Nature of business


Business Activity

What is a Business?

A business is any organisation that makes goods and services

What is the main role of a business?

Firms provide customers with the products they need

Define a good

A good is a physical product 

Define service

A service is a non-physical product

What is business activity?

Turns inputs into outputs

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Business Activity

What are inputs?

Inputs are the resources used by a business to create products

Staff, raw materials, buildings and machinery, finance and entrpreneurs

What are factors of production?

Land- all natural resources
Labour- physical and mental work of people skilled or unskilled
Capital- goods used to make more goods
Entrepreneur- a risk taking individual who organises and manages a business activity

Define output

Outputs are goods and services firms produce from inputs

List 2 unintended outputs

Pollution: i.e waste materials like smoke and effluent
Noise and waste products: i.e unsold stock past its well by date

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Adding Value

What is production?

Production is the process of creating goods and services from inputs

Define value added

Value added is the financial worth the business adds to the resources they process into products- items are worth more than their cost of production

How do firms add value?

They add value when the price of an item is higher than the cost of all the resources used

Define price

Price is the amount customers pay for goods and services

Define cost

Cost is the amount spent by firms making products

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Adding value

Give an example of adding value

Plastic and metal (£20) into an (£100) pair of sunglasses

How can a business increase added value?

Persuading customers to pay more for a product or by reducing costs

How can firms increase the worth of a product and get customers to pay a higher price?

  • Improving convenience and speed
  • Branding
  • Improve quality, design and appearance
  • Unique selling point (UPS)
  • Improved image- successful promotion campaign

How can firms increase value added by cutting costs?

  • Better use of resources
  • Reducing inputs (staff redundancy)
  • Adopting new technologies 
  • Using cheaper raw materials or components 
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Adding value

Why is adding value important in business?

  • Products are made that customers value and use to meet needs 
  • Profits reward ownders their capital investment and risk-taking
  • Jobs become available and staff can earn wages
  • Suppliers can win new business
  • Governent can provide public services paid from the tax on profit
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Cost revenue and profit

Formula for profit

Profit= revenue - costs

What happens to profits?

  • Distributed- paid out to owners as a reward for risk taking investment
  • Retained- kept back to finance extra spending on research and development, new equipment, buying rivals 
  • Paid to the government as tax

What are losses?

A loss occurs when sales revenue fails to cover the costs of production

What do losses say?

The firm must cut costs or increase revenue if it is to survive

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Cost revenue and profit

Define costs

Costs of production

Define revenue

Income earned from the sale out output

What determines revenue?

The number of items sold and their selling price

Formula for revenue

Revenue = price x quantity

What is profit?

Profit is the amount left over from revenue after paying all costs

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Types of customer

Business to consumer

Firm sells products to individuals

Business to business

Firm sells to other businesses

List some characteristics of businesses selling to other business

  • Invite potential suppliers
  • A contract to supply products is awarded to the firm which offers the quote with the lowest price and the best service
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What is a stakeholder?

A stakeholder is anyone with an interest in a business. Stakeholders are individuals, groups or organisiations affected by the activity of the business

List 7 types of stakeholder:

  • Owners: someone who owns a firm (shareholders own parts of a company)
  • Managers: a member of staff responsible for planning 
  • Workers: employees
  • Customers: individuals or other businesses that buy products mady by the firm
  • Suppliers: Firms selling products to another business 
  • Lenders: any individual or organisation to whom money is owed
  • Community: people living in a given area 

List internal and external stakeholders

Internal stakeholders: owners, managers and employees
External stakeholders: customers, suppliers, creditors, government and local communities

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List the 7 differnet stakehoder's objectives

Owners: want a profit and capital gain from an increasing share price
Managers: want high salaries and benefits and job satisfaction
Workers: seek high wages, long holidays and good working conditions
Customers: seek low priced and good quality products
Suppliers: expect to be paid on time and to be a regular customer
Creditors: want a loan to be paid back on time, with interest
Community wants jobs but no harmful spillover effects from production
Government: wants employment and a source of taxes to pay for public services
Competitors: want to maintain a price and quality advantge over its rival

List 3 ways stakeholder objectives may conflict

  • A wage rise for employyees will increase costs and redcue profit for owners
  • A price rise may increase profits but disappoint customers
  • Delaying the payment of bills improves cash flow but loses good will to suppliers

What is the difference between a shareholder and stakeholder?

Shareholders part own the company but stakeholders are any group affected by a business

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Give 4 examples of decision-making that may occur within a business

  • Distributing or retaining profit
  • Targeting domestic or overseas markets
  • Locating production in the UK or third world
  • Spending its promotion budget on advertising or direct sales

Define trade-offs

A trade-off is a process of making a choice between alternatives

What are internal constraints?

They are limiting factors wihtin the control of the business e.g is there sufficient financial and human resources available to implement decisions

What are external constraints?

They are limiting factors outside the business e.g competition, the economy or legislation

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Why does decision-making involve risk and uncertainty?

Decisions are taken on the basis of available data and assumptions about the future. Incomplete or inaccurate data, faulty assumptions or unexpected futrue events may lead to unintended consequences

How can risk and uncertainty be reduced?

Research, planning and the use of decision-making tools such as forecasts

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Opportunity cost

Define opportunity cost

The next best alternative sacrificed when making a decision

Explain opportunity cost

Choices involved deciding between alternative courses of action. The firm choose the option most likely to generate the largest benefit. Opportunity cost is the benefits lost from making a decision.

Give an example of opportunity cost

A firm has the resources to invest in either new machinery or a research and development to develop a new product- but not both. Managers choose to invest in new machines. The opportunity cost iof new equipment is the lost benefits from research and development program. 

List 3 reasons why it is difficult to measure lost benefits 

  • Uncertainty
  • Timing
  • Non-financial considerations 
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