Chapter 1 – Business Activity

The Economic Problem

Needs Wants
A good or service essential for living. Examples A good or service that people would like to
include water and food and shelter. have but is not required for living. Examples
include cars and watching movies.

Examples

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.
1
Opportunity cost

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.

SCARCITY → CHOICE → OPPORTUNITY COST

For 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 is the benefits from the
road that they have sacrificed (opportunity cost).

2
Factors of Production
Factors of Production are resources required to produce goods or services. They are classified
into four categories.

• Land: the natural resources that can be

obtained from nature. This includes
minerals, forests, oil, and gas. The reward
for land is rent.
• Labour: the physical and mental efforts put
in by the workers in the production process.
The reward for labor is wage/salary
• Capital: the finance, machinery, and
equipment needed to produce goods and
services. The reward for capital is interest
received on the capital
• Enterprise: 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.

Specialisation
Specialization occurs when a person or organisation concentrates on a task at which they are
best at. Instead of everyone doing every job, the tasks are divided among people who are
skilled and efficient at them.

Advantages Disadvantages
• Workers are trained to do a particular • It can get monotonous/boring for
task and specialise in this, workers, doing the same tasks
thus increasing efficiency repeatedly
• Saves time and energy: production is • Higher labour turnover as the
faster by specializing workers may demand higher salaries
and the company is unable to keep up
with their demands

3
Purpose of Business Activity

A business is any organisation that uses all the factors of production (resources) to create
goods and services to satisfy human wants and needs.
Businesses attempt to solve the problem of scarcity, by using scarce resources, to produce and
sell those goods and services that consumers need and want.

Added Value
Added value is the difference between the cost of materials bought and the selling price of the
product. Which is, the amount of value the business has added to the raw materials by turning
them into finished products. Every business wants to add value to their products so they may
charge a higher price for their products and gain more profits.

For example, logs of wood may not appeal to us as consumers and so we won’t buy them or
would pay a low price for them. But when a carpenter can use these logs to transform them into
a chair we can use, we will buy it at a higher cost because the carpenter has added value to those
logs of wood.

Another example of added value

4
Chapter 2 – Classification of Business

Primary, Secondary, and Tertiary Sector

Businesses can be classified into three sectors:

Primary sector: this involves the use/extraction of natural resources. Examples include
agricultural activities, mining, fishing, wood-cutting, oil drilling, etc.

Secondary sector: this involves the manufacture of goods using the resources from the primary
sector. Examples include automobile manufacturing, steel industries, cloth production, etc.

Tertiary sector: this consists of all the services provided in an economy. This includes hotels,
travel agencies, hair salons, banks, etc.

Up until the mid-18th century, the primary sector was the largest sector in the world, as
agriculture was the main profession. After the industrial revolution, more countries began to
become more industrialized and urban, leading to a rapid increase in the manufacturing sector
(industrialisation).

Nowadays, as countries are becoming more developed, the importance of tertiary sector is
increasing, while the primary sector is diminishing. The secondary sector is also slightly reducing
in size (de-industrialisation) compared to the growth of the tertiary sector. This is due to the
growing incomes of consumers which raise their demand for more services like travel, hotels etc.

5
Private and Public Sector
Private sector: where private individuals own and run business ventures. Their aim is to make a
profit, and all costs and risks of the business are undertaken by the individual. Examples, are Nike,
McDonald’s, Virgin Airlines, etc.

Public sector: where the government owns and runs business ventures. Their aim is to provide
essential public goods and services (schools, hospitals, police, etc.) in order to increase the
welfare of their citizens, they don’t work to earn a profit. It is funded by the taxpaying citizens’
money, so they work in the interest of these citizens to provide them with services.
Example: The Indian Railways is a public sector organization owned by the govt. of India.

In a mixed economy, both the public and private sector exists.

6
Chapter 3 – Business Objectives and stakeholder objectives

Business objectives - Business objectives are the

aims and targets that a business works towards to help it
run successfully. Although the setting of these objectives
does not always guarantee business success, it has its
benefits.

• Setting objectives increases motivation as employees and managers now have clear
targets to work towards.
• Decision-making will be easier and less time-consuming as there are set targets to base
decisions on. i.e., decisions will be taken to achieve business objectives.
• Setting objectives reduces conflicts and helps unite the business toward reaching the
same goal.
• Managers can compare the business’ performance to its objectives and make any
changes in its activities if required.

Objectives vary with different businesses due to size, sector, and many other factors. However,
many businesses in the private sector aim to achieve the following objectives.

• Survival: new or small firms usually have survival as a primary objective. Firms in a
highly competitive market will also be more concerned with survival rather than any other
objective. To achieve this, firms could decide to lower prices, which would mean forsaking
other objectives such as profit maximization.
• Profit: this is the income of a business from its activities after deducting total
costs. Private sector firms usually have profit-making as a primary objective. This is
because profits are required for further investment into the business as well as for
the payment of return to the shareholders/owners of the business.
• Growth: once a business has passed its survival stage it will aim for growth and
expansion. This is usually measured by the value of sales or output. Aiming for business
growth can be very beneficial. A larger business can ensure greater
job security and salaries for employees. The business can also benefit from
higher market share and economies of scale.
• Service to society: some operations in the private sectors such as social enterprises do
not aim for profits and prefer to set more economical objectives. They aim to better the
society by providing social, environmental, and financial aid. They help those in need,
the underprivileged, the unemployed, the economy, and the government.

7
Stakeholders
A stakeholder is any person or group that is interested in or directly affected by the
performance or activities of a business. These stakeholder groups can be external – groups that
are outside the business or they can be internal – those groups that work for or own the business.

Internal stakeholders:

• Shareholders/ Owners: these are the risk-takers of the business. They invest capital
into the business to set up and expand it. These shareholders are liable for a share of
the profits made by the business.

• Workers: these are the people that are employed by the business and are directly
involved in its activities.

• Managers: they are also employees, but managers control the work of
others. Managers are in charge of making key business decisions.

External Stakeholders:

• Customers: they are a very important part of every business. They purchase and
consume the goods and services that the business produces/ provides. Successful
businesses use market research to find out customer preferences before producing
their goods.

• Government: the role of the government is to protect the workers and customers from
business activities and safeguard their interests.

• Banks: these banks provide financial help for the business’ operations’
• Community: this consists of all the stakeholder groups, especially the third parties that
are affected by the business activities.

8
 Chapter 4 – Types of Business Organisation

Sole Trader/Sole Proprietorship

A business organization owned and controlled by one person.
Sole traders can employ other workers, but only he/she
invests and owns the business.

Advantages Disadvantages
• Easy to set up: there are very few • Full responsibility: Since there is only
legal formalities involved in starting one owner, the sole owner has to
and running a sole proprietorship. A undertake all running activities.
less amount of capital is enough for He/she doesn’t have anyone to share
sole traders to start the business. his responsibilities with. This
There is no need to publish annual workload and risks are fully
financial accounts. concentrated on him/her.
• Full control: the sole trader has full • Lack of capital: As only one
control over the business. Decision- owner/investor is there, the amount
making is quick and easy since there of capital invested in the business will
are no other owners to discuss be very low. This can restrict the
matters with. growth and expansion of the
• Sole trader receives all profit: Since business. Their only sources of
there is only one owner, he/she will finance will be personal savings or
receive all the profits the company borrowing or bank loans (though
generates. banks will be reluctant to lend to sole
• Personal: since it is a small form of traders since it is risky).
business, the owner can easily create • Lack of continuity: If the owner dies
and maintain contact with customers, or retires, the business dies with
which will increase customer loyalty him/her.
to the business and let the owner
know about consumer wants and
preferences.

9
Partnerships
A partnership is a legal agreement between two or more (usually,
up to twenty) people to own, finance, and run a business
jointly and to share all profits.

Advantages Disadvantages
• Easy to set up: Similar to sole traders, • Conflicts: arguments may occur
very few legal formalities are required between partners while making
to start a partnership business. A decisions. This will delay decision-
partnership agreement/ partnership making.
deed is a legal document that all • Lack of capital: smaller capital
partners have to sign, which forms investments as compared to large
the partnership. There is no need to companies.
publish annual financial accounts. • No continuity: if an owner retires or
• Partners can provide new skills and dies, the business also dies with them.
ideas: The partners may have some
skills and ideas that can be used by
the business to improve business
profits.
• More capital investments: Partners
can invest more capital than what a
sole trader only by himself could.

Joint-stock companies
These companies can sell shares, unlike partnerships and sole traders, to raise capital. Other
people can buy these shares (stocks) and become a shareholder (owners) of the company.
Therefore, they are jointly owned by the people who have bought it’s stocks. These
shareholders then receive dividends (part of the profit; a return on investment).

These are two types of companies:

Private Limited Companies: One or more owners who can sell its shares to only the people
known by the existing shareholders (family and friends). Example: Ikea.
Public Limited Companies: Two or more owners who can sell its shares to any
individual/organization in the public through stock exchanges. Example: Verizon
Communications.

10
Franchises
The owner of a business (the franchisor) grants a license to another person or business (the
franchisee) to use their business idea – often in a specific geographical area. Fast food
companies such as McDonald’s and Subway operate around the globe through lots of
franchises in different countries.

Franchisor: A franchisor is a person or company that owns a brand or business model and
allows others to use it. They provide the franchisee with the rights to operate under their name
and sell their products or services.

Franchisee: A franchisee is a person or company that buys the rights from the franchisor to
open and run a branch of the franchisor's business. They operate their business using the
franchisor's brand and guidelines.

Royalty Fees: Royalty fees are regular payments that the franchisee makes to the franchisor,
usually based on a percentage of sales or revenue. These fees are paid in exchange for ongoing
support and the right to use the franchisor's brand and system.

11
Chapter 5 – Motivating Workers
Why motivate workers? Why do firms go to the pain of making sure their workers are motivated? When
workers are well-motivated, they become highly productive and effective in their work, become absent
less often, and are less likely to leave the job, thus increasing the firm’s efficiency and output, leading
to higher profits. For example, in the service sector, if the employee is unhappy at his work, he may act
lazy and rude to customers, leading to low customer satisfaction, more complaints, and ultimately a bad
reputation and low profits.

Motivation Theories
• F. W. Taylor: Taylor based his ideas on the assumption that workers were motivated by
personal gains, mainly money, and that increasing pay would increase productivity
(amount of output produced). Therefore, he proposed the piece-rate system, whereby
workers get paid for the number of outputs they produce. So, in order, to gain more
money, workers would produce more.

• Maslow’s Hierarchy: Abraham Maslow’s hierarchy of needs shows that employees

are motivated by each level of the hierarchy going from bottom to top. Managers can
identify which level their workers are on and then take the necessary action to advance
them to the next level.

One limitation of this theory is that it doesn’t apply to every worker. For some employees,
for example, social needs aren’t important, but they would be motivated by recognition
and appreciation for their work from seniors.

12
 • Herzberg’s Two-Factor Theory: Frederick Herzberg’s two-factor theory, wherein he
states that people have two sets of needs:
Basic needs called ‘hygiene factors:
• status
• security
• work conditions
• company policies and administration
• relationship with superiors
• relationship with subordinates
• salary
Needs that allow the human being to grow psychologically, called the ‘motivators’:
•
• achievement
• recognition
• personal growth/development
• promotion
• work itself

According to Herzberg, the hygiene factors need to be satisfied, if not they will act as de-
motivators to the workers. However, hygiene factors don’t act as motivators as their effect quickly
wears off. Motivators will truly motivate workers to work more effectively.

Motivating factors –

Financial motivators –
• wages
• salary
• commission
• bonus
• performance-related pay
• profit sharing
• share ownership

Non-Financial Motivators
• Fringe benefits are non-financial rewards given to employees
• Company vehicle/car
• Free healthcare
• Children’s education fees paid for
• Free accommodation
• Free holidays/trips
• Discounts on the firm’s products

13
Chapter 6 – Leadership Styles and Organisational structure
Leadership styles refer to the different approaches used when dealing with people when in a
position of authority. There are mainly three styles you need to learn: the autocratic,
democratic, and laissez-faire styles.

The autocratic style is where the managers expect to be in charge of the business and have
their orders followed. They do all the decision-making, not involving employees at all.
Communication is thus, mainly one way- from top to bottom. This is standard in police and
armed forces organizations.

The democratic style is where managers involve employees in the decision-making and
communication is two-way from top to bottom as well as bottom to top. Information about
future plans is openly communicated and discussed with employees and a final decision is
made by the manager.

Laissez-faire (French phrase for ‘leave to do) style makes the broad objectives of the business
known to employees and leaves them to do their own decision-making and organize tasks.
Communication is rather difficult since a clear direction is not given. The manager has a very
limited role to play.

Organisational Structure
Organisational structure refers to the levels of management and division of responsibilities
within a business. They can be represented on organisational charts

14
Chapter 7 – Recruitment and Training

Recruitment is the process of identifying that the business needs to employ someone up to the
point where applications have arrived at the business.

A vacancy arises when an employee resigns from a job or is dismissed by the management.
When a vacancy arises, a job analysis must be prepared. A job analysis identifies and records
the tasks and responsibilities relating to the job. It will tell the managers what the job post is
for.

Then a job description is prepared that outlines the responsibilities and duties to be carried out
by someone employed to do the job. It will have information about the conditions of
employment (salary, working hours, and pension scheme), training offered, opportunities for
promotion, etc. This is given to all prospective candidates so they know what exactly they will be
required and expected to do.

Once this has been done, the H.R. department will draw up a job specification, a document that
outlines the requirements, qualifications, expertise, skills, physical/personal characteristics,
etc. required by an employee to be able to take up the job.

15
16
Training
Training is important to a business as it will improve the worker’s skills and knowledge and
help the business be more efficient and productive, especially when new processes and
products are introduced. It will improve the workers’ chances of getting promoted and raise
their morale.

The three types of training are:

Induction training: an introduction given to a new employee, explaining the firm’s activities,
customs, and procedures, and introducing them to their fellow workers.

Advantages:

• Helps new employees to settle into their job quickly

• Maybe a legal requirement to give health and safety training before the start
of work
Disadvantages:

• Time-consuming
• Wages still must be paid during training, even though they aren’t working

On-the-job training: occurs by watching a more experienced worker doing the job

Advantages:
• It ensures there is some production from workers whilst they are training
• It usually costs less than off-the-job training
Disadvantages:

• The trainer will lose some production time as they are taking some time to
teach the new employee
• The trainer may have bad habits that can be passed onto the trainee

Off-the-job training involves being trained away from the workplace, usually by specialist
trainers
Advantages:
• A broad range of skills can be taught using these techniques
• Employees may be taught a variety of skills and they may become multi-
skilled which can allow them to do various jobs in the company when the
need arises.
Disadvantages:
• Costs are high
• It means wages are paid but no work is being done by the worker

17
Chapter 8 – Marketing Mix
Marketing mix refers to the different elements involved in the marketing of a good or service-
the 4 P’s- Product, Price, Promotion, and Place.

Product
Product is the good or service being produced and sold in the market. This includes all the
features of the product as well as its final packaging.
Types of products include consumer goods, consumer services, producer goods, and producer
services.

What makes a successful product?

• It satisfies the existing needs and wants of the customers

• It can stimulate new wants from the consumers
• Its design – performance, reliability, quality, etc. should all be consistent with the
product’s brand image
• It is distinctive from its competitors and stands out
• It is not too expensive to produce, and the price will be able to cover the costs

Product Life Cycle (PLC)

The product life cycle refers to the stages a product goes through from its introduction to its
retirement in terms of sales.

At these different stages, the product will need different marketing decisions/strategies in
terms of the 4Ps.

18
Price
Price is the amount of money producers are willing to sell or consumers are willing to buy the
product for.

Different methods of pricing:

• Market skimming: Setting a high price for a new product that is unique or very different from
other products on the market.
• Penetration pricing: Setting a very low price to attract customers to buy a new product
• Competitive pricing: Setting a price similar to that of competitors’ products that are already
available in the market
• Cost plus pricing: Setting price by adding a fixed amount to the cost of making the product
• Loss leader pricing/Promotional pricing: Setting the price of a few products at below cost to
attract customers into the shop in the hope that they will buy other products as well.

19
Promotion
Promotion: marketing activities used to communicate with customers and potential customers
to inform and persuade them to buy a business’s products.
Aims of promotion:

• Inform customers about a new product

• Persuade customers to buy the product
• Create a brand image
• Increase sales and market share

Types of promotion
• Advertising: Paid-for communication with consumers which uses printed and visual media like
television, radio, newspapers, magazines, billboards, flyers, cinema, etc. This can be informative
(create product awareness) or persuasive (persuade consumers to buy the product). The process
of advertising:

• Sales Promotion: using techniques such as ‘buy one get one free’, occasional price reductions,
free after-sales services, gifts, competitions, point–of–sale displays (a special display stand for a
product in a shop), free samples, etc. to encourage sales.

• Below-the-line promotion: promotion that is not paid for communication but uses incentives to
encourage consumers to buy. Incentives include money-off coupons or vouchers, loyalty reward
schemes, competitions, and games with cash or other prizes.

• Personal selling: sales staff communicate directly with consumers to achieve a sale and form a
long-term relationship between the firm and the consumer.

• Direct mail: also known as mailshots, printed materials like flyers, newsletters, and brochures
that are sent directly to the addresses of customers.

• Sponsorship: payment by a business to have its name or products associated with a particular
event. For example, Emirates is the Spanish football club Real Madrid’s jersey sponsor- Emirates
pays the club to be its sponsor and gains a high customer awareness and brand image in return.

20
Place
Place refers to how the product is distributed from the producer to the final consumer. There
are different distribution channels that a product can be sold through.

21
Chapter 9 – Methods of Production

Methods of Production
• Job Production: products are made specifically to order, customized for each customer.
E.g.: wedding cakes, made-to-measure suits, films, etc.

Advantages: Disadvantages:
• The product meets the exact • Costs are higher for job
requirement of the customer production firms because they are
• Workers will have more varied usually labour-intensive
jobs as each order is different, • Production often takes a long
improving morale time
• Very flexible method of • Since they are made to order, any
production errors may be expensive to fix
• Most suitable for one-off products • Materials may have to be specially
and personal services purchased for different orders,
which is expensive
• Skilled labour will often be
required which is expensive

• Batch Production: similar products are made in batches or blocks. A small quantity of
one product is made, then a small quantity of another. E.g.: cookies, building houses of
the same design, etc.
Advantages: Disadvantages:
• Gives some variety to workers • Machines have to be reset
• More variety means more between production batches
consumer choice which delays production
• Even if one product’s machinery • Lots of raw materials will be
breaks down, other products can needed for different product
still be made batches, which can be expensive.
• Flexible way of working-
production can be easily switched
between products.

22
• Flow Production: large quantities of products are produced in a continuous process on
the production line. E.g.: a soft drinks factory.

Advantages: Disadvantages:
• Costs are low in the long run and • Lots of raw materials and finished
so prices can be kept low goods need to be held in
• Can benefit from economies of inventory- this is expensive
scale in purchasing • Capital cost of setting up the flow
• Automated production lines can line is very high
run 24×7 • If one machinery breaks down,
• Goods are produced quickly and the entire production will be
cheaply affected
• Capital-intensive production, so • A very boring system for the
reduced labour costs, and workers, leads to low job
increased efficiency satisfaction and motivation
• There is a high output of
standardized (identical) products

23
Chapter 10 – Costs and Break-even Analysis

Different type of costs

Fixed Costs are costs that do not vary with the output produced or sold in the short run. They
are incurred even when the output is 0 and will remain the same in the short run. In the long
run, they may change. Also known as overhead costs.

E.g.: rent, even if production has not started, the firm still must pay the rent.

Variable Costs are costs that directly vary with the output produced or sold. E.g.: material
costs and wage rates that are only paid according to the output produced.

TOTAL COST = TOTAL FIXED COSTS + TOTAL VARIABLE COSTS

TOTAL COST = AVERAGE COST * OUTPUT
AVERAGE COST (unit cost) = TOTAL COST/ TOTAL OUTPUT

Break-even
The break-even level of output is the output that needs to be produced and sold to start making
a profit. So, the break-even output is the output at which total revenue equals total
costs (neither a profit nor loss is made, all costs are covered).
A break-even chart can be drawn, that shows the costs and revenues of a business across
different levels of output and the output needed to break even.

24
Chapter 11 – Achieving Quality Production
Quality means to produce a good or service which meets customer expectations. The products
should be free of faults or defects. Quality is important because of it:

• establishes a brand image

• builds brand loyalty
• maintains a good reputation
• increase sales
• attract new customers

If there is no quality, the firm will

• lose customers to other brands

• have to replace faulty products and repeat poor service, increasing costs
• bad reputation leading to low sales and profits

There are three methods a business can implement to achieve quality: quality control, quality
assurance and total quality management.

Quality Control
Quality control is the checking for quality at the end of the production process, whether a
good or service.

Advantages Disadvantages
• Eliminates the fault or defect before • Still expensive to hire employees to
the customer receives it, so check for quality
better customer satisfaction • Quality control may find faults and
• Not much training is required for errors but doesn’t find out why the
conducting this quality check fault has occurred, so it’s difficult to
solve the problem
• if the product has to be replaced and
reworked, then it is very expensive
for the firm.

25
Quality Assurance
Quality assurance is checking for quality throughout the production process of a good or service.
Advantages Disadvantages
• Eliminates the fault or defect before • Expensive to carry out since quality
the customer receives it, so checks have to be carried out
better customer satisfaction throughout the entire process, which
• Since each stage of production is will require manpower and
checked for quality, faults, and errors appropriate technology at every stage.
can be easily identified and solved • How well will employees follow quality
standards? The firm will have to
ensure that every employee follows
quality standards consistently and
prudently and knows how to address
quality issues.

Total Quality Management (TQM)

Total Quality Management or TQM is the continuous improvement of products and production
processes by focusing on quality at each stage of production. There is great emphasis on
ensuring that customers are satisfied. In TQM, customers just aren’t the consumers of the final
product. It is every worker at each stage of production. Workers at one stage have to ensure the
quality standards are met for the product in production at their stage before they are passed
onto the next stage and so on. Thus, quality is maintained throughout production and products
are error-free.

Advantages Disadvantages
• quality is built into every part of the • Expensive to train employees all
production process and becomes employees
central to the worker’s principles
• eliminates all faults before the
product gets to the final customer
• no customer complaints and so
improved brand image
• products don’t have to be scrapped or
reworked, so lesser costs
• waste is removed and efficiency is
improved

26