Cambridge IGCSE and O Level Business Studies PDF

Mark Fisher, Medi Houghton and Veenu Jain Cambridge IGCSE® and O Level Business e pl Studies m Coursebook Sa Revised third edition  Mark Fisher, Medi Houghton and Veenu Jain Cambridge IGCSE® and O Level Business Studies...

Mark Fisher, Medi Houghton and Veenu Jain Cambridge IGCSE® and O Level Business e pl Studies m Coursebook Sa Revised third edition  Mark Fisher, Medi Houghton and Veenu Jain Cambridge IGCSE® and O Level Business Studies e Coursebook pl m Sa University Printing House, Cambridge cb2 8bs, United Kingdom One Liberty Plaza, 20th Floor, New York, ny 10006, USA 477 Williamstown Road, Port Melbourne, vic 3207, Australia 314–321, 3rd Floor, Plot 3, Splendor Forum, Jasola District Centre, New Delhi – 110025, India 79 Anson Road, #06–04/06, Singapore 079906 Cambridge University Press is part of the University of Cambridge. It furthers the University’s mission by disseminating knowledge in the pursuit of education, learning and research at the highest international levels of excellence. www.cambridge.org Information on this title: www.cambridge.org/9781108563987 (Paperback) www.cambridge.org/9781108348256 (Paperback + Cambridge Elevate enhanced edition, 2 years) e www.cambridge.org/9781108441759 (Cambridge Elevate enhanced edition, 2 years) © Cambridge University Press 2018 This publication is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, First published 2002 Second edition 2010 Third edition 2014 Revised third edition 2018 pl no reproduction of any part may take place without the written permission of Cambridge University Press. m 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Printed in Dubai by Oriental Press A catalogue record for this publication is available from the British Library isbn 978-1-108-56398-7 Paperback Sa isbn 978-1-108-34825-6 Paperback + Cambridge Elevate enhanced edition, 2 years isbn 978-1-108-44175-9 Cambridge Elevate enhanced edition, 2 years Additional resources for this publication are available at www.cambridge.org/9781108563987 Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or third-party internet websites referred to in this publication, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate. IGCSE is a registered trademark. The questions, example answers, marks awarded and/or comments that appear in this resource were written by the authors and are not the responsibility of Cambridge Assessment International Education. In examination, the way the marks would be awarded may be different. notice to teachers in the uk It is illegal to reproduce any part of this work in material form (including photocopying and electronic storage) except under the following circumstances: (i) where you are abiding by a licence granted to your school or institution by the Copyright Licensing Agency; (ii) where no such licence exists, or where you wish to exceed the terms of a licence, and you have gained the written permission of Cambridge University Press; (iii) where you are allowed to reproduce without permission under the provisions of Chapter 3 of the Copyright, Designs and Patents Act 1988, which covers, for example, the reproduction of short passages within certain types of educational anthology and reproduction for the purpose of setting examination questions.  Contents Contents Introduction6 Section 1: Understanding business activity 8 1 Business activity 9 2 Classification of businesses 20 3 Enterprise, business growth and size 28 4 Types of business organisation 45 5 Business objectives and stakeholder objectives 57 Exam-style case study 68 e Section 2: People in business 70 6 Motivating employees 71 7 8 9 pl Organisation and management Recruitment, selection and training of employees Internal and external communication Exam-style case study 89 106 122 136 3 m Section 3: Marketing 138 10 Marketing, competition and the customer 139 11 Market research 153 Sa 12 Marketing mix: product and price 164 13 Marketing mix: place and promotion 179 14 Marketing strategy 190 Exam-style case study 200 Section 4: Operations management 202 15 Production of goods and services 203 16 Costs, scale of production and break-even analysis 215 17 Achieving quality production 229 18 Location decisions 235 Exam-style case study 242  Cambridge IGCSE and O Level Business Studies Contents Section 5: Financial information and decisions 244 19 Business finance: needs and sources 245 20 Cash-flow forecasting and working capital 258 21 Income statements 268 22 Statement of financial position 277 23 Analysis of accounts 283 Exam-style case study 296 Section 6: External influences on business activity 298 24 Economic issues 299 25 Environmental and ethical issues 313 e 26 Business and the international economy 327 Exam-style case study 340 4 pl 27 Preparing for assessment Glossary360 Index366 343 m Acknowledgements371 Sa Sa m pl e  Cambridge IGCSE and O Level Business Studies Introduction Introduction This book has been specifically written to support the latest Cambridge IGCSE® (0450 and 0986) and O Level (7115) Business Studies syllabuses for examination from 2020. It may also prove useful for students following other courses covering similar topics. Written in clear and accessible language, it will enable you to gain the knowledge, understanding and skills required to study successfully at this level. Syllabuses and assessment The Cambridge IGCSE and O Level syllabuses have the same assessment model, consisting of two separately examined papers. You must take both papers in order to be awarded the qualification. Paper 1 consists of short answer and data response questions, while Paper 2 is a case study. e The book provides thorough support to help you study the course. Exam-style short answer and data response questions are included at the end of each chapter, with an exam-style case study at the end of each section. In addition, Chapter 27 will help you to consider the skills that you have 6 pl developed during your course and explore ways in which you could demonstrate these skills when answering assessment questions. It also includes advice on revision techniques. Therefore, you may wish to read this chapter before attempting the practice questions at the end of each chapter/section. m How to use this book The book is designed to be a practical guide using questions and case studies to help develop understanding, and assumes no prior knowledge of the topics. The structure of the book is aligned to the syllabus order with sections and chapters Sa within the book following syllabus headings to aid learning. However, chapters do not need to be studied in this order. Each chapter has a similar structure. The content is introduced in a way that is relevant to real life, and learning objectives set out the aims of the chapter. The main features are as follows: KEY TERM Key terms help you identify and understand important concepts. A glossary of all the key terms and their definitions is included at the end of the book. ACTIVITY 1.3 Activities build key skills required by the learning objectives – application, analysis and evaluation – and will help to consolidate learning. Many of the activities include a case study-style scenario, followed by questions. CASE STUDY Case studies from around the world put the topic into a real-life context.  Introduction Fast forward / rewind show where concepts appear elsewhere in the book, providing students with a handy link to support their learning. Top tips offer guidance and advice on key points. EXPLORE! Explore! provides ideas for extra activities to broaden understanding of the topic. TEST YOURSELF Test yourself questions aid self-assessment and reinforce knowledge. e EXAMPLE Example boxes put theory into context by providing worked examples. Revision checklist pl Summary points at the end of the chapter consolidate learning. 7 m Exam practice questions will help you to familiarise yourself with the style of Exam practice questions questions seen in examination, and assess your own understanding and skills to answer them. Sa Case study questions at the end of each unit offer extensive help to practise Exam-style case study answering case study-style questions. Additional resources Addtional resources to help consolidate key concepts and check understanding are available at www.cambridge.org/9781108563987. These include: mind maps revision questions multiple choice questions crosswords, word searches and other fun activities. If your coursebook includes access to the Cambridge Elevate enhanced edition, these materials are available for download within the resource.  e 8 pl m Section 1: Understanding business Sa activity This section introduces you to the basic building blocks of business studies. You will learn about the nature and purpose of business activity and the importance of needs, wants, scarcity, opportunity cost, specialisation and adding value. You will find out how business activities are classified, for example in the private sector or the public sector, and how this classification affects business objectives. You will also learn about the advantages and disadvantages of different forms of business and the role of entrepreneurs. The activities of all businesses affect several different groups of people. These groups, or stakeholders, will have their own objectives for the business and you will learn what these are and how they may influence or be influenced by the activity of the business.  1 Objectives Business activity Introduction The business world is all around us. From the minute we get up in the morning to when we go to bed at night, we are using things made by businesses around the world. Think about the food you eat, the clothes you wear, the bus or train you came In this chapter you will to school on this morning, the music CDs you listen to, even this book – all these learn about: were made by businesses. needs, wants, scarcity and Businesses provide us – consumers – with all the goods and services that we need opportunity cost and would like to have. In this chapter you will learn about the purpose of business. the importance of You will look at how businesses turn resources into goods and services to meet all specialisation to businesses our needs and wants. and consumers e the purpose of business The purpose and nature of business activity activity what is meant by ‘added value’ Needs and wants how a business adds value. KEY TERMS pl The purpose of business activity is to provide consumers – that’s you and me – with goods and services that meet our needs and wants. But what are needs? How are they different from wants? A need is any good or service which people must have to be able to live. Water, food, shelter and clothing are essential needs for living. 9 m Business activity: the process Wants are different. They are any goods or services which people would like to of producing goods and services have. They are not essential for living. Mobile phones, cars and holidays are good to satisfy consumer demand. examples. Need: a good or service which is essential to living. Want: a good or service which Sa people would like, but is not essential for living. TOP TIP It is important to learn key terms. Not only are they important when answering questions, but many in this chapter will also help you to understand topics in later chapters. Customers in a shop  Cambridge IGCSE and O Level Business Studies Section 1 Understanding business activity activity 1.1 1 Make a list of your ten most important ‘wants’. 2 Do you own any of these items? If not, why not? 3 If you are lucky enough to own all of these items, does this mean that you no longer have any wants? You have probably identified things that you still want. The main reason you may have given for not having all of your wants is you may not have enough money to buy them. Even if you are able to buy these wants in the future, you may have other wants. This is because our wants are unlimited. Throughout the world there are many people who are so poor that they cannot afford to buy the things they need for living, let alone afford their wants. So, some people cannot afford to buy their basic needs. Others, who can afford their basic needs, cannot afford to buy what they want. Surely, then, the cause of these problems is that consumers do not have enough money! Let’s see if this e is the case. activity 1.2 10 pl A very small island country has the following supplies of the four groups of goods and services identified as basic needs. Basic need Quantity available m Water 50 000 litres Food 10 000 kilos Clothing 8 000 units Housing 400 Sa The country has a population of 500 families. Each family unit must have the following quantities of each basic need for essential living. Basic need Quantity needed per family unit Water 100 litres Food 25 kilos Clothing 20 units Housing 1 In small groups: 1 Using the information in the tables, calculate whether there is enough supply of basic needs in this country to support the essential living of all the families. 2 If 100 people in the country had a much higher income than the rest of the population, what might happen?  1: Business activity KEY TERMS Scarcity and opportunity cost In Activity 1.2, you may have worked out that money alone cannot solve the Economic problem: unlimited wants cannot be met because problem. There are just not enough goods and services to meet the needs and there are limited factors of unlimited wants of all consumers – this is known as the economic problem. If production. This creates scarcity. this is the case, then the answer is simple – produce more goods and services! Factors of production: the Unfortunately, the answer is not so simple. To understand why not, first we need resources needed to produce to look at factors of production. goods and services – land, labour, The production of goods and services requires four factors of production: capital and enterprise. Land is all natural resources such as minerals, ores, fields, oil and forests. Labour is the number of people available to work. Capital is machinery, equipment and finance needed for production of goods and TOP TIP services. The term ‘capital’ has several Enterprise is people prepared to take the risk of setting up businesses – they are meanings in business. Make sure known as entrepreneurs. you understand its meaning as a e factor of production. pl 11 m Sa Figure 1.1 Factors of production  Cambridge IGCSE and O Level Business Studies Section 1 Understanding business activity Figure 1.2 Scarcity However, there are not enough of these factors of production in the world. This means that it is not possible to make all the goods and services needed or wanted by the world’s population. In other words, the unlimited wants of consumers cannot be satisfied because the factors of production required to produce the goods and services to meet those wants are limited. This is the problem of scarcity. We have seen that there are not enough resources to e produce all the goods and services needed to meet consumers’ wants. So, KEY TERMS choices have to be made. 12 Scarcity: there are not enough goods and services to meet the wants of the population. Opportunity cost: the benefit that could have been gained from pl We all make choices in our everyday lives. Do you choose to go to the cinema with friends or spend the money on a new computer game? Perhaps you have enough money to buy the latest CD release from your favourite pop star, or you can use the money to buy a Business Studies revision textbook. Whichever decision you make will mean that you will have to give up the chance of having the other. When m an alternative use of the same making the choice you need to make sure that the product or service you choose is resource. worth more to you than the one you give up. The next best alternative you give up is known as the opportunity cost of your decision. activity 1.3 Sa Fatima works in a bakery and earns $120 per week. Fatima’s grandfather has given her $5000. Fatima is going to use this money to start her own business. She is going to make cakes for special occasions such as birthdays, weddings and religious festivals. 1 Give an example for each of the four factors of production Fatima will use in her new business. 2 What is the ‘opportunity cost’ to Fatima of her decision to start her own business? 3 Is Fatima’s business meeting consumer ‘needs’ or consumer ‘wants’? Justify your answer. It is not only consumers like you who have to make choices about how to use EXPLORE! scarce resources. Businesses and governments also have limited resources and Use newspapers, library resources must choose between alternative uses of those resources. For example, a business or the internet to research the might have to choose between using resources on an advertising campaign, or things that your government on a training programme for its employees. A government might have to choose spends money on. Have a class discussion about between building a new school or a new hospital. the opportunity cost of these spending decisions. If you were a member of the government Importance of specialisation would you spend the money We have seen how consumers, businesses and governments must make choices. differently? They must do this because of the scarcity of goods and services which results from limited factors of production. For this reason, it is very important that the  1: Business activity Figure 1.3 A single employee and the production process factors of production are not wasted on the production of goods and services that consumers do not need or want. Most goods and services are produced by more than one person. The production e process often uses machinery and equipment which has been specially designed to produce a specific good. This is very different from the production that would have taken place hundreds of years ago. Then a product would have been produced by KEY TERM Specialisation: people and businesses concentrate on what they are best at. pl just one person using machinery and equipment which was far less specialised. The increasing specialisation of factors of production has meant that businesses are far more efficient than they once were. Specialisation reduces the costs of production. This benefits consumers by providing more goods and services at lower prices than before specialisation took place. A good example of specialisation in 13 m business is Microsoft, which develops and produces computer soft ware. caSE StUDy Making footballs Global Sports manufactures sports equipment. Its most popular Sa product is footballs. To make one football requires five employees. Each employee completes a separate task, usually with the aid of specialised machinery. The five stages in making a football are: 1 Panels are cut out of sheets of leather. 2 A design and logo are stamped on the panels. 3 The panels are stitched together into the shape of a football. 4 The bladder is inserted into the ball. 5 The ball is moulded into the correct shape and inflated to the correct pressure. Making a football TASK a Identify an example of the factor of production ‘capital’. b Use the information here to explain ‘division of labour’. c Identify two reasons why Global Sports benefits from specialisation. d Explain one benefit to Global Sports and one benefit to its customers of specialisation.  Cambridge IGCSE and O Level Business Studies Section 1 Understanding business activity Specialisation of labour is now commonplace in the workplace. Instead of Labour productivity: see employees producing one product from start to finish, they focus on just one skill. Chapter 15, page 204. The production of a product now requires several employees, each using their skill. This is an example of the division of labour. Since each employee is now specialising in just one skill, they become far more efficient and this increases the productivity of labour. KEY TERM In the past, most products were made by employees with only basic tools and Division of labour: production equipment. The development of machinery and advances in technology have is divided into separate tasks and changed the production process. Machinery and equipment have become far more each employee does just one of specialised and this has greatly increased the efficiency of capital. those tasks. Even entrepreneurs have realised the benefits of specialisation. There are many examples of businesses that specialise in the production or supply of just one type of product. EXPLORE! Use the internet, newspapers Purpose of business activity and other resources to research We have already learnt that businesses take scarce resources – factors of e businesses in your country which production – and use these to produce the goods and services demanded produce or supply only one type of product. For example, look at by consumers. Without the activity of business there would be no products farmers to see if they grow only and services. 14 one type of cereal, or rear only one type of animal. Are there any retailers or professionals who supply only one type of good or service? What do you think are the pl m benefits and limitations to these businesses of specialising in the production or supply of just one type of good? Figure 1.4 The purpose of business activity Sa Businesses produce different types of goods and services. These are known as: consumer goods consumer services capital goods. Consumer goods KEY TERM Consumer goods are those goods which are sold to the public that they can see (physical goods) and touch (tangible goods). These can be divided into durable and Consumer goods: products which are sold to the final non-durable consumer goods: consumer. They can be seen and touched, for example computers Durable consumer goods can be used over and over again, for example televisions, and food. computers, cars, tables and chairs. Non-durable consumer goods can only be used once, for example food and drink.  1: Business activity e Figure 1.5 Consumer goods KEY TERMS Consumer services: non- pl Consumer services Consumer services are products which are also sold to the public, but they cannot be seen or touched (intangible), for example insurance, 15 m tangible products such as banking and bus journeys. You can see and touch insurance services, transport. the buildings where insurance and banking Capital goods: physical goods, such as machinery and delivery services take place and you can obviously see vehicles, used by other businesses and touch a bus, but you are not buying these to help produce other goods and items, you are using a service which they provide Sa services. and this service cannot be seen or touched. Figure 1.6 Consumer service Capital goods Capital goods are products which are sold to other businesses to help them in their production process. These are physical goods such as machines, computers and delivery vehicles. caSE StUDy RT Products (RTP) is a manufacturer of printers. It also manufactures replacement ink cartridges for its printers. Each employee assembles all of the different components into making one computer. The Operations Director is considering introducing division of labour into the production of computers. RTP has recently invested in new computer-controlled equipment to help manufacture printer cartridges. Last year it produced 600 000 printer cartridges. RTP will be able to produce 30% more cartridges this year. RTP sells its printers to businesses and private individuals for use with their computers at home. TASK a Calculate the number of printer cartridges RTP will be able to produce this year. b Use the information here to explain the difference between ‘consumer goods’ and ‘capital goods’. c Do you think the Operations Director should introduce division of labour into the production of printers? Justify your answer.  Cambridge IGCSE and O Level Business Studies Section 1 Understanding business activity Adding value Whatever good or service a business produces, it will try to add value at every stage of the production process. It does this by taking raw materials and turning them into a good or service which it sells to customers at a price greater than the cost of the raw materials used in their production. Added value is one of the most important objectives of business. Figure 1.7 shows how value is added in the production of a cake. e Figure 1.7 Adding value How businesses increase added value Added value is not the same as profit. You will learn later how a business calculates 16 How a business calculates pl profit. All you need to know now is that other costs such as employees’ wages and energy costs must be deducted from the added value to calculate profit. Profit will increase if a business is able to increase its added value without increasing its costs. In practice, it is difficult to increase value without increasing costs. m profit: see Chapter 21, If the increase in added value is greater than the costs of achieving it, profits will rise. page 269. There are a number of different ways a business can increase its added value. Branding Have you ever wondered why Coca-Cola, Sony and other well-known companies spend huge sums of money on advertising and other promotional activities? They Sa do this to build and then maintain their brand. The products produced by each of these companies all have close substitutes – that means you can buy other brands of drink and electronic goods. However, these companies are able to charge a higher price than their competitors, even though the costs of production are likely to be quite similar. Branding increases added value because people want to or feel they should buy the item from this particular company. TOP TIP Try to read local and national newspapers as often as you can. There are lots of business articles. You may not understand everything, but it will help you to have a better understanding of business, especially in your country. You could cut out any articles or advertisements you think may be useful later in the course. You could bring them into school for your teacher to keep as a resource for future lessons. A Subway outlet in Asia  1: Business activity activity 1.4 Name your top ten brands. Then cut out advertisements from newspapers and magazines and make a poster. Excellent service quality In some industries, providing a high-quality, personalised service can be the difference between being able to charge a high price or one which is much lower. The price of a made-to-measure suit will be higher than the price of a ready-made suit. The cost of the materials used will be very similar, but the personalised service increases the added value. e pl 17 m Personalised service increases the cost of the product Sa Product features Products that have more features and functions than similar products on the market will allow the producer to charge a higher price. Although these additional features will increase costs, consumers are prepared to pay a much higher price than they would pay for a product with fewer features or functions. The mobile phone market is a very good example of how features and functions are used to increase the product’s added value. Convenience Many consumers lead busy lives and they are often prepared to pay a higher price for goods and services which they can have immediately or which save them time, for example ready meals. activity 1.5 Explain how these businesses add value: restaurant shoe manufacturer house builder florist.  Cambridge IGCSE and O Level Business Studies Section 1 Understanding business activity caSE StUDy Making leather bags and belts in Ethiopia e 18 youth unemployment. pl Leather bags and belts in Ethiopia The Ethiopian government is encouraging young entrepreneurs to start small businesses in order to reduce the rate of In Hawassa City in southern Ethiopia, Mitike Paulos, her younger sister and three friends are producing leather m bags and belts in a small workshop. Mitike and her sister learnt the craft from their brother. They started business in 2011 with a $2000 loan from a small-loan lender. They used the money to buy equipment and raw materials and to rent their workshop. Today their business employs ten workers and, as they expand production, they also hope to hire more. ‘The more we work, the more we grow,’ says Mitike. Adapted from an article by Andualem Sisay, www.theafricareport.com/East-Horn-Africa/how-a-group-of-young- Sa ethiopians-beat-unemployment.html TASK a Identify examples from the case study for each of the four factors of production. b Using examples from the case study, define ‘business activity’. c How is the business helping to satisfy the needs of Mitike’s employees? d How does this business add value? e Explain two ways Mitike and her sister could increase their business’s added value. tESt yOURSELF 1 Explain the difference between ‘needs’ and ‘wants’. 2 Define ‘scarcity’. 3 Define ‘the economic problem’. 4 Identify two ways a business might benefit from using specialised machinery.  1: Business activity Revision checklist Exam practice questions Business activity combines the factors of 1 Jonah is employed as a joiner by a firm whose main business production to produce goods and services activity is building houses. The firm also employs bricklayers, that meet consumer needs plumbers, painters and other skilled tradesmen. Other factors and wants. of production are used when building houses. The owner of The economic problem and the problem the firm, Jack, believes that specialisation of labour brings of scarcity are due to unlimited needs and many benefits to the business and its employees. wants of consumers which cannot be met by businesses because they have limited In his spare time, Jonah makes wooden toys which his sister factors of production. Choices must be sells on her stall at the local market. He buys the wood and made and this creates an opportunity cost. other resources from a local supplier. The wooden toys have Specialisation of both labour and capital been so successful that Jonah has decided to leave his job helps businesses to produce more goods as a joiner to set up his own toy-making business. and services at a lower cost. a Identify two stages of business activity. e Businesses add value by taking raw materials and turning these into goods and b Define ‘opportunity cost’. services that they can sell to consumers. c Identify four factors of production. pl d Explain two ways Jonah could add value to his toys. e Do you agree with Jack that ‘specialisation of labour brings many benefits to the business and its employees’? 19 m Justify your answer. 2 Company X is a manufacturer of pottery products, such as plates and bowls, which are mainly sold to hotels and restaurants. The company employs 50 workers. Each Sa employee receives a good wage and this helps them to meet their needs. Production is broken down into nine processes. Employees specialise in just one process. The marketing manager of Company X has been asked by the directors to look at ways of adding value to the company’s products. a Identify two factors of production. b Define ‘needs’. c Outline how Company X benefits from specialisation. d Explain two stages of Company X’s production process. e Suggest two ways the marketing manager might increase Company X’s added value. Justify your answer. Total available marks 40  2 Objectives Classification of businesses Introduction In the last chapter you looked at the purpose of business activity. In this chapter you are going to learn how business activity can be used to classify all the businesses in an economy and why it is important to classify businesses in this way. In this chapter you will What is an economy? The country where you live has an economy. It is a measure of learn about: all the wealth and resources in your country. It includes the things that your country primary, secondary and produces and the goods and services that consumers buy. tertiary sector business activity the changing importance Primary, secondary of the classification of and tertiary sectors e business activity by sector for developing and developed How businesses are classified economies Businesses produce a wide range of goods and how business enterprises are services to meet the needs and wants of consumers. 20 classified in the private sector and the public sector. pl The goods and services they produce can be used to classify all of a country’s businesses into one of three different sectors. We call these: the primary sector m the secondary sector Needs and wants: see the tertiary sector. Chapter 1, page 9. Primary sector Primary sector business activity involves extracting Sa or harvesting natural resources from the land or KEY TERM sea. These include agricultural products such as rice, Primary sector: firms whose fish, wood, coal and oil. Examples of primary sector business activity involves the business activity are: extraction of natural resources. farming Harvesting in a rice field fishing forestry mining. Primary sector business activity often provides raw materials for secondary sector business activity. An example is the extraction of oil which is used to produce petrol or plastics. However, some primary sector business activity produces final products. For example, consumers can buy raw vegetables, fruit and fish. activity 2.1 Make a list of the primary sector business activities found in your country, including the natural resources they produce.  2: Classification of businesses Secondary sector KEY TERM Secondary sector business activity takes the natural resources produced by primary sector activity and turns these raw materials into finished goods. The Secondary sector: firms that activities of the secondary sector include: process and manufacture goods from natural resources. refining manufacturing construction. Examples of secondary sector business activity include food canning, furniture making, car manufacturing and house building. e pl 21 m Sa A car manufacturing plant activity 2.2 Make a list of the secondary sector business activities found in your country, including the products they make. Tertiary sector KEY TERM Tertiary sector business activity involves providing services to the final consumers or businesses. Examples of tertiary sector businesses include: Tertiary sector: firms that supply a service to consumers and shops other businesses. restaurants banks cinemas airlines.  Cambridge IGCSE and O Level Business Studies Section 1 Understanding business activity These businesses provide services such as retailing, finance, entertainment TOP TIP and transport. You must be able to define and give examples of businesses found in each sector. Calculations are also quite common on this topic in examinations, for example calculating the number of employees in a sector. e Fast food at a cinema 22 activity 2.3 pl Make a list of the tertiary sector business activities found in your country, including the services they provide. m How the sectors depend on each other KEY TERM Although an economy can be divided into primary, secondary and tertiary sectors, the different sectors of business activity are often dependent upon each other. This Chain of production: the is known as a chain of production. Let’s look at oil, for example. Oil is extracted production and supply of goods from underground and is a business activity of the primary sector. Once it has been Sa to the final consumer involves activities from primary, secondary extracted, oil needs to be refined to produce other products such as petrol or gas. and tertiary sector businesses. This is a process carried out by businesses in the secondary sector. Finally, tertiary sector activity is needed to bring the petrol to your nearest petrol or gas station, for sale to the final consumer. Figure 2.1 Primary, secondary and tertiary sectors  2: Classification of businesses caSE StUDy Diamonds in South Africa group in South Petra Diamonds is a leading independent mining is exploring Africa. It has eight producing mines in Africa and for diamonds in Botswana. Source: www.petradiamonds.com Browns are a leading South facturing African jewellery store. They sell For over 28 years, Mark Solomon has been manu a wide range of diamond rings, htaki ngly beautiful pieces of diamond jewellery. Breat bracelets, neck laces and earrings. ns ranging beautiful South African diamonds are set in desig ement from stunning indiv idually crafted diamond engag e rings through to highly prized tanzanite jewellery. Source: www.brownsjewellers.com Source: www.marksolomonjewellers.co.za TASK pl a Using the information contained in the three articles above, define: i primary sector business activity 23 m ii secondary sector business activity iii tertiary sector business activity. b Explain how the three businesses form a ‘chain of production’. c Mark Solomon is also a retailer of diamond jewellery and Browns is also a manufacturer of diamond jewellery. What do you think are the benefits to both businesses of being both manufacturers and retailers? Sa Changing importance of business classification Countries are often described as developing or developed. A developing country, or less developed country (LDC), often has a small industrial sector and a lower standard of living compared to other countries. A developed country, or more developed country (MDC), has high levels of industrialisation and its people have higher average incomes and enjoy a higher standard of living compared to less developed countries. The classification of business activity by sector is not used to class a country as developing or developed. However, the size of a country’s different sectors of business activity often indicates if it has a developing or developed economy.  Cambridge IGCSE and O Level Business Studies Section 1 Understanding business activity activity 2.4 The data below shows countries which are currently classified as having developing or developed economies. Country data for business activity by sector Primary sector as a % of Secondary sector as a % Tertiary sector as a % of the total economy of the total economy the total economy Developing economies Rwanda 33.3 13.9 52.9 Vietnam 21.5 40.7 37.7 Zimbabwe 20.3 25.1 54.6 Developed economies Bermuda 0.7 7.0 92.3 e Japan 1.2 27.5 71.4 Norway 2.7 41.5 55.7 1 Which country has the lowest percentage of activity in the primary sector, but the highest percentage of business activity 24 in the tertiary sector? pl 2 Which country has the smallest percentage difference between primary business activity and secondary business activity? 3 Using data from the table to support your answer, is it true to say that countries whose tertiary sector is larger than their other two sectors of business activity are always developed economies? 4 What does the data in the table tell you about the relationship between primary business activity and developing and m developed economies? The importance of business classification has changed for many countries. There are two main reasons for this: Sa Industrialisation – the growing importance of secondary sector business activity and the reduced importance of primary sector business activity. The emerging economies of both China and India are good examples. De-industrialisation – the growing importance of the tertiary sector and the reduced importance of the secondary sector. The UK and the USA are good examples of this type of economic activity. However, the changing importance of business classification may also be due to the following: A change in consumer behaviour as a result of both industrialisation and de-industrialisation: o Higher incomes – consumers demand better quality and a wider choice of products. o Better education – consumers expect better products and know that they can buy goods from suppliers in a different region or country through e-commerce. o More leisure time – consumers work fewer hours than they used to. The demand for leisure activities, such as cinemas, restaurants and holidays, has increased.  2: Classification of businesses A change in business behaviour resulting from: o the need for finance to fund expansion so that businesses can compete in global markets o the need to be able to communicate internally and externally quickly and as cheaply as possible to take advantage of the opportunities of wider markets o the need to provide better services for employees, for example canteens; this in turn increases business demand for the goods and services of other businesses. tESt yOURSELF 1 Give one example of primary, secondary and tertiary sector business activity. 2 Explain the difference between primary sector and tertiary sector business activity. 3 Define ‘secondary sector business activity’. 4 Using an example, explain the relationship between business activities in the e primary, secondary and tertiary sectors. 5 How might the classification of business activity by sector be used to tell the difference between a developing and a developed economy? pl Business enterprises in the private and public sectors 25 m KEY TERMS Most countries in the world have mixed economies. These are economies that have both private sector and public sector organisations. Mixed economy: an economy In the private sector, businesses are owned and controlled by individuals or where the resources are owned groups of individuals, for example Sony, Tata Corporation and Apple. and controlled by both the private Sa In the public sector, organisations are owned by the country as a whole and the public sectors. and controlled by the state or government; for example, most countries have Private sector: the part of the economy that is owned and publicly owned television and radio broadcasting services such as SABC in controlled by individuals and South Africa. Figure 2.2 shows the main types of organisations found in a companies for profit. mixed economy. Public sector: the part of the economy that is controlled by the state or government. Mixed economy Private sector Public sector Franchises, joint Limited Government Public Nationalised Sole traders Partnerships ventures, social companies departments corporations industries enterprises Figure 2.2 Organisations in a mixed economy  Cambridge IGCSE and O Level Business Studies Section 1 Understanding business activity In a mixed economy, decisions about what to produce, how to produce and Sole traders, partnerships, for whom to produce are made by both the private sector and the public sector – private and public limited see Table 2.1. companies, franchises and joint ventures: see Private sector Public sector Chapter 4, page 45. What to produce Consumer choices The government decides How to produce Firms want to make profit The government decides EXPLORE! For whom to produce Customers’ buying power The government decides Use newspapers, library Table 2.1 Choices in the private and public sectors resources or the internet to research the private and public Private sector decisions sectors in your country. Draw bar In the private sector, consumers want to buy certain goods and services. Consumer charts or pie charts showing how choices help businesses to decide what they produce. important each sector is to your Businesses only produce the goods and services that consumers want if they can country’s economy, for example make a profit from doing so. Businesses decide the best way of producing their products. e how many people are employed in each sector. This is at the lowest cost so that they can make a profit when the products are sold. Identify the different The goods and services produced by private sector businesses will only organisations in the public sector be bought by people who have enough money to pay the price charged. Some of your country and the products 26 they provide. Which of these products are provided ‘free’ to the population and which ones do consumers have to pay for? Are there any products which pl consumers will not be able to buy products they want because they do not have enough money. Public sector decisions The decisions about what, how and for whom to produce in the public sector are all m are provided by both the private made by government. sector and the public sector? Why The public sector in many countries produces goods and services that all people do you think both sectors provide in the population need, for example electricity, roads, education and health care. these products? Government departments make decisions about how to produce these goods and services. The decisions are based on providing good-quality services to the public rather than making profit. Sa Some of the goods and services TOP TIP provided by the public sector are Knowing your own country’s provided free at the point of use, economy, and the businesses for example primary and secondary within it, will help you to better understand many of the key education and hospital treatment. terms and concepts you will study Other goods and services are sold to in this and later chapters. consumers. If some consumers do not have enough money to buy these goods and services, the government might sell them at a lower price, or provide them free of charge. A secondary school classroom tESt yOURSELF 1 State four forms of private sector business organisation. 2 Explain the role of four public sector organisations in your country. 3 Explain two differences between the private sector and the public sector. 4 Define ‘mixed economy’. 5 In a mixed economy how is the decision made about ‘what’ to produce?  2: Classification of businesses Revision checklist Exam practice questions Businesses in every country 1 Paul owns a fishing boat with his father John. They have been in business can be classified, according to together for over 15 years. Paul is thinking of investing money in his their activities, into primary, friend’s fish canning company – Pisces Products (PP). secondary and tertiary. PP sells most of its canned products to local supermarkets, but The primary, secondary and about 10% of the output is sold to public sector organisations such as tertiary sector businesses are linked because one provides schools and hospitals. the resources required a Identify two forms of business organisation (other than by another. supermarkets and fish canning) found in the private sector. The classification of businesses by activity is often b Define ‘public sector’. used to classify the economies c Outline how the decisions about ‘what to produce’ and ‘how to of countries into developing produce’ are made in the private sector of a mixed economy. or developed. e d Explain two differences between primary sector and secondary Most economies have a private sector and a public sector business activity. Use the information in the question to help sector. with your explanation. pl e Do you think Paul should invest in his friend’s fish canning company? Justify your answer. 2 Consider the following data for two countries, X and Y. 27 m Sectors Country X – size Country Y – size of business activity of business activity by sector by sector Primary 61% 3% Secondary 24% 32% Sa Tertiary 15% 56% Country X Country Y Size of private sector 28 49 Size of public sector 72 51 a Country X has a working population of 40 million. How many people work in the tertiary sector? b Define ‘primary sector’. c Outline two differences between the public sector and the private sector. d Using data from the tables, explain two differences between Country X and Country Y. e The people who live in Country Y are likely to have a higher income and a better standard of living than people who live in Country X. Do you agree? Justify your answer. Total available marks 40