1. Business Activity
SEPTEMBER, 2012

2. 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

3. Key Words
 Consumers
 Consumption
 Production
 Factors of production
 Firms
 Opportunity cost
 Wages and salaries
 Customers
 Revenue
 Profit
 Value added

4. 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.

5. 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.

6. Needs, Wants and Scarcity
 Human wants – Unlimited!
 Resources – Scarce!
 Choices = ?
 Things to consider:
 What to produce?
 How to produce?
 Who to produce for?

7. 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).

8. 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.

9. 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.

10. Key Words
Specialization Tertiary sector
Industrial sector Industrial structure
Primary sector Developed economy
Manufacturing Deindustralization
Secondary sector Newly industralization economy

11. 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.

12. 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.

13. 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

14. 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

15. 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

16. 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

17. 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.

18. 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.

19. 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.

20. 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.

21. 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.

22. 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.

23. Key Words
 Capital employed
 Capital intensive
 Labour intensive
 Market size
 Market share
 Merger
 Takeover
 Diversification

24. 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

25. 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.

26. 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.

27. 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.

28. 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.

29. 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.

30. 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.

31. 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.

32. 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.

33. 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.