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Business Activity

Unit 1. Introduction to business activity

2+Learning outcomes

Develop an understanding of needs, wants and scarcity

Understand the purpose of business activity

Develop knowledge of the objectives of non-profit making activity, private enterprise and public enterprise

Appreciate the concept of adding value

Definition of ‘scarcity’

The basic economic problem that arises because people have unlimited wants but resources are limited. Because of scarcity, various economic decisions must be made to allocate resources efficiently

3+What is enterprise?

The term “enterprise” has two common meanings.

Firstly, an enterprise is simply another name for a business.  You will often come across the use of the word when reading about start-ups and other businesses…“Simon Cowell’s enterprise” or “Michelle set up her successful enterprise after leaving teaching”.

Secondly, and perhaps more importantly, the word enterprise describes the actions of someone who shows some initiative by taking a risk by setting up, investing in and running a business.   

4+Business Activity

Businesses produce goods and services. These are the products of the business.

Which are goods and which are services?

5+Business Activity

6+Business Activity

Goods are things you can touch

Services are things that other people do for you

7+Needs and wants

What we need and what we want can sometimes be confusing.

Often you say you need a new iPod/mobile device when in fact you want it rather than need it.

Which items do you think people need and which items do you think people want?

8+Business in context

Kuwait Petroleum Corporation (KPC) is one of the world’s largest oil companies. The company makes products such as petrol and diesel from crude oil. Crude oil is oil in it’s raw or natural state. It occurs naturally in deposits within the earth. To produce the petrol that people buy from garages, KPC must first extract the crude oil from the earth. The company does this by drilling oil wells, many of which are under the sea. KPC then transports the crude oil to oil refineries where it is turned into petrol or other oil products customers want.

Individually answer the following questions:

1. What does KPC produce?

2. Does KPC produce goods or services?

3. Where can you buy KPC’s product?

4. What is KPC’s product made from?

5. Why do you think KPC produces petrol and diesel?

9+Business in context

1. KPC produces oil products such as petrol and diesel.

2. KPC produces goods (products).

3. KPC’s product can be purchased at garages and gas or petrol stations.

4. KPC’s product is made from raw or crude oil.

5. Student’s own answer. Points to consider could include:

KPC has the necessary raw materials in its country.

KPC has developed the skills to extract and produce petrol and diesel. This means it could seek new locations to find oil.

There is a market for the product.

10+

Think carefully about the following products and answer the questions.

(a)A loaf of bread (b) An oak coffee table (c) a book

1.What are the raw materials that each product is made of?

2.Where do these raw materials come from?

3. If society keeps using these raw materials, will they run out? Explain your answer.

Definition ‘raw materials’

A material or substance used in the primary production or manufacturing of a good.

1.1 Activity

11+1.1 Answers

1. Bread is made from flour; an oak coffee table is made of wood; the book is made of paper.

2. Flour is made from wheat that is grown on farms; wood comes from trees that grow on the land; paper is made from wood and other fibres.

3. Wheat and trees are both renewable. This means that as they are used to make products, new wheat and trees can be grown. However, while a new crop of wheat can be grown every year, it takes many years for trees to grow. If these resources are used to make products faster than they can be replaced, supplies will run out.

12+Demand and effective demand

Our wants influence the way we satisfy our needs. For instance, if you need food which would you choose to satisfy your need?

You may choose to satisfy your need by eating a burger because that is what you want.

13+Demand and effective demand

When you want something, you create a demand for it.

You have decided that you want the new iPhone 4S. What do you require to satisfy your want?

14+Demand and effective demand

To satisfy your want you will need money to pay for it as well as the willingness to spend the money on it. You may wish to spend the money on something else

15+

Your demand for an iPhone 4s will not be successful unless other people want the same phone too and have the money and are willing to pay for it.

Apple would not make these products if you are the only person who wants them. The same response applies to businesses.

This is called effective demand. People create effective demand when enough people want something and are able to and willing to pay for it.

Demand and effective demand

16+Needs and wants

NeedsNeeds

ClothingClothing ShelterShelter FoodFood

17+Needs and wants

WantsWants

ClothingClothing

JeansJeans

Party DressParty Dress

ShelterShelter

HouseHouse

ApartmentApartment

FoodFood

BurgerBurger

PizzaPizza

18+The purpose of business activity

Businesses have been set up to produce goods and services. These goods and services are supplied to individuals and other business organisations that want them.

There are many types of business organisation. Some are major international businesses and others are smaller local businesses.

Activity: Come up with 3 major international businesses and 3 smaller businesses that operate in their own country.

19+International

20+National

21+Regional

22+Local

23+Business Activity

Activity 1:

In pairs, list 3 major international businesses and 3 smaller businesses that operate in their own country and 3 local businesses.

24+Activity 1.2

1. What is the main difference between needs and wants?

2. Make two lists: the first showing the things that you need; the second listing things that you want.

3. Identify 3 kinds of businesses or organisations that supply each item on your lists.

4. Select two businesses that you have identified and explain why you think that they supply the item.

25+Activity 1.2 answers

1. Needs are items that we must have in order to live, whereas wants are items that we would like to have but which are not essential for us to live.

2. Student’s own answer. Needs include items such as food, water, shelter and clothing. Wants might include a certain style of clothing, a holiday, a mobile phone and so on.

3. Student’s own answer based on items identified in question 2.

4. Students own answer based on businesses identified in question 3. Reasons why the business supplies an item could be:

it wants to provide a service

it has spotted a market for the product to make money.

26+Private sector: private businesses and enterprises

Private Sector: Business activity owned financed and controlled by private individuals

27+Private sector

Self-employed traders

Professional firms

Small and large businesses

International companies

28+Public sector: businesses owned and run by the government are public enterprises Public Sector: Business Activity owned, financed and controlled

by the state through government or local authorities Government – key departments set policy and monitor

implementation Local Authorities – County Councils, District Councils Schools Hospitals Libraries Public Corporations – BBC Transport

29+Non-profit-making: a third type of enterprise

Non-profit-making organisations include charities and voluntary organisations.

These organisations are set up to fulfil a perceived social need or to provide help to a specific section of the community.

30+Similarities and differences

Non-profit-making and public sector organisations have profit as a high priority

The difference between these two is that public sector organisations is run by or on behalf of the government whilst non-profit-organisations could easily be set up by private individuals who want to support a specific cause.

The government focus on enriching society and ensuring a basic standard of living

31+Similarities and differences

Non-profit-making and public sector organisations have profit as a high priority

The difference between these two is that public sector organisations is run by or on behalf of the government whilst non-profit-organisations could easily be set up by private individuals who want to support a specific cause.

The government focus on enriching society and ensuring a basic standard of living

All organisations in the public and private sector are involved in some form of business activity and it is only their objectives that differ. For example: what, whom and why they produce goods and services.

32+Activity 1.3

1. Investigate the different types of business in your local area. You should find examples of private enterprise, public enterprise, and non-profit-making activity.

2. Identify the objectives of each.

3. Draw up a table

Type Organisation Objective

Private sector

Public sector

Non-profit-makng

33+Deciding on what to produce

Resources found on earth are finite or in limited supply such as:

Crude oil Gold Aluminum

34+Scarcity

Some resources such as air satisfy everybody’s needs but most resources are not plentiful enough for this.

Although trees are renewable you have to be careful of the amount of trees cut down taking into consideration of the time it takes for the replacement tree to grow.

35+Scarcity

36+Managing scarce resources

Since resources to produce goods and services are scarce a choice must be made to decide what to produce from them.

For example, furniture and houses can be made from timber so a decision needs to be made whether to cultivate trees for furniture or houses.

Similarly, if a government spends too much money on building skills then it will not be able to spend much on training extra doctors

37+Cost and opportunity cost If you want an iPod and a pair of shoes but only have

enough money to buy one of them, you will have to choose which one to buy. Both products cost money and that is their financial cost.

There is also an opportunity cost – the possibility of buying and enjoying the use of the other item.

If you buy the iPod, the opportunity cost of the iPod is the shoes

If you buy the shoes, the opportunity cost of the shoes is the iPod

Here's another example: if a gardener decides to grow carrots, his or her opportunity cost is the alternative crop that might have been grown instead (potatoes, tomatoes, pumpkins, etc.)

38+Business activity and the factors of production

Business activity involves the use of resources known as factors of production. These are:

Land

Labour

Capital

Enterprise

39+Factors of production: land

Land includes all resources that occur naturally.

Can you think of any?

40+Factors of production: labour

Labour is the effort of work provided by people.

Labour-intensive production can often be found in many developing countries. Labour-intensive production means labour is plentiful and relatively cheap compared with the technology available to do the job.

In more industrialised countries such as the UK labour-intensive production can be more expensive in terms of wages than the cost of running machinery.

41+Factors of production: capital

Capital includes items used in the production of goods and services made by people. These include:

Buildings

Machinery

Equipment

Finance required to purchase these items

Production that uses a high proportion of capital compared to labour is called capital-intensive. Capital-intensive production can be seen as a cheaper and more efficient production using the latest technology than by hand (labour-intensive)

42+Factors of production: enterprise

Enterprise is the ability, skill and enthusiasm to take risks involved in developing a business idea and gathering appropriate resources.

All businesses combine factors of production to produce goods and services that people want to buy.

A large company like Kuwait Petroleum Corporation will use all four elements to produce the final product (petrol or diesel).

1.Land- oil wells and refineries

2.Labour- staff

3.Capital- drilling equipment, pipelines, office buildings

4.Enterprise- the skill of senior management

43+Village fisherman

Land:

Labour:

Capital:

Enterprise:

44+Adding Value

Added value = the difference between the price of the finished product/service and the cost of the inputs involved in making it.

This is because of the work carried out increases the value of the parts and raw materials used. When the product is complete its value and the price it is sold at is more than the value of the factors of production used to make the product.

So added value is the increase in value that a business creates by undertaking the production process.

It is quite easy to think of some examples of how a production process can add value.

Consider the examples of new cars rolling down the production line being assembled by robots.  The final, completed and shiny new car that comes off the production line has a value (price) that is more than the cost of the sum of the parts.  Value has been added.  Exactly how much added value is determined by the price that a customer pays.

Alternatively, imagine a celebrity chef preparing a meal at his luxury restaurant.  Once the cooking is complete, the meal is being served and sold for a high price, substantially more than the cost of buying the ingredients.  Value has been added.

45+Activity 1.4

1. Consider one of the following businesses:

a farm

a furniture maker

a shop

a cosmetics manufacturer

a paper producer

a producer of music CDs

46+Activity 1.4

Construct a table like the one shown below. Complete your table with examples of the types of resources or factors of production used by your selected business. The first line of the table has been completed as an illustration.

Factors of production

Business Land Labour Capital Enterprise

Farm Land for grazing animals or growing crops

Farm workers

Tractors Skills and efforts of the farmer in setting up and running the farm

47+Activity 1.4

Design a poster of diagram showing how, by combining these resources and transforming them into a finished product, the business adds value to the resources.

48+Adding value

You don’t have to use robots or have the culinary skills of Gordon Ramsay to “add value”.  For example, businesses can add value by:

Building a brand – a reputation for quality, value etc that customers are prepared to pay for.  Nike trainers sell for much more than Hi-tec, even though the production costs per pair are probably pretty similar!

Delivering excellent service  – high quality, attentive personal service can make the difference between achieving a high price or a medium one

Product features and benefits  – for example, additional functionality in different versions of software can enable a software seller to charge higher prices; different models of motor vehicles are designed to achieve the same effect.

Offering convenience  – customers will often pay a little more for a product that they can have straightaway, or which saves them time.

A business that successfully adds value should find that it is able to operate profitably. Why?  Remember the definition of adding value: where the selling price is greater than the costs of making the product.

Do not confuse added value with profit as they are not the same (we will come to profit later)

49+Adding value Why would people pay a bit

more money for a loaf of bread than make it at home?

50+Summary

EnterpriseEnterpriseEnterpriseEnterprise

Opportunity Opportunity costcost

Opportunity Opportunity costcost

Factors of Factors of productionproductionFactors of Factors of productionproduction

ScarcityScarcityScarcityScarcity

Effective Effective demanddemandEffective Effective demanddemandDemandDemandDemandDemand

CapitalCapitalCapitalCapital

LabourLabourLabourLabour

LandLandLandLand

Supplying Supplying needs and needs and

wantswants

Supplying Supplying needs and needs and

wantswants

Goods and Goods and servicesservices

Goods and Goods and servicesservices

What is What is business?business?What is What is

business?business? ResourcesResourcesResourcesResources

Adding valueAdding valueAdding valueAdding value

Selling price Selling price minus costminus cost

Selling price Selling price minus costminus cost

51+Summary1. We all have needs and wants.

2. The main purpose of business activity is to supply the goods and services people want.

3. The objective of most private sector businesses is making a profit.

4. The main objective of public enterprise is to provide services to the local and national community.

5. The main objective of non-profit-making organisations is to meet a perceived social need or to provide help to a specific section of the community that is not met by private or public enterprise

6. Businesses produce goods and services using scarce resources known as factors of production: land, labour, capital, enterprise.

7. Value is added to the resources because of the work carried out to produce the finished product has a value that increases the value of the parts and raw materials used.

52+Key terms Added value – the difference between the selling price of

a product and the cost of raw materials used to make it

Effective demand – demand for a product that is backed up by the ability and willingness to pay for it

Factors of production – the four categories of resources that are used to produce goods and services: land, labour, capital, enterprise

Goods- tangible products that can be touched and consumed

Needs – things necessary to sustain life

Opportunity cost – the cost of something in terms of the next best thing

Private sector – the sector of business consisting of businesses owned by private individuals or groups

Profit – the profit a business makes is the amount by which its income from selling the goods and services it produces exceeds the costs of producing those goods and services

Public sector – the sector of business consisting of businesses owned by the state

Resources – items of limited availability that can be used in human activity

Services – things other people or businesses do for you

Wants – things chosen to satisfy a need or to make life more enjoyable

53

54+Factors of production

Match each factor of production to the correct description and example (cards).

Exemplar question:

What is meant by the term ‘added value’? (2)