http://3education.

mu/forum
BUSINESS STUDIES OLEVEL CHAPTER 1
Types of business activity
Levels of economic activity
We have 3 stages of the level of business activity: Stage1: Primary production I
t involves all the earth natural resources activities in the primary involve min
ing, fishing, forestry, oil extraction. Stage 2: Secondary stage of production T
his stage involves taking material and resources from the primary sector and con
verts them into manufactured goods. It involves activities like building and con
struction, air craft making baking. Stage 3: Tertiary production Involves in pro
viding services to consumers and other businesses also this include banking insu
rance hotels and hairdressing
Public and Private sectors of Industry There are 3 different types of economic s
ystem which are used by the countries to manage their resources efficiently as p
ossible. These are http://3education.mu/forum
Free market economy is
1) Where all resources are owned privately. 2) There is no government control ov
er land and labour. 3) Business produces goods to make a profit. 4) They make mo
re profitable goods that consumers demand. 5) They make less of less profitable
goods. 6) Prices are determine by the demand and supply of goods.
http://3education.mu/forum
-1-
http://3education.mu/forum Advantages of a free market economy 1. Consumers are
free to choose what they want to buy. 2. Workers are encourage to work hard as t
hey can keep most or all their income because of low or non existence of taxes.
3. Business compete with each other and this could keep prices low 4. New busine
ss are encouraged to set up in order to make profits
Disadvantages of free market economy 1. As private firms aim at profit maximizat
ion they will not provide goods and services such as street lighting bench healt
h and care services to everybody. Only those who can afford the private firm pri
ces will be benefiting from this others will be deprived from it 2. When there i
s no government control the economy will face booms and recession. 3. To increas
e prices firm can become monopolies and exploit consumers
In this whole world we do not have any economy which is 100% free market. Govern
ment are involved in important economic decisions, to a greater or lesser degree
. The United States is the country with an economy most like a free market syste
m. But even there, the United States is a free market economy but the government
has a lot of control over the economy.
http://3education.mu/forum
Command or planned economy
(a) Here all the resources are planned by the government (b) There might be no p
rivate property at all (c) The government decides what to produced and what quan
tities (d) Consumers have little choice
Workers could be told where to work and what to work to perform
http://3education.mu/forum
-2-
http://3education.mu/forum Advantages of a command or planned economy 1. Governm
ent control eliminate any waste resulting from competition between two firms 2.
There should be work for everybody The needs of the population are met, but ther
e is little production of the luxury goods for the wealthy
Disadvantages of a command or planned economy 1. There is no incentive to work h
arder as the government fixes wages and private property is not allowed. 2. The
government may not produce goods which people want to buy. 3. The lack of a prof
it motive for firms leads to low efficiency. Examples of the command economy is
Russia, china however china now is moving toward a free market economy http://3e
ducation.mu/forum
Mixed economy
A mixed economy combines some features of both a free market economy and command
economy e.g. of mixed economy is Mauritius
Private sector Private sector made of businesses not owned by the government. Th
ese businesses will make their own decision and earn profit. Most of the private
firms will run profitably.
Public sector Public sector made of government or state owned. The government de
cides how much to produce and what price to charge consumers. Some goods and ser
vices are provided free of charge to the consumer-such as a state health and edu
cation services. This money comes from the taxpayers. Here profit is not the aim
but welfare of the people.
http://3education.mu/forum
-3-
http://3education.mu/forum What are the most common areas of government ownershi
p? 1) Health 2) Education 3) Defence 4) Public transport 5) Water and electricit
y supply
Privatisation
Privatisation is the process of the government selling the public sector to the
private sector e.g. recently the MSPCA has been sold to private sector.
Arguments in favour of privatisation 1. If the new owners aim at profit maximisa
tion the business will run more efficiently 2. Competition may encouraged them w
hich will increase efficiency and keep prices low 3. Government are often lack m
oney, thus the new owner will bring additional capital to invest. http://3educat
ion.mu/forum Arguments against privatisation 1. Workers jobs can be in danger if
owner try to remove labour to capital. 2. The business might be sold off to one
owner who will be able to run it as a monopoly. This could lead to higher price
s for the customers. 3. As the new owners are interested mainly in profits, some
services making losses may be closed. These might be very important for some pe
ople or areas e.g. if the central water authority does not find it profitable to
supply water at the chamarel because it involve a huge cost of investment and o
nly few people will use it if the private firm will operate it they may stop pro
vide this service at chamarel and these few people will suffer
http://3education.mu/forum
-4-
http://3education.mu/forum
Comparing the size of business
There is no a simple method of assessing to measure a firm several different met
hod used below but none automatically regarded as the best.
Profit Level
Total profits can be argued that since profits maximisation is the post of priva
te business. Total profit is the best indication of success as profitability is
important to current and prospective shareholders against this it can be argued
that profits vary significantly from year to year. It can be some large business
es can make very low profit if they are being badly managed.
Comparing business size number of employees
This method is very easy to understand .however, some firms use production metho
ds which employ very few people and high output levels. This is true for automat
ed factories which use the latest computer-controlled equipment. These firms are
called capital intensive firms-they use a great deal of capital equipment to pr
oduce their own output. Therefore, a company with high output levels could emplo
y fewer people than a business which produce less output.
http://3education.mu/forum
Size of output and sales.
This is a common way of comparing business in the same industry because it shows
which one is the most important in that industry. However, a high sale does not
mean that a business is a large when using the other methods of measurement. A
firm employing few people might sell several very expensive computers each year.
This might give higher sales
Capital employed
This should show the value of asset employed in the business although it is impo
rtant to compare the firm in the same industry. However it is difficult to measu
re capital employed because asset such as property, land and building maybe asse
ssed by different regulators.
http://3education.mu/forum
-5-
http://3education.mu/forum
How can business grow?
The owners of business often want their firm can expand. What advantages will a
business and its owners gain from expansion? The possibility of higher pro
and prestige for owners and managers Lower average cost Increase in the market
share Businesses can expand in 2 main ways
Internal growth e.g. a cyber cafe owner can open a branch of cyber cafe in other
town or village (this growth is often finance by the profits from the existing
business) The external growth involving, involving take over or merger with anot
her business
Three examples of mergers are shown below.
They all involve two firms coming together to form one business. However, they a
re all rather different in their impact. Horizontal merger When one firm merges
with or takes over one in the same industry at the same stage of production (e.g
. a shoe company merge with another one)
Vertical merger When one firm merges win or takes over another one in the same i
ndustry but a different stage of production. vertical integration can be forward
-when a firm integrates with another firm which is at a later stage of productio
n, i.e. closer to the consumer, or backward-when a firm integrates with another
firm at an earlier stage of production ,i.e. closer to the raw material supplies
, in the case of a manufacture firm. Conglomerate merger/integration Is when one
firm merges with or other takes over a firm in a completely different industry.
This is also as diversification. E.g. a shoe firm takes over an iron firm http:
//3education.mu/forum -6-
http://3education.mu/forum
Benefits with integration
Horizontal integration The merger reduces the number of competitors in the indus
try There are opportunities for economies of scale The combine business will hav
e bigger share of the total market than either firm before integration
Forward integration For example a car manufacturer takes over a car retailing bu
siness. The merger gives an assured outlet for their product The profit margin m
ade by the retailer is absorbed by the expanded business. The retailer could be
prevented from selling competing makes of car Information about the consumer nee
ds and preferences can now be obtained directly by the manufacturer http://3educ
ation.mu/forum Backward vertical integration The merger gives an assured supply
of important components. The profit margin of the supplier is absorbed by the ex
panded business The supplier could prevent from supplying other manufacturers. C
ost of components and supplies for the manufacturer could be controlled.
Conglomerate integration The business now has activities in more than one indust
ry. This means that the business has diversified its activities and this will sp
read the risks taken by the business. For example suppose that a newspaper busin
ess has taken over a car manufacturer. if sales of newspapers fell due to change
in consumer taste, sales of computer can be rising due to an interest in home c
omputing.
http://3education.mu/forum
-7-
http://3education.mu/forum There might be transfer of ideas between the differen
t sections of the business even though they operate different industries. For ex
ample, an insurance firm buying an advertising agency could benefit from better
promotion of its insurance activities as a result of the agency's new ideas.
Why do some businesses stay small?
Market size If the number of consumer we have for that good is small its is more
likely to remain small in size e.g. luxurious cars Owners' objectives Some busi
ness owners prefer to keep their firm small. They could be more interested in ke
eping control of a small business, knowing all their staff and customers, than a
much larger business. Owners sometimes wish to avoid the stress and worry of ru
nning a large firm. http://3education.mu/forum
Growth Makes Profits Survival
Business objectives
Provide a service
Added value
Summary of the chapter business activity
http://3education.mu/forum
-8-
http://3education.mu/forum
Owners
Managers
Different people with different objectives
Community
Workers
http://3education.mu/forum
http://3education.mu/forum
-9-