The Purpose of Business Activities

The purpose of business activities(prepared by Lincoln Henry)

Business is the production of goods or provision of service with the aim of making a profit.

Production – is the process of transferring raw materials into semi – finish of finish goods.

Provision – making something available.

Good – is a tangible item that one can see, touch and that is portable.

Service – is intangible, it is something that one can experience and enjoy.

Profit – profit is cost of production minus sales.

Businesses exist because people have needs and wants.

Needs – a need is something that is necessary /essential for survival e.g. food, clothing and shelter. They are basic needs.

Wants – a want is something that we desire in order to improve our quality of life or make our lives more comfortable e.g. fridge to keep our drinks cool.

Objectives of business

Objectives are the ends that a person or organization sets out to achieve. Objectives need to be

S – Specific that is to the point.

M – Measurable – either quantitative or qualitative e.g. 1, 2, 3.

A – attainable – must be capable of achieving.

R – relevant – must be related to the subject matter

T – Time bound – must be completed in a certain time.

Objective of a business.

Profit maximization.

Cutting cost - one of the main ways is by reducing the number of employees. One way of reducing labour is by outsourcing some of the work or paying a specialized firm to do it.

Satisfying customers – they try to find out what customers want to satisfy their wants so that they become regular, loyal customers.

Increase market share – is the percentage of total market that a product or a company holds.

Calculating market share – market 6 billion, company A 750 million, company B 300 million.

Company A market share = 750/6 billion x 100 = 12.5%.

Market share is one of the best measures of success.

Expanding the business.

The size of the company can be measure by turnover, number of employees, amount of money invested, and stock market value.

Building a reputation

A good reputation wins customers, which in turns wins profit.

Role of business

Provide employment – that is, people work for pay.

Provide goods or service.

Look after the well – being of the workers and customers.

Promote local industry

Increase yearly sales

Stake holders of business

A stake holder is someone with an interest in the success of an organization.

Entrepreneur – are particularly interested in their firm’s survival and the likelihood of profits.

Employees – all employees will wish to see the business be successful to keep their jobs and income. They may also benefit through share ownership or profit sharing schemes.

Shareholders – share holders are part owners of the business. Have an interest in the company financial performance.

Customers – concerned about the quality and price of the product.

Lenders – they are interesting in obtaining interest and the repayment of their money.

Community – they are interesting in employment and environmental policy.

Government – that good goods and services are provided to the public and the collection of taxes.

Economic problem

In theory the basic economic problem is how to use the available resources in a community to meet the existing needs of society. The resources are usually limited. All countries have land, labour and capital. However, their quantity and quality vary.

On the other hand needs and wants are unlimited. The basic need for food , clothing and shelter are fulfilled for most people living in the developed countries of the world.

In the undeveloped countries basic needs are often rarely met, although occasionally the luxurious wants of the rich few are satisfy.

As all wants cannot be met, choices have to be made in allocating the resources. In making these choices, decisions about production have to be made.

For whom to produce?

What to produce?

Where to produce?

How to produce?

How individuals solve the economic problem?

Direct production – this is production of goods for one‘s own use e.g. a man builds his own house.

Indirect production – the production of goods for sale. It depends upon trade. People usually engage in only one particular occupation which they are best and sell the product and earn money with which they buy the other goods/services they want. e.g. a farmer sell some of his produce and buy cloth.

How do businesses solve the economic problem?

Specialisation – is the process whereby a company or person concentrates on producing only one product.

Division of labour – is the breaking down of work into individual tasks for individual workers to specialize.

Specialization by individual – individual become professionals e.g. a doctor.

Specialization by regions – occurs because of natural conditions, Middle East oil.

Specialization by nations – this result because of natural conditions, special skills.

Advantages (POST ME)

Practice make perfect

Output increases

Savings in training

Tools and equipment

Machinery efficiency.

Disadvantages (DIMS)

Dislocation of production can easily occur

Industrial action is easier

Size of market limits division of labour.

Stages of production

Primary (extractive)

It is concern with the extraction of natural resources, minding diamonds.

Secondary

It is the transformation of raw materials into semi – finish or finish goods. It consists of manufacturing and construction.

Manufacturing – is the transformation of raw materials into usable products e.g. shoe.

Construction – this uses both the products of primary and manufacturing industries to assemble or build e.g. house.

Tertiary (services)

Services are intangible which you can experience.

Commercial services – a charge is made and the provider of the service seeks to make a profit e.g. transport.

Social services – these are provided free or subsidized at a cheap rate, because the government thinks it is desirable. e.g. Government clinic.

Value added.

Adding value is the process of making a product more desirable for a customer. The business that best understands the wants of and needs of it customers is best placed to add value to its products.

How governments solve the economic problem?

Types of economic systems

Free market economy

Private individuals and firms own and manage nearly all the means of production and the distribution of goods and services. There is freedom of individuals both as a customer and as the owner factors of production.

The working of the price mechanism solves what is produced. Prices are set through demand and supply. The profit motive encourages risk takers.

Advantages.

Individuals have freedom of choice

Wants are gauged through market prices

Efficiency is achieved through the incentive of profit.

A small labour force is required.

Disadvantages

It leads to inequalities of wealth

Goods are produced which yield the highest profit

Some goods are not produced

Certain forms of competition lead to waste and inefficiency

The motive of private profit does not ensure public wealth.

Planned economy

There is one central authority. Resources are owned and managed by the state, who, what, why, when, for whom. Prices are set by the state. The government manages wages or salaries of workers.

Advantages

Government can decide what needs to be produce for the good of the country.

Profits resulting from industry are used for development

No group of workers can force up wages.

Workers may be prepared to work harder.

Disadvantages

The system is very rigid

Requires many people to work

Lots of dissatisfied people

There is usually much inefficiency and wastage.

Mixed economy

The mixed economy is a mixture of both the free market and a centrally planed system.

Free market exists side by side with government planning and regulation.

Ownership of most of the means of production of goods and services is in the hands of private individuals and firms. Some governments control water, electric power, publications, transportation and mines. There is also some government action to encourage parts of the economic process by means of tariffs, subsidies and patents. Some government activity also discourages certain activities for reasons of health and safety.