PRINCIPLES OF BUSINESS – LESSON 1

In CSEC Principles of Business, you will learn about how the world of
business works and its relevance to almost every aspect of modern society.
Among other topics, you will learn organisational principles, finance,
marketing and the business environment.

Within this learning environment you will be expected to immerse yourself

in a business-like mind set and to pay attention to the world around you.

BUSINESS CONCEPTS AND DEFINITIONS

1. Enterprise: This refers to a business or company.

2. Entrepreneurship: The act of combining all the other factors of production (land, labour and

capital) with the aim of establishing a profitable venture for the production of

goods and services.

3. Barter: The exchange of one good/service for another.

4. Profit: The surplus funds which remain after all expenses have been covered.
Revenue – Expenses = Profit

5. Loss: The situation which exist when total sales are not enough to cover all expenses.

6. Trade: The buying and selling of goods and services.

7. Organisation: An arrangement or group of people who pursues collective goals such as the

production of goods and services.

8. Economy: The system within a country which determines the production, exchange and

consumption of goods and services.

9. Producer: Any individual or organisation who make goods and services.

10. Consumer: Any individual or organisation who use goods and services.

11. Exchange: The voluntary trade of goods and services.

12. Goods: Tangible products which have been produced. e.g. car, rice, clothing etc. There

are different types of goods

 Free goods- These are available to all without charge. They are gifts of

nature e.g. air, sea, sunshine etc.

 Public goods- These are goods which can be consumed by all and are

usually paid for by taxation. Consumption by one person does not

exclude consumption by others. E.g. national defence.

 Merit goods- These goods can provide benefits to the consumer as well

as to the rest of society e.g. health services and education.

13. Service: Intangible products which have been produced. e.g. banking, transportation,

insurance etc.

14. Market: Any place where buyers and sellers meet to engage in trade. It is also referred

to as the demand for a product.

15. Commodity: Any final good used for some purpose.

16. Capital: Money which is used in the organisation to acquire assets. It also refers to

items (factories, equipment, machinery etc.) used to create final products.

17. Labour: This is the physical and mental contribution of individuals to the creation of

goods and services.

18. Specialisation: This is the division of labour into specific tasks. A whole process is divided

into several tasks. This helps to speed up the process and may result in an

increase in productivity and a decrease in unit cost.

 THE DEVELOPMENT OF INSTRUMENTS OF EXCHANGE
Over the centuries, as commerce has developed, so have the various instruments of
exchange. In early times, people cultivated the land and reared animals to provide for their
needs. The most basic of these needs were food, clothing and shelter. This production was the
earliest form known as direct production or subsistence economy. As production increased, there
was a surplus of goods. However, no individual could produce all their needs and the system of
barter resulted. This is where an individual exchanged one item for another. It was simple and
helped to create wealth but there were also problems. These include:
 A double coincidence of wants -People could only trade with those who had
something they wanted.
 An exchange rate -How much of one good was another worth
e.g. how many chicken was a cow’s worth.
 Divisibility of goods -Some goods could not be broken down into
smaller parts. E.g. Live animals could not be
sold in portions.
 Storage of wealth -Many goods could not be saved/stored for
the future e.g. fruits/meat spoil easily.
To solve the problems of barter, a system of ‘money’ was developed. Today, money does not only
come in the form of notes and coins. It also includes:
 Credit cards- Credit company pays for goods/services while consumer makes
payments to credit company
 Debit cards- Payment for goods through access of consumer’s bank account
 Cheques- Payment represented on paper to be taken from consumer’s bank account.
 Electronic transfer- Funds are transferred from one bank to another via computer.
 Tele-banking- The use of the telephone to manage bank accounts to make payments.
 E-commerce- The use of the internet to make purchases. Payment can then be made
via electric transfer, credit card etc.

PUBLIC VS PRIVATE SECTOR

All business can be classified as either being owned by members of the public (private sector) or by
the government (public sector). The differences between private and public are stated below.

Public Sector
1. Run by government Eg. Ministries in Trinidad and Tobago – Ministry of Health
2. Provides most public goods – Ministry of National Security provides national defense
which is a public good
3. Usually not profit oriented
4. Raises funds through taxation, borrowing(home/abroad), issuing government securities
 etc.

Private Sector
1. Driven by the profit motive which may be reflected by the prices eg. Sports and Games
2. Raises funds by borrowing / loans
3. Controlled by families or shareholders

FORMS OF BUSINESS ORGANIZATIONS

1. SOLE TRADER :
A sole trader is an individual running a business. It is the simplest and cheapest business structure. If
you operate your business as a sole trader, you are the only owner and you control and manage the
business. You are legally responsible for all aspects of the business.

Characteristics
1. Easy to set up
2. Financed by the owner
3. Bears all risks and keeps all profits
4. Has no one to account to
Advantages
1. Easily and quickly formed and dissolved
2. Close relationship with customers
3. Decisions can be made quicker
4. Takes all profits
5. Pays lower personal tax not company tax
Disadvantages
1. Limited capital and it is not easy to get loans
3. Long working hours
4. Business usually dissolves if owner dies
4. Lack of specialized staff
Formation
The are usually no legal formalities needed except that in some cases, a special licence (e.g. liquor
licence, health certificate) may be needed. The sole trader is usually required to register their trade
name.
Management
The business is managed personally by the sole trader.

2. PARTNERSHIP:
An association between 2- 20 people operating a business with the common goal of making a profit.

Characteristics
1. Minimum of 2 and maximum of 20 for formation
2. Capital is provided by the partners
3. Profits share equally unless stated in agreement

Advantages
1. Relatively easy to set up
2. More capital can be obtained than sole trader
3. Business will not end if one partner dies (continuity)
4. Specialization can occur thus leading to greater efficiency
5. Shared work load
5. Pays lower personal tax not company tax
Disadvantages
1. Unlimited liability
2. Personalities of partners may cause difficulties in decision making.
3. Some difficulty in raising capital.
4. In the absence of an agreement all profits must be shared equally regardless of individual effort.
Formation
A partnership deed is usually written up to form the arrangement. This agreement usually
indicates the number of partners, amount of capital from each partner, how profits are to be divided,
name of partnership, salary to be paid, how partnership is to be dissolved, role of each partner, etc.
Management
This is carried out by the ordinary partners.

3. CO-OPERATIVES
Cooperatives are people-centred enterprises owned, controlled and run by and for their members to
realise their common economic, social, and cultural needs and aspirations.

Characteristics
1. All members have a vote
2. Limited interest on money invested
3. Profits distributed among members
4. The members are the clients
5. Members usually have a common bond
Advantages
1. There is a market for members
2. Employment is provided
3. Owned and operated by members, therefore there is a greater commitment to making it a success.
4. A medium through which government can channel aid to the society.
5. All profits shared among members
6. Shared decision making
Disadvantages
1. Poor, inexperienced and unqualified management. This can hinder growth.
2. Conflict among members can lead to slow decision making
3. Unable to attract skilled professionals
Formation
Each member purchases shares to form the capital base of the co-operative.
Management
They are governed by the membership through a management board elected by members
Examples of Types of Co-operative
1. Financial co-ops: e.g. credit unions which offers methods of savings and loans
2. Consumer co-ops: These are involved in the provision of goods and services
3. Agricultural co-ops: provide agricultural products and equipment to farmers

4. COMPANIES
A company is a business entity which has been incorporated. It is a legal entity, separate from its
owner(s) i.e. it can enter into contract, can sue and can be sued. There are two types of companies
a) Private Limited Companies (Ltd is usually written as part of the name)
b) Public Limited Companies (PLC is part of the name)

A. PRIVATE LIMITED COMPANIES

A company where 2-50 shareholders form a company.
Characteristics
1. Limited liability
2. A separate legal entity
3. Governed by a) memorandum of Association b) Articles of Association
4. Directors elected at AGM
5. Proper accounts must be kept for tax purposes
6. 2-50 shareholders
7. They tend to be owned by families and close friends.
Advantages
1. The company is separate from owners
2. Shareholders have limited liability up to the amount they have invested
3. Easy access to loans
4. Larger capital base than sole traders or partnerships
5. Privacy
6. Death of an owner will not affect the continuity of the business
Disadvantages
1. Shares are not traded publicly and therefore the capital base will be limited
2. Skills may be limited
3. Shares are not transferable without the director’s consent

Formation
Certain legal requirements are needed such as:
a) Memorandum of Association
b) Articles of Association
c) Statement of Authorised Registered or Nominal capital
Management
The owners manage the business or hire personnel. Membership must approve disposal of shares
and their sale is restricted to the members.
B. PUBLIC LIMITED COMPANY
An incorporated company which offers shares to the public.

Characteristics
1. Limited liability
2. A separate legal entity
3. Governed by a) memorandum of Association b) Articles of Association c) Prospectus.
4. Directors elected at AGM
5. Proper accounts must be kept for tax purposes
6. Shares are sold to members of the public
Advantages
1. The company is separate from owners
2. Shareholders have limited liability up to the amount they have invested
3. Easy access to loans
4. Death of an owner will not affect the continuity of the business
5. Risk is spread among shareholders
6. Easy transfer of shares
7. Specialists are hired to run the firm
Disadvantages
1. Objectives of managers may be different from owners (shareholders)
2. Workers are not part of decision making
3. Accounts must be submitted for inspection
Formation
Certain legal requirements are needed such as:
a) Memorandum of Association
b) Articles of Association
c) Statement of Authorised Registered or Nominal capital
d) Prospectus

C. CONGLOMERATE
A group of companies, each of which operates in different industries. There is usually no common
identity or purpose except that of making a profit. E.g. BS&T (B’dos), Neal & Massey (T’dad),
Grace Kennedy (J’maica)

Advantages
1. Opportunities for training and transfer of staff between industries
2. Good cash position since all companies
3. Industries can advertise under the group name
4. Risk of group failure is spread over a range of industries.
Disadvantages
1. No common objective other than profit
2. Comparative analysis not possible
3. Outside control from the head office is resented

D. MULTINATIONALS
A firm of this nature is one which owns, controls and operates business activities in several countries
at the same time. Decisions are made by the parent company. e.g. Cable and Wireless, Neal &
Massy.
Advantages
1. Provides investment in local economy
2. Provides training, expertise, employment and tend to pay higher wages
3. A source of taxation and foreign exchange
4. Provides markets
Disadvantages
1. Large amount of profits leave the country in which it operates to return to parent company
2. May exploit natural resources of small countries
3. The welfare of the country is not the concern of the company
4. May leave country after tax holidays are over
5. May harm the environment
6. They nay leave if political ideas are not the same as theirs
E. FRANCHISE
A right which is bought by an individual/organisation (franchisee) from the person/firm(franchisor),
in order to sell goods by using the franchisor’s name. e.g. McDonald’s, KFC etc.

TYPES OF ECONOMIC SYSTEMS

What is an economic system?

The system in which it is determined how goods and services will be produced. There are FOUR
main economic systems:

1. Traditional/Subsistence
2. Free or Capitalist
3. Command or Planned (Socialist)
4. Mixed (Public & Private Sector)

1. TRADITIONAL/SUBSISTENCE ECONOMY
In this type of economy, people live in groups and tend to grow most of their own food. It is called a
subsistence economy because people only provide for their basic needs. This was a feature of the life
of early man. Within this economy there is little or no trade. However, there was little choice or
variety in the types of goods produced

2. FREE ECONOMY
1. Little government interference
2. Resources are owned by private individuals and companies.
3. What, how and for whom to produce is determined by the price system
4. Prices are determined by the interaction of supply and demand
5. Competition among producers
6. Freedom to enter or leave the market or particular industry
7. Profit motive
Advantages
1. Competition keeps prices low and quality high
2. Freedom to choose and greater variety
3. Creation of jobs
4. Lack of government intervention

Disadvantages
1. Uneven distribution of wealth
2. Little production of public goods
3. Profit is pursued which may result in the total welfare of society being ignored

3. PLANNED ECONOMY
1. All resources or factors of production owned by the government
2. Prices are set by government
3. Profits spent on all citizens
4. The decision of what, how and for whom to produce is made by the central planning
agency
Advantages
1. Competition is avoided
2. The welfare of citizens is the primary goal
3. Social/Public goods can be adequately produced e.g. police, roads, hospital etc.
Disadvantages
1. Since there is no real way of determining the needs of the consumers, situations of
shortages or glut of certain goods may occur
2. Choice of goods tend to be limited
3. Workers may be inefficient due to lack of motivation since there may be no incentives to
work hard
4. Over employment can lead to inefficiency and high cost

3. MIXED ECONOMY
1. Combination of public and private sector
2. Factors of production owned by both private and public enterprise
3. The government provides public goods not for profit while the private sector’s focus is on
producing goods and services for profit
Advantages
1. The welfare of citizens is considered
2. Social/Public goods can be adequately produced e.g. police, roads, hospital etc.
3. Competition keeps prices low and quality high
4. Freedom to choose and greater variety
5. Creation of jobs
6. Government can set price ceilings on certain products (Research what is a price ceiling)
Disadvantages
1. There is some uneven distribution of wealth
2. Profit is pursued which at times may result in the welfare of society being ignored by
private sector
3. Workers (especially in public sector) may be inefficient due to lack of motivation since
there may be no incentives to work hard.
4. Bureaucracy and ‘red tape’ exist in public sector.

ROLES OF STAKEHOLDERS IN BUSINESS ACTIVITIES

Stakeholders - a person with an interest or concern in a business
1. Owners
2. Employees
3. Customers
4. Government
5. Others (creditors, trade unions, society, suppliers)

Roles of Owners/Employers
 Provide relatively secure jobs and fair wages according to the position of employee
  Comply with government legislation e.g. payment of taxes, publishing annual accounts
statements
 Provide a safe working environment
 Protect the surrounding physical environment
 Provide good conditions for employment e.g. working hours, holidays, paid overtime, breaks
during the day etc.
 To provide safe products and services to customers
 To maximise profit

Roles of Employees
 Provide honest labour
 Use equipment carefully
 Minimise wastage during production of goods and services

Roles of Customers
 Be well informed of rights and duties
 To make public any unethical practices
Roles of Government
 Provide adequate legislation to control the business and natural environment
 Enforce laws relating/governing business activities

ROLE OF BUSINESS WITHIN THE COMMUNITY

Economic Role
Businesses have the responsibility to make a contribution to the economy in which
they exist. This can be done through the payment of taxes, provision of jobs and
its contribution to GDP (Gross Domestic Product) through the production of goods and
services. Goods exported all provide valuable foreign exchange for the economy.
Financial Role
Each business not only seeks to maximise sales but also profits where possible. It
also has a responsibility to its shareholders (if any) to provide dividends on shares
issued.
Social Role
Businesses are required to ensure that their production in no way harms consumers
or the environment. Many of them also see social responsibility as becoming
involved in community activities such as sports, charities and the provision of
scholarships. There is also the responsibility to ensure that employees are working in a
safe and comfortable environment.
Political Role
Businesses are required to follow the legislation which may govern their business
environment e.g. recognising trade unions, minimum wages, payment of N.I.S.,
disclosing financial statements etc.
Ethical Role
Any business must ensure that their product is free from defects, they do not
infringe on copyrights and do not engage in false advertising. They should also
be willing to hear genuine complaints from consumers and attempt to rectify
such situations where they are clearly at fault.

Ethical issues arising from internal practices:

1. Working conditions and treatment of workers
2. Bribes to secure contracts
3. Child labour in the developing world

Unethical pratices in marketing:

1. Lack of clarity in pricing

2. High pressure selling – especially in relation to groups such as the elderly
3. Copying packaging styles in an attempt to mislead customers
4. Deceptive advertising

Unethical practices relating to products:

1. Failing to provide information on side effects

 2. Inaccurate or incomplete testing of products
3. Deceptive of size and content
4. Treatment of animals in product testing

Ethical Practices

1. A business should be a bona fide (real) firm or establishment and not used as a ‘front’ for
money laundering and other illicit activities.
2. An ethical business should make sure taxes and national insurance contributions are paid to
the government on time.
3. All businesses should have a code of ethics to assist managers and other employees in
determining if certain behaviours are appropriate and acceptable in their dealings with
customers, suppliers and other agencies.
4. Policies should be put in place to protect personal data of employees, suppliers and financial
information.