Section 1: Business and the environment

in which it operates Chapter 1

What is business activity?

Getting started…
Some people try to make money by setting up a business. They might do this because they want to work for
themselves. Or they think they can make more money than if they work for someone else. Or perhaps they have
been made redundant and cannot find another job. Running a business is hard work, but the rewards can be
worth it. Look at the example below.

Okkas Taverna
In 2008 Marios and Alexia Okkas opened Okkas
Taverna, a restaurant catering for tourists in Cyprus
(see Figure 1.1). The couple no longer wanted to work
for another employer. Both had previous experience in
catering. Alexia had worked as a waitress in Limassol,
while Marios was employed as a chef in Paxos. The
couple used €15,000 of their own money to set up the
business. Before trading began they had to:
• obtain a €10,000 bank loan;
• find suitable premises and decorate the restaurant area;
• obtain a fire certificate to meet health and safety
regulations;
• buy furniture and kitchen equipment;
• employ two part-time staff to help out when busy;
• advertise the restaurant in the local area.
Marios ran the kitchen. He was responsible for menu
design, dealing with suppliers and preparing the food.
Alexia ran the restaurant area. She waited on tables,
settled bills and looked after the customers. Marios and
Figure 1.1 A Greek restaurant
Alexia worked long hours, but it was worth it because
in 2009 Okkas Taverna made a profit of €34,600.

(a) Why do you think Marios and Alexia opened a restaurant?

(b) State three resources used by Marios and Alexia when setting up their business.
(c) Why do you think businesses exist?

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Land The plot of land where business premises
are located. Raw materials such as coal, oil,
iron ore, plant life and animals, are taken from
the land to make products
Enterprise The person(s)
who set up the business.
Entrepreneurs take risk by
investing their own money.
They also organise the
other factors of production
Figure 1.2
The four factors of production
Business activity
A business is an organisation that provides goods or services. The
example above illustrates many features of business activity.
• Business activity produces an output – a good or service. A restaurant
service is being provided by Marios and Alexia.
• Goods and services are consumed. Tourists consume the service
provided by Marios and Alexia.
• Resources are used up. Food and drinks, furniture, people, gas and
electricity are examples of the resources used by Okkas Taverna. Money,
such as the €10,000 bank loan is also a resource. The resources used
by businesses are often called the four factors of production. These are
explained briefly in Figure 1.2.
• A number of business functions may be carried out. Production,
marketing, administration (the paper work), managing staff and
financial control are examples. Production in the above case involved
the provision of meals in a restaurant. Marketing involved advertising in
the local area.
• Businesses can be affected by external
factors. This means they are affected
by things that they cannot control
Labour The people who
work in the business such as government laws, changes
in consumer tastes and competitors.
Four factors Marios and Alexia had to obtain a
of production fire certificate because of health and
safety regulations.
Capital Man-made resources such • Businesses aim to make a profit.
as tools, equipment, machinery and Most businesses are set up by people
buildings that are used to produce
to make money. In this case Okkas
goods and services. Capital also
includes money Taverna made a profit of €34,600 for
Marios and Alexia in 2009.

Goods and services

Businesses provide a wide range of goods and services.
Some produce products for consumers – ordinary
Raw materials Processes Product people. These are called consumer goods. Products
Wood Joining
Glass Glazing sold by one business to another are called producer
Paint Painting Conservatory goods. Some businesses serve both consumers and
Floor tiles Tiling producers. For example, the Taj Mahal hotel in
Window fittings
Mumbai caters for both tourists and business people.
Other raw materials

$11,500 $29,000

Value added  $17,500

Adding value
Business activity involves adding value to resources.
Figure 1.3 Added value is the difference between the cost of raw
Adding value when constructing a materials and the price charged:
conservatory Value added = selling price − cost of raw materials

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 What is business activity?

In Figure 1.3 a builder uses raw materials such as wood, glass, floor tiles,
window fittings and paint to build a conservatory. The builder uses
processes such as joining, glazing, painting and tiling to construct the
conservatory. The value added in this case is $17,500 ($29,000 2 $11,500).
It is the difference between the cost of the raw materials and the price
of the conservatory. However, $17,500 is not the profit made by the
builder. Part of the $17,500 will be used to meet other costs such as motor
expenses, administration, insurance and wages.

Question 1
Imad Arshad is a jeweller. He owns a small shop in Dehli and makes items of jewellery in a workshop at the
back. One of his customers paid 4,500 rupees (Rs) for a brooch. He made it from silver and jade and designed
it himself. The cost of the silver was Rs 1,000 and the cost of the jade Rs 900. He also used other materials
costing Rs 200.
(a) Calculate the value added in this example.
(b) Explain the difference between value added and profit.

Satisfying needs and wants

Businesses have to satisfy people’s needs and wants. Needs are the
requirements for human survival. Some are physical such as water, food,
Key terms
warmth, shelter and clothing. If these needs cannot be met, humans will die.
Added value – the difference
Humans also have other desires. These are called wants and include
between the cost of raw
holidays abroad, a better house, a bigger car, more status, more love, a
materials and the selling price.
better education and a cleaner environment. These wants are infinite.
Business – an organisation that
Most people want more than they already have. It is human nature.
produces goods and services.
Unfortunately, the resources used by businesses are finite. This means
Consumer goods – goods
there is a limited amount. Economists say that resources are scarce.
and services sold to ordinary
To survive, businesses must produce goods and services that satisfy people (consumers) rather than
people’s needs and wants. They also need to understand that these may businesses.
change over time. Also, other businesses will be attempting to do the Goods – physical products such
same. This shows that businesses operate in a changing and competitive as a mobile phone, packet of
environment (see Chapter 9). crisps or a pair of shoes.
Needs – basic requirements for

The purpose of business activity human survival.

Producer goods – goods
Businesses exist to provide goods and services. However, different types of and services produced by one
organisation provide goods and services for different reasons. They have a business for another.
different purpose. Scarce resources – the amount
of resources available is limited.
• Private enterprise Most businesses are owned privately by individuals
Services – non-physical products
or groups of individuals. They are private sector (see Chapter 10)
such as banking, car cleaning and
businesses. In the UK there are over four million privately owned
waste disposal.
businesses. Most of these are small or medium-sized. The aim or goal of
Wants – people’s desires for
a private enterprise is to make money – a profit for the owners. The aims
goods and services.
and objectives of private sector businesses are discussed in Chapter 5.

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 • Non-profit making organisations Some organisations in the private
sector are non-profit making. Organisations such as charities, pressure
groups, clubs and societies exist for other reasons. For example, charities
such as Oxfam exist to raise money for ‘good’ causes. Pressure groups, such
as Greenpeace, exist to influence decision makers in politics and business.
Clubs and societies, such as the scouting association and sports clubs,
provide opportunities and facilities for people with common interests.
Non-profit making organisations aim to meet the needs and wants of their
members, or those that they aim to support.
• Public enterprise Some goods and services are provided by
organisations owned by central or local government. These are public
sector organisations (see Chapter 10) and examples in the UK include
the National Health Service (NHS), the Post Office, the Bank of England
and public libraries. The main purpose of public enterprise is to provide
goods and services that private enterprise fails to provide adequately.
Most goods and services provided in the public sector are free. They are
paid for from taxes. Public sector organisations do not normally aim to
make a profit. They try to provide good quality services.

Question 2
The Li Ka Shing Foundation is a charity founded
in 1980 by Hong Kong business man Li Ka Shing. 47% Education
6%
Its mission is to develop ‘a culture of giving’ Healthcare
in Chinese society. The money raised by the Li 4% Culture
Ka Shing Foundation is used for education and 43%
Community
healthcare projects. For example, in 2005, the
foundation gave HK$1 billion to the University of
Hong Kong. To date the Li Ka Shing Foundation, Source: adapted from www.lksf.org

and other charities established by Mr. Li, have Figure 1.4

donated HK$10.7 billion (see Figure 1.4). Donations made by Li Ka Shing Foundation as of 15 April 2009
– by type
(a) Using this case as an example, explain
what is meant by a non-profit making organisation.
(b) What is the purpose of the Li Ka Shing Foundation?

Chapter review – SurgiCo

SurgiCo is a private sector business that designs and (a) SurgiCo makes producer goods.
manufactures surgical instruments. The company Explain what this means. (2 marks)
aims to be the world’s leading supplier of high-quality
(b) What examples of capital are used by
and cost-effective instruments. In 2008, the business
SurgiCo? (2 marks)
made a profit of $780,000 on sales of $4.3 million.
This was an increase on the previous year when the (c) Explain how SurgiCo meets needs. (4 marks)
profit was $685,000. In 2008, the business moved to (d) How does SurgiCo add value? (4 marks)
new premises. This helped SurgiCo to improve its
manufacturing processes. For example, since the move (e) Explain how the aims or goals of SurgiCo might
the business has bought some specialist machinery differ from those of the hospitals which
which has helped to improve quality. it supplies. (8 marks)