Business Activity Notes PDF

Understanding Business Activity 1.1.1 The purpose and nature of business activity Disclaimer: This document contains copyrighted materials that are intended solely for the use of the class. Unauthorized sharing of these materials with individuals who are not members of this class withou...

Understanding Business Activity 1.1.1 The purpose and nature of business activity Disclaimer: This document contains copyrighted materials that are intended solely for the use of the class. Unauthorized sharing of these materials with individuals who are not members of this class without obtaining permission from the document owner is strictly prohibited. Any unauthorized sharing may result in legal liability and copyright infringement. 1.1 Business Activity In this topic you will learn about ◎ Concepts of needs, wants, scarcity and opportunity cost ◎ Importance of specialisation ◎ Purpose of business activity ◎ The concept of adding value and how added value can be increased Needs, Wants and Scarcity ◎ People have unlimited wants ◎ However, there aren’t enough resources available to supply all of these wants ◎ This creates the problem of scarcity ◎ This occurs when there are limited resources available to supply unlimited wants i.e. scarcity ◎ Therefore, choices have to be made  Business Activity Basic Terms The central purpose of business activity is the production of goods and services to satisfy needs and wants. Needs are those things required that are essential to maintain survival. Wants are those things that are desired but not essential to survival. Scarcity occurs due to the fact that there are finite (limited) resources available to meet infinite (endless) wants and needs.  Business Activity Basic Terms A business is a decision-making organization established to produce goods and/or provide services. Goods are physical products, e.g., food, clothes, furniture, cars and smartphones. Services are intangible products, e.g., haircuts, tourism, public transport, banking, insurance education, and healthcare. The term product can refer to both goods and services.  The economic problem - The real cause ◎ The real cause of the shortage or scarcity of goods and services is that there are not enough factors of production to make all of the goods and services that the population needs and wants. The factors of production These are the resources needed to produce goods and services. They are the inputs into a production process in order to achieve an output: ❖ Land – natural resources such as agriculture, fishing, forestry, oils ❖ Labour – the skills available and characteristics of the workforce ❖ Capital – investment in man-made aids to production such as factories and machinery ❖ Enterprise – the risk undertaken by an entrepreneur in transforming the other factors of production into output in order to gain a reward, normally profit  Opportunity cost ◎ Opportunity cost can be defined as the benefit lost of the next best alternative when making a choice ◎ As all resources are scarce we must make choices in order to allocate these resources ◎ There are always competing alternatives when making choices e.g. should I buy a Pepsi or a Fanta ◉ If I buy a Fanta I have lost the benefit of the closest alternative, a Pepsi ◎ There is an opportunity cost for all decisions made Opportunity Cost Summary - The economic problem Specialisation / Division of Labor ◎ Specialisation occurs when economic units such as individuals, firms, regions or countries concentrate on producing specific goods or services ◎ Specialised use of workers within an organisation is called the division of labour ◎ Specialisation is likely to lead to increased output per worker (productivity) as the workforce have a better understanding of their job role ◎ This will help to address the problem of scarcity as there will be a greater supply of goods and services to meet unlimited wants ◎ Specialisation allows for the exchange of goods and services between the economic units Specialisation is very common now because: ◎ Specialised machinery and technology are now widely available ◎ Increasing competition means that businesses have to keep costs low ◎ Most people recognize that higher living standards can result from being specialised Case study example - p.5 Case study example - p.5 Advantages and Disadvantages of Division of labour  The Purpose of Business Activity Businesses combine the factors of ◎ To produce goods production to make ◎ To distribute products To make a products profit which satisfy ◎ To provide a service people’s wants. ◎ To help others ◎ To meet the needs of society Not for profit / social enterprises Add an example of each of the above from your local area  Say what you see MARGAPKET  Looking for a gap in the market ◎ It is important to identify whether or not there is a gap in the market And ◎ Whether that gap needs filling ◎ Sometimes there is a good reason for something not existing already! ◎ Where might you look? ◉ Trends in the market ◉ Bring in an idea from abroad ◉ Market research ◉ Meeting a personal need What about a dog wash? The Purpose of Business Activity ◎ Why might someone want to start up their own business? ◉ Challenge and satisfaction ◉ To make money ◉ Be own boss ◉ Provide employment for self and others ◉ Security for family – legacy of a family business  Business Activity ◎ Combines scarce factor of production to produce goods and services. ◎ Produces goods and services which are needed to satisfy the needs and wants of the population. ◎ Employs people as workers and pays them wages to allow them to consume products made by other people. ADDED VALUE  The Production Process Inputs are processed into outputs, which are goods or services.  Added Value Adding value is when a business increases the worth of its factor inputs (the factors of production) by creating new output (the new product). This added value can be measured in terms of financial worth. Example: The total value of inputs to a car might be worth $6000 in terms of metal, wages etc. and the firm sell the car for $10000 - adding value of $4000. Added value is the difference between the selling price of a product and the cost of bought-in materials and components. Value Added: Example 1 A bakery produces loaves of bread. The cost of ingredients per loaf is $0.50. The bakery incurs $800 in daily expenses and pays $150 per day in wages. Each loaf sells for $2. The bakery makes 1000 loaves each day. Question: What is the added value of each loaf of bread? Value Added: Example 1- Answer A bakery produces loaves of bread. The cost of ingredients per loaf is $0.50. The bakery incurs $800 in daily expenses and pays $150 per day in wages. Each loaf sells for $2. The bakery makes 1000 loaves each day. Question: What is the added value of each loaf of bread? Answer Cost per loaf: Ingredients $0.50 + Expenses/ loaf $800/1000 loaves = $ 0.8 + Daily wages/ loaf $150/ 1000 loaves = $0.15 Cost per loaf = 0.50+ 0.8 + 0.15 = $ 1.45 Selling price per loaf: $2. Added value per loaf: Selling price - Cost = $2 - $1.45 = $ 0.55 per loaf Value Added: Example 2 A coffee shop brews coffee. The cost of coffee beans per cup is $0.80. The shop has daily expenses of $500 and pays $100 per day in wages. Each cup of coffee sells for $3. The shop serves 300 cups daily. Question: What is the added value of each cup of coffee? Value Added: Example 2 - Answer A coffee shop brews coffee. The cost of coffee beans per cup is $0.80. The shop has daily expenses of $500 and pays $100 per day in wages. Each cup of coffee sells for $3. The shop serves 300 cups daily. Question: What is the added value of each cup of coffee? Answer Cost per cup: Ingredients (Coffee beans) $0.80 + Expenses/ cup $500/300 cups = $ 1.67 + Daily wages/ loaf $100/300 cups = $0.33 Cost per cup = 0.80+1.67+0.33 = 2.8 Selling price per cup: $3 Added value per cup: Selling price - Cost = $3 - $2.8 = $ 0.20 per cup The Need to Add Value Firms add value to a product to provide a competitive edge. This allows them to charge higher prices. Higher prices will allow for a bigger profit margin per unit sold. Profit margin is the difference between the cost of the item and its selling price. Profit = Sales - Cost How could a business increase added value? ◎ Increase the selling price but keep the cost of materials the same. ◉ Create higher image quality for the product ◎ Reduce the cost of materials but keep the price the same. ◉ **Lower price materials might reduce the quality of the product!  Bananas are Bananas! Why do you think that customers will pay more for bananas from a hypermarket, an application or supermarket than they will for bananas from a corner shop or local market? The main sources of Added Value: 1- Convenience and Speed ◎ Consumers look for ease of access and fast service when buying products ◎ Would it stop you from visiting a store if it wasn’t convenient and the service was slow? The main sources of Added Value: 2- Branding Organisations spend enormous amounts of time and money branding their company and products. Branding involves the creation of an identity for the business that distinguishes that firm and its products from other firms. Branding can add value to a product allowing firms to charge higher prices and also leads to brand loyalty whereby customers will continue to buy products from that firm. The main sources of Added Value 3- Quality and Design ◎ Quality is also important when providing a service, the measures we apply may however be different. ◉ Friendliness of staff ◉ Speed of service ◉ Efficiency of service ◉ Staff knowledge ◉ Cleanliness of facilities ◉ Appearance of environment The main sources of Added Value 4- Unique Selling Point ◉ A Unique Selling Point (USP) is something that distinguishes a firm's product from those of its competitors. ◉ Firms try to make their product different to the competition by adapting the actual product in some way or by distinguishing the product through advertising and branding. ◉ This is known as product differentiation. ◉ A USP can allow a firm to charge a premium price. Disclaimer: This document contains copyrighted materials that are intended solely for the use of the class. Unauthorized sharing of these materials with individuals who are not members of this class without obtaining permission from the document owner is strictly prohibited. Any unauthorized sharing may result in legal liability and copyright infringement.