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1) Understanding business activity

1) Business activity

1) Understanding business aCTIVITY

Here is the list of topics we will cover in this first unit

cHAPTERS

1)Business Activity

2) Classification of business

3) Enterprise, business growth and size

4) Types of business organisation

5) Business objectives and stakeholders objectives

1) Business activity

NEEDS vs wants

Begin by watching

this video

needs and wants

Now try this

simple activity (you can find it on Google classroom)

needs:

A need is a good or service essential for living. Example: Food, water, medicine,clothes...

WANTS

Definitions

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.

the economic

problem

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?

is the real economic problem caused by a 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".

dEFINITION

The economic problem is that there exist unlimited wants but limited resources to produce the goods and services to satisfy those wants.

Normally this "Resources" that we mentioned, are called "Factors of production".

TThere are 4 factors of production¨:

Land: all of the natural resources provided by nature. Example: fields, forests, oil, gas, metals...

factors of production

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.

Factors of production

The resources needed to produce goods and services. There are 4 factors.

definitions

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.

exercise

Complete the activity in

Google Classroom called "Factors of production".

Opportunity cost

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.

opportunity Cost

The opportunity cost is what we are giving up.

(giving up = cost)

my PARENTS GAVE ME MONEY TO TAKE THE BUS TO Come BACK HOME FROM SCHOOL. but MY FRIENDS INVITED ME FOR LUNCH TO GO TO MC DONALD'S. WHAT SHOULD I DO?

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.

Examples

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.

Opportunity cost

is the next best alternative given up by choosing another item.

DEFINITION

who has this problem of "having to give up" ?

Not only us, consumers. But also Business and Government.

WHO?

summary

SUMMARY

Specialisation

In all societies the factors of production are in limited supply. It is therefore important to use those resources in the most efficient ways possible.

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

specialisation

specialisation

occurs when people and business concentrate on what they are best at.

definition

division of labour

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.

division

of labour

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.

definition

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.

pro

vs

cons

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.

purpose of business

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.

history

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.

Business activity therefore:

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

ADDED VALUE

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?

added value

* Because you need to pay other costs (labour costs, management expenses, advertising...

*To make some profit

It´s not always easy to add value. It can lead to some disadvantages. For example: if you increase the prices, it can lower sales, which means lower profits.

SO, HOW CAN BUSINESS INCREASE ADDED VALUE?

how to increase av

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.

2) business OBJECTIVES AND STAKEHOLDERS OBJECTIVES

2) business OBJECTIVES

Def.

An objective is an aim or target to work towards.

All businesses should have objectives. They help to make a business successful-although just setting objectives doesn´t guarantee success.

Why set them

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

which objectives to set?

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).

what objectives?

The most common objectives for businesses in the private sector are to achieve:

SURVIVAL

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.

1) survival

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.

Profit

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.

2) 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?

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.

return to shareholders

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

3) return to shareholders

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.

How to increase returns?

  • Increasing share price by putting plans in place giving the company a good chance of growth and higher profits in the future
  • increasing profit and so the dividends paid to shareholders

Grow the size of the business-usually measured by value of sales or output

growth:

Why would a company want to grow?

  • to make jobs more secure
  • to increase the salaries and status of the managers
  • to open up new possibilities and help to spread the risk of the business (decreasing the chances of failure) by moving into new products and new markets (ex: new countries)
  • to obtain a higher market share (attracts new customers)
  • to obtain cost advantages (if you produce a high output, you could decrease your costs)

4) growth

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:

the proportion of total market sales achieved by one enterprise

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:

5) 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")

Providing a service to society

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:

6) service to society

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

Why could business objectives change?

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.

why do objectives

change? c_

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

Which stakeholder groups are involved in business activity?

The following groups of people are involved in business activity in one way or another, or are affected by it:

  • Owners
  • Consumers
  • Workers
  • Government
  • Managers
  • Banks
  • the whole community

stakeholders involved

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).

How is each stakeholder affected by the business ?

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