Business Studies Notes for Igcse - IGCSE Business Studies Introduction Hello, this is a summary of - Studocu

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IGCSE Business Studies

Introduction

Hello, this is a summary of IGCSE Business Studies to help you understand the its core
concepts more easily. As a student, I would like to share with you my experience since I am
studying this subject right now. I am not a professional so please feel free to add comments and
suggestions on how I should improve.

This study guide is going to be about IGCSE Business Studies, Third Edition by Karen
Borrington and Peter Stimpson. For more information, visitthis page credit goes to the
authors.

I hope you will enjoy this study guide and for me to be of help!

MrSpitfire

Chapter 1: The purpose of Business Activity

Chapter 2: Types of business activity

Chapter 3: Forms of business organisation

Chapter 4: Government and economic influences on business

Chapter 5: Other influences on business

Chapter 6: Business costs and revenue

Chapter 7: Business Accounting

Chapter 8: Cash flow planning

Chapter 9: Financing business activity

Chapter 10: Organisational Structure

Chapter 11: Managing a business

Chapter 12: Communication in business

Chapter 13: Motivation at work

Chapter 14: Recruitment, Training, and human resources

Chapter 15: Employee and employer associations

Chapter 16: The market and marketing

Chapter 17: Market research

Chapter 18: Presentation of information

Chapter 19: The marketing mix: product and packaging

Chapter 20: The marketing mix: price

Chapter 21: The marketing mix: promotion

Chapter 22: The marketing mix: place

Chapter 23: Factors affecting production

Chapter 24: Factors affecting location

Chapter 25: Business in the international community

Division of labour/Specialisation

Because there are limited resources, we need to use them the most efficient way possible.
Therefore, we now use production methods that are as fast as possible and as efficient (costs less,
earns more) as possible. The main production method that we are using nowadays is known
as specialization , or division of labour.

“Division of Labour/Specialisation is when the production process is split up into different
tasks and each specialized worker/ machine performs one of these tasks. “

Pros:

Specialized workers are good at one task and increases efficiency and output.
Less time is wasted switching jobs by the individual.
Machinery also helps all jobs and can be operated 24/7.

Cons

Boredom from doing the same job lowers efficiency.
No flexibility because workers can only do one job and cannot do others well if needed.
If one worker is absent and no-one can replace him, the production process stops.

Why is business activity needed? (summary)

Provides goods and services from limited resources to satisfy unlimited wants.
Scarcity results from limited resources and unlimited wants.
Choice is necessary for scarce resources. This leads to opportunity costs.
Specialisation is required to make the most out of resources.

Business activity:

Combine factors of production to create goods and services.
Goods and services satisfy peoples wants.
Employs people and pays them wages so they can consume other products.

Business Objectives:

All businesses have aims or objectives to achieve. Their aims can vary depending on their type of
business or these can change depending on situations. The most common objectives are:

Profit: Profit is what keeps a company going and is the main aim of most businesses.
Normally a business will try to obtain a satisfactory level of profits so they do not have to
work long hours or pay too much tax.
Increase added value: Value added is the difference between the price and material costs
of a product. E. If the price when selling a pen is $3 and it costs $1 in material, the value
added would be $2. However, this does not take into account overheads and taxes. Added
value could be increased by working on products so that they become more expensive
finished products. One easy example of this is a mobile phone with a camera would sell
for much more than one without it. Of course, you will need to pay for the extra camera
but as long as prices rise more than costs, you get more profit.
Growth: Growth can only be achieved when customers are satisfied with a business.
When businesses grow they create more jobs and make them more secure when a
business is larger. The status and salary of managers are increased. Growth also means
that a business is able to spread risks by moving to other markets, or it is gaining a larger
market share. Bigger businesses also gain cost advantages, called economies of scale.
Survival: If a business do not survive, its owners lose everything. Therefore, businesses
need to focus on this objective the most when they are: starting up, competing with other
businesses, or in an economic recession.
Service to the community: This is the primary goal for most government owned
businesses. They plan to produce essential products to everybody who need them.

These business objectives can conflict because different people in a business want different
things at different times.

Stakeholders:

Stakeholders are a person or a group which has interest in a business for various reasons and will
be directly affected by its decisions. Stakeholders also have different objectives and these also
conflict over time.

There are two 6 types of stakeholders, and these types can be classified into two groups with
similar interests.

Chapter 2: Types of business activity

Levels of economic activity

In order for products to be made and sold to the people, it must undergo 3 different production
processes. Each process is done by a different business sector and they are:

Primary sector: The natural resources extraction sector. E. farming, forestry,
mining… (earns the least money)
Secondary sector: The manufacturing sector. E. construction, car manufacturing,
baking… (earns a medium amount of money)
Tertiary sector: The service sector. E banks, transport, insurance… (earns the most
money)

Importance of a sector in a country:

no. of workers employed.
value of output and sales.

Industrialisation: a country is moving from the primary sector to the secondary sector.
De-industrialisation: a country is moving from the secondary sector to the tertiary sector.
In both cases, these processes both earn the country more revenue.

Types of economiess

Free market economy:
All businesses are owned by the private sector. No government intervention.

Pros:

Consumers have a lot of choice
High motivation for workers
Competition keeps prices low
Incentive for other businesses to set up and make profits

Cons:

Not all products will be available for everybody, especially the poor
No government intervention means uncontrollable economic booms or recessions
Monopolies could be set up limiting consumer choice and exploiting them

Command/Planned economy:
All businesses are owned by the public sector. Total government intervention. Fixed wages for
everyone. Private property is not allowed.

Pros:

Eliminates any waste from competition between businesses (e. advertising the same
product)
Employment for everybody
All needs are met (although no luxury goods)

Cons:

Little motivation for workers
The government might produce things people don’t want to buy
Low incentive for firms (no profit) leads to low efficiency

Mixed economy:
Businesses belong to both the private and public sector. Government controls part of the
economy.

Industries under government ownership:

health
education
defence
public transport
water & electricity

Privatisation
Privatisation involves the government selling national businesses to the private sector to increase
output and efficiency.

Pros:

New incentive (profit) encourages the business to be more efficient
Competition lowers prices
Individuals have more capital than the government
Business decisions are for efficiency , not government popularity
Privatisation raises money for the government

Cons:

Essential businesses making losses will be closed
Workers could be made redundant for the sake of profit
Businesses could become monopolies , leading to higher price

Backward vertical merger:

Constant supply of raw materials
Profit from primary sector business is absorbed by manufacturer
Prevent supplier from supplying other businesses
Controlled cost of raw materials

Conglomerate merger:

Spreads risks
Transfer of new ideas from one section of the business to another

Why some businesses stay small:
There are some reasons why some businesses stay small. They are:

Type of industry the business is in: Industries offering personal service or specialized
products. They cannot grow bigger because they will lose the personal service demanded
by customers. E. hairdressers, cleaning, convenience store, etc.
Market size: If the size of the market a business is selling to is too small, the business
cannot expand. E. luxury cars (Lamborghini), expensive fashion clothing, etc.
Owners objectives: Owners might want to keep a personal touch with staff and
customers. They do not want the increased stress and worry of running a bigger business.

Thats the end of chapter two! Chapter 3 coming soon!

Chapter 3: Forms of business organisation

Almost every country consists of two business sectors, the private sector and the public sector.
Private sector businesses are operated and run by individuals, while public sector businesses are
operated by the government. The types of businesses present in a sector can vary, so lets take a
look at them.

Private Sector

Sole Traders

Sole traders are the most common form of business in the world, and take up as much as 90% of
all businesses in a country. The business is owned and run by one person only. Even though he
can employ people, he is still the sole proprietor of the business. These businesses are so
common since there are so little legal requirements to set up:

The owner must register with and send annual accounts to the government Tax Office.
They must register their business names with the Registrar of Business Names.
They must obey all basic laws for trading and commerce.

There are advantages and disadvantages to everything, and here are ones for sold traders:

Pros:

There are so few legal formalities are required to operate the business.
The owner is his own boss, and has total control over the business.
The owner gets 100% of profits.
Motivation because he gets all the profits.
The owner has freedom to change working hours or whom to employ, etc.
He has personal contact with customers.
He does not have to share information with anyone but the tax office, thus he enjoys
complete secrecy.

Cons:

Nobody to discuss problems with.
Unlimited liability.
Limited finance/capital , business will remain small.
The owner normally spends long hours working.
Some parts of the business can be inefficient because of lack of specialists.
Does not benefit from economies of scale.
No continuity , no legal identity.

Sole traders are recommended for people who:

Are setting up a new business.
Do not require a lot of capital for their business.
Require direct contact for customer service.

o The Articles of Association: This contains the rules on how the company will be managed. It
states the rights and duties of directors, the rules on the election of directors and holding an
official meeting, as well as the issuing of shares.
o The Memorandum of Association: This contains very important information about the company
and directors. The official name and addresses of the registered offices of the company must be
stated. The objectives of the company must be given and also the amount of share capital the
owners intend to raise. The number of shares to be bought b each of the directors must alsobe
made clear.
o Certificate of Incorporation: the document issued by the Registrar of Companies that will allow
the Company to start trading.

Shares cannot be freely sold without the consent of all shareholders.
The accounts of the company are less secret than that of sole traders and
partnerships. Public information must be provided to the Registrar of Companies.
Capital is still limited as the company cannot sell shares to the public.

Public Limited Companies

Public limited companies are similar to private limited companies, but they are able to sell shares
to the public. A private limited company can be converted into a public limited company by:

A statement in the Memorandum of Association must be made so that it says this
company is a public limited company.
All accounts must be made public.
The company has to apply for a listing in the Stock Exchange.

A prospectus must be issued to advertise to customers to buy shares, and it has to state how the
capital raised from shares will be spent.

Pros:

Limited liability.
Continuity.
Potential to raise limitless capital.
No restrictions on transfer of shares.
High status will attract investors and customers.

Cons:

Many legal formalities required to form the business.
Many rules and regulations to protect shareholders, including the publishing of annual
accounts.
Selling shares is expensive , because of the commission paid to banks to aid in selling
shares and costs of printing the prospectus.
Difficult to control since it is so large.
Owners lose control , when the original owners hold less than 51% of shares.

Control and ownership in a public limited company:

The Annual General Meeting (AGM) is held every year and all shareholders are invited to
attend so that they can elect their Board of Directors. Normally, Director are majority

shareholders who has the power to do whatever they want. However, this is not the case for
public limited companies since there can be millions of shareholders. Anyway, when directors are
elected, they have to power to make important decisions. However, they must hire managers to
attend to day to day decisions. Therefore:

Shareholders own the company
Directors and managers control the company

This is called the divorce between ownership and control.
Because shareholders invested in the company, they expect dividends. The directors could do
things other than give shareholders dividends, such as trying to expand the company. However,
they might loose their status in the next AGM if shareholders are not happy with what they are
doing. All in all, both directors and shareholders have their own objectives.

Co-operatives

Cooperatives are a group of people who agree to work together and pool their money together to
buy ” bulk “. Their features are:

All members have equal rights, no matter how much capital they invested.
All workload and decision making is equally shared, a manager maybe appointed for
bigger cooperatives
Profits are shared equally.

The most common cooperatives are:

producer co-operatives : just like any other business, but run by workers.
retail co-operatives : provides members with high quality goods or services for a
reasonable price.

Other notable business organizations:

Close Corporations:

This type of business is present in countries such as South Africa. It is like a private limited
company but it is much quicker to set up:

Maximum limit of 10 people.
You only need a simple founding statement which is sent to the Registrar of Companies
to start the business.
All members are managers (no divorce of ownership and control).
A separate legal unit, has both limited liability and continuity.

Cons:

The size limit is not suitable for a large business.
Members may disagree just like in a partnership.

Public Sector

Public corporations:

A business owned by the government and run by Directors appointed by the government.
These businesses usually include the water supply, electricity supply, etc. The government give
the directors a set of objectives that they will have to follow:

to keep prices low so everybody can afford the service.
to keep people employed.
to offer a service to the public everywhere.

These objectives are expensive to follow, and are paid for by government subsidies. However, at
one point the government would realise they cannot keep doing this, so they will set different
objectives:

to reduce costs , even if it means making a few people redundant.
to increase efficiency like a private company.
to close loss-making services, even if this mean some consumers are no longer provided
with the service.

Pros:

Some businesses are considered too important to be owned by an individual. (electricity,
water, airline)
Other businesses, considered natural monopolies , are controlled by the government.
(electricity, water)
Reduces waste in an industry. (e. two railway lines in one city)
Rescue important businesses when they are failing.
Provide essential services to the people (e. the BBC)

Cons:

Motivation might not be as high because profit is not an objective.
Subsidies lead to inefficiency. It is also considered unfair for private businesses.
There is normally no competition to public corporations, so there is no incentive to
improve.
Businesses could be run for government popularity.

Municipal enterprises

These businesses are run by local government authorities which might be free to the user and
financed by local taxes. (e, street lighting, schools, local library, rubbish collection). If these
businesses make a loss, usually a government subsidy is provided. However, to reduce the
burden on taxpayers, many municipal enterprises are being privatised.

Chapter 4: Government and economic influences on business

The impact of business activity on society

All business activity has benefits and undesirable effects on society. These reasons are why
governments want to have some control over business activity:

Possible benefits:

Production of useful goods to satisfy customer wants.
Create employment /increases workers living standards.
Introduction of new products or processes that reduces costs and widen product range.
Taxes help finance public services.
Business earn foreign currency in exports and this could be spent on imports.

Possible undesirable effects:

Business might ruin cheap but beautiful areas.
Low wages and unsafe working conditions for workers because businesses want to lower
costs.
Pollution
Production of dangerous goods.
Monopolies
Advertising can mislead customers.

Governments tend to pass laws that restrict undesirable activities while
supporting desirable activities.

Governments and the economy
Government economic objectives:

Governments all have aims for their country, and this is what they are:

Low inflation.
Low unemployment.
Economic growth.
Balance of payments.

Low inflation:
Inflation occurs when prices rise. When prices rise rapidly many bad thing could happen:

Workers wages buy less than before. Therefore their real income (how much you can
buy with so much money) falls. Workers will be unhappy and demand for higher wages.
Prices of local goods will rise more than that of other countries with lower inflation.
People may start buying foreign goods instead.
It would cost more for businesses to start or expand and therefore it does not employ as
many people.
Some people might be made redundant so that the business can cut costs.
Standards of living will fall.

This is obviously why governments want to keep inflation as low as possible.

Slump: A long drawn out recession. Unemployment will peak and prices will fall. Many
firms will go out of business.

After all of this happens the economy recovers and begins to grow again. Governments want to
avoid a boom so that it will not lead to a recession and a slump. Currently, the government of
China is spending a lot of money so that their economy would continue to grow and avoid a
boom.

Balance of payments

Exports earn foreign currency , while imports are paid for by foreign currency (or vice versa).
The difference between the value of exports and imports of a country is called balance of
payments. Governments try to achieve a balance in imports and exports to avoid a trade deficit ,
when imports are higher than exports. Of course, the government will lose money and
their reservoir of foreign currency will fall. This results in:

If the country wants to import more, they will have to borrow foreign currency to buy
goods.
The country’s currency will now worth less compared to others and can buy less goods.
This is called exchange rate depreciation.

Government economic policies

Governments want to influence the national economy so that it would achieve their
aforementioned objectives. They have a lot of power over business activity and can pass laws to
try to achieve their goals. The main ways in which governments can influence business activity
are called economic policies. They are:

Fiscal Policy: taxes and public spending.
Monetary policy: controlling the amount of money in the economy through interest rates.
Supply side policies: aimed at increasing efficiency.

Fiscal policy

Government spending could benefit some firms such as:

Construction firms (road building)
Defense industries (Iraq war)
Bus manufacturers (public transport)

Governments raise money from taxes. There are Direct taxes on income and Indirect
taxes on spending. There are four common taxes:

Income tax
Profits tax
VAT (Value Added Tax)
Import tariffs

Income tax

Income tax is based on a percentage of your income. Income tax is usually progressive , meaning
that the percentage of tax you have to pay rises with your income. Effects on business and
individuals if there was a rise of income tax:

People will have less disposable income.
Sales fall because people have less money to spend.
Managers will cut costs for more profit. Workers might be made redundant.
Businesses producing luxury goods will lose the most, while others producing everyday
needs will get less affected.

Profits tax or corporation tax

This is a percentage of the profit a business makes. A rise in it would mean:

Managers will have less retained profit , making it harder for the business to expand.
Owners will get l ess return on capital employed. Potential owners will be reluctant to
start their own business if the profit margin is too low.

Indirect taxes

These taxes are a percentage on the price of goods, making them more expensive. Governments
want to avoid putting them on essential goods such as foods. A rise it it would mean:

The effect would be almost the same as that of an increase in income tax. People
would buy less but they would still spend money on essential goods.
Again, real incomes fall. Costs will rise when workers demand higher wages.

Import tariffs and quotas

Governments put tariffs on imports to make local goods look more competitive and also to reduce
imports. When governments put import tariffs on imports:

Sales of local goods become cheaper than imports, leading to increased sales.
Businesses who import raw materials will suffer higher costs.
Other countries will retaliate by putting tariffs on the country’s exports , making it less
competitive.

Quotas maybe used to limit the amount of imports coming in.

Monetary policy and interest rates

Governments usually have to power to change interest rates through the central bank. Interest
rates affect people who borrow from the bank. When interest rates rise:

Businesses who owe to bank will have to pay more , resulting in less retained profit.
People are more reluctant to start new businesses or expand.
Consumers who took out loans such as mortgages will now have less disposable income.
They will spend less on other goods.