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1) Understanding business activity
1) Business activity
Here is the list of topics we will cover in this first unit
1)Business Activity
2) Classification of business
3) Enterprise, business growth and size
4) Types of business organisation
5) Business objectives and stakeholders objectives
Begin by watching
this video
Now try this
simple activity (you can find it on Google classroom)
A need is a good or service essential for living. Example: Food, water, medicine,clothes...
WANTS
A want is a good or service which people would like to have, but which is not essential for living. Example: a house in the beach, the latest iphone, makeup...
If you do a list of your needs and wants, do you have all of the items on the "wants" list?
Normally we don´t. Most people in the world cannot
afford to buy everything they want because our wants are unlimited. In many countries, some people cannot afford
to buy things they need and they are likely to be very poor.
Why are there so many wants and needs that we cannot satisfy? Why are millions of people living in poverty ll arount the world? Many would answer to this question saying ¨Money".
But is the real economic problem caused by
shortage of money?
No, it is caused by a shortage of ¨Resources".
The real problem is not money. We may have the money to buy a luxury car.But if the country doesn´t have the workers and the machines needed to produce the car, we won´t be able to purchase the luxury car.
"Workers" and "machines" are what we call "Resources".
The economic problem is that there exist unlimited wants but limited resources to produce the goods and services to satisfy those wants.
TThere are 4 factors of production¨:
Land: all of the natural resources provided by nature. Example: fields, forests, oil, gas, metals...
Labour: the people available to make products
Capital: the finance, machinery and equipment needed for the manufacture of goods
Enterprise: the skill and risk-taking ability of
the person who brings the other factors
together to produce a good or a service.
Example:
the owner of a business.
The resources needed to produce goods and services. There are 4 factors.
However, in the world as a whole, these factors of production are limited in supply. As there is never enough land, labour, capital and enterprise to produce all of the needs and unlimited wants of a whole population, there is an economic problem of Scarcity.
Scarcity
Is the lack of sufficient
products to fulfill the total
wants of the population.
Complete the activity in
Google Classroom called "Factors of production".
As we saw, there are unlimited wants but
limited resources. That means we need to
choose which want we want to satisfy. By choosing
one alternative, we are given up on another one.
Because as we said, resources and our time is limited.
We can´t do everything. We always have to choose.
The opportunity cost is what we are giving up.
(giving up = cost)
If I decide to go for lunch, the opportunity cost will be returning home by bus
I will need to walk.
If I decide to comeback home by bus, the opportunity cost will be having lunch with my friends.
I have an important test on Monday. But I have this awesome party on Saturday. Should I stay home or attend the party?
What will be the opportunity cost of each alternative?
If I go the party, the opportunity cost will be staying home (implies waking up early and study hard, probably I will do better on the test).
If I stay home, the opportunity cost will be missing the party.
is the next best alternative given up by choosing another item.
Not only us, consumers. But also Business and Government.
Specialisation
How we can produce more efficiently with the resources we have?
Is it a good idea to produce cupcakes, cakes and ice creams, but all of them in an intermediate quality? Or is it better to produce only cupcakes? You will have more time to focus on cupcakes and become the best at it. Yours will be the best cupcakes, so everyone will go to your shop. You will end up by attracting more customers for your higher quality product. More customers= higher profits.
Simple, by focusing on one thing. It´s better to do one thing very good, than to do multiple things but in a wrong way,don´t you think? If we focus only on 1 thing, we will have more time to practice it. The more you practice one thing, the better you get at it. Example: think of sports
occurs when people and business concentrate on what they are best at.
For example:
*Papiros specialise on producing notebooks
*La cigale produces ice creams
*Pedigree specialises on dog food
A business may specialise on a certain product.
But at the same time, there can be
specialisation inside the business.
Imagine an enterprise who specialises on producing 1 product. Probably in the making of that product, there will be several stages, which involves different tasks. For example imagine an enterprise
that produces books. We need to print the pages, cut them, sew
them together, adding the covers of the books... Do you think all of
the workers do all the tasks? Do they do a little bit of everything?
Is that efficient? After what we saw about Specialisation, we have to
say no, that´s not efficient. It´s better to divide workers into groups
and each group will take care of a certain stage of production.
That is what we call Division of Labour.
is when the production process is split up into
different tasks and each worker performs
one of those tasks. It is a form of
specialisation.
The purpose of business activity
Definition:
The purpose of all businesses is to combine the factors of production to make products that will satisfy people´s wants.
These products can either be goods (physical items such as cars and shoes that we can touch and see) or services (such as insurance, tourism or banking).
Business can be small (just one person for example) or large and employ thousands of people in different countries.
Business can be privately owned or owned by the state.
They can be owned by one person or by thousands of
shareholders.
What would be life without business activity?
In simple, undeveloped societies, business do not exist. Everyone attempts to do everything by themselves.With their own plot of land and their own efforts, such as hunting, they attempt to survive and produce enough fr their own needs. This is a very basic existence and living standards are low.
By a slow process of specialisation, people began to concentrate on what they were best at. They then traded those goods for others made by people who have different skills. In this way, business began to be formed, and trade and exchange of goods expanded.
Combines scarce factors of production to produce goods and services
Production of goods and services which are needed to satisfy the needs and wants of the population
Employs people as workers and pays them wages to allow them to consume products made by other people
Activity
definition:
Added value is the difference between the selling price of a product and the cost of bought in materials and components.
Example:
An ice cream in Freddo costs 200$ (SP). The materials bought to produce it (milk, sugar, fruit...) cost 50$ (CM).
The added value is 150$.
AV= SP -CM
BUT WHY DO BUSINESS ADD VALUE TO THEIR PRODUCTS?
* Because you need to pay other costs (labour costs, management expenses, advertising...
*To make some profit
SO, HOW CAN BUSINESS INCREASE ADDED VALUE?
Increase selling price but keep the price of the materials the same. This might be possible if business tries to create a higher quality image for its product. If consumers are convinced by this, they might be prepared to pay higher prices.
BUT, cost could increase when trying to create this quality image.
Reduce the cost of materials but keep prices the same. A
building firm could use cheaper wood or cheaper bricks.
BUT remember that lower price materials could lead to
lower quality of the products. That could lower the
sales, since customers won´t be prepared to
pay the same price for a lower quality.
Def.
All businesses should have objectives. They help to make a business successful-although just setting objectives doesn´t guarantee success.
Here are some benefits of setting objectives:
It motivates workers and managers, by giving them a clear target to works towards.
It makes it easier for managers to make decisions.They just need to ask themselves: "Will it help achieve our objectives?"
Clear and measurable objectives help unite the whole business
towards the same goal
Business managers can compare how the business has
performed with their objectives- to see if they
have been successful or not
Objectives are often different for different businesses.
A business may have been formed by an entrepreneur to provide employment and security for the owner or his/her family. It could have been started to make as big a profit as possible for the owner. On the other hand, the business might have a more charitable aim in mind (ONG´S).
The most common objectives for businesses in the private sector are to achieve:
When a business has recently been set up, or the economy is moving into recession, the objectives of the business will be more concerned with survival than anything else. New competitors can also make a firm feel less secure. The managers of a business threatened in this way, could decide to lower prices in order to survive, even though this would lower the profit on each item sold.
Think of the current situation of COVID 19 and many businesses. For example restaurants: No one is going to go right now. Besides implementing delivery, many have lowered prices to encourage customers to buy. It´s better to lower the profit by lowering the prices (surviving) than seeing its sales decreasing completely (enterprise needs to close).
Profit is the total income of a business (sales revenue) less total costs.
When a a business is owned by private individuals rather than the government it is usually the case that the business
is operated with the aim of making a profit.
Profits are needed to :
pay a return to the owners of the business for the capital invested and the risk taken
provide finance for further investments in the business
With no return at all, the owners are likely to close the business.
But, will a business try to make as much profit as possible?
It is often assumed that this will be the case. But there are dangers to this aim. Suppose a firm put up its prices to raise profits. It may find that consumers stop buying their goods. Other people will be encouraged to set up in competition, which will reduce profits in the long term for the original business.
So, actually...
The owners of the business will aim for a satisfactory level of profits which will avoid them having to work too many hours or paying too much in tax to the government.
A business can be owned by one person or group of people.
The group can take the form of "shareholders".
The ownership of the enterprise is split into many little fragments (shares), each belonging to the different shareholders.
Shares can be bought and sold to a determined price.
What is the benefit of being a shareholder?
At the end of the year, if the company does well, the shareholders receive a portion of the benefits (returns/dividends).
If this isn´t clear enough, please watch the video
That is why an objective set by the manager could be "increasing returns to shareholders"
Shareholders want to increase their returns as much as possible. They want managers to make this possible.
Grow the size of the business-usually measured by value of sales or output
Why would a company want to grow?
Those of you who will prepare the IGCSE exam, will see this in further detail next year
Growth will only be achieved if the business´s customers are satisfied with the product/service. That is why it is a high priority to meet customer´s needs.
Market share % = (Company Sales / Total market sales) X 100
If the total value of sales in a market is $100 million in one year and Company A sold $20 million, then Company A´s market share is 20%
Benefits of increasing the market share:
good publicity, as they could claim they are becoming "the most popular"
Increased influence over suppliers, these would be very keen to sell to a business that is becoming relatively larger than others in the industry
Increased influence over customers (for example: in
setting prices, they could possibly increase the price
as they are "the most popular")
A Social enterprise has social objectives, as well as an aim to make a profit that can be reinvested back into the business.
Example: TOMS Shoes: One for One
With every pair of shoes you buy from them they will donate an adequate pair to a child in need. These shoes will enable them to play and go to school safely: improving Health, providing access to Education and building Confidence. TOMS has given over 50 million pairs of new shoes to children in need.
Social enterprises are operated by private individuals (not by the Government). They have 3 main objectives:
Social: to provide jobs and the support for disadvantaged groups in society, such as the disabled or homeless
Environmental: to protect the environment
Finance: to make a profit that can be
reinvested back into the social
enterprise to expand the
social work that it performs
It´s very unusual for a business to have the same objective forever!
Here are some examples of situations in which a business might change its objective.
A business set up recently has survived for 3 years and the owner now aims to work towards higher profit
A business has achieved higher market share and now has the objective of earning higher returns for shareholders
A profit-making business operates in a country
facing a serious economic recession so now has the
short-term objective of survival
The following groups of people are involved in business activity in one way or another, or are affected by it:
Def. A stakeholder is any person or group with a direct interest in the performance and activities of a business.
These groups are sometimes called the Stakeholders of the business as they have an interest in how the business is run. Some of these groups are internal to the business (they work for it or own it) and others are external (they are groups outside of the business).