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IGCSE Business Chapter 02 Notes

The document summarizes different types of business activity and economic systems. It discusses the three main production sectors (primary, secondary, tertiary), and the importance of industrialization and de-industrialization in earning countries more revenue. It also describes the characteristics of free market, command, and mixed economies. Business size is measured in terms of employees, output, sales, and capital employed. Business growth can occur internally through retained profits or externally through mergers and acquisitions.

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516 views

IGCSE Business Chapter 02 Notes

The document summarizes different types of business activity and economic systems. It discusses the three main production sectors (primary, secondary, tertiary), and the importance of industrialization and de-industrialization in earning countries more revenue. It also describes the characteristics of free market, command, and mixed economies. Business size is measured in terms of employees, output, sales, and capital employed. Business growth can occur internally through retained profits or externally through mergers and acquisitions.

Uploaded by

emonimtiaz
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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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.g. farming, forestry,
mining... (earns the least money)
 Secondary sector: The manufacturing sector. E.g. construction, car manufacturing,
baking... (earns a medium amount of money)
 Tertiary sector: The service sector. E.g 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
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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.g. 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
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Comparing the size of businesses


Businesses vary in size, and there are some ways to measure them. For some people, this
information could be very useful:

 Investors - how safe it is to invest in businesses


 Government - tax
 Competitors - compare their firm with other firms
 Workers - job security, how many people they will be working with
 Banks - can they get a loan back from a business.

Ways of measuring the size of a business:

 Number of employees. Does not work on capital intensive firms that use machinery.
 Value of output. Does not take into account people employed. Does not take into account
sales revenue.
 Value of sales. Does not take into account people employed.
 Capital employed. Does not work on labour intensive firms. High capital but low output
means low effiency.

You cannot measure a businesses size by its profit, because profit depends on too many factors
not just the size of the firm.

Business Growth
All owners want their businesses to expand. They reap these benefits:

 Higher profits
 More status, power and salary for managers
 Low average costs (economies of scale)
 Higher market share

Types of expansion:

 Internal Growth: Organic growth. Growth paid for by owners capital or retained profits.
 External Growth: Growth by taking over or merging with another business.

Types of Mergers (and main benefits):

- Horizontal Merger: merging with a business in the same business sector.

 Reduces no. of competitors in industry


 Economies of scale
 Increase market share

- Vertical merger:
Forward vertical merger:

 Assured outlet for products


 Profit made by retailer is absorbed by manufacturer
 Prevent retailer from selling products of other businesses
 Market research on customers transfered directly to the manufacturer
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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.g. 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.g. 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!


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