Learning Outcomes Students should be able to describe the following: Business activity as a means of adding value and meeting customer needs. Classification of local and national firms into primary, secondary and tertiary sectors. Business growth and measurement of size. Key features of a national economy
Key Words Consumers Consumption Production Factors of production Firms Opportunity cost Wages and salaries Customers Revenue Profit Value added
What is a Business? Business activity to provide the goods and services we need and want. People and organizations consume goods and services. Questions: How do organizations consume goods and services? Productive resources are used to make goods and services. Inputs vs. Outputs Factors of production: land, labour, capital and enterprise Resources are organized into firms to produce goods and services. Private and public enterprises provide goods and services.
Needs, Wants and Scarcity Productive resources are scarce. People and organizations must choose what to produce and consume. Opportunity cost is the cost of choice. E.g. eating steak vs. salmon in a restaurant. Hence, if you ordered steak, your opportunity cost is salmon because you are giving up salmon to eat steak.
Needs, Wants and Scarcity Human wants – Unlimited! Resources – Scarce! Choices = ? Things to consider: What to produce? How to produce? Who to produce for?
How Business Adds Value to Productive Resources Value is added by satisfying customer needs and wants. Value added by a business activity is the difference between the price paid for a product by a consumer and the cost of natural and man-made materials, components and other resources used to make it. E.g. a furniture manufacturer buys the raw materials (wood, tools, glues, etc. ) at $400 and sells the furniture at $1000, the business will have added $600 to the value of the resources bought. Value is added by providing employment (jobs) and incomes (money).
How Can Businesses Increase Their Value Added? Using resources as efficiently as possible to produce as much output as it can from them. Reducing waste Reducing the cost of the natural and man-made resources it must buy or hire. Making products more attractive to consumers so they are willing to pay a higher price for them. Making its products more appealing to consumers through advertising. Creating a recognized brand so that consumers are willing to pay more for.
The Purpose of Business Activity Combining and organizing resources to produce goods and services. To make a profit for-profit organizations. E.g. Apple, Ford. Some do not aim to make a profit not-for profit organizations. E.g. schools, hospitals.
What Are Industrial Sectors? Firms specialize in particular business activities. Why? To make the best possible use of the skills and resources a firm has and add much more value to them. But higher risk from a fall in consumer demand for its product.
What Are Industrial Sectors? Production involves a chain of activity. From raw materials to consumers. Similar business activities are grouped together into industries. An industrial sector or industry is a group of firms specializing in similar goods and services or using similar production processes. Includes small companies to MNCs (multinational corporations). E.g. automotive manufacturing industry.
What Are Industrial Sectors? Industries in the primary sector extract or produce natural resources. Production or extraction of natural resources = first stage of production for most goods and services. Crop and animal production Forestry and logging Fishing Mining Quarrying Oil and gas extraction
What Are Industrial Sectors? Industries in the secondary sector process natural resources. Turning natural resources into other goods = manufacturing. Food processing Textiles Paper, pulp and paperboard Chemicals Oil and gas refining Pharmaceuticals Rubber and plastic products
What Are Industrial Sectors? Industries in the secondary sector process natural resources. Turning natural resources into other goods = manufacturing. Fabricated metals Computer, electronic and optical products Water collection, treatment and supply Electric power generation, transmission and distribution Construction
What Are Industrial Sectors? Industries in the tertiary provide services. Wholesaling, retailing and repairs Transportation and storage Accommodation and food services Publishing and broadcasting Telecommunications Banking and insurance Real estate Public administration Defense services Education Arts and entertainment Health care Legal services
The Industrial Structure of National Economies An economic system involves production and consumption. Every country has an economy or economic system involving all business activities and the exchange of goods and services for money between producers and consumers.
The Industrial Structure of National Economies The mix of industrial sectors in different economies has changed over time. The industrial structure of a national economy is determined by the relative size and importance of its different industrial sectors and the industries within them. E.g. the primary sector is the most important in some countries but the tertiary sector is the most important in other countries.
The Industrial Structure of National Economies Two ways to measure and compare the size and importance of different industrial sectors in an economy: How much output they produce. How many workers they employ.
The Industrial Structure of National Economies Developed economies = countries with large secondary and tertiary sectors and a wide range of different industries. But this is changing. Now these countries are experiencing more tertiary sector growth and a decline in the secondary sector. E.g. USA, Canada, France and the UK. Result: Deindustrialization = the decline in manufacturing and the growth of services in developed economies. Incomes and living standards are generally good for most people. A variety of goods and services are available to consumers.
The Industrial Structure of National Economies These people now buy from newly industrialized economies, e.g. South Korea, Singapore, Taiwan, China, India and Malaysia. Manufacturing output and employment is expanding rapidly in these countries. There is a large but shrinking primary sector, especially in agriculture. Incomes and living standards for many people are improving. The amount and variety of goods and services available are growing quickly.
The Industrial Structure of National Economies Countries that have very few secondary and tertiary industries = Less-developed economies. Most workers are employed in agriculture and other primary industries. Have very few manufacturing industries. The service sector is small and growing only very slowly. Incomes and living standards in these economies are low so there is little demand for many goods and services.
Key Words Capital employed Capital intensive Labour intensive Market size Market share Merger Takeover Diversification
Measuring the Size of Firms How many workers they employ How much capital they employ The volume or value of their output or sales Their market share
Measure 1: Number of Employees Firms with fewer than 50 employees are often considered to be as small. Some companies are capital intensive and employ relatively few workers. They rely on machines and computer-controlled equipment.
Measure 2: Capital Employed The money invested in productive assets in a firm. These assets are used to produce and sell goods and services. Assets used in production include machinery, factor and office buildings, stocks of materials and components, and money to pay salaries and other costs. The more capital employed in a firm the more it can produce and hence the greater its size or scale of production. But some firms are labour intensive, meaning they use a lot of workers in the production process.
Measure 3: Output or Sales Output and sales can be measured in terms of volume. We usually compare firms in the same industry. E.g. Samsung android phone vs. Apply iPhone.
Measure 4: Market Share Market size = total amount spent by consumers on a particular product per week, month or year. Market share = the proportion of total sales revenue or turnover that is attributable to a particular firm. E.g. Global consumer spending on soft drinks was $146 billion in 2008. Coca-cola sold the most soft drinks, earning almost $69 billion in revenue. Hence, it has a 47% share of the global market in soft drinks.
Why and How Firms Grow in Size Firms may expand to lower their costs and increase their market share. Banks may lend more money to large businesses and at lower interest rate. Suppliers of materials, component parts, computers and other equipment and services may give price discounts to large businesses buying them in bulk. A large firm may have the financial resources to invest more in the latest machinery and equipment. Business managers can increase their responsibility and salaries.
Why and How Firms Grow in Size Firms may expand to lower their costs and increase their market share. Workers may benefit from more secure jobs and higher salaries in larger firms. Business owners may earn more profits. A large business can increase sales and its market share. A large firm may be able to produce a wide range of products for different markets at home and overseas to reduce risk = diversification. Increasing the volume of output or scale of production of a product can reduce the average cost of producing each item or unit of output. These cost savings are called economies of scale.
Why and How Firms Grow in Size Firms can grow internally or by taking over or merging with other firms. Internal growth = involves a firm expanding its scale of production through the purchase of additional equipment, increasing the size of it premises and hiring more labour if needed. External growth = this is more common. It involves one or more firms joining together to form a larger enterprise = integration through merger or takeover. A merger occurs when the owners of one or more firms agree to join together to form a new, larger enterprise. A takeover or acquisition occurs when one company buys enough shares in the ownership of another so it can take overall control.
Can Firms Grow Too Much? Yes. E.g. Starbucks closing down store in the US and Australia in 2008 due to a fall in property prices and consumer spending. Firms expanding the size and scale of production too much = diseconomies of scale = production problems, higher costs and lower profits.
Why Some Firms Remain Small? Not all firms can or should grow into much larger enterprises. The size of their market is small. E.g. local restaurants, luxury items market. Access to capital is limited. Owners usually use their own savings for the business. New technology has reduced the scale of production needed. Some business owners may simply choose to stay small.