Business Activity: Production Factors

Chapter 1: Business Activity

• Economics involves unlimited wants with limited resources for goods and services that meet those wants, which creates scarcity
• Production factors are insufficient due to scarcity

Production Factors

• Land comprises natural resources
• Labour means the number of people available to produce items
• Capital is finance, machinery, and equipment
• Enterprise consists of entrepreneurs/owners

Limited Resources: Choosing & Opportunity Cost

• Choices require sacrifice, creating an opportunity cost.
• Opportunity cost is what is given up when a want cannot be satisfied
• When buying pants and not a shirt, the opportunity cost is the shirt

Specialisation

• Efficient use of limited supplies of production factors relies on specialization
• Efficient usage of limited production factors sees most businesses specialising in one product and workers mastering one skill
• Specialisation is common because specialised machinery and technology are accessible, it lowers costs from increasing competition, and boosts living standards

Problems with Lack of Specialisation

• Includes the need to do everything independently
• Production becomes low with less output

Division of Labour: Advantages

• Workers are well-trained on one task, resulting in high efficiency and output
• It reduces wasted time and ensures a high production rate

Division of Labour: Disadvantages

• Workers might feel bored, reducing efficiency rates
• Stoppage of production if one person is absent and no one can fill their space

Business Activity Purpose

• Involves combining scarce production factors to generate goods/services
• Products and services meet needs and wants

Purpose of Business Actvity

• It employs people as workers and pays wages to facilitate product consumption by other individuals

Added Value

• Businesses seek to add value to sales revenue as it is greater than material costs
• Other expenses such as labour, management and advertising can be paid
• Making profit depends on other costs totaling less than the added value
• Inability to make profits can arise if other costs cannot be covered
• Added value can be added by increasing the selling price, while maintaining material costs but other costs will also increase
• Added value can be added by lowering material costs, while maintaining the same selling price but quality is reduced

Chapter 2: Business Classifications

Stages of Economic Activity

• Stage 1 (Primary Sector): Utilising Earth's natural resources like farming, fishing, and mining
• Stage 2 (Secondary Sector): Transforming primary sector resources into goods via construction, baking, and manufacturing
• Stage 3 (Tertiary Sector): Providing services to consumers and businesses like transport, banking, hotels, and restaurants

Economic Sector of Relative Importance

• Assessed by the percentage of workers and the value of goods/services against national output
• The sector of economic output is compared by the percentage of numbers of workers

Developing Countries

• Primary sector employs the majority of workers
• Manufacturing industry is newly introduced, most live in rural areas
• There is low income with little demand for services

Developed Countries

• Secondary + tertiary sectors employs the most workers
• Manufacturing industry started years ago
• Output of tertiary is often higher than other two sectors combined as 70% are in the tertiary sector

Changes in Sector Importance

• De-industrialisation is the decline of the significance of the manufacturing industry

Reasons for Change in Sector Importance

• Occurs with the depletion of primary product sources
• Most developed economies are losing manufacturing competitiveness to newly industrialised countries
• Total wealth and living standards see consumers spend more on services like travel and restaurants vs manufactured goods

Mixed Economy

• Nearly every country uses a mixed economy approach with a private sector regulated by the government, and government-owned/controlled public sector

Private Sector vs Public Sector

• The private sector's aim is to run profitably, and it makes their own choices
• The public sector’s decisions are made by the government, services are free and are paid for by taxpayers, such as healthcare

Mixed Economy: Recent Changes

• Conversion of public sector businesses into private sectors is known as privatisation
• Efficiency and profit goals in private sectors lead to cost control
• Private owners invest more than governments, and increased competition aids product quality

Private Sectors Downside

• Private sector are less likely to focus on social considerations thus more people may be unemployed due to the cutting costs

Chapter 3: Enterprise, Business Growth, and Size

Enterprise and Entrepreneurship: Benefits

• Independence offers control over time and money
• Making own decisions occurs with fame and success
• Using personal interests and skills happen with full control and profit retention

Enterprise and Entrepreneurship: Disadvantages

• Risk of failure with potential for financial loss
• Capital demands own resources or external funding
• Lack of knowledge and experience happen alongside instable income

Characteristics of Successful Entrepreneurs

• Successful entrepreneurs are good risk takers, hardworking, creative, optimistic, self-confident, innovative, independent, and effective communicators

Government Support for Business Start-Ups

• Government supports businesses that reduce unemployment, enhances competition, increases economic output, benefits society, and fosters growth

Business Plan

• Banks usually require a plan before offering financial aid

Bank Unwillingness

• Detailed planning is required since bank might be unwilling to lead if entrepreneurs are unprepared

Comparing Business Size Importance

• Investors want use in deciding on investments
• Governments requires the use for different tax rates for businesses
• Competitors to determine size and importance
• Workers to give an idea of how many people they are with
• Banks to determine a loan's importance comparative to size

Business Size Measurement

• Measured via number of employees, output value, total sales, and capital used

Employee Number: Advantages

• Easy to find
• Easy to compare with others

Employee Number: Limitations

• Some firms have few people, but levels are high as they use machines more

Output Value: Advantages

• Common to comparing size within the same industry

Output Value: Limitations

• High output levels can reflect expensive products

Value of Sales: Advantages

• Comparing retailing businesses selling similar products

Value of Sales: Limitations

• Different products affect comparison accuracy

Capital Employed: Advantages

• Comparing capital value invested into the business

Capital Employed: Limitations

• High worker number, but machines limited

Business Growth

• Desire arises with higher profits, status, lower costs, and bigger market influence
• Consumers are attracted to bigger businesses and salaries

Business Growth Type

• Growing within a business is internal, but it is slow and external happens with takeovers and mergers

External Growth Types

• Horizontal integration is combining firms in the same industry and production stage
• Vertical integration is when merging firms that are at different production stages and can be forward with later stage integration and/or backward can be early stage intergration
• Conglomerate integration is merging firms that exist in different industries and is called diversification

Integration Benefits

• Enhances economy
• Increases outlet numbers

Problems of Business Growth

• Not all expansion is successful
• Controllability and communication become poor with high costs

Overcoming Expansion Roadblocks

• Involves communication increase, finance use, and management enhancement

Small Business Reasons

• The business might not want to lose the close and personal services
• Type of industry, market size, and objectives

Business Failure Reasons

• Poor management leads to bad decisions
• Business environment change and poor financial management

Chapter 4: Types of Business Organisations

• Private sector businesses are owned by individuals

Sole Traders

• The sole proprietor is the most common business and set up regulation is not a lot

Sole Trader: Advantages

• Regulation is less, and has complete control that allows schedule and price changes

Sole Trader: Disadvantages

• No one to discuss business matters with
• Unlimited liability and limited source of financial support

Partnership

• Involves two people agreeing to run a business together, and can be created easily

Partnership: Advantages

• Invested capital and shared duties motivates increased work

Partnership: Disadvantages

• Unlimited liability, lack of separate identity, and disagreement that leads to limited investment

Private Limited Companies

• Owned by shareholders
• Business is now independent
• Can make contracts

Private Limited Companies: Advantages

• Shares can increase capital which leads to shareholders that can grow risk free with constant control

Private Limited Companies: Disadvantages

• It is difficult to gain large sale sums
• There are legalities and people are hesitant to be open for business

Public Limited Companies

• It suits large business because it can grow nationally
• In the public sector

Public Limited Companies: Advantages

• Limited liability, incorporation, and can grow shareholder investment