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1.1.1 Business activity as a means of adding value

and meeting customer needs

{ Business involves organizing and combining resources into firms to produce goods and
services to satisfy the needs and wants of consumers.
{ Resources, or factors of production, are used to make goods and services.
{ Resources are scarce. There are not enough to produce everything we need and want.
We must choose between alternative uses of resources.
{ Resources include land (natural resources), labour (human effort), capital (man-made
resources) and enterprise (the knowledge and skills people need to own and run business
{ Resources are inputs to productive activity and products (goods and services) are outputs
from productive activity.
{ Business activity adds value to resources by using them to produce goods and services that
are more desirable to consumers.
{ Firms owned by private individuals are private enterprises. Most firms aim to make a profit
but some, like charities, engage in non-profit making activities.
{ Some business organizations are owned and controlled by government authorities. These are
public enterprises. Many provide public services.

1.1.2 Classification of local and national firms into

primary, secondary and tertiary sectors

{ An industrial sector or industry is a group of firms producing similar goods and services or
using similar production processes.
{ The production or extraction of natural resources is the first stage of production for many
products. Industries in the primary sector of an economy produce natural resources.
{ Using natural resources to make other goods involves a process called manufacturing.
{ The secondary sector in an economy includes industries engaged in manufacturing and
{ The final stage of production involves the distribution and sale of products to consumers.
These and other services are provided by service industries in the tertiary sector of an
{ Most people in developed economies are employed in services. Manufacturing output and
employment has been shrinking over time.
{ Secondary and tertiary industries are growing rapidly in many developing economies.

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1.1.3 Business growth and measurement of size

{ It is useful to compare the size of different firms. Measures of size include:
● how many workers they employ
● how much capital they employ
● the volume or value of their output or sales
● their market share.
{ Different measures of the size of firms may give different results. Some large firms may
be capital intensive but employ very few workers. In contrast, some firms may be labour
intensive but have very little capital employed.
{ A firm can expand its scale of production internally or by external growth through the
takeover of another firm or a merger with another firm.
{ Business growth can help a firm increase its sales and market share, reduce its production
costs and increase profits.
{ Some firms may experience problems with growth. These are called diseconomies of scale.
Some large firms may be difficult to manage and may not be able to obtain all the materials
and workers they need. Production costs may rise and profits may fall as a result.
{ The most efficient size for a firm will be closely related to the size of its market.

1.1.4 Key features of a national economy

{ As the global population grows and business activity expands we are using up the world’s
limited natural resources at an increasing rate.
{ Many natural resources are non-renewable resources.
{ Global warming will cause climatic changes and the melting of ice caps to accelerate which
will have a significant impact on human activity. Some plant and animal species may not be
able to adapt.
{ Business activity adds to the national wealth of a country. It helps to improve living standards
by employing people and providing them with incomes and by producing goods and services
people need and want.
{ All countries want to increase their national wealth and living standards but this uses up more
resources, can cause pollution and congestion and have other harmful effects on welfare and
the natural environment.
{ Sustainable development involves reducing the rate at which we use up natural resources,
reducing waste in production and consumption and reducing harmful emissions by changing
the way we produce and consume goods and services.

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1.2.1 Business objectives and their importance

{ Business objectives are the goals or aims of business organizations.
{ Many business objectives have clear and measurable business targets, for example increasing
profits by 5% per year.
{ A business organization will make production and other plans and undertake practical actions
to help it achieve its targets.
{ Progress towards agreed targets can be measured and monitored over time.
{ The most common objectives among private sector business organizations are profitability,
growth and increasing market share.
{ Business survival is a key objective for many new business organizations, but survival will also
be an important objective for large and established businesses during an economic recession.
{ Business objectives may change over time as economic conditions, competition between firms
or technology changes.

1.2.2 Stakeholders and their differing objectives

{ Most businesses have a wide range of business stakeholders. They have an interest in what a
business does and how it performs.
{ Different stakeholders have different aims and objectives and a business may find it difficult
to satisfy them all.
{ Owners and shareholders aim to increase the value of their investments in their businesses
and to earn a profit.
{ Business managers take important decisions to run a business and may aim for business
growth and higher salaries before profit.
{ Creditors help to finance a business and will be interested in its ability to repay its debts.
{ Consumers want good quality and reasonably priced products that offer value for money.
A business will fail to make a profit if it does not attract enough customers.
{ Employees help to manage business organizations and produce goods and services. They are
motivated by their pay and conditions. Better pay and working conditions can be costly for
businesses and reduce their profits.

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1.2.3 Aims of private and public sector enterprises

{ All national economies have a private sector and a public sector.
{ How much the private and public sectors contribute to national output and employment in
different economies varies widely.
{ Many public sector organizations deliver essential public services funded from taxes paid by
the private sector.
{ Public corporations carry out specific public sector functions, such as a municipal water
company, hospital or central bank.
{ Some public corporations are trading bodies and aim to make a profit.
{ Public corporations are responsible for the day-to-day running of nationalized industries
owned and controlled by a national government.

1.3.1 Government influence over decision making by

using economic policy measures

{ Many governments intervene in their national economies to achieve four main objectives
● low and stable price inflation
● high and stable employment
● economic growth in national output and income
● a favourable balance of international trade and balance of payments
{ Governments use policy instruments to influence consumer spending and business decisions
to help achieve their economic objectives. They include
● varying the level of public expenditure
● changes in direct and indirect taxes, and the overall level of taxation
● changing interest rates
● introducing laws and regulations
{ Raising public expenditure, cutting direct taxes and lowering interest rates can increase total
demand for goods and services, boost business investment, output and employment creation.
However, these measures may increase the demand for imports and cause prices to rise.
{ Changes in indirect taxes on the prices of some goods and services can directly influence
consumer spending on those products and therefore the sales of busineses supplying them.
{ Laws and regulations can be used to control or even outlaw some business activities to
protect consumers, employees and the natural environment.

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1.3.2 Impact of technology on business

{ The research and development (R&D) of new products, processes and materials can give a
business a competitive advantage over rival organizations. However, R&D can be expensive
and not all new discoveries and developments succeed.
{ The increasing speed at which technological change is taking place means many more
products and processes are becoming out of date and being replaced with new ones at an
increasing rate.
{ New technologies can save labour, reduce costs, increase quality and make production more
efficient. However, costs of buying or hiring new technologically advanced machines, like
robots and other advanced equipment, can be high. Workers may also need retraining.
{ Workers and trade unions may resist the introduction of new technologies if it threatens their
jobs. New technologies have replaced many tasks originally undertaken by labour but have
also created a demand for new skills, for example in computer software engineering, website
design and ‘green’ technologies.
{ The Internet is a powerful sales and marketing tool in business. Many businesses can
reduce their costs, increase sales, and improve their productivity and competitiveness using
{ E-commerce offers consumers increased choice and increases competition between businesses,
but online fraud is increasing.

1.3.3 Business reaction to market changes

{ Consumer spending patterns are always changing. A good business will try to predict the
products and product features consumers will want in the future and supply them before rival
firms do.
{ To analyse market trends it is important to know what is causing them and what factors may
cause them to change in the future.
{ Changes in income, the cost and availability of credit, populations, social and cultural factors,
advertising, tastes and fashions, seasonal factors and laws and regulations can all affect
consumer demand and spending patterns.
{ Competition to supply the markets for many goods and services is growing. Business growth
in newly industrialized economies, such as China and India, and technological change are
driving this trend.
{ Increasing price competition and non-price competition can lower prices and improve the
quality of products and choice for consumers.
{ Competition forces businesses to innovate, increase their productivity and cut costs, but not
all businesses will survive destructive competition.

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1.4.1 Mixed and market economies

{ In a free market economy, the decisions of consumers and producers will determine what
goods and services are produced and who they are produced for. There is no government
control over resources and no taxation.
{ Producers in a market economy organize and use resources to make a profit from producing
and selling those goods and services consumers want.
{ Entrepreneurs use price signals to determine what is profitable. Rising consumer demand for
a product will tend to increase its price. Producing more of that product could earn a business
more profit.
{ A market economy will produce a wide variety of goods and services if it is profitable to do so
but only for those consumers with the ability to pay for them.
{ Producers and consumers may take decisions that are wasteful, inefficient or even harmful to
people, other businesses and the environment. These are market failures.
{ A government can try to correct market failures. It can employ and organize resources to
provide goods and services for people in need and can introduce laws and regulations to
control harmful business activities.
{ All national economies are mixed economies. A mixed economy has a private sector and
a public sector. A mixed economy therefore combines a market economic system with
government control over resources.

1.4.2 International trade (access to markets

and tariffs)

{ International trade enables national economies to specialize in the production of those goods
and services their industries are best able to produce.
{ Through international trade consumers import a wide variety of goods and services from
overseas producers and businesses can expand the scale of their production through exports
to overseas consumer markets.
{ Access to international markets enables firms to find and benefit from the best workforces,
resources and technologies worldwide.
{ International trade and competition is growing rapidly as more economies develop and
global incomes rise. Established businesses may lose market share and may even be forced to
close if they cannot compete with larger overseas businesses or new businesses in low-cost
{ In response some business organizations are moving their production to other economies to be
near sources of low-cost materials and labour and their expanding consumer markets.
{ Some governments use trade barriers to protect their industries from global competition.
These include tariffs and quotas.
{ Trade barriers restrict free trade, consumer choice and business opportunities. They may be
used to protect less-efficient producers at the expense of more-efficient businesses overseas.

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1.4.3 Problems entering new markets abroad

{ A business can enter an overseas market in a number of ways, by:
● selling exports directly to overseas buyers
● setting up a business unit in the target country
● using an local contact in the target country such as an agent or a distributor.
{ Market entry overseas can be costly and risky. A business seeking to do so will need good
market knowledge and language skills to make contacts, generate sales and avoid failure.
{ Customs, cultures, tastes, laws, regulations and tax systems can vary widely. A foreign business
will need to be aware of these and make sure it acts appropriately or complies.
{ Operating in overseas markets also exposes a business to exchange rate risks and possible
non-payment by overseas buyers.
{ A rise in the value of its national currency against other currencies will make products
exported by a business more expensive to buy overseas. However, it will reduce the cost of
setting up and operating business units in other countries.
{ A business may overcome some of the problems with entering overseas markets through the
use of local contacts, or through joint ventures or mergers with established businesses in
target markets overseas.

1.4.4 Competition and business

{ Vigorous price and non-price competition between rival firms is a key feature of a
competitive market.
{ The designs and features of products available to consumers to choose from, the quality of
after-sales service and product prices may change frequently in a competitive market as firms
challenge each other for sales.
{ Market shares and profits of competing businesses will vary over time as new businesses
enter competitive markets and others are forced to close.
{ A monopoly may restrict competition in an uncompetitive market by forcing existing
businesses out of the market and preventing new ones from entering.
{ A monopoly may use its market power to restrict supply and consumer choice, and charge
consumers a higher price than firms in a competitive market.
{ Governments have introduced laws to outlaw anti-competitive behaviour and to protect
consumers from exploitation. Measures include imposing fines, breaking up monopolies or
regulating their prices and service levels.
{ Not all monopolies are bad for consumers. Some are more efficient than smaller firms and
have lower costs. They may be more willing than competing firms to reinvest profits in new
and better products because the profits they could earn will not be competed away. Some
inventions may be protected by patents.

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1.4.5 Exchange rates and how changes in them

affect business

{ Payments for imports, exports and to make investments overseas require the exchange of
different national currencies. Currencies are exchanged on the global foreign exchange market.
{ Every national currency will have an exchange rate in terms of every other national currency
in the world.
{ Businesses engaged in international trade need to be aware of the impact changes in
exchange rates can have on their costs, revenues and profitability.
{ An appreciation in the value of a national currency will make exports from that country more
expensive to buy in overseas markets, but import prices will fall. This will reduce the costs of
businesses buying imports from overseas producers.
{ A depreciation in the value of a national currency will make exports from that country
cheaper to buy in overseas markets, but import prices will rise. This will increase the costs of
businesses buying imports from overseas producers.
{ A tariff on the price of goods imported to a national economy from overseas will raise their
selling price and reduce their competitiveness. Businesses exporting to that country will suffer
declining sales. The tariff will also raise the costs of domestic businesses that need to import
these goods to continue trading.
{ A quota will limit the volume of imported goods allowed into a national economy and
therefore restrict the sales and market shares of businesses exporting to that country. It will
also cause supply problems for domestic businesses that rely on these imports.

2.1.1 Relationship between objectives,

growth and business organization
2.1.5 Limited and unlimited liability
{ An entrepreneur is willing to take the decisions and risks necessary to organize productive
resources in a private sector business organization. Entrepreneurs have business skills and
‘know-how’ but not all will be successful.
{ An entrepreneur will consider how to finance and manage the new business, and how
much risk they are willing to take before choosing the most appropriate type of business
organization to set up.
{ All businesses need fixed capital and working capital. This is money used to finance a business.
{ Some businesses need more capital than others. An entrepreneur who lacks enough capital to
start and run a business may need to share the ownership and any profits of their business
with other providers of capital.
{ Some business owners, such as sole traders, have an unlimited liability to repay the debts
of their business in the event it fails. This is because their business does not have a separate
legal identity.
{ An entrepreneur who is unwilling to risk having an unlimited liability will need to consider
other types of business organization, including limited partnerships and limited companies,
in which business owners have only a limited liability for business debts.

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2.1.2 Types of business organization

{ There are different types of private sector business organization. They vary according to how
they are owned, controlled and financed, and the owner’s liability.
{ Most business organizations are sole traders. This is the oldest and most common form of
business organization in the world.
{ Partnerships are popular business organizations among professions such as solicitors, doctors
and accountants. Most are general partnerships in which partners have unlimited liability but
some partners may have limited liability.
{ Limited companies are incorporated businesses. They are also known as joint-stock companies
or corporations. This is because they sell stocks (also known as shares) to raise capital.
{ Shareholders in a limited company will elect a board of directors with valuable financial and
business skills to manage their company from day to day.
{ A public limited company is able to sell its shares publicly on the stock market. A private
limited company can only sell its shares privately.
{ The risks of starting and running a new business can be reduced by entering into a joint
venture or a franchise with an established business organization.

2.1.3 Growth of multinational companies

{ Multinationals are some of the largest companies in the world, with annual revenues of many
of billions of dollars and many thousands of employees globally.
{ Many of the biggest multinational organizations in the world are US-owned corporations with
interests in oil and gas exploration and petroleum.
{ Multinationals can benefit from increased sales, low wage costs in low-wage economies and
significant economies of scale because of their size and access to overseas markets.
{ Multinationals can benefit national economies through direct inward investment, providing
new jobs and incomes and teaching new skills.
{ Governments may offer generous subsidies and tax advantages to multinational organizations
to encourage them to locate business units in their national economies.
{ Multinationals may also create disadvantages for host countries. They may force local
competition out of business, exploit low-wage employees and repatriate their profits to
other countries overseas to avoid paying taxes.

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2.1.4 Control and responsibility

{ Organizational structure determines the roles, responsibilities and authority of managers and
employees within a business.
{ Most businesses are organized into divisions or departments that specialize in peforming
particular tasks such as production, sales, marketing and finance.
{ Organizational charts are diagrams that provide a useful way of showing roles,
responsibilities and relationships. A chart will show:
● The hierachy of different layers of management within an organization. More layers may
be added as an organization grows.
● The chain of command each manager has in terms of how many other layers of
management a manager has authority or control over.
● The span of control each manager has in terms of the number of employees the person
● How tasks and responsibilities are delegated from managers to their staff.
{ A hierarchical organization with a tall structure has a long chain of command and a
relatively narrow span of control compared with organizations with flat structures.
{ An increasing number of modern business organizations have chosen to widen their structure
to cut out layers of management to reduce costs and increase the speed at which important
decisions are taken and implemented.

2.1.6 Internal organization

{ All organizations, public or private sector, charities and even sports teams, need good
managers if they are to achieve their objectives.
{ Good managers will make other employees more effective than they would have been without
those managers.
{ Business management involves a set of functions that will help organizations make the best
use of their financial, human, natural and man-made resources.
● Planning involves setting objectives and deciding on business strategies and the actions
needed to achieve them.
● Managers cannot do everything themselves. Organizing employees and other resources to
achieve organizational objectives is one of their responsibilities.
● Co-ordinating involves bringing employees and other resources together in the
organization to achieve organizational objectives.
● Commanding involves giving instructions to employees to carry out tasks.
● Controlling involves measuring and assessing the performance of employees to make sure
their work is satisfactory and on target, and putting corrective actions in place if not.

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{ As organizational structures become larger owners may lose control of their businesses to
the managers they employ.
{ Shareholders in medium-sized to large companies will elect directors to run their companies
but directors and shareholders may have conflicting objectives. For example, large pay awards
for senior managers will reduce profits.

2.1.7 Internal and external communication

2.1.8 Internal communication (effective
communication and its attainment)

{ Businesses need to communicate with their customers, other organizations and employees on
a daily basis. A business that fails to communicate the right information at the right time to
the right people or organizations will not be successful.
{ Good internal communications are vital to ensure that everyone in an organization knows
what their objectives and responsibilities are.
{ Good external communications are needed, especially with customers to encourage them
to continue buying the goods or services of that business and with suppliers to ensure that
goods and services required by the business are delivered on time and of the required quality.
{ Information and messages can be spoken, written or visual and many can be transmitted
● Verbal communications include meetings, telephone calls and conferences.
● Written communications include letters, memos, e-mails, notices and press releases.
● Visual communications include pictures, charts and diagrams.
{ The cost, speed and the size of the intended audience are important considerations in
choosing methods of communication.
{ Communication breakdowns occur when messages are misunderstood, wrongly targeted or
just ineffective, for example, when the people trying to communicate do not have the same
language skills or because the message is too technical.

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2.2.1 Use of funds

2.2.2 Short- and long-term financial needs

{ All businesses will need money or finance for business start-up, expansion and survival.
{ Without sufficient finance an enterprise cannot obtain all the goods and services it needs to
begin or stay in business.
{ Capital refers to money used to purchase business assets including land, premises and
equipment, and to finance running costs such as the payment of wages, telephone bills and
insurance premiums.
{ Businesses need capital to fund capital expenditure and operating expenditure.
{ As fixed assets, such as buildings and machinery, can last a long time, it is sensible to pay for
these over a long period of time. To do so requires medium- or long-term finance.
{ Businesses will use short-term finance to pay for equipment that has a shorter productive
life, such as telephones and laptop computers, and for major operating expenditures such as
quarterly or annual electricity bills and bulk purchases of materials and other supplies.

2.2.3 Sources of internal and external funds

{ A business may raise finance from its own internal sources of finance, including from
retained profits, the savings of business owners or the sale of unwanted assets.
{ A business may also secure capital from external sources of finance. External providers of
finance include banks, government, leasing companies and suppliers.
{ Banks are one of the most important external providers of finance for businesses and can
provide short-, medium- and long-term loans.
{ Suppliers may provide short-term finance to help a business to buy the materials, parts and
services they need from them. Trade credit can be up to 90 days.
{ Limited companies can sell shares and debentures to raise finance. The sale of shares (equity
finance) provides non-repayable permanent capital for a company.
{ Too much borrowing (debt finance) can cause problems for a business. Loans must be repaid
with interest from future revenues. This reduces profits and if these are not sufficient a
business may not be able to repay its debts. Interest rates may also rise.
{ Banks and other lenders usually insist business assets are used as collateral against loans. If a
business defaults, lenders can insist the assets are sold to recover their loans.

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2.2.4 Factors affecting the methods of finance chosen

{ Choosing finance requires managers to assess the costs and benefits of different methods
available to their business. The assessment will consider:
● why finance is needed and what it is needed for
● how much capital is needed
● how quickly capital is needed
● how much the method of finance will cost
● how much risk it involves.
{ It is important to match the type of finance to the use it will be put to. Long-term finance
should not be used to meet short-term operating expenditures.
{ Sources of finance for businesses requiring significant new finance for expansion or the
introduction of new advanced machinery may be limited. Smaller businesses especially may
lack internal financial resources and be unable to secure bank loans because of their size and
lack of financial security.
{ Applying for bank loans and arranging share issues can take time and be expensive for a
{ A highly geared business will find it difficult to raise finance from other sources, including
providers of trade credit and hire purchase. Too much borrowing increases the risk of
business failure.
{ A business with a poor track record of financial performance and inexperienced managers is
unlikely to attract many lenders or investors.

3.1.1 Role of marketing

3.1.5 Mass market, niche market
3.1.6 Marketing mix

{ Marketing involves identifying, generating and satisfying consumer wants.

{ Most businesses, unless they are small, will have a marketing department responsible for
marketing activities including the research and development (R&D) of new products, and the
sale, promotion and distribution of products.
{ Marketing objectives will include raising consumer awareness and improving the image of
a product or organization, developing new or improved products, increasing or maintaining
market share, entering new markets and ultimately increasing sales and profits.
{ The marketing mix combines marketing strategies concerning product design, price, place of
sale to the consumer and promotions. Each part of the mix must be effective and complement
the others.

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{ Mass-marketing strategies will be developed to mass produce, price, promote and sell
products into large national or international markets.
{ Niche-marketing strategies will be used for small, specialized consumer markets. Technology,
design and quality of products and the reputation of the producer will be more important
considerations than price and promotions.

3.1.2 Market research (primary and secondary)

3.1.3 Presentation and use of results

{ The main purpose of market research is to identify whether there is a consumer want for a
product – a gap in the market – or if a want for a new product can be created with advertising.
{ A market-oriented business will always research the market before it invests in the
development and production of a new or improved product.
{ Market research can collect quantitative data, such as sales and price information, and
qualitative data, including consumers’ opinions.
{ New or primary data is collected to meet specific business requirements but can be
expensive. It can be collected from interviews, surveys, panels of consumers or by observing
consumer behaviour.
{ Sampling is used in primary data collection because it is impractical to interview or survey all
consumers in a target population or market. Sampling bias may occur if the sample chosen
is not representative of consumers in the target population.
{ Secondary data is often cheaper and less time consuming to obtain than primary research
data from existing internal sources, such as sales records, or external sources, including
published reports and statistics.

3.1.4 Market segmentation (purpose and methods)

{ Market segmentation involves dividing up a market into different groups of consumers with
similar characteristics, preferences and buying habits.
{ Market segmentation recognizes all potential users of a product are not alike, and that what
appeals to one group of consumers may not appeal to others.
{ Consumer characteristics, preferences and buying habits will differ between market segments
but will be broadly similar within the same market segment.
{ Quota sampling in market research can be used to find out the preferences and buying habits
of consumers in different market segments. Businesses can use this information to design
different products, pricing strategies and promotions that will appeal to consumers in different
market segments.

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{ Consumer preferences and buying habits will depend on such factors as consumers’ age,
gender, income and lifestyle. Consumer preferences can also depend on their religion, culture
and where they live.
{ Lifestyle, income and education are often closely linked to socio-economic group or social
class. For example, people in higher managerial and professional occupations tend to have
more educational qualifications and earn more income than people in routine semi-skilled and
unskilled occupations.

3.1.7 Product (design, brand, packaging,

life cycle)

{ Producing the right product at the right price is vital. A product must be designed to the
quality consumers want and sold at a price they are willing and able to pay and which covers
production costs.
{ Poorly designed or unreliable products can damage the reputation of a product range and an
{ Creating and advertising a strong brand name and image will help develop brand
awareness – the ability of consumers to recall and recognize the brand.
{ A brand image can create the impression that a product has particular qualities or
characteristics that make it special or unique. In this way, consumers can be persuaded to pay
a higher price for the branded product.
{ Product life cycle analysis helps a business to plan its marketing strategies. A product’s
life cycle is divided into several stages characterized by the sales revenue generated by the
product over time. These are product development, launch, growth, maturity and eventually
{ Changes in the marketing mix will usually be required during the life cycle of a product.
Extension strategies may be used to boost sales and the profitable life of a mature product,
for example by selling it into new markets, adding product variants or developing a new
advertising campaign.
{ Many product life cycles are becoming shorter due to rapid advances in technology and
increasing global market competition. A business will need to manage its product portfolio
by introducing new products as old ones mature and decline.

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3.1.8 Price (price elasticity of demand, pricing

methods and strategies)

{ The strength of consumer demand, the degree of competition and the costs of production
must be taken into account by a business in its pricing decisions.
{ Knowledge of the price elasticity of demand for different products will help a business to
predict what is likely to happen to consumer demand and total sales revenue following a
change in the price of its goods or services.
{ Cutting prices when demand is price inelastic will lose revenue, while cutting the prices of
products for which demand is price elastic will increase revenue.
{ Demand-based pricing strategies will price products according to what consumers are
willing to pay in order to build sales and market share.
{ A high price skimming strategy may be used for a new advanced or novel product that faces
little or no competition following product launch. Alternatively, a low penetration pricing
strategy may be used to build sales of a new product in a highly competitive market.
{ Competitive pricing strategies can be used when the objective is to deter new competition,
defend market share or help a business to survive. Destruction pricing involves deep cuts in
prices, often below costs, in order to ‘destroy’ the sales of a new or existing competitor.
{ The objective of cost-plus pricing is to cover production costs and earn a good profit margin.
However, this does not take into account what consumers may or may not be willing to pay or
how much competition there is to supply the market.

3.1.9 Distribution channels

{ Distribution is often the final part of the marketing mix. It can be expensive so will require
careful planning and management to minimize costs.
{ Effective logistics in business involves managing the process of distribution so that the right
product gets to the right consumers, in the right place, in the right quantities and at the right
time as quickly and as cheaply as possible.
{ Some producers sell their products direct to their final consumers. This can be done in a
number of ways, for example through retail outlets owned by the producer, via mail order or
telesales. E-commerce using the Internet has increased direct selling.
{ Alternatively, producers can distribute their products through intermediaries such as retailers,
wholesalers or agents. Intermediaries can also help promote goods at their point of sale.
{ Without intermediaries, manufacturers will need to sell their products direct to customers.
This will increase their costs of administration and employing sales staff.
{ Wholesalers buy in bulk and will break up the bulk to sell smaller quantities to retailers. Many
smaller retailers may be unable or unwilling to buy bulk because they do not have enough
storage space. Also, many food items will perish if they cannot be sold quickly.

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{ Many manufacturers and large retailers have developed their own warehousing and
distribution systems in order to speed up delivery times and capture the extra profit that
would otherwise be earned by a wholesaler.
{ There is increasing pressure on and competition between producers to reduce delivery
lead times. Businesses therefore need to balance the cost and speed of different methods of
transporting goods in distribution decisions.

3.1.10 Promotion (advertising, sales, point of sale)

{ Promotions are marketing communications designed to influence consumer behavior and

spending decisions. They make consumers aware of a product, its brand name and features,
where it is sold and the price it sells for.
{ Advertising involves above-the-line promotions in newspapers and magazines, on television,
via the Internet and other advertising media. Persuasive advertising is designed to create a
consumer want and boost sales of a product.
{ The most suitable choice of advertising media depends on the target audience or market
segment intended for the advertisement. National newspapers and television have large
audiences but can be expensive. They are more suitable for mass advertising.
{ Creating a powerful brand image and spending a large amount of money on advertising can
create a barrier to new competition.
{ Below-the-line promotions are used to support and reinforce above the line advertising.
They are normally short lived, such as offering free gifts or money off coupons, or product
placements in new films and television programmes.
{ Point-of-sale promotions include attractive stands and product displays, posters near
checkouts and friendly sales representatives who can offer customers free samples to try or
demonstrate how a product can be used.
{ Some promotions aim to create customer loyalty by providing extra incentives for them
to continue purchasing the same product, including BOGOF offers and collecting product
coupons to enter competitions or to obtain money off their next purchase.
{ Personal selling can deliver informative and persuasive messages to a customer necessary to
‘close a sale’.

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3.1.11 Marketing strategy

3.1.12 Marketing budget

{ A marketing strategy determines the target market of a business and the marketing mix. It
combines product development and design, pricing, promotion and distribution.
{ Marketing objectives include growing the sales of a new or existing product, increasing or
maintaining market share, seeking a commanding position in a niche market or, in some
cases, exiting a market if sales have declined significantly.
{ Most marketing strategies aim to influence consumer wants and buying behaviour.
{ Marketing strategies should be flexible and adapt as consumer preferences change,
competition increases and products mature.
{ Setting a marketing budget must start with a well thought-out marketing strategy.
{ A marketing budget is a managerial tool that helps balance what a business needs to be
spent on marketing against what it can afford. This budget can then be used to monitor
spending and the how well the marketing strategy performs against its objectives.
{ A typical marketing budget will take into account all marketing costs including market research,
marketing communications, salaries for marketing staff, travel costs and cost of office space.
{ Some pre-budget research into current industry and market factors, the strengths and
weaknesses of competing businesses and how previous marketing strategies have performed
will help marketing managers make more-informed cost calculations.
{ A marketing budget that is cost effective will involve identifying and spending only the
minimum amount of money necessary to achieve marketing objectives.

3.2.1 Using resources to produce goods and services

3.2.9 An appreciation of how production can be made
more efficient

{ Production is a process that involves using resources to make goods and services to satisfy
consumer needs and wants. The process is not complete until those goods and services reach
the people and businesses who want and need them.
{ Resources are the inputs to productive activity while products are the outputs of productive
{ Productivity measures the amount of output that can be produced from a given amount of input.
{ The aim of any business will be to combine its resources in the most productive or efficient
way. That is, it will aim to produce as much output as it can with the least amount of
resources it can, and therefore for the lowest cost possible.
{ Increasing productivity can lower the costs of production. Productivity will have increased if
more output or revenue is produced from the same amount of resources, or the same output
or revenue can be produced using fewer resources.

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{ Labour productivity is the most common measure of productivity in business. It measures

how efficient workers are and how efficiently they use other resources.
{ Teaching labour new skills, reducing waste, introducing new processes and working practices
or automating production by replacing labour with advanced equipment and machinery, can
all help to increase productivity in a business.

3.2.2 Methods of production (job, batch, flow)

3.2.4 Lean production
3.2.7 Quality control

{ Production methods can vary from the production of individual custom-made products (job
production) to the continuous production of identical items on a mass scale (flow production).
{ A business will choose a method of production that best meets the demands of its customers
in terms of the type of product and the size of the market.
{ Production processes can always be improved and made more efficient. Lean production
methods seek to eliminate waste and create more value. It can involve just-in-time
production and kaizen techniques.
{ Kaizen involves the reorganization of production processes and patterns of work, the
repositioning of equipment and stocks so they are located closer together and the constant
monitoring of production targets.
{ Quality control is vital in business. Improving the quality of products and processes reduces
costs, increases consumer confidence and boosts sales. A business that produces poor-quality
goods and services will fail to attract and retain customers.
{ Total quality management (TQM) seeks to identify and remove any source of defect from a
production process so problems never occur and so product quality and customer satisfaction
continually improve.

3.2.5 Costs and cost classification

3.2.6 Break-even analysis and simple cost-based
decision making
3.2.3 Scale of production

{ Cost control is vital in business because the main objective of most private sector firms is to
make a profit.
{ Costs can be fixed or vary with the level of output. A business will need to cover its fixed
costs regardless of how much output it produces.

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{ The sum of all fixed costs and variable costs gives the total cost of all the activities of a
{ To break-even a business must earn enough revenue to equal its costs. At the break-even
level of output profit or loss is zero.
{ Total revenue and total cost can be plotted on a break-even chart to identify levels of
output that will make a loss, break-even or yield a profit.
{ Business owners and managers can use break-even charts to examine what might happen to
the break-even level of output and profits if costs or prices change.
{ The main limitation of break-even analysis is that it assumes all output is sold and at the
same price. Businesses often hold stocks and market prices can vary.
{ Expanding the scale of production can benefit from economies of scale that reduce the
average the cost of producing each unit of output.
{ Many large firms have cost advantages over smaller business rivals because they receive
discounts for buying supplies in bulk, they can access cheaper sources of finance and invest
in specialized equipment, highly skilled workers, and new products and processes to increase

3.2.8 Location decisions

{ Businesses will choose locations that minimize their costs of production.

{ Two major considerations in business location decisions are ease of access to customers and
access to sources of materials and other supplies.
{ Locations near to sources of raw materials or suppliers of component parts may be particularly
important for a manufacturing business if they are heavy or bulky and if they need to be
delivered quickly, for example for just-in-time processing.
{ Improvements in transport and communications have reduced the need for many businesses to
locate near to sources of materials or their main markets.
{ If the manufacturing process is labour intensive a location in or near a densely populated area
or an area of high unemployment may be suitable.
{ The availability and cost of suitable land and premises, planning laws, the availability of
government grants and even the personal preferences of the owners will also influence
business location decisions.
{ Businesses that cluster together in the same location with ancillary firms can benefit from
external economies of scale. Shops will also tend to locate together to attract a greater
number of customers to an area.
{ The growth of new markets overseas, increasing wage costs and taxes at home, a desire to
avoid trade and tariff barriers and the availability of government grants and other incentives
in other countries may attract businesses to relocate their operations overseas.

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3.3.1 Cash and cash flow forecasts

{ A business that runs out of cash has a cash flow problem and will need to find ways to
increase the amount of cash it has available to make payments.
{ A business that is unable to raise cash quickly has a liquidity problem. Cash is the most liquid
asset a business can hold.
{ A business must make sure it has enough cash to meet large, infrequent bills. This means
holding a cash reserve.
{ Cash inflows from sales revenues and other sources may also be irregular over time. A
business will add to its cash reserve when it has a positive net cash flow.
{ A cash flow forecast will help a business manage its cash flows and cash reserve. It shows
expected inflows, outflows and the balance of cash remaining or available to a business at the
end and start of each month.
{ All businesses can experience cash flow problems if they expand too quickly, invest too much
in fixed assets and stocks, borrow heavily or give too much credit to customers.
{ Reducing cash outflows and boosting inflows can improve the cash position of a business. A
business may also arrange short term finance, sell off surplus stocks of finished products and
materials, and assets, or use a debt factoring service to raise cash and avoid insolvency.

3.3.2 Profit (what it is and why it matters)

3.3.3 Purpose and main elements of a profit
and loss account

{ Profit is a reward for enterprise and risk taking in business. Without it people would not
bother to start up and own businesses.
{ The amount of profit a business makes each month and the amount of cash it receives may
differ because some sales may be on credit and paid for in cash at a later date.
{ A profit and loss statement can be used to measure and monitor gross and net profit or loss
over a 12-month trading period. This can be compared with the previous period to examine
whether profitability has improved or deteriorated.
{ A profit and loss statement consists of a trading account, profit and loss account and
appropriation account.
{ The trading account in a profit and loss statement records revenues from goods and services
sold and the direct costs of any materials, parts and labour used to produce them. The
difference is gross profit.
{ The profit and loss account adds any further revenues and costs from activities not directly
related to trading, including the depreciation of fixed assets. This provides a measure of net
{ Profit remaining after any corporation or profit taxes have been deducted will be distributed
to the business owners and/or retained by the business. What happens to profit after tax is
recorded in the appropriation account.

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3.3.4 Purpose and main elements of a balance sheet

3.3.6 Working capital

{ The value and financial health of a business is measured using a balance sheet.
{ Businesses invest in fixed assets and current assets to carry out productive activity.
{ Total assets owned by a business are financed from capital provided by the business owners
and from loans and other liabilities to external creditors.
{ The total liabilities or debts of a business consist of its short-term or current liabilities and its
long-term liabilities.
{ A balance sheet clearly shows the amount of working capital in a business used to pay
operating expenses. It is a vital indicator of financial health.
{ If a business does not have enough working capital it will be unable to met its short-term debts
and suppliers may stop providing it with the goods and services it needs to continue production.
{ Total assets less current liabilities measures the amount of capital employed in assets that
will enable a business to continue production and generate revenue.
{ The value of the net assets of a business is the difference between its total assets and total
liabilities. It is a measure of the net worth or value of the business to its owners. In a limited
company the shareholders own this wealth.

3.3.5 Simple interpretation of financial statements

using ratios

{ Ratio analysis can be used to monitor the performance of a business over time and to
compare the performance of different businesses.
{ An accounting ratio or financial ratio is a comparison of two figures in the financial
accounts of a business produced by dividing one key figure by another.
{ Performance ratios measure how well a business is performing in terms of profitability and
use of its assets.
● The gross profit margin is a measure of how much total profit is made as a percentage of turnover.
● The net profit margin is a measure of how much profit net of overheads is made as a
percentage of turnover.
● The return on capital employed (ROCE) expresses the net profit of a business as a
percentage of the total value of its capital invested in assets.
{ Liquidity ratios measure the ability of a business to pay its short-term debts.
● A current ratio less than 1 means a business does not have enough current assets to meet
its current or short-term liabilities.
● The acid test ratio measures whether or not a business is able to meet its short-term
liabilities without having to sell off any stocks.
{ Ratio analysis uses past financial results and cannot provide a complete picture of the current
or future performance of a business.

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3.3.7 Financial budgets

{ A well-managed business will agree a number of challenging but achievable targets. By

planning ahead a business can make sure it has enough equipment, materials, labour and
capital necessary to meet its targets.
{ A budget will contain financial plans for cash, revenues and capital, and plans for non-
financial items such as staff numbers, machine usage, output and orders.
{ Budgeting allows a business to plan ahead, assist with cost control and monitor the
performance of a business.
{ A business will first prepare key budgets for production and sales. All other operating budgets
will be based on plans for output and sales. Operating budgets will include budgets for cash
(a cash flow forecast), labour, materials, fixed assets and all overheads.
{ A master budget for an entire organization will be compiled from the individual operating
budgets of a business to produce a comprehensive financial plan.

3.3.8 Users of accounts

{ All businesses need to keep accurate financial records summarizing their financial position and
{ Businesses normally produce accounts at the end of each accounting period or financial
year, usually starting on the day the business first started trading or when a company first
{ Businesses produce accounts to monitor their performance over time, to secure and maintain
sources of short- and long-term finance and to meet legal requirements.
{ Accounts are required by government tax authorities to calculate business tax liabilities and
limited companies are also legally required to publish their accounts.
{ The financial accounts of a business may be examined and used in decision making by a wide
range of business stakeholders.
{ Business owners will monitor how much their investments in businesses are worth, and
business investors will monitor and compare returns in different business sectors before
deciding whether or not to provide capital.
{ Lenders and creditors will use accounts to judge whether or not a business can meet its short-
and long-term debts.
{ Employees and trade unions will monitor the profitability of the businesses that employ them
to determine whether or not if can afford more generous pay rises.
{ Competing businesses will use the accounts of rival businesses to assess their financial
strength and efficiency, and their ability to finance new product developments and to compete
on prices and costs.

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4.1.1 Role of work in satisfying human needs

{ In addition to a need for money, working satisfies many different human wants and needs.
{ A combination of different factors, both financial and non-financial, will motivate people to
seek work and be productive.
{ Knowing what motivates people in work is vital in business. A key role for management is
to ensure that the employees they supervise and support maximize their productivity and
contribute fully to the goals of the organization.
{ Employee behaviour has been studied many times and there are many theories about what
motivates employees.
{ If employees are primarily motivated by money they will be more productive if they are paid
more. Wages and salaries provide money to buy food, shelter and clothing to satisfy their
physiological needs.
{ Employees are also motivated by the satisfaction of other needs, such as the need for job
security and a safe working environment, and social needs to work as part of a team and gain
the respect of their colleagues.
{ Some employees may be motivated by money but dislike working. They may only be productive
if they are supervised closely and rewarded with higher wages.
{ Other employees may be self-motivated. They want to do a good job and realize their full
potential. Instead of simply supervising these employees, managers should be supportive, give
them opportunities to develop and encourage them with positive feedback.

4.1.2 Methods of financial rewards

4.1.3 Non-financial rewards
{ Managers and human resources departments in businesses have devised different methods of
rewarding work to motivate their employees.
{ The earnings of an employee each week or month may be made up of different financial
rewards, including a basic wage or salary, overtime and performance-related pay.
{ The wage rate for a particular job may consist of a basic wage for a given number of hours
each week plus a time rate for any overtime hours worked and/or a piece rate for any
additional output produced above an agreed target.
{ An annual salary will normally be paid to managers, office staff and other non-manual
employees in 12 equal monthly payments.
{ Performance-related pay can reward increased effort and productivity. For example,
commission will often be paid in addition to a basic wage or salary to retail employees and
others involved in sales. High-achieving employees may also receive bonus payments and a
share of profits.
{ In addition to financial rewards, business organizations may attempt to motivate their
employees by giving them non-financial rewards including use of a company car, price
discounts and free medical insurance.
{ Non-financial rewards may be more cost effective than giving large pay awards to employees.

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4.1.4 Management styles and motivation methods

{ Employees will be more motivated, more productive and contribute more the aims of their
organization if they have interesting and satisfying jobs to do. Absenteeism, staff turnover and
business costs will also be lower.
{ Business organizations can design jobs to meet employees’ needs and increase their job
satisfaction through job enlargement, job rotation, job enrichment and teamwork.
{ Good managers can inspire and motivate their employees to achieve organizational goals.
{ Managers may adopt different styles of management depending on the situation or the
employees they are required to manage and the outcome they hope to achieve.
{ Managers may become autocractic when decisions need to be taken quickly, democratic
when problems need to be solved in consultation with employees and ‘hands- off’ or laissez
faire when they trust employees to organize their own work.

4.2.1 Stages of recruitment and selection

{ The most valuable resource in any business organization is its people, or human resources. The
success of a business depends on the quality of its workforce.
{ The purpose of human resources management is to ensure that employees in an organization
are selected, used and developed in the best and most effective ways possible.
{ Recruitment and selection involves attracting and choosing the most suitable employees for
an organization.
{ Every job vacancy will have a job description of its main tasks and responsibilities and a
person specification listing the skills and qualities an employee needs.
{ A job vacancy can be filled through internal recruitment, by advertising the vacancy
externally in newspapers and magazines or using recruitment agencies and government
employment centres.
{ Most vacancies are filled through external recruitment. It can be more time consuming and
expensive than internal recruitment but will enable a business to attract employees with new
and perhaps more advanced skills.
{ Job applicants who are a close match to the person specification in terms of their skills,
experience and other qualities will be shortlisted for interview.
{ The purpose of an interview is to assess the communication, interpersonal and other skills of
each candidate and select the most suitable one for the job.

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4.2.2 Training methods

{ Training employees can increase their job satisfaction and motivation and increase the amount
and quality of the work they do.
{ Training employees to improve their existing skills and to learn new ones can help a business
introduce new equipment and technologies, reduce supervision and improve health and safety
at work.
{ A multi-skilled workforce can adapt quickly to organizational changes and changes in
working practices.
{ Training methods used by an organization will vary depending on the objective, for example
the induction of new employees or teaching professional qualifications.
{ Induction training involves teaching new employees about the organization they work for and
their responsibilities.
{ On-the-job training has the advantage of work continuing while employees train.
{ Off-the-job training involves employees attending training and educational courses away
from their normal place or work.
{ Off-the-job training can be more expensive than on-the-job training. Fees and charges for
training courses and venues can be very high and employees on training courses will not be
available for work.

4.2.3 Dismissal and redundancy

{ An organization will follow a disciplinary procedure to discipline an employee who is
performing or behaving badly.
{ A disciplinary procedure normally involves giving verbal and written warnings to an employee
about his or her poor performance or behaviour.
{ If the work and behaviour of an employee continues to be unacceptable he or she could be
demoted, suspended or even dismissed from the job.
{ Reasons for the fair and legal dismissal of an employee include redundancy; incompetence;
or gross misconduct, such as stealing from the organization or sexually harassing colleagues
at work.
{ Some employees may choose to take voluntary redundancy, for example older employees who
want to retire early or those who can easily get jobs elsewhere.
{ Compulsory redundancy may be necessary if an organization needs to make a large number
of employees redundant. This may be the result of downsizing the organization.
{ Closure of an organization will result in compulsory redundancy for the entire workforce.

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5.1.1 Impacts of business decisions on people,

the economy and the environment
{ Business activity contributes to social and economic welfare. It produces goods and services
people need and want and creates jobs and incomes. For these reasons governments try to
encourage and support business activity in their economies, but some activity can be bad for
social and economic welfare.
{ Negative externalities from business activities, such as pollution, impose costs on others
and reduces welfare. Government intervention may be needed to persuade or force business
organizations to reduce the negative externalities of their activities.
{ Taxes on activities that create negative externalities will increase their financial costs and
make them less profitable.
{ Laws and regulations can control or ban business activities that create significant negative
externalities and protect the environment and the rights of consumer and employees.
{ People may organize local or nationwide publicity campaigns and protests including
marches and boycotts, against businesses that fail to act in a socially and environmentally
responsible way.
{ Pressure groups aim to change business behaviour and influence government policies. They
can be very powerful because they can create bad publicity for a business and persuade
consumers to boycott its products.
{ Trade unions or labour unions seek to protect their members and other employees from
exploitation at work and improvements in their wages and working conditions.
{ Positive externalities, including health and environmental benefits and improved workforce
skills, help to improve social and economic welfare. Governments may give grants and
subsidies to firms to invest in activities that create new jobs and positive externalities.

5.2.1 Location decisions

{ Businesses will establish operations in locations that minimize their costs of production but
this may conflict with government economic, social and environmental objectives for different
areas in their economies.
{ Planning laws and building regulations may restrict the type of business activity and the
design of business premises allowed in certain areas to protect local residents and the natural
{ Areas with high unemployment, a low-skilled workforce, a lack of infrastructure and few or
declining industries are unlikely to be attractive locations for most businesses.
{ Governments may offer government grants and subsidies to encourage business start-up
or relocation in underdeveloped areas and areas of high unemployment to provide jobs and

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{ Other regional policy incentives available to new or existing businesses in assisted areas may
include rent-free premises, tax concessions and relaxed planning laws.
{ Governments may also offer generous financial and other incentives to attract direct inward
investment from foreign-owned businesses in new productive assets, technologies and skills.
Inward investment creates jobs and brings wealth into an economy.

5.2.2 Workforce and the working environment

(health and safety, employment protection)
{ Many governments have introduced laws to protect consumers, the environment and
employees from unethical business practices and behaviour.
{ The trade union movement worldwide has helped to fight and bring to an end to child labour
in many countries, improved workers’ safety, increased wages for both union and non-
unionized workers, reduced hours of work and improved education and other benefits for
many poor and working-class families.
{ A trade union will be in a strong bargaining position to negotiate improved wages and
working conditions if it represents all workers in a workplace producing essential products.
{ Trade union members may take disruptive industrial action if they fail to reach agreement
with employers through collective bargaining. Affected businesses will suffer higher costs
and lose output, revenues and profits during industrial action. Jobs may be lost as a result.
{ Employment legislation and health and safety laws and regulations determine many of
the rights and obligations of employees and their employers, including the right not to be
dismissed or discriminated against unfairly and to receive financial compensation in the form
of wages or salaries.

5.2.3 The consumer

{ Some businesses may take advantage of a lack of consumer knowledge about many products
and prices and make misleading claims in order to increase their sales and profits.
{ Many governments have introduced consumer protection laws to ensure fair competition and
to prevent business organizations restricting or misusing information on products and prices.
{ Consumers may be protected from misleading product descriptions and price claims, the sale
of unsatisfactory or poor-quality products, failure to disclose hidden fees and charges and the
sale of underweight items or the use of inaccurate weighing equipment.
{ Competition laws are used by governments to control anti-competitive business activities
and behaviours. Large powerful firms may otherwise use their market power to restrict
competition, reduce product quality and force up market prices.

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{ Businesses found to be breaking consumer protection or competition laws may be fined

heavily, regulated or even forced to cease trading.
{ The governments of many countries have also banned the production and sale of many
products and substances that are considered harmful or dangerous to people and the

5.2.4 External cost and benefits

{ Business activity produces goods and services to satisfy our needs and wants, provides
employment and incomes, and therefore increases living standards and economic welfare.
However, some business activity can also have negative consequences for people and the
{ Private sector businesses will engage in productive activities if they are profitable. The profit
from a business activity is the difference between its private costs and its private benefits,
or revenues.
{ Negative externalities from a business activity impose external costs on other people and
organizations. External costs will reduce social welfare.
{ Many business activities produce positive externalities. These create external benefits for
other people and firms. A business will not receive payment for the external benefits it creates
from its activities.
{ Business owners will be better off if their business activities yield a profit, but society will only
be better off if the social benefits of business activities are greater than their social costs.
{ If the social costs of a business activity exceed its social benefits then society would be better
off if resources were used to produce other goods and services instead.
{ External costs, including the impact of pollution on human health and climate change, are
difficult to measure and value accurately. External benefits, such as improvements in social
welfare from employment and business investments in advanced technologies, are also
difficult to measure and value with precision.

5.2.5 Exchange rates

{ International trade allows business organizations access to the best and cheapest sources of
materials, labour and finance anywhere in the world.
{ Payments for imports and exports require the exchange of different national currencies.
Currencies are exchanged on the global foreign exchange market.
{ Businesses engaged in international trade need to be aware of the impact changes in
exchange rates can have on their costs, revenues and profits. For example, an export priced
at $10 will sell for 15 euro in Europe if the exchange rate is $1 5 1.5 euro. If the $ exchange
rate falls to $1 5 1.4 euro the product will sell for 14 euro. The fall in price could boost sales
of the exports in Europe.

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{ An appreciation in the value of a national currency will make exports from a business located
in that country more expensive to buy in overseas markets. Demand for exports may fall,
reducing the sales and profits of the exporting firm.
{ A depreciation in the value of a national currency will make exports from a business located
in that country cheaper to buy in overseas markets. Demand for exports may rise boosting the
sales and profits of the exporting firm.
{ A business importing goods or services from overseas will face an increase in import costs and
a reduction in profits if its national currency depreciates against other currencies. In contrast,
an appreciation of the national currency against other currencies will reduce the costs of
imported products and boost the profits of the importing organization.

5.2.6 Business cycle

{ All major economies experience a business cycle in business activity and output.
{ Most people are better off today than they were many years ago because most economies
have experienced economic growth over time. However, steady economic growth may not
be achieved every year. Sometimes national output and income will fall during an economic
{ Sales and profits will vary with the business cycle. During an economic boom sales, profits
and business activity will be at their peak. Prices rise as demand for goods and services
exceeds their output. Business costs may also rise rapidly due to shortages of materials, parts,
equipment and skilled labour.
{ Sales and profits will decline for many businesses during an economic recession. As consumer
demand falls, firms will cut production and workers will be made redundant.
{ A slump is a deep and prolonged recession. Unemployment will be at a peak as many
businesses may be forced to close due to low levels of consumer demand.
{ An economy will recover from recession as consumer confidence and spending returns. During
an economic recovery sales and profits will begin to rise and business activity will grow.
{ Business cycles may vary in length and scale. Some can involve significant peaks and troughs
and recessions lasting a long time.

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