Understanding The Economic Problem

The Economic Problem

• Needs are essential goods and services for living
• Wants are non-essential goods and services driven by desire
• Scarcity arises from insufficient products to meet total production wants
• Opportunity cost represents the value of the next best alternative forgone when making a choice
• The economic problem stems from unlimited wants and limited resources, creating scarcity
• The core issue is the inadequacy of production factors to satisfy population needs and wants

Factors of Production (FOP)

• Land includes natural resources like oil, gases, fields, and forests
• Labour represents the available workforce for production
• Capital refers to the finance, machinery, and equipment used in manufacturing
• Enterprise is the skill and risk-taking ability to combine resources for production

Scarcity Equation

• Scarcity is illustrated as: Unlimited wants + limited resources = scarcity

Importance of Specialization

• Maximizes the use of limited resources

Specialization

• It occurs when people or businesses concentrate on their strengths
• Division of labour splits production into separate tasks, each performed by a worker
• Specialization is common due to available machinery, technologies, and the need to reduce costs amid competition
• Higher living standards can result from specialization

Advantages of Specialization

• Efficiency and output increase as workers specialize in one task
• Less time wasted moving between tasks
• Training workers is quicker and cheaper due to fewer skills needed

Disadvantages of Specialization

• Workers may become bored, reducing efficiency
• Production might stop if an absent worker's task cannot be covered

Business Activity

• It combines scarce factors, produces goods and services, and employs people
• Businesses combine production factors to satisfy people's wants
• Added value is the difference between selling price and the cost of materials and components

Added Value

• If value isn't added, other costs cannot be covered, and no profit is made
• It ensures sales revenue is greater than the cost of materials
• Added value helps cover labour costs and other expenses, potentially leading to profit
• Businesses can increase added value by increasing prices while keeping material costs the same or by reducing material costs while maintaining the same price

Classification of Businesses - Primary Sector

• It extracts and uses natural resources to produce raw materials.

Classification of Businesses - Secondary Sector

• Manufactures goods using raw materials from the primary sector

Classification of Businesses - Tertiary Sector

• The industry provides services to consumers and other sectors

Relative Importance of Economic Sectors

• Determined by the percentage of workers employed and the value of output in each sector

Changes in Sector Importance

• De-industrialisation is the decline of the manufacturing or secondary sector
• De-industrialisation occurs when the secondary, manufacturing sector becomes less important in a country

Reasons for Sector Changes

• Depletion of primary product sources
• Developed economies losing manufacturing competitiveness to newly industrialized countries
• Increased consumer spending on services as wealth and living standards rise

Mixed Economy

• A mixed economy includes both private and public sectors
• Capital: Money invested into a business

Public vs Private Sector

• Private sector businesses are not owned by the government and make their own production decisions to make a profit
• Public sector businesses are owned and controlled by the government which decides what to produce, charges, and provides some free services funded by taxpayers
• Private sectors' efficiency is due to its profit objective and cost control
• Private sector owners may invest more capital
• Competition in the private sector enhances product quality
• The private sector prioritize cutting costs which may lead to more unemployment
• The private sector is less likely to prioritize social objectives

Entrepreneurship

• Entrepreneurs organize, operate, and take risks in new business ventures

Advantages of Being an Entrepreneur

• Independence in time and money management
• Ability to use personal skills and interests
• Potential for higher income than employment provides

Disadvantages of Being an Entrepreneur

• Risk of business failure, especially with poor planning
• Necessity of investing personal capital
• Challenges due to lack of knowledge and experience

Characteristics of Successful Entrepreneurs

• Hard working
• Creative
• Risk Taker

Business Plan

• It contains business objectives, operational details, finances, and ownership information

How a Business Plan Helps Entrepreneurs

• Banks require it for financing
• It aids decision-making with operational and financial details

Why Governments Support Business Start-ups

• To reduce unemployment by creating job opportunities
• To increase competition and consumer choices
• To foster the growth of potentially large and important firms

How Governments Help Start-ups

• Providing finance through low-interest loans
• Offering low-cost premises in 'Enterprise zones'
• Offering grants to train employees and increase productivity

Measuring Business Size

• Methods include the number of employees, value of output, sales and capital employed
• Investors, governments, and banks use it to compare businesses

Capital Employed

• It is the total value of capital used in the business

Limitations of Measuring Business Size

• The number of employees doesn't account for firms using capital-intensive production with few people but high output
• Value of output doesn't account for fewer people producing expensive computers vs more people producing cheaper products
• Value of sales can be misleading when comparing businesses selling different products
• Value of capital employed does not account for when companies are more labour intensive than capital intensive

Reasons to Expand Business

• To increase profits
• To lower average costs with economies of scale
• To attain status and prestige

Internal vs External Growth

• Internal growth expands existing operations
• External growth occurs through takeovers or mergers

Takeovers and Mergers

• A takeover is when one business buys out another
• Merger: Owners of two businesses agree to join together

Horizontal Integration

• It is the merger or takeover of businesses in the same industry and production stage

Vertical Integration

• It occurs when businesses merge or take over others in the same industry but at different production stages

Conglomerate Integration

• It happens when businesses merge or take over in a completely different industry

Internal Growth

• Businesses open more branches in town
• It is paid for by existing business profits which which is often slow but easier to manage

External Growth

• By external growth involving a takeover or merger with another business

Expanding a Business

• Expanding options include horizontal merger, vertical merger (forward or backward), and conglomerate merger

Merger Examples

• Horizontal merger: businesses in the same industry and production stage merge
• Vertical merger: businesses in the same industry but different production stages merge
• Forward vertical merger: sweet factory buys a sweets shop (closer to the consumer)
• Backward vertical merger: sweet shop buys a factory (closer to suppliers)
• Conglomerate merger: business building houses merges with a business making clothes

Benefits of Integration

• Horizontal integration reduces competition and provides opportunities for economies of scale
• Forward vertical integration assures product outlets and absorbs retailer's profit margin
• Backward vertical integration assures material supply and absorbs supplier's profit margin
• Conglomerate integration diversifies the business to spread risk and transfer ideas between business

Problems Linked to Business Growth

• Larger business are harder to control
• Expansion can strain finances and cause a shortage of available money
• Different management styles can cause a culture clash

Operating the Business in Small Units

• Expand slowly using profits
• Maintain open communication to ensure awareness of the changes and for what reasons

Why Some Businesses Remain Small

• Due to the type of industry, such as hairdressing, which require personal services
• It might be due to the market size being small, like rural shops
• Some owners focus on quality control and personal involvement, rather than expanding

Causes of Business Failure

• Lack of management skills lead to poor decision making
• New technology, competitors, or economic change cause the failure to plan for the future
• Poor financial management causes cash shortages
• Expanding too quickly creates management and financial problems

Types of Business Organizations

• Several main forms of business organisations in the private sector: Sole traders, partnerships, private limited companies, public limited companies, franchises, and joint ventures

Sole Trader

• A sole trader is a business owned by one person
• The owner operates the business alone
• There are few legal regulations
• The owner controls the business without the need to discuss with others
• He or she has the freedom to choose holidays, hours of work and employees to hire
• The sole trader is in close contact with its customers and provide satisfaction by responding to demands rapidly
• The trader has an incentive to work as he gets to keep all profits after tax
• The owner must discuss the matters alone as he is a sole owner
• There Is no limited liability and the business and owner are the same legal unity
• Finances for the sole trader are limited
• The capital for expansion is restricted so unlikely to benefit scale of economies
• Sole trader has no continuity after owner is gone

Limited Liability

• The liability of shareholders in a company is limited to only the amount they invested

Unlimited liability

• It means that the owners of a business can be held responsible for debts of the business they own with no investment limit

Partnership

• A partnership is formed when two or more people agree to jointly own a business
• A partnership agreement is a written and legal agreement between two + business partners
• Responsibilities can be now shared
• Both partners are motivated to work hard as they both benefit from profits
• There is no limited liability in most partnerships
• The business does not have a separate legal identity
• Limited partnerships have limited liability, their shares cannot be bought or sold
• They have a have a legal unit that exists until after the partner's death

Business Definition

• An unincorporated business operates without a separate legal identity. Sole trades and partnerships are examples of unincorporated businesses

Private Limited Companies

• An incorporated business has a separate legal status to its owners
• Shareholders are owners of a limited company with part-ownership represented in shares
• Private limited companies are owned by shareholders but they cannot sell shares to the public
• Shares can be sold to a large number of people and that lead to larger sums of capital invested
• Shareholder shave limited liability so less risk of investment

Risks of Starting Private Limited Companies

• There are many legal matters that need to be dealt with
• Shares cannot be sold or transferred to anyone else without the agreement of shareholders
• They are reluctant to invest as they can't sell shares if they are to get more investment Shares must be sold to a large number of shareholders
• They are afraid to invest as they aren't able to sell their shares quickly if they need investment back
• The accounts are less secret than sole traders
• This rapidly expanding business cannot offer its shares to the public so limits it to raise capital investment

Public Limited Companies

• These businesses are owned by shareholders, however, they can sell shares to the public which are tradeable on the Stock Exchange
• Provides the ability to expand and increase the capital

Advantages of Public Limited Companies

• They have a limited liability
• The business and operation will continue for as long as the shareholders live
• Raise larger capital sums and invest in business
• there is no restriction on buying selling or transferring of shares

Disadvantages of Public Limited Companies

• Legal formalities of forming this type of company is time consuming and complicated
• They face many more regulations and controls over these companies
• Selling shares to the public is expensive
• They are susceptible to over control concerns

Control and Ownership of Public Limited Companies

• Impossible for everyone to be involved in the decision making
• shareholders can choose the managers as company directors with are made in an election that attend a public meeting yearly
• It is for rapid expanding the business is restricted as it cannot offer its shares to the public Annual General Meeting is a require requirement for all companies and shareholders may attend to vote
• Dividends are payments that are made to shareholders which are payment from the profits for their return of the investment They run the business to meet their own objectives which can be growth justify higher management salaries or reducing dividends to shareholders to pay for expansion of the business

Franchising

• A franchise is a business based upon the use of the brand's name, promotional logos and trading methods of an existing successful business
• The franchisee buys the license to operate the business from the franchisor
• The franchisor is a business that needs others to sell the product by appointing franchisees ( e.g MacDonalds)
• expansion of the franchised business is much faster as the franchisor had to finance all new outlets
• Management of the outlets is responsible by the franchisee

Advantages of Franchising

• Reduced chances of business failure as the products sold are well known
  • Franchisor pays for advertising, supplies all and provides training management

Disadvantages of Franchising

• License fee must be paid to the franchisor and possibly a percentage or annual turnover
• Less independence than operating a non-franchised business
• Less ability to sell to the local area as they can use local decisions so local consumers' demands are not met

Joint Venture

• It is where two or more business start a new project together, sharing ,risks and profits
• Sharing of costs so the project is important and local business is achieved
• Risk are shared

Disadvantages of Joint Ventures

• The profits need to be shared
• Disagreements over important decisions
• business partners and have different ways of running a business

Public Corporation

• It is a business in the public sector that is owned and controlled by the government
• Public corporations are owned by the government but it does not directly operate the business Advantages and disadvantages of public corporations Some industries are considered so important that the government ownership is thought to be essential as water If business that provides water is failing it can nationalize to keep the jobs open and business functional Some important services like TV and Radio are kept in the public sector"
• The government does not need private shareholders to insist on high profit or efficiently if the business makers a loss

Government Role

• The use the business for political reasons to create more jobs before an election