Section 1: understanding the business
activity.
Chapter 1: business activity
Exam-style questions
Q1 Gowri plans to start up her own business using her savings. She wants to produce
fashionable clothes for women. She is a very good clothes designer but she does not like
stitching clothes together. Two friends have offered to help Gowri. Abha is an experienced
material or fabric cutter – she can cut lengths of material or fabric for clothes with very little
wastage. Aditi is quick at sewing fabric together.
a) Define ‘business’. [2]
A business is an organization which combines factors of production to produce products
both goods and services that satisfy consumer wants and needs, intending to make a profit.
b) Identify two factors of production that Gowri will need for her new business. [2]
Capital and labour
c) Outline two possible opportunity costs that Gowri may have from her decision to start her
own business. [4]
Setting up her own business might prevent gowri to spend time with family and friends as
being a sole trader requires a lot of time and effort.
Secondly, working with another company or designing clothes for others will be an
opportunity cost due to which her earnings may be lower.
d) Explain one advantage and one disadvantage to Gowri’s business of using division of
labour in making clothes. [6]
Advantage: increased labour productivity.
Explanation: concentrating on a specific task will make both Aditi and Abhia more efficient
and expert at their tasks. due to this productivity will increase and hence the quality of
clothes will be improved.
disadvantage: increased dependency on each other.
Explanation: if one of Abhia Or Aditi is absent, the production of clothes will be stopped as
Aditi will not be able to sew fabric if it is not cut by Abhia, who is the only labour specialised
for cutting fabric.
,e) Do you think that Gowri’s business will be able to sell all of the clothes that it makes?
Justify your answer. [6]
Gowri business is likely to sell all of the clothes produced as all of the labour is specialized,
due to which the production time will be low and a large number of clothes can be made in a
short time. secondly, if the design is unique, more consumers will be attracted towards it,
due to which high sales revenue will be earned.
However, as the business is new, all of the clothes may not be solid as consumers will lack
awareness about gowri’s clothes. secondly, existing competition in the market of clothes may
also prevent sales of gowri. Thirdly, if prices are kept higher to cover start-up costs, all
clothes are less likely to e sold.
Consequently, it may be difficult for gowri to sell all clothes it makes.
Q2: Mohammed owns a bakery. He makes bread and cakes. He employs three workers who
help him mix the dough for the bread and cakes, put the dough into tins, bake the bread and
cakes, and serve customers. Mohammed has calculated that the ‘added value’ of his
business is low. His customers complain when he tries to increase his prices. ‘We can buy
the same bread and cakes at lower prices,’ they tell him.
a) Define ‘added value’. [2]
Added value is the difference between the cost of bought-in materials and components used
and the selling price of that product.
b) Identify the opportunity cost to Mohammed of buying a new oven. [2]
It may be the earnings he would have made from investing the money somewhere else,
such as increasing promotions or advertisement of his bread and cakes.
c) Outline two benefits to Mohammed’s business of all of his workers being able to do all of
the jobs in the bakery. [4]
Firstly, in case of one labour being absent, the production will continue as all of his workers
being able to do all of the jobs means they are not restricted to only one task and hence are
not dependent on each other. Due to this the production process will not be disrupted in case
of absenteeism by one worker.
Secondly, because of this, workers can work faster and more efficiently. Due to this more
quantity of bread and cakes can be made in the same amount of time. This will lead to
increased output, hence resulting in increased sales revenue earned.
d ) Explain two ways in which Mohammed could increase the value added to his bakery
business. [6]
Firstly, Mohammed can reduce his costs such as by reducing waste or buying raw materials
i.e flour, butter and sugar in bulk. Due to this average costs of production will be lowered,
thereby allowing Mohammed to increase the added value of his bakery business.
Secondly, Mohasmmedf can charge higher prices for his bread and cakes. Due to this, a
higher average selling price will lead to a higher added value./ however, due to this demand
may fall.
,e) A friend told Mohammed, ‘Your business would be more successful if you only served in
the shop and let your workers make the bread and cakes.’ Do you agree? Justify your
answer. [6]
Serving bread and cakes himself can help Mohammed build an as good relationship with
customers and respond to their grievances such as high prices charged. Secondly, it will
allow him to know about the changes in consumer demand.
However, due to this, he will not contribute to the production, which might lead to a loss of
output and hence can reduce sales. Secondly, by this, the taste of the bread and cakes in
the hands of Mohammed may be lost which was appreciated by the customers.
Chapter 2: classification of businesses.
Exam-style questions :
Q1: Ade’s Engineering Company (AEC) makes parts for cars and trucks. These are sold to
car manufacturers in many countries. The parts include metal brake components and rubber
seals to fit around windows. AEC operates in Country X, which, until a few years ago, had an
economy dominated by agriculture and coal mining. Over the last 20 years, the relative
importance of the primary sector has declined. To be successful AEC requires natural
resources to make car parts and services provided by other businesses. Consumer incomes
are rising rapidly in Country X.
a) Define ‘primary sector’. [2]
The primary sector of an industry extracts and use natural resources of the earth to produce
raw materials which are used by other businesses. Examples may include farming, fishing,
etc
b) Identify two examples of services that a business such as AEC requires. [2]
Transportation service and communication service.
c) Outline two reasons why a business such as AEC could not be successful without other
firms providing natural resources. [4]
Firms procuring natural resources will be needed by AEC to make car parts and services,
which may also uplift the demand for the primary sector in the economy.
Secondly, other businesses contribute to the success of AEC as they provide services such
as transportation and energy which are essential for AEC to operate.
d) Explain two likely reasons why the relative importance of the primary sector of Country X’s
economy has declined. [6]
,Firstly, it may be because of the depletion of natural resources such as rubber and steel.
Due to the lack of accessibility to top natural resources, the relative importance of the
primary sector of the industry is likely to decline.
Secondly, there may be less labour involved or employed in the primary sector due to which
the importance of it will decline as the labour will not be employed in the extraction of natural
resources which tends to be expensive.
e) A government minister in Country X recently said: ‘The secondary sector of the industry
will always be more important than the tertiary sector to our economy.’ Do you agree with
this view? Justify your answer. [6]
The secondary sector tends to contribute directly to the growth and wealth of the economy.
As it involves GDP and output. secondly, the secondary sector is important as it employs
more of the labour force in it, which also then reflects the incomes earned and standard of l;
living in an economy. The secondary sector also provides products for some tertiary sector
businesses such as retailers and supermarkets, thereby also influencing the importance of
tertiary sector business.
However, the tertiary sector is also important as it provides essential services such as health
and education which will ensure good health and training of the labour force. Without the
tertiary sector, the secondary sector might be neglected.
In consequence, both sectors are equally important and contribute significantly to the growth
of an economy.
Q2 The government of Country Y owns and controls many businesses. ‘The public sector
always produces goods and services more efficiently than privately owned businesses,’ a
government minister recently said. Other ministers disagree and want to privatise many
state-owned businesses. The private sector businesses in Country Y produce 55 per cent of
total output – mainly in services such as transport, tourism and finance. The secondary
sector of industry produces 35 per cent of the total output.
a) Define ‘public sector’. [2]
The public sector involves businesses owned and controlled by the government such as
schools or hospitals etc. these do not have the aim of profit maximisation.
b) Identify two industries in the secondary sector. [2]
Manufacturing industry
Construction industry
c) Outline two reasons why the tertiary sector of the industry is becoming more important in
most economies. [4]
Firstly, the tertiary sector is less susceptible to economic recessions than the other sectors
as consumers can go without manufactured goods but they may not cut down their spending
on essential services provided by tertiary sector businesses such as health and education.
Secondly, with increasing industrialisation and urbanisation, the demand for products
produced by the tertiary sector is increasing such as the demand for entertainment,
education, health etc. this increases its importance relatively.
,d) Explain two possible reasons why some ministers want to privatise some businesses in
the public sector. [6]
Firstly, it may be because private sector businesses are more efficient. This may be because
they aim to maximise profits and hence their efficiency and productivity are greater than
public sector businesses. Due to this, they may provide a better quality product with reduced
wastage.
Secondly, privatisation will help increase competition in an economy which will be beneficial
for businesses due to which the efficiency and productivity of firms will further increase. As a
result, consumers will have a wide variety of products of good quality at affordable prices.
e) Do you agree with the government minister’s view that: ‘The public sector always
produces goods and services more efficiently than privately owned businesses’? Justify your
answer. [6]
His view may be right to some extent as public sector businesses will usually care more
about public welfare rather than profit and hence can take measures to improve standards of
living. Secondly, they may also create more employment opportunities and discourage
unemployment. However, they may not be more efficient than the private sector, as there is
no competition in the public sector which may make it inefficient, whereas competition in the
private sector gives the incentive to firms to be more efficient or otherwise they may lose
sales. Secondly, a lack of accountability in the public sector tends to reduce its efficiency, as
some ministers may also run the businesses in their political interest. Due to this stagnation
can occur. whereas in the private sector, all the employees are held accountable under
managers and hence they are more efficient in their work. Thirdly, public sector business
tends to take longer in decision making as all stakeholder needs to be satisfied due to which
the efficiency will reduce.
In consequence, the public sector is not always efficient in producing goods and services as
compared to the private sector.
Chapter 3: enterprise, business growth and size.
Exam-style questions
Q1 Sabrina was bored with her job in a clothing factory. Her main passion was fashion and
she had always been good at selling since helping her father at his market stall. She
encouraged her parents and some friends to invest in her idea of opening a shop selling
good quality women’s clothes. Sabrina, as the entrepreneur behind the idea, was prepared
to risk her savings too. She had some exciting ideas for the shop layout and presentation of
clothes.
a) Define ‘entrepreneur’. [2]
An entrepreneur is a person who organises the factor of production, operates and takes the
risk of a new business venture.
,b) Identify two benefits to Sabrina of starting her own business. [2]
She can execute her ideas into practice by having full control and being her boss.
Secondly, she will enjoy all the profits made alone.
c) Outline two characteristics that Sabrina seems to have that might lead to the success of
her business. [4]
Sabrina is a good and effective communicator, which means she can convince her family
and friends to invest and can attract customers by making them believe in the success of her
business.
Secondly, Sabrina should be hardworking as she may need to work for large no. of hours
alone and should aim for short holidays to make her business successful.
d) Explain two benefits to Sabrina of keeping her business small. [6] \
Firstly, Sabrina aimed for the business to remain small as the market for her product is small
and she does not want it to grow. Due to this Sabrina will be able to better understand
consumer wants and respond to them, as well as build a good relationship with customers,
thereby increasing customer loyalty and ensuring sales.
Secondly, by remaining small Sabrina can maintain a high level of control over all aspects of
her business. Due to this she can satisfy herself by ensuring the high quality of all of her
products and their ability to meet the demand and wants of the customers.
e) ‘I think I should draw up a business plan before I start,’ said Sabrina to a friend. ‘I think it
would be best if you set the business up now – you don’t need a plan as the shop will be so
small,’ said her friend. Which view do you agree with? Justify your answer. [6]
Producing a business plan may help Sabrina to have a complete indication and guide
towards the success of her business. Carrying out market research and identifying the prices
she should charge for her product and the type of product to be produced can help her in
decision-making. Moreover, competition can also be analysed by the business plan. It may
also help Sabrina to ask for a bank loan or investment as the business plan will be proof,
indicating the path to success of her business.
However, her friend may be right to indicate the unnecessity of a business plan as before
starting up a business some aspects may be difficult to predict or plan. This business plan
might be misleading and may require a lot of time too such as in carrying out market
research.
In consequence, a business plan should be made as it will lead to the success of her
business in the long run.
Q2: TelCom owns a phone network and provides phone network services to many
consumers. The business does not manufacture phones and it does not own retail stores
selling them. Senior managers at TelCom are considering a takeover of either a phone
manufacturer or a chain of phone shops. TelCom employs 4000 workers and, last year,
recorded total sales of $300 million. In contrast, the largest manufacturer of mobile phones,
PhonTec, has 450 workers and recorded total sales last year of $1200 million.
,a) Define ‘takeover’. [2]
An acquisition or takeover is when a business buys out the owners of another business
which then becomes part of the predators’ business( the business which has taken it over)
b) Identify two other ways, apart from takeovers, that a business might grow. [2]
By a merger or by internal growth.
c) Outline two reasons why external groups would be interested in measuring the size of
businesses such as TelCom. [4]
The government may be interested in the size of the business as it determines the amount of
tax to be levied on them. The larger the business size, the higher the profits are likely to be
which means a high payment of tax to the government.
Secondly, investors may be interested in the size of the business to allocate their investment
In the right place. Such as larger and successful businesses are more likely to attract
investors rather than small and unsuccessful firms.
d) Explain two possible reasons why senior managers at TelCom want to expand the
business. [6]
Firstly, it might be because of their prestige and recognition, as managers of larger
businesses are likely to be paid more. Due to this reason, they tend to work more hard to
contribute to the success and expansion of TelCom.
Secondly, it might aim to increase market share. This can be done by a takeover or merger
with a phone manufacturer as currently TelCom only has a small share in the phone network
market. Therefore, managers may want to expand it so that the relative importance and
market share of TelCom could increase.
e) How should TelCom expand – taking over a phone manufacturer or a chain of shops
selling mobile phones? Justify your answer. [6]
Taking over a phone manufacturer may help TelCom to reduce costs and increase quality by
being able to control the manufacturing process. Secondly, it may also give it a better
opportunity to compete and increase market share.
On the other hand, taking over a chain of shops might give an edge to TelCom by allowing it
to directly sell to the consumer and have a presence in the market due to which good
customer relations can be made and knowledge of the market can be accessed.
Therefore, taking over a chain of shops selling mobile phones is more likely to contribute
significantly to the expansion of TelCom.
, Chapter 4: types of business organisations.
Exam-Style questions :
Q1 When Jameel lost his job in a fruit and vegetable shop that closed down, he decided to
open his store. He had good contacts with suppliers. They said they would give him one
month’s credit before he paid for supplies. Jameel had $5000 in savings to invest in the
shop. He thought this would be sufficient to start the business. He is an independent man –
he never liked taking the manager’s orders in the food shop! He wanted to operate his new
business as a sole trader.
a) Define ‘sole trader’. [2]
A sole trader is a single person who organises, operates and takes risks for a business
venture. It is an unincorporated business with unlimited liability.
b) Identify two other types of business organisations. [2]
Partnership
Private limited company
c) Outline two benefits to Jameel of operating his business as a sole trader. [4]
Firstly, as Jamil never wanted to take orders from his manager, being a sole trader will
enable him to be his boss and take decisions independently, having complete control of the
business.
Secondly, operating his business as a sole trader will allow Jameel to enjoy all of the profits
alone. This may be higher than the salary he was getting by working as an employee in the
vegetable shop.
d) Explain two drawbacks to Jameel operating his business as a sole trader. [6]\
Firstly, Jameel would have unlimited liability. This means in case of loss or business failure,
his savings and assets will be held at risk to support the business. Due to this, the loss will
be significantly greater.
Secondly, operating his business as a sole trader might limit the finance and not allow
Jameel to grow and expand or experience economies of scale. Additional finance is difficult
to be attained in a sole trader business.
e) Do you think Jameel should open new branches of his business by selling franchises?
Justify your answer. [6]
Selling franchises might help Jameel to increase awareness about his business and expand
as expansion will be faster because the franchisee will finance the new outlet and will also
have the management responsibility. Secondly, Jameel’s vegetables and fruit quality can be
retained and maintained as the franchisee will buy them from Jameel.
