International Examinations. IGCSE Business Studies Chris J Nuttall

Transcription

1 International Examinations IGCSE Business Studies Chris J Nuttall

2 PUBLISHED BY THE PRESS SYNDICATE OF THE UNIVERSITY OF CAMBRIDGE The Pitt Building, Trumpington Street, Cambridge, United Kingdom CAMBRIDGE UNIVERSITY PRESS The Edinburgh Building, Cambridge CB2 2RU, UK 40 West 20th Street, New York, NY , USA 477 Williamstown Road, Port Melbourne, VIC 3207, Australia Ruiz de Alarcón 13, Madrid, Spain Dock House, The Waterfront, Cape Town 8001, South Africa Cambridge University Press 2002 This book is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published 2002 Printed in the United Kingdom at the University Press, Cambridge Typeface 10.5pt Meridien Roman System QuarkXPress A catalogue record for this book is available from the British Library ISBN paperback Design, page layout and artwork Illustrations by Hardlines, Charlbury, Oxford. Cover image by courtesy of Digital Vision

3 Contents Introduction 2 Unit 1: The nature and purpose of economic activity 5 Unit 2: What is business all about? 13 Unit 3: What part does the state play? 21 Unit 4: How is business organised? 29 Unit 5: Is size important? 37 Revision questions and past examination questions 44 Unit 6: Sole traders and partnerships 45 Unit 7: Limited companies 54 Unit 8: Other types of business organisation 62 Unit 9: Is there a best type of business? 69 Unit 10: Where does the money come from? 76 Unit 11: How much does it cost? 83 Unit 12: Accounting for success 91 Unit 13: What do the accounts mean? 97 Unit 14: How do forecasts help decision-making? 103 Unit 15: Structuring for growth 115 Unit 16: Is it worth the risk? 123 Unit 17: Letting people know 132 Revision questions and past examination questions 139 Unit 18: Why do people work? 141 Unit 19: Workgroups and managers 149 Unit 20: Working together 159 Unit 21: How do businesses find the right employees? 166 Revision questions and past examination questions 176 Unit 22: What is marketing? 177 Unit 23: What do customers want? 185 Unit 24: Handling information 193 Unit 25: What product? 203 Unit 26: How much is it? 210 Unit 27: How do businesses attract customers? 215 Unit 28: How does the customer get the product? 222 Unit 29: Marketing, planning and strategy 227 Unit 30: How are goods produced? 235 Unit 31: Where should a business locate? 244 Revision questions and past examination questions 250 Unit 32: Government and the economy 252 Unit 33: The social costs and benefits of business activity 260 Unit 34: Business and the state 266 Revision questions and past examination questions 275 Appendix 276 Questions 276 Answers 278 1

4 1 The nature and purpose of economic activity In this unit you will learn that economic activity is concerned with the ways in which the scarce resources of the earth are used to produce goods and services. Businesses produce goods and services: Goods are things you can touch and use, or consume, such as clothes, food and books. Services are things that other people do for you, such as cutting your hair or selling you goods in a shop. To produce goods and services businesses use resources or other goods that are made from resources that are found naturally occurring on or in the earth. Goods tangible products that can be touched and consumed Services things other people or businesses do for you Business in context Shell is one of the world s largest oil companies. The company makes products such as petrol and diesel from crude oil. Crude oil is unrefined oil that is found occurring naturally in deposits within the earth. To produce the petrol that people buy from garages Shell must first extract the crude oil from the earth. The company does this by drilling oil wells, many of which are under the sea. Questions 1 What does Shell produce? (>) 2 Where can you buy Shell s product? (>) 3 What is Shell s product made from? (>) 1 The nature and purpose of economic activity 5

5 1.1 Activity Think carefully about the following products and answer the questions: (a) a loaf of bread (b) an oak coffee table and (c) this book. 1 What are the materials that each product is made of? (>) 2 Where do these raw materials come from? (>) 3 If society keeps using these raw materials will they eventually run out? Explain your answer. (>>>) Scarcity, choice and the allocation of resources Everything found on earth is finite, or in other words in limited supply. This is as true of resources, such as oil and the human labour required to operate the refineries that turn the oil into petrol, as it is of the money that is used to build the refineries, pay the wages of the employees, or used by customers to pay to fill their cars at filling stations. The supply of some resources, such as air, is plentiful enough to satisfy everybody s needs. But the supply of most resources is not and, where this is the case, the resource is said to be scarce. This is so even though some resources, like trees or wheat, are renewable and replace themselves either naturally or through careful management. Since the resources needed to produce goods and services are scarce, a choice must be made as to what to produce from them. For example, timber is used to make furniture and to build houses. However, a tree that has been cut down to produce furniture cannot also be used in the frame of a house. A choice has to be made between using the tree for furniture or houses. Similarly, if you have $100 you can spend it on a mobile phone but you cannot also spend it on a pair of trainers. And the government cannot train additional doctors with the money it has already put into refurbishing schools. Need something necessary to sustain life Want something chosen to satisfy a need or to make life more enjoyable Needs and wants We all have needs that must be satisfied in order to sustain life. Wants are the ways in which we choose to satisfy our needs, and also to gain a level of satisfaction and enjoyment. For example, we need things like food and drink, shelter and clothing, but may choose to satisfy those needs with a burger or a pizza, a house or an apartment, and jeans or a suit, because these are the things we want. We also want refrigerators, radios and cars, because these things make life easier and more enjoyable, although they are not necessary to sustain life. 6 1 The nature and purpose of economic activity

6 Figure 1.1 Needs Food Clothing Shelter Wants Wants Wants Pizza Hamburger Jeans Suit House Appartment Needs and wants While resources are scarce, however, people s needs and wants are potentially unlimited: In time, most things that you buy wear out and need to be replaced. Fashions and people s tastes change. As technology develops, new or improved products become available. Demand and effective demand When you want something, you create a demand for it. However, you cannot satisfy your want unless you have the money and are willing to pay for it. For example, while you may want a new pair of trainers you cannot satisfy your want unless you have the money to pay for the trainers, and are willing to spend it on them (you may prefer to spend the money on books or a sweater). Even so, your demand for trainers will not be effective unless other people want trainers and are able and willing to pay for them, too. Effective demand, therefore, is created when enough people want something and are able and willing to pay for it. Demand is cumulative: the greater the number of people who want something and are able and willing to pay for it, the stronger the demand for it. The stronger the demand, the more likely a business or other organisation will supply the item demanded. Effective demand demand for a product that is backed up by an ability and willingness to pay for it 1 The nature and purpose of economic activity 7

7 Business in context Throughout the world, the demand for petrol and diesel is enormous. Without petrol or diesel people could not travel anywhere in their cars, either on business or for pleasure, and goods could not be transported to shops and customers. People and other businesses are therefore willing to pay for the petrol and diesel that Exxon and other oil companies produce, even though they often complain about the price! However, think about some of the things you buy regularly for example clothes or food. The companies that make these products do so because there is an effective demand for them enough people are prepared to buy them at their current prices. But think what might happen if the prices of these products increased. How much would you be prepared to pay for them? At what price would you reduce the amount you bought? At what price would you stop buying them altogether? What does this tell you about those companies and their products? Figure 1.2 Trainers Allocating resources T shirt Satisfying our wants from scarce resources involves a choice. For us as individuals, the choice is: which of our wants do we satisfy? If you want a pair of trainers and a T shirt, but only have enough money to buy one, you have to choose between them. This choice, although it may be difficult, is fairly straightforward. When you consider that all the different wants of everybody in society have to be satisfied from scarce resources, however, choosing which wants should be satisfied is far more complex. It involves allocating resources to the satisfaction of those wants. 8 1 The nature and purpose of economic activity

8 Cost and opportunity cost We saw that if you want a pair of trainers and a T shirt but only have enough money to buy one of them, you have to choose between them. Both the trainers and the T shirt cost money that is their financial cost. They also have an opportunity cost the opportunity to purchase and enjoy the use of the other thing you would have liked to buy. If you buy the trainers, the opportunity cost of the trainers is the T shirt and the enjoyment you would get from it. Every choice made by an individual or society, by the government or a business, involves an opportunity cost. If a government decides to spend an extra $100 million improving roads, the opportunity cost is spending it on other things such as schools or hospitals. The opportunity cost of society wanting more cars is the other things that could be produced using the extra labour and materials allocated to car production, such as houses or aeroplanes. Opportunity cost the cost of one item in terms of the next best alternative that must be foregone The emergence of specialisation, the division of labour and exchange Exchange in early societies In the earliest societies, people had to produce everything they wanted for themselves. They had to grow their own food, build their own shelters and make their own clothes. The reasons for this were that there were not so many people alive as there are today, and with the tools (technology) available they could only produce what they required for their own needs. As societies developed, however, so too did technology. New technology meant that one person could produce more than he or she needed. The result was that some people had a surplus of the goods they produced and found they were able to exchange this surplus for the surplus goods and services produced by other people. People began to specialise in producing the goods and services they were best at producing, because they knew they could exchange them for other goods and services. and exchange meant that society as a whole could produce more goods and services than when individuals had to produce everything they needed for themselves. Goods and services were also of a higher quality. Exchange the ability to exchange one type of goods or services for another, normally using money as a means of exchange the tendency of an individual, business, region or country to produce certain goods or services 1 The nature and purpose of economic activity 9

9 Money as a means of exchange In the early days of specialisation, goods and services could only be exchanged by a system of barter, or swapping one product for another. The problem with this was that somebody who produced, say, cabbages and wanted a cart needed to find a person who not only produced carts but wanted cabbages and was prepared to exchange a cart for them. This introduced another problem: how many cabbages was a cart worth? Money was developed to solve this problem. In the past, many things have been used as money: cattle, cocoa beans, maize, beeswax, shells, teeth, gold rings, iron swords and axe heads have all served as money. Most societies, however, have settled on the type of metal coin and paper note money familiar today. Whatever is used as money, it must be accepted as a means of exchange for different types of goods. People who accept money in exchange for goods or services must be able to exchange it again for other goods or services. Money must also serve as a measure of value so that comparisons of the value of different goods and services can be made. The development of firms and the division of labour In the eighteenth century, the development of specialisation and of money as a means of exchange, coupled with developments in technology, gave rise to the growth of firms and the division of labour. A firm, or business, is able to specialise in one type of good or service because the owners of the firm can sell (exchange for money) their goods and services and buy those produced by other firms. Similarly the employees of a firm (the people who work in the business) can specialise in one type of activity, such as accountancy or operating a computer, as they can exchange their labour for money to buy the goods and services they need. The specialisation of individual employees is known as the division of labour. This is only one level of specialisation, as can be seen in Figure 1.3. Each level depends on the principle of exchange and on money as both a means of exchange and a measure of value The nature and purpose of economic activity

10 Figure 1.3 by country Namibia: diamonds and copper Syria: Oil and Agriculture by industry Oil products Wheat production by firm Flour mill Bakery by unit Baking Selling by individual employee Baker Sales assistant Levels of specialisation. At the highest level, countries may specialise in the production of goods for which they have a natural advantage (such as an abundance of natural resources). Within a country, industries specialise in types of goods (level 2). Individual businesses within an industry specialise in different stages of production, for example production and retailing (level 3), and a firm may have different units (e.g. factories or branches) to manufacture different parts of the product (level 4). Finally, people employed by a business will specialise in the type of work in which they have the greatest skills or abilities (level 5) 1 The nature and purpose of economic activity 11

11 International and regional specialisation Geographical, geological and climate factors make some areas of the world more suitable than others for the production of certain goods. For example, tea is grown in tropical and subtropical areas such as eastern Asia and South America and is bought by countries elsewhere, and copper cannot be mined in countries where there are no deposits. Countries also differ in the amount of machinery and other technology, or the availability and cost of labour to produce goods and services. These factors influence the types of goods a country produces, and most countries specialise in producing those goods in which they have a natural advantage. Any surplus is then exported to (sold to) countries from which other goods are imported (bought). Similar conditions often lead to specialisation between areas or regions within a country. The availability of factors such as a workforce with skills appropriate to a particular industry tends to concentrate industries in particular areas. The result is that it is often difficult for competing firms in the same industries to be established outside those regions. Summary Goods and services are produced using scarce resources. Businesses supply goods and services to meet the needs and wants of consumers. An effective demand for a product is created when sufficient people want the product and are willing and able to pay a price at which the producer will make a profit. Resources are allocated to the production of goods and services by the government or by the forces of demand and supply. Individuals, businesses, regions and countries tend to specialise in producing or supplying the types of goods and services for which they are most suited. Money allows individual employees and businesses to exchange their services or the goods they produce for other goods and services The nature and purpose of economic activity