1 - Understanding business activity

Question 1

What is a want? Give some examples.

Answer 1

a good or service that people would like to have, but is not required for living. Examples include cars and watching movies.

Question 2

What is a need? Give some examples.

Answer 2

a good or service essential for living. Examples include water and food and shelter.

Question 3

What is scarcity? Give an example.

Answer 3

Scarcity is the basic economic problem. It is a situation that exists when there are unlimited wants and limited resources to produce the goods and services to satisfy those wants. For example, we have a limited amount of money but there are a lot of things we would like to buy, using the money.

Question 4

What is opportunity cost?

Answer 4

Opportunity cost is the next best alternative forgone by choosing another item. Due to scarcity, people are often forced to make choices. When choices are made it leads to an opportunity cost

Question 5

Give an example of opportunity cost.

Answer 5

Example: the government has a limited amount of money (scarcity) and must decide on whether to use it to build a road, or construct a hospital (choice). The government chooses to construct the hospital instead of the road. The opportunity cost here are the benefits from the road that they have sacrificed (opportunity cost).

Question 6

What are factors of production?

Answer 6

Factors of Production are resources required to produce goods or services. They are classified into four categories: Land, Labour, Capital and Enterprise.

Question 7

What is land?

Answer 7

the natural resources that can be obtained from nature. This includes minerals, forests, oil and gas. The reward for land is rent.

Question 8

What is labour?

Answer 8

the physical and mental efforts put in by the workers in the production process. The reward for labour is wage/salary

Question 9

What is capital?

Answer 9

the finance, machinery and equipment needed for the production of goods and services. The reward for capital is interest received on the capital

Question 10

What is enterprise?

Answer 10

the risk taking ability of the person who brings the other factors of production together to produce a good or service. The reward for enterprise is profit from the business.

Question 11

What is specialisation occur?

Answer 11

Specialisation means people in business focus on what they do best. A shoe store focuses on selling shoes only, not clothes or food. A transport company may hire a website designer to create their website, as their expertise is in driving and vehicles, not in information technology.

Question 12

What are some advantages of specialisation?

Answer 12

• Workers are trained to do a particular task and specialise in this, thus increasing efficiency
• Saves time and energy: production is faster by specialising
• Quicker to train labourers: workers only concentrate on a task, they do not have to be trained in all aspects of the production process
• Skill development: workers can develop their skills as they do the same tasks repeatedly, mastering it.

Question 13

What is the purpose of business activity?

Answer 13

The purpose of business activity is to satisfy consumers’ wants. A fast-food outlet satisfies consumers desire to eat a hamburger. A social media network satisfies users who want to connect with their friends.

Question 14

What is the concept of adding value?

Answer 14

Added value is the difference between the selling price and the cost price of a good or service . When a good or service is made more appealing, customers will usually be willing to pay more. Therefore, adding value increases the amount of profit that a business can make.

Question 15

How is added value calculated?

Answer 15

Added value is calculated by subtracting the cost of materials from the selling price.

Question 16

How is the cost of materials calculated?

Answer 16

Cost of materials is calculated by adding together the costs of all the different materials to make a product.

Question 17

How can added value be increased?

Answer 17

Value Added can be increased by increasing the selling price or reducing the cost of materials.

Question 18

What could Mac do to justify his increase in price?

Answer 18

Businesses may offer additional features. Mac could add bacon or avocado to the hamburgers they sell.

They can also improve the quality of materials. Mac’s could offer organic cheddar cheese in their burgers rather than processed cheese.

Branding is crucial in increasing added value. If consumers trust a branded product they will be willing to pay more. If Mac has a positive reputation and builds brand identity he may be able to increase prices for his burgers. Apple can charge high prices for their products due to the strength of its brand image.

Question 19

What three sectors can businesses be classified into?

Answer 19

• primary
• secondary
• tertiary

Question 20

What is the primary sector?

Answer 20

The primary sector is extracting or growing natural resources to supply raw materials for business. Mining, farming and forestry are all examples.

Question 21

What is the secondary sector?

Answer 21

The secondary sector is manufacturing goods from raw materials. For example, a factory producing furniture. The secondary sector is also known as the manufacturing sector..

Question 22

What is the tertiary sector?

Answer 22

The tertiary sector involves businesses providing services to consumers or other businesses. This could be a barber cutting hair, a shop selling clothes or a bank providing loans to small businesses.

Question 23

What is the importance of business classification?

Answer 23

As countries’ economies grow, the primary sector gets smaller and the secondary and tertiary sectors grow.

Between 1978 and 2017 China’s tertiary sector doubled as a percentage of Gross Domestic Product (GDP) from 25% to 50%.

The exceptions to this general rule are countries with large reserves of natural resources. Countries in the Middle East continue to have a high proportion of their GDP from the primary sector as oil and gas generates large revenues for their economies.

Question 24

What is the private sector?

Answer 24

The private sector is a part of the economy owned and controlled by private individuals. Any privately owned business is in the private sector. It’s the kind of business organisation people come into contact with most day to day. McDonalds, Apple and small businesses like your local corner store, are all in the private sector.

Question 25

What is the public sector?

Answer 25

The public sector is the part of the economy owned and controlled by the government. Business activity in the public sector varies from country to country. Often health care, postal services and the electricity network are owned and controlled by the government.

Example: the Indian Railways is a public sector organization owned by the govt. of India

Question 26

What is a mixed economy?

Answer 26

The mixed economy describes a country with economic activity in both the public sector and private sectors. In reality, nearly all countries have a mixed economy. The variation lies in the balance between the public and private sectors in the overall economy. India has a very small public sector lower than 10% of the total economy. However, in China, estimates put government-owned activity at around 50% of the whole economy.

Question 27

What is an entrepreneur?

Answer 27

An entrepreneur is a person who organizes, operates and takes risks for a new business venture. The entrepreneur brings together the various factors of production to produce goods or services.

Question 28

What are some characteristics of a entrepreneur?

Answer 28

• Risk taker
• Creative
• Optimistic
• Self-confident
• Innovative
• Independent
• Effective communicator
• Hard working

Question 29

What is a business plan?

Answer 29

A business plan is a document containing the business objectives and important details about the operations, finance and owners of the new business.

Question 30

What are some of the content in business plans?

Answer 30

• Products and services that you will sell
• Costs of your business
• Location of the business
• What do I need to operate my business e.g. Machines, employees

Question 31

How does a business plan assist entrepreneurs?

Answer 31

Making a business plan before actually starting the business can be very helpful. By documenting the various details about the business, the owners will find it much easier to run it. There is a lesser chance of losing sight of the mission and vision of the business as the objectives have been written down. Moreover, having the objectives of the business set down clearly will help motivate the employees. A new entrepreneur will find it easier to get a loan or overdraft from the bank if they have a business plan.

Question 32

Why do governments want to help new start-ups?

Answer 32

• They provide employment to a lot of people
• They contribute to the growth of the economy
• They can also, if they grow to be successful, contribute to the exports of the country
• Start-ups often introduce fresh ideas and technologies into business and industry

Question 33

How do governments support businesses?

Answer 33

• Loans at low interest rates
• Land to set up businesses at low costs
• Grants (money) to train employees
• Use research facilities at public universities
• Business advice from experts

Question 34

What are some methods of measuring business size?

Answer 34

• Number of employees: larger firms have larger workforce employed
• Value of output: larger firms are likely to produce more than smaller ones
• Value of capital employed: larger businesses are likely to employ much more capital than smaller ones
• Revenue: the money received from selling items (price x quantity)
• Market share
• profit is NOT a method of measuring business size

Question 35

What are the limitations of the ‘number of employees’ as a way of measuring business size?

Answer 35

When using the ‘number of employees’ method to compare business size is not accurate as a capital intensive firm ( one that employs a large amount of capital equipment) can produce large output by employing very little labour (workers). Similarly, value of capital employed is not a reliable measure when comparing a capital-intensive firm with a labour-intensive firm. Output value is also unreliable because some different types of products are valued differently, and the size of the firm doesn’t depend on this.

Question 36

Why do business want to grow?

Answer 36

Profit: is the easiest one to remember. The bigger a company grows, the more products or services it can sell. Therefore, if a business grows there is a greater potential to make profit.

Economies of scale: as companies grow larger they can cut costs by buying in bulk, and can afford to invest in technology or machinery that lowers the unit cost of each item they produce, cutting costs and increasing profits.

Diversification or spreading risk. As a business grows it can produce different products and it lowers its dependence on one product. For example, a car rental company may expand to also offer van and truck rental. This means if there is a downturn in the car rental market the business can can still rely on revenue from the truck market.

Market domination: as companies grow they gain greater market share and greater control of the market. For example, if a coffee shop in a small town has a number of outlets, it can have a large influence over setting prices for of a cup of coffee in that town.

Question 37

What is internal growth?

Answer 37

Internal Growth (or organic growth) is when a company expands by building another outlet or adding another service rather than taking over another business. For example, Ed’s Coffee expands by renting another shop, redecorating, employing staff and starts operating. (the business grows by hiring more staff and equipment to increase its output.)

Question 38

What is external growth?

Answer 38

where a business merges with or takes over another organization. Combining two firms increases the scale of operation.

Question 39

What is horizontal intergration?

Answer 39

Firms in the same industry at the same stage of production merges. e.g. 2 Bakeries merging to form a larger business

Question 40

What is vertical integration and give an advantage?

Answer 40

Business expands by merging with another business in another stage of production. There are 2 types of vertical integration. Backwards and fowards. Backward vertial integration is when a business merges with another business in the previous stage of production for example, Bakery merges with wheat farm. Foward is when a business merges with a business in the next stage of production e.g. Sugar farm merges with candy factory

Advantage of vertical integration is to have more control over distribution of goods and services.

Question 41

What is a conglomerate merger?

Answer 41

Two businesses in a completely different industry combine to form a new business. e.g. Insurance company buys an advertising agency.

Question 42

What is a joint venture?

Answer 42

Two or more businesses agree to start a new project together.

Question 43

What are the problems of business growth and some solutions for these problems?

Answer 43

• Large businesses are difficult to control. Solution – Operate in business in small parts.
• Costs of expansion are high. Solution – Expand slowly
• There can be poor communication in large businesses. Solution – use technology to communicate e.g. email. Operate the business in small parts.

Question 44

Why do some businesses choose to remain small?

Answer 44

• Type of industry e.g. hair salons stay small because of the connection with their customers, if they grow too large they won’t be able to offer personal service to their regular customers.
• Market size Some businesses such as stores in small towns are likely to remain small due to the limited amount of customers. Businesses that produce specialised goods such as brand name clothing or luxury cars are also likely to remain small.
• Owner’s objective Some owners want to keep their businesses small to keep full control and know all their employees and customers. Running a large business can become stressful.

Question 45

Why do some business fail?

Answer 45

Poor management – Many businesses fail due to poor management from lack of experience by the managers.

Failure to plan for change – The business environment is constantly changing, Businesses need to change to keep up with technology.

Poor financial management – Shortage of money means that the businesses cannot be operated. Businesses needs to always make sure they have enough money

Over expansion – Some businesses expand too quickly and not have enough money to operate.

Startup risk – Starting up a new business is always risky, entrepreneurs may lack experience and not be able to compete with larger businesses.

Question 46

Why are new businesses at a greater risk of failure?

Answer 46

Less experience: a lack of experience in the market or in business gets a lot of firms easily pushed out of the market

New to the market: they may still not understand the nuances and trends of the market, that existing competitors will have mastered

Don’t a lot of sales yet: only by increasing sales, can new firms grow and find their foothold in the market. At a stage when they’re not selling much, they are at a greater risk of failing

Don’t have a lot of money to support the business yet: financial issues can quickly get the better of new firms if they aren’t very careful with their cash flows. It is only after they make considerable sales and start making a profit, can they reinvest in the business and support it

Question 47

What is a ‘sole trader’?

Answer 47

A business that is owned and controlled by just one person who takes all of the risks and receives all of the profits.

Question 48

Name the advantages and disadvantages of a sole trader.

Answer 48

Ads:
- Quick and easy to set up
- Makes all the decisions
- Has complete control
- Keeps the profit

Disads:
- Unlimited liability
- May not be able to raise funds to expand the business
- Maybe have to work long hours
- Difficult to compete with larger rival firms
- May not have the business skills to run a business

Question 49

What is a partnership?

Answer 49

A business formed by two or more people who will usually share responsibility for the day-to-day running of the business

Question 50

Name the advantages and disadvantages of a partnership.

Answer 50

Ads:
- Easy to set up a deed of partnership
- Partners invest in the business so greater access to funds
- Shared decision making
- Shared management and workload

Disads:
- Unlimited liability
- Share the profits
- Business ceases to exist if one partner leaves
- Decisions binding on all partners
- Difficult to raise finance

Question 51

What are private limited companies?

Answer 51

Often a small to medium-sized company, owned by shareholders who have limited liability. The company cannot sell its shares to the general public

Question 52

What are the features of private limited companies?

Answer 52

Advantages:
Limited Liability to all shareholders
Capital can be invested by many shareholders
Cheaper to set up than public limited companies
Continuity of existence – If the business owner dies, the business still exists.

Disadvantages:
Slower to startup (many legal documents needs to be signed)
Shares can only be sold to family and friends
Other shareholders need to agree before shares can be sold

Question 53

What are public limited companies?

Answer 53

Often a large company; owned by shareholders who have limited liability. They can sell its shares to the general public.

Question 54

What are the features of public limited companies?

Answer 54

Advantages:
Limited Liability
Shares can be sold to the general public without permission (Capital (Money) can be raised quickly)
Continuity of existence
Company can grow and expand quickly

Disadvantages:
Complicated legal documents (Wastes money and time)
Expensive to start up
Company can grow large very quickly which will be difficult to control
Original owners of the business may lose control of the company
Shareholders may vote who manages the business in AGM (loss of control)

Question 55

What is a franchise?

Answer 55

A business system where entrepreneurs buy the right to use to the name, logo and product of an existing business

Question 56

Name the advantages and disadvantages of franchises.

Answer 56

Advantages:
Less chances of failure since the business is well known.
Most of the advertisements are paid by the franchisor
Less decision making is required from the franchisee e.g. food recipe is already planned from franchisor
Staff training may be provided from franchisor

Disadvantages:
Franchisee won’t be able to make own decisions e.g. come up with own menu
Franchisee needs to pay the franchisor to use brand name

Question 57

What is a joint venture?

Answer 57

Two or more businesses agree to work together on a project and set up a separate business for this purpose

Question 58

Name the advantages and disadvantages of joint ventures:

Answer 58

Advantages:
Costs can be shared amongst the companies
Knowledge and skills from more than one company
Risks are shared (If the project fails)

Disadvantages:
Profit is shared
Businesses may disagree with each other.

Question 59

What is an unincorporated business?

Answer 59

A business that does not have a separate legal identity from its owner(s) e.g. If the business is sued, the owner is responsible and may need to cover the cost with their own personal money.

Question 60

What is an incorporated business?

Answer 60

Business that has a separate legal identity from its owner(s) e.g. If the business goes bankrupt, the owners won’t be held responsible and only lose the money they invested.

Question 60

What is unlimited liability?

Answer 60

Owners are held liable for the business. If the business goes in debt, the owner needs to pay back with their own money.

Question 61

What is limited liability?

Answer 61

Opposite of Unlimited liability, If a business fails, the owners only lose what they invested

Question 62

What is the Annual general meeting?

Answer 62

Meeting that must be held every year for shareholders to vote for the company’s next directors.

Question 63

What are shareholders?

Answer 63

Owners of a limited company, they buy shares which represent the percentage they own of the company.

Question 64

What is a public corporation?

Answer 64

Public sector corporations are businesses owned by the government and run by directors appointed by the government. They usually provide essentials services like water, electricity, health services etc. The government provides the capital to run these corporations in the form of subsidies (grants). The UK’s National Health Service (NHS) is an example

Question 65

What do public corporations aim to do?

Answer 65

• to keep prices low so everybody can afford the service.
• to keep people employed.
• to offer a service to the public everywhere.

Question 66

What are the advantages and disadvantages of public corporations?

Answer 66

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 through nationalisation
- Provide essential services to the people

Drawbacks:
- 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

Question 67

What is a business objective?

Answer 67

a target that a business works towards.

Question 68

Why are objectives important for a business?

Answer 68

• They act as a motivator as they give managers and workers a target to move towards
• Helps with decision making (managers will know what is better for the business to reach its target)
• Can make the entire business work toward a goal
• Managers can see if the business has achieved its goals or not.

Question 69

List some objectives that business may set?

Answer 69

• Business survival – This is common for new businesses and businesses in bad economic times
• Profit – Businesses want to maximise profit.
• Growth – Businesses may want to grow for various reasons. Common reasons for business growth is to obtain a higher market share, increase jobs etc…
• Return to shareholders – incorporated businesses (Private and public limited companies) are owned by shareholders. There are 2 main ways to return to share holders 1.Businesses profits can be paid to shareholders as dividends and increasing share price will keep the shareholders happy so managers won’t be voted out.
• Market share – Businesses want to obtain a higher market share. The advantages of this is to make the business more well known. With a higher market share, the businesses may also be able to negotiate lower costs from suppliers (economies of scale)
• Providing a service to society – Social enterprises are privately owned businesses that focus on 1. providing a service to society such as providing jobs to disabled or homeless people or 2. Protecting the environment.

Question 70

Will business objective change?

Answer 70

Business objectives are likely to change over time. For example, A new business has survived a few years so the managers decide to change the objective to maximising profit.

Question 71

What is a skateholder?

Answer 71

A person or group with a direct interest in the performance and activities of a business.

Question 72

What are the internal stakeholders?

Answer 72

• Owners – These are people who invested and set up the business. Objective = Profit so they make money from the business.
• Workers – Employees of the business. Objective = Payment for their work, job promotion (increased salary), job security.
• Managers – Employees that control other workers. Objective = Higher salary, job security, Successful company means better status.

Question 73

What are the main external stakeholders and their objectives?

Answer 73

• Consumers – Customers who buy goods and services from the business. Objective = Good products from business, reliable service and maintenance from the company.
• Government – Responsible for the economy of the country, laws to protect customers and employees. Objective = Successful business means more jobs (less unemployment), Tax paid by the business and the business’ contribution to the country’s output.
• Community – Interested in how the business affects the local community, e,g, employment, environment. Objective = Jobs for people, environmentally friendly business, safe products for the customers.
• Bank – Lend money for the business to startup. Objective = Wants the business to have enough money to pay them back.

Question 74

What are some examples of how stakeholders’ different objectives can cause conflict?

Answer 74

• Managers of a business want to build a factory in an area however the local community are against this as it may cause pollution and noise in the area.
• Owners want to use cheaper low-quality materials to lower product costs and increase profits however consumers are against this as the quality of the products they are buying will be lowered.

Question 75

What are the private sector business objectives?

Answer 75

• Business survival
• Profit
• Growth
• Returns to shareholders
• Market share
• Service to society

Question 76

What are the public sector business objectives?

Answer 76

• Provide service to the public
• Increase living standards of the public e.g. health care, education
• Increase jobs to lower unemployment in the country