IGCSE BUSINESS STUDIES
NOTES
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,Contents INDEX Page number
Business
-B1. Understanding business activity 2
-B2. People in business 12
-B3. Marketing 25
-B4. Operations management 29
-B5. Financial information and decisions 34
-B6. External influences on business activity 37
Business
Understanding Business Activity
The economic problem, needs and wants:
All humans have needs and wants. Need are things we can´t live without, while wants
are simply our desires that we can live without. Businesses produce goods and services
to satisfy needs and wants. We have unlimited wants but not enough resources.
Resources can be split into 4 factors of production:
Land: All-natural resources used to make a product or service.
Labour: The effort of workers required to make a product or service.
Capital: Finance, machinery and equipment required to make a product or service.
Enterprise: skill and risk-taking ability of the entrepreneur.
The economic problem: Results from limited resources and unlimited wants. This
situation causes scarcity, when there are not enough resources and goods to satisfy
everyone’s wants. As we have to choose which wants benefit us more, there is a
second-best option which we don’t choose. This is the opportunity cost, the best next
alternative given up by choosing another item.
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,Division of Labour: As there are limited resources, we need to use them efficiently. We
now use production methods that are as fast and efficient as possible. In developed
countries, almost everyone specializes gets good at one particular thing.
Division of Labour Definition: Is when specialization is taken to an ultimate extreme,
when the production process is split up into different tasks and each specialized
worker or machine performs one of these tasks.
Advantages: Specialized workers are good at one task and increase efficiency and
output. Less times ins wasted switching jobs. Machinery also helps all jobs and can be
operated 24/7.
Disadvantages: Boredom from doing the same job, lowers efficiency. No flexibility
because workers can only do one job and can’t do others well if needed. If one worker
is absent and no one can replace him, the process stops.
Purpose of business: To combine the factors of production to create goods and
services that people want or need.
Benefits of business activity: By using specialization and division of labour business
allow us to make the most efficient use of scarce resources. They make things that
people want or need. Employ people and pay them wages so they can consume other
products.
Added value: The value added is the difference between the selling price and the
material cost of a product.
Added Value= Selling price – Cost of bought in materials. A Business can’t survive
without added value. The extra money they earn is used to pay wages, advertising,
bills, …
They are only 2 ways to increase added value: Increase selling price (Customers may
switch to your competitors if the feel the price is too high) or reduce cost of Bought in
Materials (may affect the quality of the product and costumers may switch to your
competitors.)
Levels of economic activity:
Primary Sector: Extracts and uses the natural resources to produce raw materials used
by other businesses. Earns the least money. E.g. Mining, farming…
Secondary sector: Manufactures goods using raw materials provided by the primary
sector. Earns medium amount of money. E.g. Construction, car manufacturing….
Tertiary sector: Provides services to consumers and other sectors of industry. Earns
the most money. E.g Banks, transport…
The importance of a sector in a country is measured by the number of workers and the
value of output and sales.
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,Industrialisation: A country is moving from the primary sector to the secondary sector.
De-industralisation: A country is moving from the secondary sector to the tertiary
sector.
Why do things change:
Using up Resources: Many countries have used up the resources, like coal, oil….
Lack of Competitiveness: Basic manufacturing and assembly work can be done
cheaper elsewhere.
Changing Spending Patterns: In the poorest countries, people spend their money on
food shelter, clothes…. As countries get richer, the citizens can spend more money in
services like transport.
Mixed Economy: Businesses belong to both the private and the public sector. The
government controls part of the economy.
Public Sector: The part of the economy owned and controlled by the government. The
objective of this businesses relates to providing services.
Industries normally under government ownership:
Health, Education, Defense, Public Transport and Water and Electricity.
Private sector: The part of the economy owned and controlled by individuals. This
business has objectives related to survival, profit, growth and increasing market share.
Privatisation: Involves the government selling national businesses to the private sector
to increase output and efficiency.
Advantages: New incentive, need to make profit, this encourages the business to be
more efficient. Competition lowers prices. Individuals have more capital than the
government. Privatization raises money for the government.
Disadvantages: Essential businesses making losses will be closed. Workers could be
made redundant for the sale of profit. Businesses could become monopolies, leading
to higher prices.
Enterprise and Entrepreneur:
Entrepreneur: Is a person who takes the risk of starting a new business.
Benefits of an entrepreneur: You are your own boss, possibly make lots of money, get
all of the reward for your hard work.
Disadvantages of an entrepreneur: Many new businesses fail, you put your own
savings at risk, opportunity cost of not working for someone else and getting a
guaranteed income.
Characteristics of successful entrepreneurs: Hard working, risk taking, creative, self-
confident, good communicator…
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,Governments often support new businesses:
As they increase competition, reduce unemployment, increase tax revenue… They
sometimes give money as loans that have to be paid back at a low interest or grants
that don’t need to be paid back, to help new businesses or offer training support or
guidance. Some parts of a country may have a worse economy, in these areas’
governments give more help to try and improve the economy.
Business Plan:
Is a document that describes the business objectives and details the financial and
operational plans of a new business. Producing a business plan makes the
entrepreneur predict what can happen to the business, how much money they will
have to spend in raw materials and how often… It allows the entrepreneur to identify
potential problems in advance and come up with ways to overcome them. Reassures
the banks or investors that the entrepreneur knows what they are doing. Without a
business plan you would only be able to borrow money from family and friends.
Measuring business size:
Who wants to know: Investors before they decide which business, they will invest
their savings in. Governments to know what tax rate and how much tax thy need to
charge. Competitors to compare size and importance with other firms. Workers to
know how many people they might be for promotion; how safe the company and their
job is. Banks to know how safe it is to lend money to the business, if the business will
pay back the loan, can the bank recover their money form the business assets, is the
loan big or small compared to the total amount of money passing through the
business.
Methods for Measuring Business Size:
Number of employees: Easy to do and understand. Doesn’t work on capital intensive
firms that use machinery.
Value of sales: Often used when comparing similar businesses, particularly retailers.
E.g. Supermarkets. Easy to do and understand, can be misleading if businesses are
similar and they don’t sell the same type of products.
Capital employed: Easy to do and understand. Doesn’t work on labour intensive firms.
The benefits to a business of getting bigger:
Benefit from economies of scale, lower unit cost due to an increase in size. A larger
market share means they can charge higher prices and gain more profit. As means of
survival if they wish to compete with other growing businesses. More status for the
owners and managers, probably higher salaries. Bigger businesses find it easier to raise
money.
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,Possible disadvantages of a business getting bigger: Diseconomies of scale if
business becomes too large, which leads to higher unit costs.
How can a business grow:
Internal growth means the business grows by expanding its sales or their operations
and the growth is financed from their own profit. Business could grow internally in the
following ways:
1. Lower price, people will buy more at lower prices.
2. Increase advertising, costumers are made more aware of the attraction of the
products.
3. Expand product range, you can grow by developing new products which people
want to buy.
4. Sell in different location, open a new shop or branch somewhere else.
5. Sell on credit, costumers are attracted by the ability to buy now pay later.
External growth by acquisitions and mergers. A merge is where 2 or more businesses
agree to join together to become one large firm. An acquisition is when one firm buys
another firm.
Disadvantages of External Growth:
Clashes of culture between different business reducing the effectiveness of the
integration.
May need to make some workers redundant, this can have an effect on motivation.
Maybe a conflict of objectives between different businesses, meaning decisions are
more difficult to make, causing disruption in the running of the business.
There are 4 basic types of merger:
Horizontal integration: Joining with another business in the same industry, at the
same stage of production. E.g. One bakery joins another bakery.
Advantages: The merger reduces the number of competitors in the industry. There are
opportunities for economies of scale.
Vertical integration: Joining with another business in the same industry, at the same
stage of production. There are 2 types of vertical integration:
Forward vertical integration: E.g. A bicycle manufacturer buys a bicycle shop.
Advantages: The merger gives a guaranteed selling location for their product, and the
retailer could be prevented from selling products made by competitors. Retailers profit
margin is absorbed by the expanded business.
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,Backward Vertical integration: E.g. A supermarket buys a business which makes
cleaning products.
Advantages: The merger gives a guaranteed source of raw materials and the supplier
could be prevented from selling raw materials to competitors. Suppliers profit margin
is absorbed by the expanded business.
Conglomerate integration or diversification: Joining with another business in a totally
different industry. E.g. A bakery joins or buys a bookshop.
Why do some businesses stay small:
Some businesses may want to stay small, owner preference, he wants good work-life
balance and doesn’t want stress. Enjoys personal contact with staff and costumers,
particularly businesses that provide a service.
A business may not raise the necessary finance to grow any bigger. Either banks are
not willing to lend money or the business has not made enough profit to generate cash
for investment.
The size of the market. There is often a limit to the number of people who are willing
to buy the type of product that the business is producing. Some businesses are located
in remote areas, no matter how well run a shop is, there are no new costumers nearby.
Government controls means that a business can’t necessarily have more than 25
percent of the market share.
Human resources are limited in terms of the skill available. Specially in more
specialized areas it may be difficult to find enough qualified staff in that location to
expand the business.
Why do some new businesses fail:
Poor management, making bad decisions.
Failure to plan for a change. Markets change, new products are introduced, new
technologies are created…
Rapid growth, can lead to huge problems with cash flow and management in different
parts of the business.
Poor financial management, even profitable businesses fail if they don’t manage their
cash, if they give costumers too long to pay…
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, Main types of private sector businesses:
Sole traders: Is the most common form of business. The business is owned and run by
one person. Although she or he can employ people, they would still be the proprietor
of the business.
Advantages: These businesses are common as they are easy to set up and need few
legal requirements. Independence for owner. All profit goes to the owner.
Disadvantages: The owner must register with the government and send to the Tax
office their annual accounts. They must obey all basic laws for trading and commerce.
Owner has to find all the capital for expansion, lack of continuity. No-one to talk with.
Unlimited liability.
Sole traders are recommended to people: That are setting up a new business. Do not
require a lot of capital for their business. Require a direct contact for customer service.
Partnership: A group of 2 to 20 people who run and own a business together. They
require Partnership Agreement, which is a document that states that all partners agree
to work with each other, and gives details on who put the most capital into the
business or who is entitled to the most profit. Other legal regulations are similar to the
Sole Trader. It’s an unincorporated business, they don’t have their own legal identity.
When they commit to something, the owner signs a commitment as individuals.
Advantages: More capital contributors. Less risk. Greater continuity. Possibility of
limited liability.
Disadvantages: Each partner usually has unlimited liability. Partners may disagree.
Number of partners are limited.
It’s recommended for people who: Want to make bigger a business but do not want
legal complications. Family, when they want to get all the members into a business.
However, nepotism, employing relatives is usually not recommended.
In some countries including the UK there can be Limited partnerships. This business
has limited liability but shares can’t be bought or sold.
Also, there can be a Sleeping partner, which is someone who has invested money into
the partnership and gets a share of the profit, but doesn’t take decisions and has
limited liability.
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