Unit 1: Business Activity | Purpose of business activity

A business is any organisation that uses resources to meet the needs of customers by providing a product or service that they demand. Without business activity, we would all still be entirely dependent on the goods that we could make or grow ourselves. Business activity allow us to enjoy a very much higher standard of living that would be possible if we remained entirely self-sufficient.

The goods and services can be classified in several ways:
Consumer goods → the physical and tangible goods sold to the general public - they can be durable and non-durable.
Consumer services → the non-tangible products sold to the general public.
Capital goods → the physical goods used by industry to aid in the production of other goods and services, such as machines and commercial vehicles.

Unit 5 | Regulations - Business Cycle

BOOM: A period of fast economic growth. Output is high due to increased demand, unemployment is low. Business confidence may be high leading to increased investment. Consumer confidence may lead to extra spending.

SLUMP: A period when output slows down due to a reduction in demand. Confidence may begin to suffer.

RECESSION: A period where economic growth slows down and the level of output may actually decrease. Unemployment is likely to increase. Firms may lose confidence and reduce investment. Individuals may save rather than spend.

RECOVERY: A period when the economy moves between recession and a boom.

WHAT HAPPENS IN A BOOM?

• Businesses produce more goods
• Businesses invest in more machinery
• Consumers spend more money. There is a
• Less money is spent by the Government on unemployment benefits
• More money is collected by the Government in income tax and VAT
• Prices tend to increase due to extra demand

WHAT HAPPENS IN A RECESSION?

• Businesses cut back on production
• Some businesses may go bankrupt
• Consumers spend less money.
• Individuals may lose their jobs
• More money is spent by the Government on unemployment benefits
• Less money is collected by the Government in income tax and VAT
• Prices start to fall

Unit 5 | Regulations - Economic factors affecting businesses

Inflation rate - Inflation means that firms have to constantly change their prices. Inflation creates uncertainty - firms won’t know how much they will be charging for their products in the future, so they can’t be sure if an investment will be profitable or not - therefore they invest less, and then they will become less efficient and less competitive. Also, inflation will increase production costs. 

High interest rates - Higher Interest rates will lead to a fall in the aggregate demand in the economy thus leading to difficulty for business to find customers willing to buy its product - as it is more expensive for foreign customers to buy goods exported from that country, and cheaper for that country’s population to buy imports. Lower interest rates will lead to a increase in demand in the economy.

Unemployment level - High level of unemployment in the country can also adversely affect a business. People will not have enough money to purchase a firm’s product.

Labor costs - High labor cost will result higher production costs. This will make a firm’s product more expensive as compared to other firms affecting its sales and profit margin.

Unit 5 | Regulations - Government help

How does government help businesses?

• Providing cheap loans and giving grants.
• Providing advice and information centres for businesses.
• Providing college courses and training programmes for entrepreneurs.
• Offering subsidies or tax reduction to businesses.
• Maintain a stable exchange rate of the currency.

Why does government help businesses?

• To help small businesses to survive and encourage competition in the economy.
• To encourage firms to export and earn foreign exchange for the country.
• To encourage businesses to set up in underdeveloped regions of the country and create wealth and employment opportunities in these areas.

Unit 5 | Regulations - Cost Benefit analysis

Cost Benefit Analysis is typically used by governments to evaluate the desirability of a given intervention in markets. The costs and benefits of the impacts of an intervention are evaluated in terms of the social benefits or social cost. The guiding principle is to list all of the parties affected by an intervention, and place a monetary value of the effect it has on their welfare.

Private cost - It is the cost of setting up the business. The owner(s) pay for the hire of machinery, buying of materials, payments of wages.

Private benefit - The monetary benefits i.e. the revenue earned by the firm is a benefit for the owner.

External Cost - The problems that the external stakeholders have to bear due to the firm’s activity are known as external cost. Example: cleaning a river which has been polluted by a firm’s waste products. Private firms usually ignore external cost.

External benefits - Some firms can cause external benefits. These are the benefits to the external stakeholders due to the activity of firm. For example, a firm may train workers, which might get them better wages in other firms. These external benefits are free.

Social cost - the total cost paid for by the society due to the activities of a firm. It is the sum of all the external cost and private cost.

Social benefit - the total benefit arising due to the production of goods and services by a firm. This is equal to the total of private benefits and external benefits.