Business activity: the process ‘of producing goods and servicos tsatisfy consumer demand. Need 2 good or service which is ‘essantial to ving, Want: 9 good or service which people would like, butis not essential fo living. oe —~ ToPTIP Itisimportant to learn key torms, Not only are thay important when, ‘answering questions, but many inthis chapter willalsohelp you tounderstand topics in later chapters, ness a Ess act 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 ood you eat, the clothes you wear, the bus ortrain you came to school on this morning, the music CDs you listen to, even this book ~ all these wore made by businesses. Businesses provide us ~ consumers - with all the goods and services that we need and would like to have. In this chapter you will learn about the purpose of business. You will look at how businesses turn resources into goods and services to meet all our needs and wants. The purpose and nature of business activity Needs and wants “The purpose of business aetivity is to providle consumers ~ that’s you und swith 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, Wants are different. They are any goods or services which people would like to have. They are not essential for living. Mobile phones, cars and holidays are good examples. Customers in ashopRei aces fed Re eee ed ear ecu ra eee a 1 Make alist of your ten most important ‘wants! 2. Doyouown any ofthese items? If not 3. It you are lucky enough to onn all ofthese items, dees 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 ail 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, the of these problems is that consumers do not have enough money! L is the case the cause 's see if this \CTIVITY 1. Avery small island country hes the following supplias f the four groups of goods and services identified as basic needs, Water 50000 litres Food 10000 kilos Clothing 8000 units Housing, 00 The country has a popu essential living on of 500 families. Each family unit must have the following quantities of each basic need for Clothing 20 uni Housing 1 2. Using the information inthe tables, calculate whether there is enough supply of basic needs in this country to support the essential tiving of all the familie 2. 1f100 peoplein the country hai armuch higher income than the rest of the population, what might happen?Scarcity and opportunity cost In Activity 1.2, you may have worked out that money alone cannot solve the i problem. There are just not enough goods and services to meet the needs and ited Factors of unlimited wants of all consumers ~ this is known as the economic problem. If reae thisis the case, then the answer is simple ~ produce more goods and services! juctior Unfortunately, the answer is not so simple. To understand why not, first we need je to pc to look at factors of production, vices = land labour “The production of goods and services requires four factors of production: 1 Landis 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 np services. “The orm capital has several = Entorprise is people prepared to take the risk of setting up businesses - they are ‘meanings in business. Make sure enol ascites rene: you understand itsmeaningas a factor of production. Land FACTORS OF PRODUCTION Enterprise Gay Labour Capital Figure 1.1 Factors of productionSoar M erent ire its Figure 1.2 Scarcity However, there are not enough of these factors of production in the worl. ‘This means that it is not possible to makeall 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 produce al the goods and services needed to meet consumers’ wants. So, choices have to be made. Weeall 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 making the choice you need to make sure that the product or service you choose is 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. ren tiaie Fatima works ina bakery antl earns $120 per week. Fetima’s grandfather has given her $5000: Fatima is going to use this ‘money to start her own business. Shes going to make cakes for special occasions such as birthdays, weddings and religious festivals, 1. Give.an example for each ofthe four factors of production Fatima will use in her new business, 2 Whatis 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, Tis not only consumers like you who have to make choices about how to use (pou scarce resources, Businesses and governments aleo have limited resources and must choose betiveen alternative ses of those resources, For example, business might have to choose between using resources on an advertising campaign, or ‘on a training programme for is employees. A government might have to choose between building a new school ora new hospital Importance of specialisation We have seen how consumers, businesses and governments must make choices, ‘They must do this because ofthe scarcity of goods and services which results from limited factors of production. For this reason, it is very important that thefeet Figure 1.3Asingle ‘employee and the production process factors of production are not wasted on the production of goods and services that consumers do not need ot want. Most goods and services are produced by more than one person. The production 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 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 lovrer prices than before specialisation took place. A good example of specialisation in business is Microsoft, which develops and produces computer software, concer Making footballs Global Sports manufactures sports equipment. Its most popular product is footballs. ‘To make one football requires five employees. Bach employee completes a separate task, usually with the aid of specialised nachinery. ‘The five stages in making a football are: Panels are cut out of sheets feather, {A design and logo are stamped on the panels. ‘The panels are stitched together into the shape ofa football ‘The bladder is inserted into the ball ‘The ball is moulded into the correct shape and inflated tothe correct pressure, Making a football TASK Identify an example ofthe factor of production ‘capital bb Use theinformation here to explain ‘dhision of labour. € Identify two reasons why Global Sports benelits from specialisation. 4_ Explain one benefit to Global Sports end one benefit to its customers of specialisationDra eee at Labour productivity: see Chapter 15, page 204. Specialisation of labour is now commonplace in the workplace. Instead of employees producing one product from start to finish, they focus on just one skill ‘The production of a product now requires several employees, each using their skill. This fs an example of the division of labour. Since each employee is now specialising in just one skil, they become far more efficient and thi productivity of labour. In the past, most products were made by employees with only basic tools and equipment. The development of machinery and advances in technology have changed the production process. Machinery and equipment have become far more specialised and this has greatly increased the efficiency of capital. 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, reases the Purpose of business activity ‘We have already learnt that businesses take scarce resources ~ factors of production ~ and use these to produce the goods and services demanded by consumers. Without the activity of business there would be no products and services. ii ame ips Figure 1.4 The purpose of business activity Businesses produce different types of goods and services. These are known as: = consumer goods = consumer services = capital goods. Consumer goods 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 non-durable consumer goods: "© Durable consumer goods can be used over and over again, for example televi computers, cars, tables and chairs. ‘= Non-durable consumer goods can only be used once, for example food and drink, isetd Figure L.5 Consumer goods Consumer services Consumer services are products which are also sold to the public, but they cannot be seen or touched (intangible), for example insurance, banking and bus journeys. You can sce and touch the buildings where insurance and banking services take place and you can obviously see and touch a bus, but you are not buying these items, you are using a service which they provide and this service cannot be seen or touched. Figure 1.6 Consumer service Capital goods Capital goods are products which ate sold to other businesses to help them in thetr production process. ‘hese are physical goods such as machines, computers and delivery vehicles RI Products (RTP) isa 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 6000000 printer cartridges. RTP will be able to produce 30% more cartridges this year IRTP sell its printers to businesses and private individuals for use with their computers at home. TASK ‘a Calculate the number of printer cartridges RT? wil be able to produce this year, Use the information hereto exolain the difference between ‘consumer goods’ and ‘capital goods’. ‘€ Doyou think the Operations Director should introduce division of labour into the production of printers? Justify vyouranswer.Carer DPM ere ia at Adding value ‘Whatever good or service a business produces, it will ry to add value at every stage ofthe production process. It does this by taking raw materials and turning them into a good or service which it sells to customers ata price greater than the cost ofthe 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. = How businesses increase added value ‘Added value is not the same as profit. You will learn later how a business calculates 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. S. = Profit will increase ifa business is able to increase its added value without How abusinesscatculates increasing its costs. In practic, itis dificult to increase value without increasing costs, profit: seechapter 2, Ifthe increase in added value is greater than the costs of achieving it, profits will rise. age 269. There area number of different ways a business can inerease its added value. oe Branding Have you ever wondered why Coca-Cola, Sony and other well-known companies apend huge sums of money on advertising and other promotional activities? They do this to build and then maintain their brand, The products produced by each af these companies all have close substitutes ~ that means you can buy other brands of dink and electronic goods. However, these companies are able to charge higher price than thetr competitors, even though the costs of production are likely to be quite similar, Branding increases adled value because people wont to or fe! they 9... should buy the item from this particular company. Trytoreadlecatandrational | aenepapers asaten syou | an. Therearetotcofbusiness | artices. You mayrotunderstand | everything, but itwill helpyou | tohave abetterunderstanding | of business, especialy nyour | country Youcouldcutoutary | articles or advertisements you thinkmoy be useful ite inthe course You could bring them nt School for your teachertokeepas a resource for future lessons ASubway outlet in AsiaTIVITY 1 Name yourtop ten brands, Then cut out advertisements from nenepapers 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 wil be higher than the price of a ready-made suit The cost ofthe materials used will be very similar, but the personalised servic increases the added value, Personalised service increases the cost of the product 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 isa very good example of how features and functions are used to increase the product’s added value. Conver nce 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, anuinared Explain ow these businesses add value: = restaurant = shoe manufacturer = housebbuitder floristGreed a CUBR earn Making leather bags and belts in Ethiopia Leather bags and belts in Ethiopia “The Ethiopian goverament is encouraging young entrepreneurs to start small businesses in order to reduce the rate of youth uncmployment. {In Hawassa City in southern Ethiopia, Mitike Paulos, her younger sister and three friends are producing leather bags and belts in a small workshop. Mitike and her sister learnt the eraft from their brother: They started business in 2011 with a $2000 loan from a simall-loan lender: They used the money to buy equipment and raw materials and torent their workshop. Today their business employs ten workers and, as they expand production, they also hope to hire more, ‘The more we work, the wwe grow says Mite. ‘Adapted from an article by Andualem Sisay, ww w.theafricareport.com/East-Horn-Africa/how-a-proup-of young. thiopians-beat-unemployment.html ples from the case study for each of the four factors of production, Using examples from the case study, define ‘business activity Hows the business helping to satisfy the needs of Mitike’s employees? How does this business add value? Explain two ways Mitike and her sister could increase their business's add value, aca Explain the difference between ‘needs’ and ‘wants Define scarcity Deline ‘the economic problem” Identity ewo ways a business might benefit rom using specialised machineryae ae 24 Business activity combines the factors of production to produce goods and services that meet consumer needs ‘and wants. The econamic problem and the problem ‘of scarcity are due to unlimited needs and ‘wants of consumers which cannot be met by businesses because they have limited factors of production, Choices must be ‘made and this creates an opportunity cost Specialisation of both labour and capital helps businesses to produce more goods and services at a lower cost Businesses add value by taking raw materials and turning these into goods and services that they can sell to consumers. Exam-style practice questions 4 Jonah is employed as a joiner by a firm whose main business activity is building houses. The firm also employs bricklayers, plumbers, painters and other skiled tradesmen. Other factors ‘of production are used when building housas. The owner of the firm, Jack, believes that specialisation of labour brings: many benefits to the business and its employees, Ini spare time, Jonah mekes wooden toys which his sister sells on her stall at the local market. He buys the wood and ther resourcas from a local supplier. The wooden toys have been so successful that Jonah has decided to leave his job ‘ag a joiner to set up his own toy-making business. Identify two stages of business activity a b_ Define ‘opportunity cost’ a Identify four factors of production. ol ‘@_expiain two ways Jonah could add value to his toys. fa € Do you agree with Jack that ‘specialisation of labour borings many benefits to the business and its employeos"? Justify your answer. fa 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 employee receives a good wage and this helps them to, mest thelr needs. Production is broken down into nine. processes. Employees spacialse in just one process. The marketing manager of Compary X has been asked by the directors to jook at ways of aciding value to the company’s products. Identify two factors of production, a b Define needs’ a © Cutline how Company X benefits rom specialisation. [4] d_ Expbiin two siages of Company X's production process ie) @ Suggest two ways the marketing manager might increase Company X's added value. Justify your answer. 6 Total available marks 40