Understanding Business Activity

• Need


  A good or service essential for living
• Want


  A good or service which people would like to have but which is not essential for living
• People's wants are unlimited
• Economic Problem


  There exist unlimited wants but limited resources to produce the goods and services to satisfy those wants. This creates scarcity
• Factors of production


  • Resources needed to produce goods and services
  • In limited supply
• Scarcity


  The lack of sufficient products to fulfil the total wants of the population
• Opportunity cost


  The next best alternative given up by choosing another item
• Specialization


  When people and businesses concentrate on what they are best at
• Division of labour


  The production process is split up into different tasks and each worker performs one of those tasks. It is a form of specialization
• Businesses combine the factors of production to make goods and services which satisfy people's wants
• Added value


  The difference between the selling price and the cost of bought-in materials and components
• Sectors of industry


  • Primary sector
  • Secondary sector
  • Tertiary sector
• De-industrialisation


  A decline in the importance of the secondary manufacturing sector of industry in a country
• Mixed economy


  Has both a private sector and a public (state) sector
• Capital


  The money invested into the business by the owners
• Entrepreneur


  A person who organises, operates and takes the risk for a new business venture
• Capital employed


  The total value of capital used in the business
• Types of business growth

  • Internal growth
  • External growth
• Internal Growth


  When a business expands its existing operations
• External Growth


  When a business takes over or merges with another business. It is often called integration, as one business is integrated into another one
• Types of external growth

  • Takeover or acquisition
  • Merger
• Takeover or acquisition


  When one business buys out the owners of another business, which then becomes part of the 'predator' business [the business which has taken it over]
• Merger


  When the owners of two businesses agree to join their businesses together to make one business
• Types of integration


  • Horizontal integration
  • Vertical integration
  • Conglomerate integration
• Horizontal integration


  When one business merges with or takes over another one in the same industry at the same stage of production
• Vertical integration


  When one business merges with or takes over another one in the same industry but at a different stage of production. Vertical integration can be forward or backwards.
• Conglomerate integration


  When one business merges with or takes over a business in a completely different industry. This is also known as diversification.
• Sole trader


  A business owned by one person
• Limited liability


  The liability of shareholders in a company is limited to only the amount they invested
• Unlimited liability


  The owners of a business can be held responsible for the debts of the business they own. Their liability is not limited to the investment they made in the business
• Partnership


  A form of business in which two or more people agree to own a business jointly
• Unincorporated businesses


  Do not have a separate legal identity. Sole traders and partnerships are unincorporated businesses
• Incorporated businesses


  Companies that have separate legal status from their owners
• Shareholders


  The owners of a limited company. They buy shares, which represent part-ownership of the company.
• Types of limited companies

  • Private limited companies
  • Public limited companies
• Private limited companies


  Businesses owned by shareholders, but they cannot sell shares to the public
• Public limited companies


  Businesses owned by shareholders but they can sell shares to the public and their shares are tradable on the Stock Exchange
• Dividends


  Payments made to shareholders from the profits [after tax] of a company. They are the returns to shareholders for investing in the company.
• Franchise


  A business based upon the use of the brand names, promotional logos and trading methods of an existing successful business. The franchisee buys the license to operate this business from the franchisor.
• Joint venture


  Where two or more businesses start a new project together, sharing capital, risks and profits.