Topic 1: Business Organization and Environment

1.1 The Nature of

Business Activity
• Today’s objectives:
– Describe the purposes of businesses
– Identify inputs, outputs and processes
– Differentiate between types of goods/service
– Discuss how businesses add value
– Distinguish between revenue, cost and profit
 What is a business?
• Businesses exist to satisfy the needs and the
wants of customers.
• Needs are basic necessities for survival
– Examples: food, water, shelter
• Wants are things that people would like to have
– Examples: steak, Fiji water, larger home

vs.
What is a business?
• A business is an organization that is
involved in the production of goods and/or
the provision of services.
• Inputs are processed into outputs, which
are goods or services.
INPUTS PROCESSES
Raw materials Turn inputs OUTPUTS
Components into provision Final goods or
Machinery of service or provision of
Equipment manufacture services.
Labor of goods.
Example: Chocolate Chip Cookies
INPUTS PROCESSES OUTPUTS
Raw materials Turn inputs Final goods
Components into provision or provision
Machinery of service or of services.
Equipment manufacture
Labor of goods.
 Customer or consumer?
• Customers are the people or
organizations that buy a
product.
• Consumers are those that
actually use a product.

• A market is a place or process where buyers

(customers) and sellers (businesses) meet to
trade.
– Examples: store, restaurant, internet, flea market
Types of Products
• Consumer goods are sold to the general public
rather than to other businesses.
– Examples: video game, hamburger, iPhone app
• Capital goods or producer goods are products
purchased by other businesses.
– Examples: machinery, equipment, raw materials
• Services are intangible products.
– Examples: car wash, video rental, hair cut
Consumer good, capital good
or service?
• With your partner, decide if your example is a
consumer good, capital good or service.
• Once you decide, write your answer next to
your example on the board.
 Adding Value
• Added value is the difference between the
value of inputs (cost of production) and the
value of outputs (what is sold to the customer).
• This allows businesses to sell a product for
more than its production cost, resulting in a
profit.
 How Value is Added
Customers will pay more for:
– Speed or quality of service
– Prestige associated with product
– Feel-good factor
– Perceived value for money
– Quality of the finished product
– Brand image or brand loyalty
– Appealing design
Clarification: Perceived Value
• Not necessarily related to the market price
of a product, but rather to the value that
the customer places on that product
• Which of these tickets would tend to have
a higher perceived value?

vs vs
As a group or table (4A), think of a
product that utilizes….

– Speed or quality of service

– Prestige associated with product
– Feel-good factor
– Perceived value for money
– Quality of the finished product
– Brand image or brand loyalty
– Appealing design
 Opportunity Cost
• Opportunity cost is defined as the best alternative
that is forgone (missed out on) when making a
decision.
– Example: Opportunity cost of going to a movie instead of
studying could be a lower grade.
• Business management assumes that people choose
the most beneficial option.
Opportunity cost of watching TV
Opportunity cost of watching TV
Opportunity cost of watching TV
 The Role of Profit
• Revenue is the inflow of money, usually
from the sale of products
• Cost is the outflow of money, often to
finance production
• Profit is the positive difference
between total revenue and total cost.
• If total cost is greater than total
revenue, the business experiences a
loss
 Functions of Profit
• Profit is an incentive to produce.
• Profit is the reward for taking risk.
• Profit encourages invention/innovation.
• Profit is an indicator of growth.
• Profit is a source of finance used to grow the
business.
 Profit, revenue or cost?
• On average, the Hollister store at Crabtree
sells 50 t-shirts per day at a price of $20
each.
• Hollister spends $4 on materials for each
shirt.
• Each store has 12 employees that make
$9.50 an hour.
• Each store has $10,000 invested in racks,
shelves and mannequins.