Vertical merger: when a firm takes over another one of the same industry but of different
stage of production. It can be backward or forward.
3. Conglomerate merger: when a firm merges a firm with a completely different industry.

Skateholders
A skateholder is any person or group with a direct interest to the performance and activities of a business.
Below theres a list of the main skateholders groups and their aims:
Owners:
a share of the profits so that they can gain a return on the money put into the business.
growth of the business so that the value of their investment increases.
Workers:
regular payment for their work.
job security - workers do not want to look for new jobs frequently.
a job that gives satisfaction and provides motivation.
Managers:

high salaries because of the important work they do.

growth of the business so that managers can control a bigger and better known business. This

gives them more status and power.

Customers:
safe and reliable products
value for money
well-designed products of good quality
Government:
successful businesses will employ workers, pay taxes and increase the countrys output.
government will expect all businesses to stay within the law.
The whole community:

jobs for the working population

production that does not damage the environment
safe products that are socially responsible

Why do businesses stay small?

There are several reasons why businesses stay small:
Type of industry the business operates:
Firms in industries such as hairdressing, window cleaning, etc. offer personal services or specialised
products. If they were to grow too large, they would find it difficult to offer close and personal service
demanded by consumers.
Market size:
If the market (total number of consumers) is small, the businesses are likely to remain small. This is true
for firms which produce specialised products/services - which appeal only to a limited number of
consumers.
Owners objectives:
Some owners prefer to keep the firm small, to have more control over it or to avoid stress and worry of
running a large business.

Comparing Business Size

Business size can be measured in a number of different methods, the most common are:
Comparing business size by number of employees:
This method is easy to understand, yet some firms use production methods which employ very few people
but produce high output levels. This is true in automated factories, which use the latest computercontrolled equipment. These firms are called capital intensive firms - they use very costly equipment to
produce their output. In conclusion, a company with high output levels could employ fewer people than a
business which produced less output.
Comparing business size by value of output and sales:
A high output of sales does not mean that a business is large when using other methods of measurement.
E.g: A firm employing few people might produce and sell several very expensive computers each year.
This might give higher sales figures than a firm selling cheaper products but employing more workers.
Comparing business size by capital employed:
This means the total amount of capital invested into the business. A company employing many workers
may use labour-intensive methods of production. These give low output levels and use little capital
equipment.
Comparing business size by profit:
It is used to measure efficiency when compared with the sales or capital employed at the business. Profit
depends on more than just the size of the firm - it depends on the efficiency and the skills of the
managers. Some large businesses can make very low profits if they are badly managed.
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Types of Economic Systems

There are three types of economic systems which are used in countries:
Free Market Economy: they have no public sector, so it has no government control over factors of
production - all resources are owned privately. Business produce goods to make a profit. Products should
be efficient and of high quality because business will only make products that they know they can sell.

Advantages

Disadvantages

Consumers are free to choose what they

want to buy.

There is no government planning or

control over the economy so there could
be many uncontrolled economic
booms/recessions.

New businesses are encouraged to setup in order to make profits.

Businesses might be encouraged to

create monopolies in order to increase
profits.

Businesses compete with each other and

this could help keep prices low.

Monopoly a business which controls all of the market for a product.

Command Economy: it is the opposite of market economies. Economic decisions are taken by the
government, and all firms and resources are owned by the government; the government decides what to
produce and in what quantities. Consumers have little choice and workers could be told where to work
and what to perform. The decisions are made for the interest of people, and therefore they dont want to
make a profit.
Advantages

Disadvantages

There should be work for everybody.

Lack of a profit motive for firms leads to

low efficiency.

Needs of the population are met (but

there is little production of luxury goods
for the wealthy).

Government may not produce goods

which the population want to buy.

Mixed economy: it combines some features of both; a free-market economy and a command economy.
Most countries in the world today are mixed economies - they have both a public and a private sector, so
they get the best of both sectors: efficient, competitive firms providing the goods and services people
want, and a public providing their welfare needs.
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Unit 1: Business Activity | Sectors of the Economy

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Public sector:
Includes everything that it is owned by the government. This is things like army, police force

and most schools and hospitals.

Public means that they are owned by the government for the benefit of everyone.

Private sector:
Contains all businesses owned by private individuals.
Private means that these businesses are run for the benefit of the owners.
Aims of private and public sectors:
The main objective of the public sector is to provide a service and not to maximise profit.
Whereas private sectors give priority to profits and may end the service if it is not profitable.

Public sector strives to create employment, but private sectors main aim is to become efficient

and cut costs (and this might include cut jobs).

Public sector businesses usually locates in regions where there is under-development in order

to create jobs and income for the local communities. But private sectors might not keep these
things into consideration and will look for external economies of scale.
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Unit 1: Business Activity | Stages of Production

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Stage 1 is called Primary Sector: extracts and uses natural resources of the earth. Eg: farming, fishing
etc.
Stage 2 is called Secondary Sector: manufactures goods using the raw materials provided by the
primary sector. Eg: building, aircraft making, etc.
Stage 3 is called the Tertiary Sector: provides services to consumers and the other sectors of the
industry. Eg: transport, banking, teaching, etc.
When there is a decline in the importance of the secondary sector of industry in a country, it is known
as deindustralisation.
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Unit 1: Business Activity | Division of Labour

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Today we use resources in a more efficient way for two reasons:

1. Machinery is more used and often specialised to perform one task.
2. Larger firms employ workers skilled in particular tasks.
Specialisation when the production process is split up into different tasks and each worker performs
one of these tasks. It is also known as division of labour.
Advantages

Disadvantages

Increases efficiency and output as

workers are trained in one task &
specialised in it.

Efficiency might fall as workers can

become bored doing just one job.

Less time is wasted moving from one

workbench to another, so production is
faster.

Production might stop if one worker is

absent and no other can do the job.

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Unit 1: Business Activity | Needs, Wants and

Scarcity
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Needs those things that are necessary for living.

Wants those things that you would like to be able to own.
Needs are very limited, but wants are unlimited.
The economic problem results from there being unlimited wants but limited resources to produce the
goods and services to satisfy those wants.
The real cause of the economic problem is not because of the lack of money, but because of having too
few factors of production (resources needed to produce the goods and services). The four factors of
production are:
1. Land: Natural resources provided by nature and the land the business is on.
2. Labour: Effort of employees.
3. Capital: Money and equipment.
4. Enterprise: Skill and risk taking ability of the person who brings the other factors of production
together to produce a good or service. There people are called entrepreneurs.
Scarcity lack of sufficient products to fulfill the total wants of the population.
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Unit 1: Business Activity | Business Objectives (e.g.

Added Value, Profit, ...)
Business combine factors of production to make products which satisfy peoples wants.
An objective is an aim that a business would like to achieve. These are the five most important objectives:
1. PROFIT: Without any profit at all in a business owned by private individuals, the owners are
likely to close the business. But a business wont always aim to make as much profit as
possible; e.g: if a firm decides to raise the prices of their products, consumers will probably
stop buying their goods. Therefore, the owners of a business will aim for a satisfactory level of
profits, which will save having to work many hours and pay less amount of tax to the
government.
2. VALUE ADDED: It is the difference between the selling price of a product/service and the cost
of bought in materials and components. Higher added value means value of the firms output
increases, it sells goods in a more expensive market and it has the chance to earn higher
profits - as long as it increases prices by more than costs. A business can increase value
added by presenting items in attractive displays, add features to a product, etc.
3. GROWTH: the owners and managers will aim for growth in the size of the business for a
number of reasons: make jobs more secure, increase salaries and status of managers, obtain
higher market share from growth in sales, etc.
4. SURVIVAL: This is usually a new companys main aim, as being new to the market is usually
less secure. But also new competition might threat a firm, so businesses might lower the
prices - which will mean lower profits.

5. PROVIDING A SERVICE: Some businesses are owned by the government. The main aim of
these is to provide an essential service to the public (such as water, electricity, education,
etc.), rather than making as much profit as possible.