POB Notes for Revision

Asif Mohammed
Table of Contents

Principles of Business .............................................................................................................................. 2

Chapter 1 – Background to Business .................................................................................................. 2
Chapter 2 – Types of Businesses and Economic Systems ................................................................. 10
Chapter 3 – Business Organisation ................................................................................................... 20
Chapter 6 - Entrepreneurship ........................................................................................................... 23
Chapter 7 – Establishment of a Business .......................................................................................... 32
Chapter 11 - Production .................................................................................................................... 38

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 Principles of Business
Notes for Revision
Chapter 1 – Background to Business

Economic Activity is the satisfaction of our needs.

Direct Production is when people meet all of their needs

without the aid of others, and without the facility of money.

Subsistence Economy is providing just enough to survive, but

not enough to improve their way of life.

A Surplus is when you produce more goods than what is

needed.

Trading is the process of exchanging your surplus goods for the

surplus of others, which gives access to a wider range of goods.

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 Bartering
Barter is the exchange of one thing for another without the use of
money.

Advantages of Bartering
1. Barter makes is possible to dispose of extra surplus and obtain
things they needed.

2. Barter increases productivity which improves their way of life.

3. Barter allows them to specialise in producing things they could

do best.

4. Increase in productivity results in more surplus and further

wealth.

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 Disadvantages of Bartering
1. A double coincidence of wants – People had to find someone
who wanted their surplus, but the person must have something
they needed as well.

2. An exchange rate – When a person found someone who

wanted what they had, the early traders would have to agree
on the quantities of each-others goods that were to be
exchanged.

3. Divisibility of goods – Some exchange rates made it impossible

to trade because goods could not be split into smaller pieces.

4. Storage of wealth – Goods could not be saved for future use as

the items could not be stored for a long period of time.

The Role of Money

Money was not available in the form as we know it today, therefore
other things such as shells, dogs’ teeth, beads, grain, spearheads,
hides, arrow heads, fishhooks and animals were used as a form of
money. This was called token money.

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 The Characteristics of Money
For something to be considered as money, it must have the following
qualities:
Quality Description
Durable It must be hard-wearing
Acceptable People must agree to its use
Exchangeable It can be exchanged for goods and services
Divisible It is possible to divide it into smaller pieces
Scarce Its value is maintained when it’s harder to acquire
Portable It must be convenient to carry
Homogeneous There must be a standardised appearance for all
notes of a particular value. For example, all $10
notes look the same.

Money acted as a medium of exchange which allows people to sell

their surplus goods in exchange for money to buy the goods they
wanted.

An example of popular money around the word is metal as it is long-

lasting, able to be divided into smaller units and relatively scarce.

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 The Functions of Money
Function Description
A medium of exchange Money makes it easier to exchange goods
which makes barter useless
A measure of value Money can be used to state prices for
goods
A store of value Money can be saved whereas goods often
cannot
A standard for Money can be earned at one time and
postponed payment spent at another

Instruments of Exchange and Payment

1. The Bill of Exchange which is made by the creditor (seller) is
used in the settlement of international debts. It requires the
debtor (buyer) to pay a sum of money on demand or on an
agreed future date.

Collateral is the money given to the bank if you cannot pay.

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 Documentary Credit
Documentary credit (letters of credit) allows the exporter to
obtain payment before the importer can access the documents
of ownership.

Electronic Funds Transfer (EFT)

Electronic Fund Transfer is the electronic transfer of funds
without any paper money changing hands.

This exchange can take place within a single financial

institution, or across multiple institutions such as banks and
other financial service providers, through computer based
systems.

Many transactions are executed via EFT including:

Credit Cards allows the holder to buy goods or services

without using cash or cheques. When making a purchase
the holder presents the card at the point-of-sale terminal
and verifies it with a Personal Identity Number (PIN). The
holder is then charged the amount of the purchase by the
bank/CC company and has to make a full payment with no
interest or delay the payment with interest.

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Debit cards allow the holder to make purchases at home
or abroad, without using cheques or cash.

When making a purchase the money is transferred

directly out of the buyers account into the seller’s
account.

Standing order is a convenient way to make payments

where a certain amount must be paid in instalments.
A standing order avoids the need to write a cheque for a
specific date of each month. When there is a reliance on
cheques, the payment could be forgotten or delayed.

Direct Debit is when the account holder signs a form that

allows the payee (someone else) to withdraw the money
from their account at regular intervals.

E-commerce refers to the buying and selling of goods and

services through an electronic medium such as the
internet.

Telebanking is a 24/7 facility provided by banks which

allows customers to access account balances, payment of
bills and other services over a telephone.

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Cheques are slips of paper that a bank customer fills
which instructs the bank to do something with the money
in their account.

Information included on cheques include the Payee’s

name, serial number, sort code number, customers
account number, drawer’s signature and the amount to
be paid.

Bank Drafts are a form of cheques drawn from the bank

itself rather than the customer’s account. This is a
guaranteed form of cash.

Telegraphic Money Transfer is when the sender needs to

send money abroad, where someone at the destination
needs or is demanding cash.

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Chapter 2 – Types of Businesses and Economic Systems
Mixed Economy
A mixed economy is when some businesses are privately owned and
others are owned by the state.

Public Sector
Public sector businesses are the various forms of enterprise in public
ownership, which are owned by the public, through the government
ownership.

Public sector businesses fall into 2 categories:

Municipal Undertakings
Municipal Undertakings are enterprises operated on a commercial
basis by local government authorities.
Key Points:
• Financed by local taxation
• Subsidised by grants from central government
Examples: theatres, bus services, art galleries and conference halls.

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 State Undertakings
State Undertakings refer to a variety of enterprises operated by the
government on behalf of the public.

A Public Corporation is set up by an Act of Parliament to provide

commercial or industrial functions.
A public corporation is owned by all of the public.

Any profits generated are used to:

To pay interest on charges on capital borrowed
Set aside for future repayments of loans
Reinvested to improve or expand the service

Nationalisation and Privatisation

Nationalised corporations are ones that have been taken into public
ownership by the government after initially being under private
ownership.

Privatized Corporations is one which is taken into private ownership

after a government-owned corporation initially.

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 Reasons for State Ownership
To take a monopoly out of private ownership for the good of all
citizens
To keep natural monopoly in public ownership
The initial cost of setting up an enterprise may be too high for
private enterprise
National security may have to be protected through state
ownership
To avoid equipment replication and duplication of services
To save ailing essential industry and to protect jobs.

Advantages of State Ownership Disadvantages of State Ownership

The government has the resources Can be over-cautious as they are
to fund an essential industry. answerable to the public.
Ensures that essential services are Local issues may be disregarded in
always provided. favour of political objectives.
Profit benefits the entire nation Losses have to be met by taxpayer.
opposed to private individuals.
Enables them to enjoy maximum State monopoly can lead to an
economics of scale. inefficient profit motive.
Personnel are appointed because of The ultimate bosses are politicians
their proven abilities. who may not have the required
expertise to run a major enterprise.
Enables large sections of the
economy to be planned towards a
single strategy.

Reduces possible duplication of

services and equipment.

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 The Private Sector
Private sector businesses are owned by individuals or commercial
companies, which run for profit. These are not owned by the
government.

Main forms of private enterprise:

Sole traders
Partnerships
Co-operatives
Limited companies (private and public)

Limited Liability
Limited liability allows people to invest in a business without having
to face the risks of unlimited liability. With limited liability, the
investor is only liable to lose the amount they have put into the
business.
If the name of a business has the abbreviation ‘Ltd’ meaning
‘limited’, this indicated that the business has limited liability.

Risks involved to entrepreneurship:

1) The firm does not make a profit.
2) The business may go bankrupt.

Unlimited Liability
If a business has unlimited liability. The owners of the business are
not only liable to lose the money they have invested but they can
also lose personal assets.

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 Sole Traders
The sole trader is a form of business ownership where:
• A personal service is provided
• Limited capital is available to start up the business
• Large-scale production is not required
This type of business may be operated by the owner alone, or
employees and is usually a small business.
Their market tends to be less diversified than larger businesses
because their level of operations limits their output.

Partnerships
A partnership involves 2-20 people where an exception is banks
which are only allowed to have 10 partners. However, firms such as
accountants, solicitors and stockbrokers can have more than 20
partners.

More people in a partnership means there is more experience and

knowledge to look after the business.

Disadvantages of Partnerships:
1) Partners are fully liable for the debts of a business should
it go bankrupt due to having unlimited liability.

A partnership deed sets out the right of each partner regarding the
division of the profits. If this deed does not exist, then the profits are
shared equally.

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A sleeping partner is one who may be willing to introduce capital to
the business but may not want to be active in its operation.

Advantages Disadvantages
Easily formed Generally unlimited liability
More people to contribute Possible disagreements between
capital than a sole trader partners
Greater continuity than a sole Each partner is liable for the
trader debts of the business
Expenses and management of Twenty-person membership
the business are shared limit restricts capital resources.

Co-operatives
Co-operatives are a special form of business organisation where they
are incorporated businesses that are owned and controlled by
groups with special interests.

Four basic co-operatives:

1) Consumer co-operatives are stores which share the net profits
of business among members.
2) Marketing co-operatives are businesses with several
individuals or small businesses combine to sell their goods or
services.
3) Workers’ co-operatives are businesses owned and run by their
own workforces.
4) Producers’ co-operatives enable their members who produce
similar products, to co-operatively market and sell their
products.

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 Private Limited Companies
A private limited company is any company that is not registered as a
public limited company. The company must include the work
‘Limited’ or ‘Ltd’ in its title.
This type of company has to have one shareholder.

Public Limited Companies

A private limited company or joint stock company is an association of
people who join together to contribute common stock which is used
in some form of business enterprise.

The public limited company must include the letters ‘PLC’ in its title.
It takes a minimum of two people to form this company and there is
no maximum membership.

The shareholders elect a committee called a board of directors to

take day-to-day decisions of the business on their behalf. This board
elects a chairperson to regulate their meetings.

The board of directors then appoint a managing director as there is

still too many people on the board of directors to manage day-to-day
decisions.

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 Franchises
A franchise is a form of business in which a firm that has a successful
service or product (franchisor) enters into a contractual relationship
with another business (franchisee).

The contract allows the franchisee to operate under the franchisor’s

name with the franchisor’s guidance in exchange for a fee (royalties).

Multinationals
A multinational company is a business operating internationally,
although its ownership is usually based in one country.

Economic Systems
The term economy is used to define a country in terms of the total
composition of its economic activities.

The process of producing the things we all want goes through the
decision of what produce is limited by the resources a country has.
Countries all have to solve the following problems:
1) Deciding on what should be produced.
2) Deciding on how production should be organised.
3) Finding the best ways to combine factors of production (land,
labour, capital, enterprise).
4) Deciding if automated or manual methods should be used.
5) Deciding if technological equipment is required.
6) Deciding where the production should take place.
7) Deciding for whom the production should take place.

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 Types of Economic Systems
Subsistence Economy
A subsistence economy is one where there is little specialisation of
labour and little trade.

Today more advanced forms of economy exist but semi-subsistence

economies exist among some of the poorer regions of the world.

Economic systems differ according to the extent of the intervention

of the government in the economy. Three basic approaches adopted
by government in dealing with the economic problem are:

Command Economy
In a Command Economy all the economic decisions are made by the
government. The state decides what will be produced, how it will be
produced, and how it should be allocated to the consumers.
China and Cuba are examples of a command economy.

Free Market Economy

In a Free Market Economy there is little or no government
interference and is based on the private ownership of the factors of
production and means of distributing the goods or services.

Market forces are allowed to determine how the resources are

allocated. This economy is also called a laissez-faire economy.
USA, Hong Kong and Singapore are close examples of free market
economies.

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 Mixed Economy
A mixed economy is a combination of elements from a free economy
and a controlled economy, which means that the production and
supply are shared between the private and public sector.
Caribbean countries have a mixed economy.

Globalisation
Globalisation is the intensification and spread of worldwide social
economic, cultural and political relationships among countries.

Cane sugar produced in the Caribbean for many centuries is an

example of globalisation.

Globalisation can be seen as the linking of distant locations in such a

way that local activities are shaped by events occurring thousands of
miles away.

A major benefit of globalisation is the provision of high-quality goods

and services at a cheaper cost.

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Chapter 3 – Business Organisation

The Functional Areas of a Business

The term functional are refers to grouping individuals on the basis of
the role or purpose each performs in the organisation.

The five functional areas of a business are: production, marketing,

finance, human resources, research and development.

Production
Production is the process and methods used by producers to
transform raw materials, ideas, information or knowledge into goods
and services.

Marketing
Marketing refers to all the processes involved in promoting and
selling goods or services in the most profitable and efficient manner.

It also includes market research and advertising.

The four P’s of marketing are:

• Product identification
• Promotion strategy development
• Place of distribution to the customer
• Price determination

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 Finance
Finance is possibly the most important resource of all business
functional areas. It is the lifeblood of any business activity.

Revenue creates a continuity for the business so that it can pay

the bills and other costs associated with its continued existence
and also funds the growth of the business.

Human Resources
Human Resources are concerned with managing people within the
organisation.

This refers to the glue that holds the organisation together. There
are six areas:
• Recruitment
• Safety
• Employee Relations
• Compensation and benefits
• Compliance
• Training and Development

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 Research and Development
Research and Development is the investigative activity a business
carries out with the aim of getting new knowledge that it can use to
create new products or systems.

Applied research is carried out with a predetermined aim such as

creating a new product.

Stakeholders of a Business
A stake holder is any person or group of people that has an interest
in the business and its activities.

The main stakeholders of a business are:

1) Owners
2) Customers
3) Suppliers
4) Employees
5) The community
6) Government
7) Pressure groups
8) Schools

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Chapter 6 - Entrepreneurship
Entrepreneurship
An entrepreneur is a person who undertakes the risks involved in
establishing and running a business in the hope of making a profit.
The act of managing a business enterprise is referred to as
entrepreneurship.

An advantage of being an entrepreneur is that the owner gets the

opportunity to be their own boss, make their own decisions and
hopefully make a profit.

A disadvantage of being an entrepreneur is that it involves working

long hours and there is a risk that you will not make a profit. Most
start-up businesses fail in the first three years of trading.

To become a successful entrepreneur your must have these eight

abilities:
1) Conceptualising all the ideas related to the type of products the
business will offer and the factors that will affect profitability.
2) Planning what is required to expand the idea.
3) Accessing funds needed to establish and develop the business.
4) Organising the setting up of the business, deciding the best
location, identifying suitable premises, employing suitable
workers and deploying them effectively, and defining policy
decisions in a way all levels of personnel can understand.
5) Operating the business successfully through the start-up stages
and looking for ways to improve the products or services that
the business markets.

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6) Evaluating the performance of the business once it has been
established. Profit is the main aim of a business but the
owner(s) will have to continually assess the business.
7) Bearing risks which relate to the willingness to operate while
recognising that there are some elements of uncertainty
involved in business.
8) Making a profit or loss which relates to whether or no the
entrepreneur’s risks pays off.

Characteristics of an Entrepreneur
1) Creative – Must have a vision, imagination and originality.
2) Innovative – Can think of and develop new ideas.
3) Flexible – Can adapt to new challenges and changes and adapts
their original business plan as circumstances require.
4) Goal-orientated – Must work towards clear, realistic and
measurable targets that they have set for the business and all
of its employees.
5) Persistence – must be resilient and will not be put off by any
setbacks. They learn from their mistakes and strive to do better
when something goes wrong.
6) Persevering – must be committed and self-motivated.
7) Risk taker – Able to risk their own money, sometimes money of
others, to set up and run a business.

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 Leadership Qualities in an Entrepreneur
A successful entrepreneur requires leadership qualities that inspire
others to work hard and support their drive to achieve the desired
success. These include:

1) They have good communication skills and are able to make

their plans understandable.
2) They have a clear vision of where they want to go and how to
get there.
3) They are supportive of their team.
4) They have self-belief and confidence, but also recognise their
own strengths and weaknesses.
5) They share success by letting the whole team know it’s their
success as well.
6) They are involved in what is taking place around the business
rather than staying in their office.
7) They create an atmosphere that encourages business growth.
8) They are honest with employees, encouraging two-way
feedback of both positive and negative opinions.
9) They demonstrate their perseverance to employees,
encouraging others to remain committed.
10) They invest in learning new techniques and skills
encouraging all to ‘think outside the box’.

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 Decision Making
Conceptualising
The entrepreneur must have an idea, skill or service that others
want, one they can provide a competitive price and achieve a profit.
The entrepreneur is required to make a decision if their research
indicates that their idea is marketable for profit.

Customers will be interested in the uniqueness and the quality goods

or service being provided.

Planning
In order to achieve its objectives, a business needs a plan. A
feasibility study provides an investigation, backed by data, to
demonstrate that what is planned is really possible.

Short Term Planning refers to any developments likely to come into

effect within the next three years. It is easier than long term planning
as fewer changes are likely to occur.

Long Term Planning requires considerable skill as it incorporates

developments that are expected within a period of up to 10 years
ahead.

Long term planning is about what the firm plans to do rather what it
is currently doing.

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 Accessing Financing
The entrepreneur needs to access whether or not the new venture
will be financially viable.

Some financial issues the entrepreneur will need to consider include:

Capital Requirements
Capital refers to the wealth, in the form of money or other assets,
used to start and operate a business.

Start-up crisis is usually caused by trying to operate without enough

funds. To avoid this, the business plan should include:
• A clear statement of what the entrepreneur needs to start the
business.
• An estimate of the costs involved in obtaining these items
• An estimate of extra funds needed in the first six months for
original costs.

Sources of Capital
• Entrepreneur’s savings
• Bank loan
• Partners
• Investors

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 Organising the Factors of Production
The factors of production are the various elements needed to
produce goods or services.

The four factors of production are land, labour, capital and

enterprise. Land receives rent, labour receives wages, capital
receives interest and enterprise receives profit.

Land: all natural resources, including farmed land, and the natural
resources in the land and sea.

Labour: all human resources, including mental effort.

Capital: all man-made resources, including financial capital and also

man-made physical resources.

Enterprise: the managerial factor that co-ordinates the resources of

land, labour and capital to create consumer products and services
and distributes them to individuals and other businesses in the
economy.

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 Operating the Business
• Operating an effective accounting system is important in order
to be able to regularly analyse how the business is doing.
• Increasing sales is an ongoing process. Consideration will be
given to marketing techniques and advertising.
• Reducing costs can be effective as increasing sales. Exploring
better deals from suppliers is another way to reduce costs.
• Getting paid on time is important for cash flow. Cashing slow
payers systematically and offering discounts to prompt payers
aids cash flow.
• Maintaining records is an ongoing activity. Financial records
enable the entrepreneur to analyse businesses’ performance
regularly.
• Looking ahead involves asking certain questions like: ‘Are
customers offering a better deal?’, ‘Is there a case for setting
new goals?’

Evaluating
Evaluating is necessary to extend the life of a business and to
evaluate the outcome of events once it has been established.

Risk Bearing
If entrepreneurs did not face risks, new businesses would not be
started, innovation opportunities would be missed and there
would be a reduces contribution to general economic
development.

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 Entrepreneurs and Economic Development
Entrepreneurs collaborate when they create new businesses that
provide goods and services to satisfy citizens. They also create
jobs and contribute to nation building.

Creating New Businesses

New businesses increase market competition and this has the
effect of keeping prices competitive, therefore contributing to
increased demand and productivity.

Collaborating with others promotes economic growth in the

region where they are located as well as the wider community.

Providing good and services to Satisfy Citizens

Entrepreneurs find out what consumers want then aim to satisfy
consumers’ requirements by supplying what they want at a price
that they will find acceptable, and hopefully make a profit.

Providing Employment Opportunities

New businesses employ people to fill the jobs that they have
created, and as the business grows more workers are needed.

These employees pay taxes and spend their wages.

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 Contributing to the Nation
Nation building refers to creating a strong sense of national
identity. This requires economic, social and political development.

Sound economic development and increased national growth and

wealth it creates are a keystone of national identity.

Businesses play a significant role in economic growth in many

ways:
1) It provides employment
2) It creates a wider, competitive range of goods and services
3) It contributes to supporting and improving community life
4) It promotes national growth.

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Chapter 7 – Establishment of a Business
Reasons for Establishing a Business
1) Financial independence: Operating your own business can lead
to independent financial success, unlike a job there a person is
limited to what their employer is willing to pay them.

2) Self-fulfilment: Making success of a business through one’s own

effort and skills creates a sense of achievement and
satisfaction, fulfilling ambitions that are not felt when working
in someone else’s business.

3) Increased Income: If the business is successful and profitable

the potential for increased income is almost limitless

4) Increased control of working life: Working for someone else

means that others determine not only what you do and when
you do it but also your employment fate. An entrepreneur can
determine their own fate and working schedule.

Steps in Setting up a Business

Conceptualising
Entrepreneurs identify a need in the market, that is not being
provided or doesn’t exist, or an existing service or product that can
be improved.

Research
Research is carried out to find out if there is a definite need for the
product or service, and to collect information about the potential
market.

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Identification of Resources
Identifying resources needed to operate the business venture.

Creation of a Business Plan

A Business Plan indicated whether or not the business is viable and
likely to prove profitable.

Acquisition of Funds
Funds to start a business usually comes from the entrepreneur’s own
resources. Using funds from other will incur a cost of borrowing
which is basically interest.

Operation of the Business

The business must be efficiently operated to ensure that the goods
or services being marketed are of high standard. This is essential to
keep customers and attract new ones.

Preparing a Business Plan

A business plan is an important document as it allows the
entrepreneur the opportunity to think through and combine all the
elements relevant to the plan.

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 Reasons for Preparing a Business Plan
Preparing a business plan tests the feasibility of the business idea.
The research that compilation of the business plan demands can save
a lot of time and money if the act of working through the business
plan reveals that idea of the business is not viable.

Elements of a Business Plan

Executive Summary
This is an outline of the business that aims to give potential investors
an oversight of the company’s purpose and goals. This summary
includes:
1) The name of the business
2) Its location
3) What products or services are to be sold
4) The purpose of the plan

Operational Plan
This describes the business’s physical location, legal structure,
facilities, equipment and labour the business employs.

The Business Opportunity

A description of the product or service the business has to offer and
the target market, which includes identification of elements of
uniqueness and perhaps advantages over competing businesses.

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The Marketing Plan
This describes the specific objectives that demonstrate the
entrepreneur has a clear idea of how they will get their product into
the market.

Financial Forecast
This can be seen as turning the plan into numbers, projecting a
forecast for the next three to five years. The forecast should include:
• A cashflow statement and the first 12 months cash-flow
pattern including working capital, salaries and sales.
• A profit and loss forecast on projected scales.
• A sales forecast

Research and Feasibility

A feasibility study is an analysis of how successful a proposal to
establish a business is likely to be. It enables the entrepreneur to
now only establish if the idea is viable but to also identify possible
problems.

Primary data is collected by the entrepreneur, by talking to potential

customers and suppliers.

Secondary data is information that has been collected by someone

else for some other purpose, but useful to the entrepreneur.

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The feasibility study is conducted before the business plan. It will
answer questions such as:
• Will people buy my product?
• What competition exists and how do I compete with them?
• What costs can I expect to have to meet?
• How much finance am I going to need and for how long?

Planning Ahead
Short Term Plans are those that are undertaken on a daily or weekly
basis and include factors such as what to purchase. In a small
business this would be carried out by the owners, and lower
management employees in a large business.

Medium Term Plans are those effected for one or two years and
include implementing procedures that increase the effectiveness of
the business.

Long Term Plans are those that establish the course of the business
over a three-to-five-year period, which set out ways the business
intends to develop from its existing position to where it aims to be in
the long term.

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 Government Regulator Practices
The regulatory practices governing the establishment of a business
refer to the legislative rules by which persons who wish to establish a
business should be guided.
When starting up the business the entrepreneur must apply to the
minister of small businesses who is charged with checking and
approving their application.

Certain business operations must be duly registered with the

Registrar of Companies and in some cases with government
departments.
A certificate of registration is issued, which must be displayed in the
place of business, and all businesses must be VAT or consumption
tax-registered.

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Chapter 11 - Production
Production
Aims of production:
Production refers to the process and methods of growing or
changing raw materials and making goods or services that can be use
or sold to satisfy the needs and wants of people and business.

Needs are things that are essential to human survival. The 3 primary
needs are:
• Food
• Clothing
• Shelter

Wants are things that people desire to make the quality of life better
but is not necessary for survival.

The Four Factors of Production

There are limited resources which are used to meet our wants, these
are called the factors of production. They are:
• Land
• Labour
• Capital
• Enterprise

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Each of these factors receives a payment/reward in return for its
contribution to production.
1. Land receives rent.
2. Labour receives wages.
3. Capital receives interest.
4. Enterprise receives profit.

Land
Land does not include the land itself, but also all the natural
resources found in the earth and sea. Land can have all sorts of
mineral deposits, nature and even life.
Therefore, land includes:
• The geographical surface area
• Rivers, lakes and seas
• Minerals and chemicals

Land is fixed in supply meaning it cannot be increased but the soil

can be improved by reforestation, drainage and contouring.

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 Labour
Labour is people’s physical and mental contribution to the creation
of goods and services. It’s the factor that converts resources into
goods/services what people want.

This contribution is generally rewarded with wages but sometimes

profit or interest can be rewarded.

Labour is divided into four groups:

1) Semi-skilled and unskilled – while no formal qualifications are
required, experience and knowledge of the use certain
equipment is useful. These involve jobs which involve little
training and usually involve aspects of manual labour.
Examples: drivers, cleaners, street vendors.
2) Skilled – engineers, mechanics, electricians, plumbers, trained
machine operators and so on.
3) Managerial and professional – business executives, teachers,
doctors, nurses, lawyers, architects and so on.

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 Capital
Capital is the money that is invested in a business in order to
acquire the assets which the business need to produce or
trade.

Venture capital refers to the money subscribed to finance new

businesses and activities of an existing business that are
considered to be of a risky nature.

Capital includes money and all the other assets (possessions of

value) that are employed in the process of production in the
business sense.

Capital includes buildings, machinery, stocks, and other

equipment which are called producer goods used in the
production of other goods.

Producer goods are used by manufacturers to make the things

we consume which are called consumer goods.

Fixed capital is the items such as buildings, machinery and

other equipment with long life, which are used many times
over the production of good and services and the creation of
further wealth.

Working capital is the firm’s short-term assets that are turned

over fairly quickly. They include cash, bank balances, stocks of
raw materials, and other items for day-to-day operation of the
business which are constantly being used up.

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 Enterprise
Enterprise is similar to labour but is a separate factor because it
refers to the special skills (entrepreneurship) that some people have
to organise their business.

Entrepreneurs are the owners of the business enterprises who, by

taking risks and making decisions, enable production to be carried
out in anticipation of demand.

If entrepreneurs successfully predict future demand they are

rewarded with a special form of income called profit. However, if the
prediction was wrong, they may get no reward or even a loss.

In order to participate in entrepreneurship, the entrepreneur must

be willing to:
• Raise start-up capital, from savings or by borrowing, for
investment in their business
• Take carefully considered risks
• Organise the various levels of labour required
• Define and clarify business policy decisions so that all levels of
personnel can understand what the firm is trying to achieve
• Make any change necessary in the interest of growth and
development of the business.

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 Development of Production
Natural Resource Country Example Usage
Bauxite Jamaica, Refined as aluminium, used in pots
Guyana and pans, machines and parts.
Clay Throughout Bricks, earthenware pots
Caribbean
Diamonds Guyana Jewellery, industrial diamonds
Forestry Guyana Furniture
Gold Guyana Jewellery
Limestone Barbados, Cement products
Jamaica, TT
Manganese Guyana Metal and glass production
Natural gas Barbados, Energy fuel
TT
Oil TT Petrol and by-products such as
plastics and paints
Pitch TT Asphalt, shingles
Sand and Silica Throughout Building materials, glass
Caribbean
Sun Throughout Solar energy
Caribbean

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 Production and Productivity
Inputs and Outcomes
Inputs are what a business puts into its production process, this
applies to whatever factor of production the business is
engaged in.

Outcome is the level of performance the business has gained as

a result of its activities; the output per unit of input.

Production is the process of combining units of input (raw

materials) and human resources to create goods and services
to satisfy human needs and wants.

Productivity is a measure of the increase in output from each

unit in the production process.

The Importance of Productivity

Productivity raises the level of output. Higher levels of productivity
result in a lower cost per unit of output. This usually results in a
higher profit for the business.

The workers wages remain the same, the input of materials is the
same, but output has been doubled.

Ways to Improve Productivity

• Training existing employees.
• Recruiting people with the necessary skills or level of education
• Have good working conditions.
• Motivate workers to be more engaged and productive.

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 Capital for Production
Capital, as a factor of production, refers to the physical tools, plant
and machinery that enables production of goods and services to take
place. This is referred to as capital goods.

By having capital in this form the manufacture of goods (consumer

goods) and services can be created that could not be produced by
labour alone.

Example:
Deep-sea drilling is a classic example where labour alone could not
achieve its output. The equipment (capital) needed makes deep-sea
drilling possible. Such activities are capital-intensive.

By increasing productivity through the use of capital, more goods

and services can be produced, and increasingly effective, capital
goods can be employed, for example technology.

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 Types and Levels of Production
Types of Production
Production can be divided into three types:
1. Primary production
2. Secondary production
3. Tertiary activities
Collectively they are referred to as the chain of production.

Primary Production
Primary production is the extraction of basic raw materials provided
by nature, which are either above or below the Earth’s surface.
The extractive industries are: agriculture, fishing and mining.

❖ Agriculture involves food protection in the form of fruits and

vegetables, livestock and other produce such as trees and
flowers.
❖ Fishing plays a major role in providing food for countries that
have access to the sea, either for domestic use or for selling to
manufacturers or to other countries.
❖ Mining involves the extraction of raw materials such as fossil
fuels, oil, gas, ore and so on from below the Earth’s surface.

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Secondary Production
Secondary production consists of the manufacturing and construction
industries. They take the materials produced by the extractive
industries and change them into an end product.

❖ Manufacturers may be involved in the production of a complete

item, or they may make parts that will be assembled into a
finished article.
❖ Construction industries take the raw/partly processed materials
and change then into buildings, roads or other constructions.

Tertiary Production
Tertiary Production are also a form of production because they enable
change of ownership of goods and services.

Tertiary activities begin when goods leave the producer and have to
be transported, stored, insured and sold by traders on the open
market.

Tertiary activities are often referred to as commercial services or

commerce. Commerce consists of transport, warehousing,
advertising, banking, insurance and communication.

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 Levels of Production
There are three levels of operation:
1. Subsistence
2. Domestic
3. Surplus

Subsistence Level
This level of production meets only the basic needs of the country in
which it takes place.

Subsistence economies rely mainly on agriculture. People live almost

entirely on what can be obtained from natural resources, and this
results in a very poor quality of life.

Domestic Level
At the domestic level of production everything is produced locally
within the home country. This level does not involve any imports
from foreign countries or exports to other countries.

Some developed countries try to grow all the food they need
because they have the resources to do so.

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Surplus Level
Developed countries have a wide variety of resources and exploit
these to the full. They also have advanced technology which enables
them to take full advantage of their resources.

Countries such as these are able to achieve a level of production

which not only satisfies domestic consumption, but also provides a
surplus that can be exported to other countries.

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 Cottage Industries
A cottage industry is one of the smallest types of businesses where
are operated in the home, community centres or some other village
facilities.

Cottage Industries originated as ways of increasing income without

leaving the home and also satisfies a psychological need to use one’s
spare time productively.

Products produced by cottage industries include:

• Pastries
• Spices
• Seasonings
• Straw hats
• Embroidery
• Tailoring
• Catering

During a time of unemployment, they provide income and

independence for many people.

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 Functions of a Small Business
1) Supplying goods and services that satisfy some demand,
identify a particular need in the market and develop a product
or service that will meet that need.

2) Providing rural areas with nearby shopping facilities, especially

in rural areas.

3) Ensuring competition exists, which keeps larger businesses

aware that there are others out there ready to provide a
personal service to consumers.

4) Creating employment – although small businesses individually

employ relatively few employees, collectively they account for
a large percentage of the total employment in the Caribbean.

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 Advantages of a Small Business
1) They provide employment opportunities, particularly in rural
and depressed areas.
2) Good working relationships are more easily established and
maintained.
3) Employees are more likely to be personally involved in
achieving the goals of the business.
4) They can profit from a niche in the market and provide goods
or services that larger businesses have no interest in.
5) Closer communication exists between the owner and the
employees, and between the employees themselves.

Disadvantages of a Small Business

1) Starting up the business exposes the owner(s) to high personal
financial risk.
2) Once established, income can remain highly variable.
3) They find it more difficult than larger organisations to source
outside finance, for example loans.
4) Once established, income can remain highly variable.
5) They tend to have small budgets and do not have the funds to
put into research and development and technology.

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 Value of a Small Business to a Country
1) Small businesses provide employment which utilizes local
labour available and reduce unemployment.
2) Small businesses can sometimes respond to customers’ needs
faster than larger business.
3) Small businesses are the only way that some needs are met.
For example, garden services which are not suited to be a large
business.

Business Risk
The main risk a business faces is that it will fail to make a profit
which can possibly lead to the stop of trading.

Some risks can be insured such as bad debts, theft or damage.

One way a business can reduce risks is by being successful and

increasing profitability. As a firm becomes more successful, it
tends to grow in size.

Businesses grow in size because a large size brings various benefits

including increased survival prospects and the ability to make
economies (economies of scale).

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 Reasons why businesses grow and expand:
1) They wish to make a greater level of profit.
2) They are trying to gain economies of scale.
3) They wish to reduce competition and become market leaders.
4) Expansion will only take place if the business can benefit and
make extra profits.
5) They are successful, and expansion is necessary to meet
demand for their product.

Ways a Business can Grow

Internal Growth
Internal Growth occurs when a firm expands through the use of its
own resources, such retaining some of its profits and using them to
invest in further expansion, such as opening other outlets.

This is an example of economies of scale, increasing output with

fewer input costs, which makes further expansion possible.

Internal growth requires:

1) Investing in further cost-saving technology
2) Extending existing physical capacity or moving to a new/bigger
site.
3) Increasing workforce and employing workers with technical
skills
4) Working existing plants and machinery at optimum
performance, pushing it towards full capacity.

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External Growth
External Growth occurs when one firm takes over or merges with
another. This is a popular method of growth because the firm
increases its size quickly.

Other methods of External growth are:

a) Joint Ventures
A joint venture is a temporary partnership of some aspect of a
business venture.

A joint venture involves two or more businesses pooling their

resources and expertise to achieve a particular goal. The risks
and rewards are also shared in come way, not necessarily
equally.

b) Mergers
A merger or amalgamation is the voluntary combining together
of two or more businesses into a single business that is
mutually agreed by the firms’ management and agreed by their
shareholders.

Mergers are used by businesses to expand their operations,

usually to increase their profitability.

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c) Takeovers and Acquisitions
An acquisition or takeover refers to a business strategy
whereby the control of a business is taken over by another
business by purchasing at least 51% of its voting shares.

Unlike a takeover, a merger involves the voluntary

amalgamation combining all of the interests of two companies
into a newly name, stronger, single company.

If the merged businesses were formally competitors, the

merger is referred to as horizontal integration. But if they were
customer and supplier the merger is referred to as vertical
integration.

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Different types of mergers and takeovers:
1) Horizontal Integration occurs where a firm merges with or
takes over another firm at the same stage of production.

Since this involves firms in the same line/stage of business

production, the result should be a larger scale of production
and reduced unit cost.

Horizontal Integration can also have the effect of reducing

competition.

2) Vertical Integration occurs when one firm merges with or takes

over another one at a different stage of production. Vertical
integration can be forwards or backwards.

a) Vertical Forwards Integration takes place when a firm

integrates with another business that is at a later stage of
production.

b) Vertical Backwards Integration takes place when a company

moves backwards down the chain of production, like when a
business acquires one of its suppliers.

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 3) A Conglomerate Merger or Lateral Merger is the integration or
takeover of two or more companies engaged in unrelated
businesses.

They eventually become one corporate structure, usually

involving a parent company and possibly several subsidiaries.

A conglomerate is a multi-industry company and sometimes a

multinational concern.

This has the effect of spreading the risks of the business and
also facilitates the sharing of ideas between them.

Linkage Industries
The linkage between primary, secondary and tertiary production are
important because they facilitate a series of relationships (links)
between the productive sectors.

A linkage industry is sometimes called a ‘screwdriver’ industry or

‘spin-off’ because it has come about because of some other
development.

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For example:
Canning and preservation of foods are spins-offs of agriculture. This
is called forward linkage since one industry is producing raw
materials for another industry.

Conversely, manufacturers of confectionery rely on the sugar

supplied by the agricultural industry. This is called backward linkage
as it ensures inputs of materials needed to create products.

Why Linkage Industries are important:

1) Reduces wastage of the country’s resources.
2) Encourages growth in skills in the labour force.
3) Promotes earnings of foreign exchange.
4) Provide increased employment and improved standard of
living.
5) Forges closer Caribbean links at the social, economic and
political levels.

Examples of industrial linkage in the Caribbean:

Crude Oil [refining] Petroleum, plastics, asphalt
Sugar Cane Confectionery, rum
Fruit, vegetables Canning
Bamboo Baskets
Asphalt Road Building
Livestock Hides, leather goods
Iron Ore Steel and metal

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 Effects of Growth on a Business
Business Growth refers to an increase in size and profitability over a
period of time.

This is desirable since well-managed growth can be an ongoing

process that gives stability to the business and promotes further
growth.

Business Growth and Organisational Structure

Organisational Structure reflects the ways by which a business
organises communication, distributes responsibilities and adapts to
change.

As a company grows, increased technology is employed, more

employees are recruited and various aspects of the business are
grouped into specialist areas.
Department managers are appointed and the communication
network becomes greater.

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 Business Growth and Capital
Business risk is reduced as a business expands, and the possibility of
survival improves.

Three traditional sources of finance are:

1) The Owners (shareholders) may be willing to put more capital
into the business.

2) Retained Profits can be put back into the business.

3) Borrowing from financial institutions such as banks, is easier

for large organisations than small ones because the risks are
smaller with a large well-organised business.

Business Growth and Labour

The labour a business uses grows and changes in nature as the
business expands.

If there is an increased need for specialist skills, there are some

considerations to be made:
1) Which roles should be given priority?
2) Should these personnel be recruited from outside or from
within the organisation?
3) Would it be better to retain existing personnel?
4) Should the appointment be permanent or temporary, for
example short-term contracts?

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 Chapter 12 - Marketing
What is market?
The term market can be described as any situation that brings
together the sellers and buyers of goods or services either directly or
indirectly.

This may take place directly in a well-defined place such as a local

street market, a wholesale warehouse or retail store.
It can also be an indirect source by selling thought post, telephone or
via the internet, where the buyer and seller do not actually meet, but
trade takes place.

What is marketing?
Marketing is all the activities that enable trade to take place in the
most profitable and efficient manner.
It includes identifying customers’ needs through market research,
and all the activities that satisfy those needs by providing the
required goods or services.

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 Types of Market
There are 2 markets of concern: The consumer market and the
industrial market.

Consumer Market
The consumer market is the market for products, goods and services
bought by individuals.

Many types of goods make up the consumer market:

1. Consumer non-durables – these are fast moving goods that are
low in value and quickly sold and repurchased. Eg: canned
foods, newspapers.

2. Consumer durables – these are high-unit-value but slow

moving items. Eg: cars, computers, washing machines.

3. Soft goods – these are longer lasting than faster-moving goods,

but are replaced more frequently than customer durables.
Eg: clothes, shoes.

4. Services – these are tasks provided to benefit the consumer.

Eg: car repairs, plumbing, hair dressing, nail care, childcare.

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Industrial Market
The industrial market involves the sale of goods between businesses.
There goods are aimed at other businesses as opposed to the
general public.

The industrial market involves the selling of:

1) Capital goods – these are finished goods that are used over a
relatively long time. Eg: machinery, vehicles, computers (Fixed
Assets).

2) Consumable products – these goods are bought frequently for

resale, stationery, lubricants, raw materials and component
parts for assembling into finished parts.

3) Services – these are provided by specialists such as

transportation, security systems, recruit agencies.

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Social Media Marketing
This refers to the process of gaining attention through social media
sites.

The aim of social media marketing is to produced content that

appeals to users and links with advertising, which increases brand
exposure and creates a broader customer-awareness reach.

This aids market research by:

• Getting feedback from users or potential users of products.
• Build email marketing lists.
• Improving brand recognition.
• Identifying potential buyers.

A company engaged in marketing could use social media in the

following ways:
1) Inviting users to ask questions, provide reviews, enter contests,
join mailing lists.

2) Offering incentives to encourage social media users to provide

information about themselves by offering prizes and discounts
in exchange for information and attention.

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Integrated Marketing
Integrated Marketing is a unified, holistic approach to
communication in marketing, combining all aspects of marketing.
Eg: advertising, sales promotion, public relations, direct marketing,
social media marketing.

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