BUSINESS STUDIES REVISION NOTES CHAPTER 1: THE NEED FOR AND ROLE OF BUSINESSES

The basic economic problem

We, as a society, can satisfy our needs but we cannot satisfy our unlimited wants. This is not because of a lack of money. It is because
we only have limited resources in our society. There is a limit to what we can produce because we only have a finite quantity of the
factors of production, defined as:
i.
Land space on the land itself but also all naturally occurring substances such as oil, metals, wood.
ii.
Labour the effort of the workers employed to produce the good
iii.
Capital the tools and machinery used in production but also the money invested to but those tools and machinery
Buildings, factories, computers and vehicles are all examples of capital
iv.
Enterprise the skill of combining the other factors of production in a way that will produce a good that people will want
The allocation, or use, of our scarce resources
Who decides what will be produced? Who decides how the limited number of people who wish to work should be employed? For
example, if there are 9,500 people in Greece working in souvlaki shops, who decided that? Who decides how many factories there will
be? Shoe shops? How much steel should be used by the car industry? How much cork should be used by the wine industry? How
many hectares of land should be devoted to the growing of onions? The answer to all of these questions is that we decide. By sending
signals to businesses about what we do and do not want to consume and what we are willing to pay for goods and services,
businesses react by buying the limited factors of production and then produce the good for which there is demand and sell it to us.
Most of Business Studies is about private sector businesses (defined as businesses owned by private individuals, either one or many.
Businesses can be small or extremely large (the biggest businesses in the world are bigger than most countries in the world in terms
of value of production!).
Private Sector Business Objectives
i.
Profit to use factors of production to produce a good which can be sold such that the money earned is greater than the
costs of producing it thus profit is gained by the owners of the business
ii.
Survival an objective especially relevant to new businesses (typically up to 40% of new businesses do not survive until
their 1st birthday) and for all businesses during periods of economic difficulty known as recessions.
iii.
Growth by expanding a business becomes stronger, is more likely to survive and has the opportunity of making larger
profits.
iv.
To add value the concept of added value is the taking of ingredients or component parts, performing some process upon
them and then selling the finished good for far more for example what is a bottle of Coke made of? Water, sugar, a few
other minor ingredients, plastic, a paper label. Separately these ingredients perhaps cost 1 or 2 cents but put together in
the right way and you will pay 100 cents for them!
Businesses owned and run by the government such as healthcare services, schools, roads, police, army etc. are called public sector
businesses and have different objectives.
Public Sector Business Objectives:
i.
To provide a service perhaps private businesses will not provide some goods or will charge too much for them. The
government may step in and produce these goods and provide them more cheaply or even free for the general public
ii.
To create jobs the government needs people to work and pay tax and recognizes also that people want to work.
Unemployed citizens cost the state money so the state can run businesses to create employment
Specialisation
This is when individuals, businesses and even countries do not attempt to produce everything they need but instead concentrate on
one job at which they become an expert and very efficient. Within a business this is often called the division of labour. As long ago as
1776, an economist called Adam Smith recognized this and wrote about it. He studied work in a pin factory where he saw that when
the factory changed from having each worker separately making pins to workers specializing in one small part of the pin-making
process and working in this way together as a team the output of the factory rose more than 100 times. Countries specialize (some
more than others) in the production of certain goods and services then trade them with other countries for what those countries
produce. Greece, for example, specializes in shipping services, tourism and the production of certain agricultural goods like cotton
(Greece is the 9th biggest producer in the world). Yet every car in Greece was made in another country and imported. By exploiting
such techniques of division of labour and specialization we are able to stretch our use of our limited factors of production and
produce more goods and services.
Stakeholders are any group who are affected by a business. They include:
i.
Owners who seek to earn profit as a reward for risking their capital in a business idea
ii.
Managers who seek to earn big salaries and extra benefits as a reward for running the business well
iii.
Workers who seek to earn pay and have job security by selling their labour to the business
iv.
Customers who want the best quality goods possible at the lowest possible prices
v.
Local residents who do not want the business to disturb them with pollution, noise, road congestion
vi.
Environmental groups who are concerned by the impact on the local and national environment
vii.
Government keen to earn tax from the business though watchful of about its behaviour