CambridgeInternational AS and A Level

Business, Economics and Accounting 2014

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SAMPLE

A truly international approach A wide range of case studies, picked from around the world help students place Business and Economic knowledge into real, global contexts.

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Key knowledge at a glance Key terms, study tips, summaries and expert tips are easily identifiable throughout each of the books, enhancing understanding and highlighting important information.

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Understand what’s required Chapter overviews and learning outcomes explain what should be covered by the end of the topic so students can check their progress.

Address the key concepts Key Concepts are clearly highlighted throughout the text to help students to see the ‘bigger picture’ and to make connections within the subject.

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5

Enterprise 1.1 The nature of business activity

However, whenever decisions are made about what to produce – whether it be the free market or the government – it will involve an opportunity cost. Given that resources are limited, if they are used to produce more of one item, then this is at the expense of something else. Opportunity cost measures the sacrifi ce you make if you choose one course of action in terms of the next best alternative. For example, if a business decides to use its labour force to increase output of soft drinks then the opportunity cost is what could have been produced if the labour force had been used to produce something different. Whenever a business makes a decision it should consider the opportunity cost. A project that earns a profi t of £100 000 may seem attractive but if the resources could have been used to earn £250 000 it is not so appealing. When judging the success of a business you should consider the opportunity cost. If Walmart, the huge US retailer, makes a profi t of $10 million this may not be that impressive given the people, stores and equipment it has.

The business environmentBusinesses do not operate in isolation. What they do is linked to what other businesses do, for example, their suppliers, the fi rms that distribute and promote their products, the banks that lend them money. They are also affected by many other external factors such as:

� Political and legal issues. For example, new laws by a government can prevent the way some products are promoted (such as cigarettes) and can affect the way employees must be treated and the way a business produces (perhaps to reduce its environmental impact).

� Economic issues. For example, the amount of income in an economy can change over a period of time, affecting demand; the value of one currency in terms of another can alter, affecting the cost of importing supplies; and the cost of borrowing can go up, increasing costs.

� Social issues. For example, an increase in the size of the population or a change in the life expectancy of the population in a country can affect the level of demand and the types of products people buy.

� Technological issues. For example, changes in the availability and speed of the internet can make it easier to fi nd suppliers and sell across the world.

These external factors (known as PEST – political, economic, social and technological) will continually be changing and this will affect what businesses produce and the resources they use. If labour costs in one country become more expensive, for example, businesses might switch production to another country or start to use more machinery instead. If a government signs a treaty with another country to make trade easier its businesses might start to sell more to customers in the new partner country. Businesses therefore need to monitor their external business environment because it is dynamic (ever changing) and if necessary managers will need to change some of their decisions about inputs, the transformation process or the outputs they produce accordingly.

These external factors (known as PEST – political, economic, social and technological) will continually be changing and this

Study tip

Remember that the key external factors in the environment of a business will vary from industry to industry. In the health sector, demographics may be very signifi cant; in the computer sector, technological changes may be critical. You need to assess the key issues for any given industry.

Case Study

Brazil

The Brazilian economy has been growing fast despite a slowdown in many other economies around the world. In 2012, the National Institute of Economic and Social Research (NIESR) said that Brazil had overtaken the UK in terms of the size of its economy. The Brazilian economy is now worth $2.5 trillion (£1.6 trillion) (compared to the UK’s $2.48 trillion), making it the sixth biggest economy in the world.

Brazil is enjoying an economic boom because it is benefi ting from revenue selling its food and oil at high prices.

Brazil is the largest Latin American economy and one of the so-called BRIC nations together with Russia, India and China. Its growth has been far faster than the US and western Europe in recent years.

With substantial oil and gas reserves being discovered off the coast of Brazil, the country is now the world’s ninth largest producer of oil. Brazil has about 190 million people, in contrast to the UK’s 60 million people.

Questions1 Explain two possible reasons why the Brazilian economy

might be growing so fast. [6]2 Discuss the possible effects for Brazilian businesses of

operating in such a fast growing economy. [10]

20000

5000

10 000

15 000

20 000

2002 2004 2006 2008 2010 2012

United States

ForecastGDP US $bn

ChinaJapanGermanyFranceUnited KingdomBrazil

Figure 1.4

Source: IMF

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9

64

The balance of payments and the exchange rate

9.2 The exchange rate and international competitiveness

Closely associated with the balance of payments is the exchange rate – the price of one currency in terms of another. The exchange rate is important because it infl uences the prices that domestic consumers must pay for imported goods, services and assets, and also the price that foreigners pay for domestically produced goods, services and assets. Chapter 4 introduced the notion of the demand and supply of foreign currency, reproduced as Figure 9.2.

This uses ringgits as an example, with the vertical axis representing the price of Malaysian ringgits in terms of US dollars. The demand for ringgits arises from people holding US dollars wanting to purchase Malaysian goods, services or assets, whereas the supply emanates from holders of ringgits wanting to purchase US goods, services or assets. The connection is that the balance of payments accounts itemise these transactions, which entail the demand for and supply of ringgits. Notice that the demand for currency is a derived demand – thus ringgits are demanded when people holding dollars or other currencies want to buy Malaysian goods, services or assets. Similarly, ringgits are supplied when Malaysians want to buy foreign goods, services or assets.

Key term

Exchange rate: the price of one currency in terms of another.

In analysing the balance of payments, the relative competitiveness of domestically produced goods and services is an important issue. The exchange rate plays a key role in this process. If a country persistently shows a defi cit on the current account, does that imply that the goods that it produces are uncompetitive in international markets?

Consider the situation from the perspective of the Malaysian economy. The demand for Malaysian exports in world markets depends upon a number of factors. In some ways, it is similar to the demand for a good. In general, the demand for a good depends on its price, on the prices of other goods, and on consumer incomes and preferences. In a similar way, you can think of the demand for Malaysian exports as depending on the price of Malaysian goods, the price of other countries’ goods, incomes in the rest of the world and foreigners’ preferences for Malaysian goods over those produced elsewhere. However, in the case of international transactions the exchange rate is also relevant, as this determines the purchasing power of Malaysian incomes in the rest of the world. Similarly, the demand for imports into Malaysia depends upon the relative prices of domestic and foreign goods, incomes in Malaysia, preferences for foreign and domestically produced goods and the exchange rate. These factors will all come together to determine the balance of demand for exports and imports.

The exchange rate plays a key role in infl uencing the levels of both imports and exports, and thus affects the balance of payments, so the way it changes over time and the way in which it is determined is important.

Figure 9.3 shows the time path of the US$/£ exchange rate. The period should be seen in two sections. Until 1971, the UK government managed the exchange rate. From 1949 until 1967, the exchange rate was pegged at $2.80 per pound. The peg changed to $2.40 per pound in 1967, a policy intervention known as ‘devaluation’, which will be discussed later in the chapter. Since then the rate has been left to the market. The graph shows some fl uctuations between 1971 and the late 1980s, around a declining trend. Since then the exchange rate seems to

Quantity of ringgits per period

Demand

Supply

e*Exc

han

ge

rate

(pri

ce o

f ri

ng

git

s in

do

llars

)

0

Figure 9.2 The market for ringgits

Malaysia’s biggest exports, palm oil and oil, create a demand for local currency

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310

Chapter overview

24 Business communication

A LevelSection 2: People in organisations

Chapter overviewIn this chapter we examine:

� the purposes and methods of communication � the channels of communication used by businesses � barriers to communication � the role of management in facilitating communication.

24.1 The theory of communication

Key terms

Communication is the exchange of information between people.

Feedback is a response to communication that may confi rm receipt and comprehension.

What is communication?Communication involves the transfer of information. This transfer can take place between people or between people and organisations or between different organisations. A transmission mechanism is simply the methods by which one person communicates with another. Letters and email are examples of methods of communication. Communication involves a number of elements as shown in Figure 24.1.

Study tip

Before reading this chapter, it is worthwhile revisiting the AS Business chapters on leadership, organisational structures and motivation. These will provide you with a good foundation for studying communications.

THE SENDER(initiates the

communication)

FEEDBACK(was the message

received andunderstood?)

MESSAGE(the information

that is transmitted)

MEDIUM(how the message

is passed on,e.g. email)

RECEIVER(the audience at

whom the messageis targeted)

Figure 24.1 The process of communication

Case Study

Cathay Pacifi c

Figure 24.2 A Cathay Pacifi c aeroplane

Cathay Pacifi c is the international airline of Hong Kong. It operates scheduled passenger and cargo services to 151

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Revision Guides and Teacher CD-ROMs will also be available.

v

Contents

Introduction .......................................................................................................................................................................... xii

AS Level

Section 1: Business and its environment 01

Chapter 1 Enterprise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 011.1 The nature of business activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 011.2 The role of an entrepreneur . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 071.3 Social enterprise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Chapter 2 Business structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142.1 Economic sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142.2 Legal structures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Chapter 3 Business size . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233.1 Measuring the size of a business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233.2 Small businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Chapter 4 Business objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 274.1 Business objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 274.2 The role of objectives in the stages of business decision-making . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Chapter 5 Stakeholders in a business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 335.1 Stakeholder groups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 335.2 The importance and infl uence of stakeholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Section 2: People in organisations 39

Chapter 6 Management and leadership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 396.1 Leaders and managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 396.2 Management and managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 396.3 Leadership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 436.4 Styles of leadership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 456.5 Emotional intelligence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Chapter 7 Motivation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 527.1 What is motivation? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 527.2 Human needs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 537.3 Motivation theorists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 547.4 Motivation methods in practice: fi nancial motivators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 627.5 Motivation methods in practice: non-fi nancial motivators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

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vi

Contents

Chapter 8 Human resource management (HRM) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 698.1 What is human resource management (HRM)? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 698.2 Recruitment and selection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 728.3 Employment documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 758.4 Disciplinary procedures, redundancy and dismissal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 778.5 Training . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 808.6 Employee welfare and morale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

Section 3: Marketing 87

Chapter 9 What is marketing? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 879.1 The role of marketing and its relationship with other business activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 879.2 Supply and demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 899.3 Features of markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 929.4 Producer and consumer markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 949.5 Niche versus mass marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 949.6 Segmentation methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95

Chapter 10 Market research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9910.1 What is market research? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9910.2 Primary and secondary market research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10010.3 Sampling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10210.4 Quantitative and qualitative market research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10310.5 Market research results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10310.6 Cost effectiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

Chapter 11 Marketing mix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10511.1 The marketing mix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10511.2 The role of the customer (the 4 Cs) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10611.3 Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10711.4 Product life cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10711.5 Pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11211.6 Price elasticity of demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11611.7 Promotion methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12011.8 Channels of distribution (place) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12411.9 Using the internet for the 4 Ps/4 Cs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12711.10 An effective marketing mix? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128

Section 4: Operations and project management 131

Chapter 12 The nature of operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13112.1 Inputs, outputs and the transformation process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13112.2 The benefi ts and limitations of capital and labour intensive processes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132

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12.3 Effectiveness and effi ciency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13312.4 Creating value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135

Chapter 13 Operations planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13713.1 Infl uences on operations decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13713.2 Flexibility and innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13813.3 Operations methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13813.4 Location . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14013.5 Scale of production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144

Chapter 14 Inventory management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14814.1 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14814.2 Managing inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148

Section 5: Finance and accounting 153

Chapter 15 Business fi nance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15315.1 Why businesses need capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15315.2 Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15415.3 Revenue expenditure and capital expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15615.4 Sources of fi nance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15715.5 Factors infl uencing the choice of sources of fi nance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16215.6 Choosing an appropriate source of fi nance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164

Chapter 16 Forecasting and managing cash fl ow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16716.1 Why businesses forecast cash fl ow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16716.2 Cash-fl ow forecasts in practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16916.3 Methods of improving cash fl ow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172

Chapter 17 Costs and break-even . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17717.1 Revenue and cost information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17717.2 Uses of cost information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18217.3 Break-even analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185

Chapter 18 Accounting fundamentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19218.1 Income statements and statements of fi nancial position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19218.2 Using fi nancial ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19718.3 The main users of accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20118.4 The limitations and uses of fi nancial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20218.5 Management and fi nancial accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204

AS Level Cambridge International Examinations past paper exam questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206

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A Level

Section 1: Business and its environment 216

Chapter 19 Business structure and size . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21619.1 Local, national and multinational businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21619.2 International trading links . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21819.3 Governments and businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22019.4 Business growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221

Chapter 20 The economic environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22720.1 The government’s economic objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22720.2 Economic growth and the business cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22920.3 Infl ation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23420.4 Unemployment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23620.5 Exchange rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23920.6 Redistributing income and wealth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24220.7 The government’s economic policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24420.8 Market failure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24920.9 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249

Chapter 21 Other external infl uences on business activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25221.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25221.2 Political and legal factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25321.3 Consumer protection legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25621.4 Technological change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25821.5 Competitors and suppliers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26121.6 Social factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 263

Section 2: People in organisations 272

Chapter 22 Further human resource management (HRM) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27222.1 Different approaches to HRM: human resource strategies and fl exible workforces . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27222.2 Measures of employee performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27722.3 Management by objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28122.4 Labour legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28222.5 Cooperation between management and the workforce . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28422.6 Workforce planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28622.7 The role of trade unions in HRM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28822.8 Negotiation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29022.9 No strike deals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 293

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Chapter 23 Organisational structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29523.1 Business objectives, organisational structure and people . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29523.2 Formal and informal organisational structures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29823.3 Types of organisational structures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30023.4 Key factors within organisational structures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303

Chapter 24 Business communication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31024.1 The theory of communication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31024.2 Why do businesses communicate? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31124.3 How businesses communicate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31224.4 Barriers to communication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31624.5 Improving communication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 317

Section 3: Marketing 320

Chapter 25 Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32025.1 Marketing planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32025.2 Elasticity of demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32025.3 Product development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32225.4 The need to forecast marketing data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32525.5 The need for and development of a coordinated marketing mix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 333

Chapter 26 Globalisation and international marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33826.1 Economic globalisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33826.2 International markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 339

Section 4: Operations and project management 344

Chapter 27 Operations and project management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34427.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34427.2 Enterprise resource planning (ERP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34427.3 Capacity and capacity utilisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 345

Chapter 28 Lean production and quality management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35028.1 Lean production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35028.2 Benchmarking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35328.3 Kaizen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35328.4 Just-in-time production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35428.5 Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35528.6 Total quality management (TQM) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 357

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Chapter 29 Project management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36029.1 Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36029.2 Critical path or network analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 361

Section 5: Finance and accounting 367

Chapter 30 Costing methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36730.1 Issues in costing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36730.2 Full costing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36930.3 Contribution costing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37130.4 Contribution costing and decision-making . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 372

Chapter 31 Budgets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37731.1 Preparing and using budgets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37731.2 Variance analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 383

Chapter 32 Published accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38832.1 Income statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38832.2 Statements of fi nancial position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39032.3 Further issues on statements of fi nancial position. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 392

Chapter 33 Analysing published accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39833.1 What is a fi nancial ratio? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39833.2 The return on capital employed ratio (ROCE) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40033.3 Effi ciency ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40033.4 Gearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40233.5 Investors’ ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40333.6 The value and limitations of ratio analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 406

Chapter 34 Investment appraisal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40934.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40934.2 Financial techniques for making investment decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41134.3 Assessing the risks and uncertainties of investment decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41634.4 Qualitative infl uences on investment appraisal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 418

Section 6: Strategic management 421

Chapter 35: Strategic management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42135.1 Corporate strategy, tactics and strategic management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42135.2 Strategic analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 423

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xi

Contents

Chapter 36: Strategic choice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43036.1 The Ansoff Matrix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43036.2 Low cost vs differentiation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43236.3 Force Field Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43336.4 Decision trees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 433

Chapter 37: Strategic implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43737.1 Business plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43737.2 Corporate culture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43737.3 Developing a change culture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44237.4 Leading and managing change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44337.5 Developing a strategy to manage change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44437.6 Contingency planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 445

A Level Cambridge International Examinations past paper exam questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 449Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 474Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 485

Student’s CD contentsKey termsAnswers to short answer questions Interactive testsExamination structure, Planning your revision and Examination technique

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5

Enterprise 1.1 The nature of business activity

However, whenever decisions are made about what to produce – whether it be the free market or the government – it will involve an opportunity cost. Given that resources are limited, if they are used to produce more of one item, then this is at the expense of something else. Opportunity cost measures the sacrifi ce you make if you choose one course of action in terms of the next best alternative. For example, if a business decides to use its labour force to increase output of soft drinks then the opportunity cost is what could have been produced if the labour force had been used to produce something different. Whenever a business makes a decision it should consider the opportunity cost. A project that earns a profi t of £100 000 may seem attractive but if the resources could have been used to earn £250 000 it is not so appealing. When judging the success of a business you should consider the opportunity cost. If Walmart, the huge US retailer, makes a profi t of $10 million this may not be that impressive given the people, stores and equipment it has.

The business environmentBusinesses do not operate in isolation. What they do is linked to what other businesses do, for example, their suppliers, the fi rms that distribute and promote their products, the banks that lend them money. They are also affected by many other external factors such as:

� Political and legal issues. For example, new laws by a government can prevent the way some products are promoted (such as cigarettes) and can affect the way employees must be treated and the way a business produces (perhaps to reduce its environmental impact).

� Economic issues. For example, the amount of income in an economy can change over a period of time, affecting demand; the value of one currency in terms of another can alter, affecting the cost of importing supplies; and the cost of borrowing can go up, increasing costs.

� Social issues. For example, an increase in the size of the population or a change in the life expectancy of the population in a country can affect the level of demand and the types of products people buy.

� Technological issues. For example, changes in the availability and speed of the internet can make it easier to fi nd suppliers and sell across the world.

These external factors (known as PEST – political, economic, social and technological) will continually be changing and this will affect what businesses produce and the resources they use. If labour costs in one country become more expensive, for example, businesses might switch production to another country or start to use more machinery instead. If a government signs a treaty with another country to make trade easier its businesses might start to sell more to customers in the new partner country. Businesses therefore need to monitor their external business environment because it is dynamic (ever changing) and if necessary managers will need to change some of their decisions about inputs, the transformation process or the outputs they produce accordingly.

These external factors (known as PEST – political, economic, social and technological) will continually be changing and this

Study tip

Remember that the key external factors in the environment of a business will vary from industry to industry. In the health sector, demographics may be very signifi cant; in the computer sector, technological changes may be critical. You need to assess the key issues for any given industry.

Case Study

Brazil

The Brazilian economy has been growing fast despite a slowdown in many other economies around the world. In 2012, the National Institute of Economic and Social Research (NIESR) said that Brazil had overtaken the UK in terms of the size of its economy. The Brazilian economy is now worth $2.5 trillion (£1.6 trillion) (compared to the UK’s $2.48 trillion), making it the sixth biggest economy in the world.

Brazil is enjoying an economic boom because it is benefi ting from revenue selling its food and oil at high prices.

Brazil is the largest Latin American economy and one of the so-called BRIC nations together with Russia, India and China. Its growth has been far faster than the US and western Europe in recent years.

With substantial oil and gas reserves being discovered off the coast of Brazil, the country is now the world’s ninth largest producer of oil. Brazil has about 190 million people, in contrast to the UK’s 60 million people.

Questions1 Explain two possible reasons why the Brazilian economy

might be growing so fast. [6]2 Discuss the possible effects for Brazilian businesses of

operating in such a fast growing economy. [10]

20000

5000

10 000

15 000

20 000

2002 2004 2006 2008 2010 2012

United States

ForecastGDP US $bn

ChinaJapanGermanyFranceUnited KingdomBrazil

Figure 1.4

Source: IMF

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24

Business size3

� they are often very creative because it is easy for those involved to communicate with each other and share ideas.

However, small businesses do have disadvantages: � They lack power in the market – for example with suppliers and customers – and so can fi nd it diffi cult to survive.

� They may lack much experience compared to more established fi rms.

� They may fi nd it diffi cult to raise fi nance because of the high risk involved as so many small businesses fail.

This is why governments sometimes try to help small businesses by providing advice, lower taxes and less regulation to help them survive.

Case Study

Small business fi nance

‘Small- and medium-sized enterprises (SMEs) face challenges getting fi nance,’ said the Vietnam Chamber of Commerce and Industry (VCCI) recently. It said that fi nance was expensive because the banks themselves are paying high interest of more than 13 per cent to get savers to provide them with funds. The banks also prefer to offer loans to large companies and state-run enterprises as they are a safer investment.

The Vietnamese government has ordered the banks to lend more to small- and medium-sized enterprises (SMEs).

Questions1 Explain how high interest rates might make it diffi cult for

small- and medium-sized enterprises to survive. [6]2 Discuss why the Vietnamese government might be eager to

lend more to SMEs. [10]

The role of small businesses as part of the industry structure in some industriesSmall businesses are often very innovative. In industries such as pharmaceuticals and computers many of the breakthroughs are made by small businesses; bigger businesses then often take over or work with the smaller organisations to develop the ideas further.

Small businesses can also provide specialist services that bigger organisations might not be interested in providing for themselves; for example, while the larger fi rm concentrates on its core business the small fi rm might specialise in, say, digital marketing, specialist legal advice or provide expertise on a new market overseas. Small businesses can concentrate on small segments of the market (called niches) and sell their services to bigger organisations who buy in this expertise.

Key term

A niche is a small segment of a market.

Maths moment

The market as a whole is worth $960 000. Your niche is worth $60 000. What percentage of the market is this?

Family businesses

Figure 3.1 Family businesses are common in some countries, such as india

A number of businesses in an economy will be run by families. This is especially true in countries such as India where the culture tends to encourage families to work together.

Family businesses have some strengths: � The family members may share values, leading to fewer disagreements.

� Those involved may work hard so that the family as a whole prospers; their ties to the business will be emotional as well as fi nancial, which may make them more committed to the survival and success of the business. This may mean they will work harder and for longer than ‘outsiders’.

� Individuals may be very supportive of each other because they are family members.

� Family members may be willing to plan long term because they will be looking for the benefi ts they can bring for future generations.

� A number of family members may be involved in providing fi nance and expertise.

� There may be decreased costs as family members may be willing to work for less than outside employees, at least in the short term.

However, there may also be weaknesses: � Sometimes in a family business decisions may be made for emotional reasons rather than rational ones. It may be that the correct thing is to do ‘A’ but because we don’t want to upset a family member we do ‘B’ instead.

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147

Operations planning 13.5 Scale of production

may be able to benefi t from economies of agglomeration, i.e. the benefi ts of being in an area with many suppliers and a well-trained labour force. This might make it cheaper than setting up elsewhere. It might also mean suppliers in that area could grow because of the number of fi rms to supply to, and so can gain internal economies of scale. This leads to lower unit costs for its customers creating external economies of scale for them. Alternatively, if suppliers have become too big and experienced diseconomies then businesses still buying from them might experience internal diseconomies of scale.

External economies and diseconomies of scaleInternal economies and diseconomies of scale occur when a business expands the size of its operations. External economies and diseconomies occur when at each and every level of output the unit cost falls (for external economies) or rises (for external diseconomies). This happens due to factors outside of the business. For example, by locating close to similar producers a business

Test your learningShort answer questions

1 What is meant by process innovation? [2]

2 a What is meant by job production? [2]

b Explain one advantage of job production. [3]

3 a What is meant by batch production? [2]

b Explain one benefi t of batch production. [3]

4 a What is mass production? [2]

b Explain one advantage of mass production. [2]

5 a What is fl ow production? [2]

b Explain one disadvantage of fl ow production. [2]

6 State two factors that infl uence the location of a business. [2]

7 What is meant by an external economy of scale? Give an example. [2]

8 a What is meant by an internal economy of scale? [2]

b Explain one internal economy of scale. [3]

9 What is meant by an internal diseconomy of scale? [2]

10 Explain one reason why internal economies of scale may help a business succeed. [2]

Data response questionPantaloon Retail India Ltd

With more than 1000 stores and 16 million square feet (1.5 million square metres) of operational space, Pantaloon Retail India Ltd is now close to a point where it can gain the benefi ts of economies of scale, according to its founder and managing director Kishore Biyani.

In four years’ time, the company aims to increase the size of the operational retail space to between 25 and 30 million square feet (2.3 and 2.8 million square metres), with annual revenues forecast to grow in the 30–35 per cent range between now and then.

Biyani recently said the company was very well placed in terms of its cost structures. ‘We are eliminating all the excess costs that are there in the system and becoming very, very competitive.’

The retailing business throughout the world is known to be one with low profi t margins, with profi tability often determined

by how effi ciently a company manages its supply chain, and dependent on the scale of its operations.

Retailing in India

Large-scale retailing in India is still in its early stages of growth, with the population largely buying groceries and food items from the millions of small, independent stores.

Government restrictions on foreign direct investment have so far protected the local industry, and meant there has been a lack of investments required, noticeably in areas such as warehousing and cold-storage facilities.

In the past foreign retailers have been allowed to own up to 51 per cent in ventures that sell single-brand products, such as Nike sportswear. However, those who stock and sell multiple brands, such as Wal-Mart Stores, have been prevented from selling directly to consumers, although they can open cash-and-carry businesses that sell to wholesalers and other small businesses and shopkeepers.

Source: Adapted from http://articles.marketwatch.com

Questions

1 Explain the meaning of the following terms:

a revenues [3]

b supply chain. [3]

2 Explain two possible consequences of limiting the extent to which foreign retailers can compete in India. [6]

3 Discuss the importance of economies of scale in helping a retail business to compete. [10]

Essay questionDiscuss the possible advantages and disadvantages to a business of expanding the scale of its production. [20]

Past paper questionRead the Bee’s Meals case study on pages 465–66 and then answer the following question.

Discuss the impact on BM and its workers of a change from batch to fl ow production. [10]

Cambridge AS and A Level Business Studies 9707/02, Paper 2, Qd, May/June 2007

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310

Chapter overview

24 Business communication

A LevelSection 2: People in organisations

Chapter overviewIn this chapter we examine:

� the purposes and methods of communication � the channels of communication used by businesses � barriers to communication � the role of management in facilitating communication.

24.1 The theory of communication

Key terms

Communication is the exchange of information between people.

Feedback is a response to communication that may confi rm receipt and comprehension.

What is communication?Communication involves the transfer of information. This transfer can take place between people or between people and organisations or between different organisations. A transmission mechanism is simply the methods by which one person communicates with another. Letters and email are examples of methods of communication. Communication involves a number of elements as shown in Figure 24.1.

Study tip

Before reading this chapter, it is worthwhile revisiting the AS Business chapters on leadership, organisational structures and motivation. These will provide you with a good foundation for studying communications.

THE SENDER(initiates the

communication)

FEEDBACK(was the message

received andunderstood?)

MESSAGE(the information

that is transmitted)

MEDIUM(how the message

is passed on,e.g. email)

RECEIVER(the audience at

whom the messageis targeted)

Figure 24.1 The process of communication

Case Study

Cathay Pacifi c

Figure 24.2 A Cathay Pacifi c aeroplane

Cathay Pacifi c is the international airline of Hong Kong. It operates scheduled passenger and cargo services to 151

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Contents

Acknowledgements……… .............................................................. …………………………………………………………xiIntroduction…………………………………… ......................................................................... ……………………………xiii

AS Level

Part 1: Basic economic ideas and resource allocation 1

Chapter 1 Introducing economics ...........................................................................................................1

1.1 The economic problem ................................................................................................................................ 11.2 The production possibility curve ................................................................................................................. 41.3 Some key economic ideas ........................................................................................................................... 61.4 Types of goods and services ...................................................................................................................... 10

Part 2: The price system and the microeconomy 12

Chapter 2 The nature of demand ...................................................................................................................................... 12

2.1 The demand curve ..................................................................................................................................... 122.2 The determinants of demand .................................................................................................................... 14

Chapter 3 The nature of supply........................................................................................................................................... 17

3.1 The supply curve ........................................................................................................................................ 173.2 The determinants of supply ....................................................................................................................... 18

Chapter 4 Market equilibrium and the price system ........................................................................................................ 21

4.1 Market equilibrium.................................................................................................................................... 214.2 Examples of markets ................................................................................................................................. 224.3 Comparative statics ................................................................................................................................... 244.4 Elasticity: the sensitivity of demand and supply ....................................................................................... 26

Chapter 5 Prices and resource allocation .........................................................................................................................32

5.1 The role of prices in allocating resources ................................................................................................. 325.2 Prices and consumers ................................................................................................................................ 325.3 Prices and producers ................................................................................................................................. 35

Part 3: Government microeconomic intervention 38

Chapter 6 The government in the microeconomy ............................................................................................................. 38

6.1 Minimum and maximum prices ................................................................................................................ 386.2 Indirect taxes and subsidies ...................................................................................................................... 396.3 Government intervention to redistribute income ..................................................................................... 416.4 Direct provision of goods and services by government ........................................................................... 42

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Part 4: The macroeconomy 46

Chapter 7 Aggregate demand, aggregate supply and macroeconomic equilibrium ..........................................................46

7.1 Aggregate demand .................................................................................................................................... 467.2 Aggregate supply ...................................................................................................................................... 497.3 Macroeconomic equilibrium ...................................................................................................................... 50

Chapter 8 Macroeconomic performance and infl ation .......................................................................................................53

8.1 Macroeconomic performance .................................................................................................................... 538.2 Measuring the price level .......................................................................................................................... 568.3 The experience of infl ation........................................................................................................................ 578.4 Causes of infl ation .................................................................................................................................... 598.5 Consequences of infl ation ......................................................................................................................... 60

Chapter 9 The balance of payments and the exchange rate ..............................................................................................61

9.1 The balance of payments........................................................................................................................... 619.2 The exchange rate and international competitiveness ............................................................................. 649.3 The determination of exchange rates ....................................................................................................... 679.4 Balance of payments problems ................................................................................................................. 71

Chapter 10 Trade and specialisation ..................................................................................................................................73

10.1 The importance of international trade ................................................................................................... 7310.2 Trade liberalisation or protectionism? ................................................................................................... 7810.3 Economic integration .............................................................................................................................. 81

Part 5: Government macroeconomic intervention 85

Chapter 11 Macroeconomic policies ..................................................................................................................................85

11.1 Targets of macroeconomic policy ........................................................................................................... 8511.2 Instruments of macroeconomic policy .................................................................................................... 8611.3 Infl ation................................................................................................................................................... 8711.4 Infl ation and the balance of payments ................................................................................................... 89

A Level

Part 1: Basic economic ideas and resource allocation 92

Chapter 12 Economic effi ciency and market failure ........................................................................................................... 92

12.1 Resource allocation and effi ciency ......................................................................................................... 9212.2 The working of a market economy ......................................................................................................... 95

Contents

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Contents

Chapter 13 Externalities and cost–benefi t analysis ............................................................................................................ 97

13.1 Market failure ......................................................................................................................................... 9713.2 What is an externality? ........................................................................................................................... 9913.3 Examples of externalities...................................................................................................................... 10213.4 Social cost–benefi t analysis .................................................................................................................. 105

Part 2: The price system and the microeconomy 108

Chapter 14 Marginal utility and consumer choice ..............................................................................................................108

14.1 Marginal utility theory .......................................................................................................................... 10814.2 Marginal utility and demand ................................................................................................................ 109

Chapter 15 Firms and how they operate ........................................................................................................................ 114

15.1 The nature of fi rms ................................................................................................................................ 11415.2 Costs and revenue for fi rms .................................................................................................................. 11515.3 Profi t maximisation ............................................................................................................................... 121

Chapter 16 Perfect competition and monopoly .............................................................................................................. 123

16.1 Market structure ................................................................................................................................... 12316.2 Perfect competition .............................................................................................................................. 12516.3 Monopoly .............................................................................................................................................. 129

Chapter 17 Monopolistic competition and oligopoly....................................................................................................133

17.1 Monopolistic competition ..................................................................................................................... 13317.2 Oligopoly ............................................................................................................................................... 13617.3 Market concentration .......................................................................................................................... 140

Chapter 18 The objectives of fi rms and their pricing strategies ................................................................................... 144

18.1 The growth of fi rms............................................................................................................................... 14418.2 Alternative motivations of fi rms .......................................................................................................... 14618.3 Perfect competition and monopoly compared ..................................................................................... 14718.4 Pricing strategies and contestable markets ......................................................................................... 148

Part 3: Government microeconomic intervention 155

Chapter 19 Market imperfections and microeconomic policy ........................................................................................ 155

19.1 Market failure ....................................................................................................................................... 15519.2 Imperfect competition .......................................................................................................................... 16019.3 Natural monopoly and privatisation ..................................................................................................... 16419.4 Inequality in income and wealth .......................................................................................................... 16519.5 The effectiveness of government intervention .................................................................................... 168

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Chapter 20 Government and the labour market ............................................................................................................ 172

20.1 Demand for labour ................................................................................................................................ 17220.2 Elasticity of the demand for labour ...................................................................................................... 17520.3 Labour supply ........................................................................................................................................ 17620.4 Labour market equilibrium ................................................................................................................... 17720.5 Labour markets ..................................................................................................................................... 17820.6 Education and the labour market ......................................................................................................... 18120.7 Market failure in labour markets .......................................................................................................... 18220.8 Trade unions .......................................................................................................................................... 185

Part 4: The macroeconomy 189

Chapter 21 National income and economic growth .........................................................................................................189

21.1 Measuring national income .................................................................................................................. 18921.2 The government budget ........................................................................................................................ 19221.3 The nature of economic growth ............................................................................................................ 19321.4 GNI and growth .................................................................................................................................... 19621.5 The importance of economic growth .................................................................................................... 198

Chapter 22 Economic and human development ...............................................................................................................200

22.1 Defi ning development .......................................................................................................................... 20022.2 Which are the less developed countries? ............................................................................................. 20122.3 Indicators of development .................................................................................................................... 20222.4 Characteristics of less developed countries ......................................................................................... 20422.5 The structure of economic activity in LDCs ........................................................................................... 20622.6 The diversity of less developed countries ............................................................................................. 209

Chapter 23 Modelling the economy .................................................................................................................................212

23.1 Monetarist and Keynesian approaches to the macroeconomy ............................................................. 21223.2 A Keynesian approach to macroeconomic equilibrium ......................................................................... 21523.3 The multiplier and accelerator effects .................................................................................................. 221

Chapter 24 Money and the economy ...............................................................................................................................224

24.1 Money in the modern economy ............................................................................................................ 22424.2 Money and infl ation .............................................................................................................................. 227

Chapter 25 Policies to promote development ..................................................................................................................231

25.1 Problems facing less developed countries ........................................................................................... 23125.2 The Harrod–Domar model ..................................................................................................................... 23525.3 Institutions and development ............................................................................................................... 23725.4 The role of external resources in development .................................................................................... 23925.5 Foreign direct investment ..................................................................................................................... 24025.6 Overseas assistance .............................................................................................................................. 241

ContentsContents

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Part 5: Government macroeconomic intervention 245

Chapter 26 Macroeconomic performance ...................................................................................................................... 245

26.1 Unemployment ...................................................................................................................................... 24526.2 Interrelated macroeconomic problems ................................................................................................. 250

Chapter 27 Designing macroeconomic policy ................................................................................................................252

27.1 Objectives of macroeconomic policy .................................................................................................... 25227.2 Fiscal policy ........................................................................................................................................... 25427.3 Fiscal policy and the AD/AS model ....................................................................................................... 25627.4 Monetary policy .................................................................................................................................... 25927.5 Exchange rate policy ............................................................................................................................. 26227.6 Supply-side policy ................................................................................................................................. 26327.7 Confl icts between policy objectives ..................................................................................................... 264

Glossary .............................................................................................................................................................................269Index ................................................................................................................................................................................... 278

Student’s CD contents

Interactive testsGlossaryChapter summariesAnswers to exercisesAnswers to examination questionsRevision checklist and resource assessment

Contents

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3

20

The nature of supply

Expected pricesBecause production takes time, fi rms often take decisions about how much to supply on the basis of expected future prices. Indeed, if their product is one that can be stored, there may be times when a fi rm will decide to allow stocks of a product to build up in anticipation of a higher price in the future, perhaps by holding back some of its production from current sales. In some economic activities, expectations about future prices are crucial in taking supply decisions because of the length of time needed in order to increase output. For example, a fi rm producing palm oil, rubber or mangoes needs to be aware that newly planted trees will take several years to mature before they are able to yield their product.

Newly planted fruit trees, like those in this plantation in Thailand, take years to mature before they are able to yield their product

Movements along and shifts of the supply curveAs with the demand curve, it is very important to remember that there is a distinction between movements along the supply curve, and shifts of the supply curve. If there is a change in the market price, this induces a movement along the supply curve. After all, the supply curve is designed to reveal how fi rms will react to a change in the price of the good. For example, in Figure 3.5, if the price is initially at P

0 fi rms will be prepared

to supply the quantity Q0, but if the price then increases to P

1

this will induce a movement along the supply curve as fi rms increase supply to Q

1.

Quantity per period

Supply

Q0 Q1

P0

P1

Pri

ce

0

Figure 3.5 A movement along a supply curve in response to a price change

In contrast, as seen in the previous section, a change in any of the other infl uences on supply will induce a shift of the whole supply curve, as this affects the fi rms’ willingness to supply at any given price.

Summary

� Changes in the costs of production, technology, taxes and subsidies or the prices of related goods may induce shifts of the supply curve, with fi rms being prepared to sell more (or less) output at any given price.

� Expectations about future prices may affect current supply decisions.

Exercise 3.2

For each of the following, decide whether the demand curve or the supply curve will move, and in which direction.

a Consumers are convinced by arguments about the benefi ts of organic vegetables.

b A new process is developed that reduces the amount of inputs that fi rms need in order to produce bicycles.

c There is a severe frost in Brazil that affects the coffee crop.d The government increases the rate of value added tax.e Real incomes rise.f The price of tea falls: what happens in the market for coffee?g The price of sugar falls: what happens in the market for

coffee?

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9

64

The balance of payments and the exchange rate

9.2 The exchange rate and international competitiveness

Closely associated with the balance of payments is the exchange rate – the price of one currency in terms of another. The exchange rate is important because it infl uences the prices that domestic consumers must pay for imported goods, services and assets, and also the price that foreigners pay for domestically produced goods, services and assets. Chapter 4 introduced the notion of the demand and supply of foreign currency, reproduced as Figure 9.2.

This uses ringgits as an example, with the vertical axis representing the price of Malaysian ringgits in terms of US dollars. The demand for ringgits arises from people holding US dollars wanting to purchase Malaysian goods, services or assets, whereas the supply emanates from holders of ringgits wanting to purchase US goods, services or assets. The connection is that the balance of payments accounts itemise these transactions, which entail the demand for and supply of ringgits. Notice that the demand for currency is a derived demand – thus ringgits are demanded when people holding dollars or other currencies want to buy Malaysian goods, services or assets. Similarly, ringgits are supplied when Malaysians want to buy foreign goods, services or assets.

Key term

Exchange rate: the price of one currency in terms of another.

In analysing the balance of payments, the relative competitiveness of domestically produced goods and services is an important issue. The exchange rate plays a key role in this process. If a country persistently shows a defi cit on the current account, does that imply that the goods that it produces are uncompetitive in international markets?

Consider the situation from the perspective of the Malaysian economy. The demand for Malaysian exports in world markets depends upon a number of factors. In some ways, it is similar to the demand for a good. In general, the demand for a good depends on its price, on the prices of other goods, and on consumer incomes and preferences. In a similar way, you can think of the demand for Malaysian exports as depending on the price of Malaysian goods, the price of other countries’ goods, incomes in the rest of the world and foreigners’ preferences for Malaysian goods over those produced elsewhere. However, in the case of international transactions the exchange rate is also relevant, as this determines the purchasing power of Malaysian incomes in the rest of the world. Similarly, the demand for imports into Malaysia depends upon the relative prices of domestic and foreign goods, incomes in Malaysia, preferences for foreign and domestically produced goods and the exchange rate. These factors will all come together to determine the balance of demand for exports and imports.

The exchange rate plays a key role in infl uencing the levels of both imports and exports, and thus affects the balance of payments, so the way it changes over time and the way in which it is determined is important.

Figure 9.3 shows the time path of the US$/£ exchange rate. The period should be seen in two sections. Until 1971, the UK government managed the exchange rate. From 1949 until 1967, the exchange rate was pegged at $2.80 per pound. The peg changed to $2.40 per pound in 1967, a policy intervention known as ‘devaluation’, which will be discussed later in the chapter. Since then the rate has been left to the market. The graph shows some fl uctuations between 1971 and the late 1980s, around a declining trend. Since then the exchange rate seems to

Quantity of ringgits per period

Demand

Supply

e*Exc

han

ge

rate

(pri

ce o

f ri

ng

git

s in

do

llars

)

0

Figure 9.2 The market for ringgits

Malaysia’s biggest exports, palm oil and oil, create a demand for local currency

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Firms and how they operate15

114

Firms and how they operate15

15 Firms and how they operate

15.1 The nature of fi rms

What is a fi rm?One way of answering this question is to say that fi rms exist in order to organise production: they bring together various factors of production, and organise the production process in order to produce output.

There are various forms that the organisation of a fi rm can take. Perhaps the simplest is that of sole proprietor, in which the owner of the fi rm also runs the fi rm. Examples are an independent shop, hairdresser or taxi driver, where the owner is liable for the debts of the enterprise, but also gets to keep any profi ts.

A LevelPart 2: The price system and the microeconomy

Learning outcomesAfter studying this chapter, you should:� be aware of the reason for the birth of fi rms, and the desire

for their growth� be familiar with short- and long-run cost curves and their

characteristics� understand the signifi cance of economies of scale in the

context of the growth of fi rms� understand the profi t maximisation motive and its

implications for fi rms’ behaviour.

In some professions, fi rms are operated on a partnership basis. Examples here are doctors’, dentists’ and solicitors’ practices. Profi ts are shared between the partners, as are debts, according to the contract drawn up between them. Some non-professional enterprises, such as some builders and hardware stores, also operate in this way.

Private joint-stock companies are owned by shareholders, each of whom has contributed funds to the business by buying shares. However, each shareholder’s responsibility for the debts of the company is limited to the amount he or she paid for the shares. Profi ts are distributed to shareholders as dividends. The shares in a private company of this kind are not traded on the stock exchange, and the fi rms tend to be controlled by the shareholders themselves. Many local businesses are operated on this basis. Private limited companies have limited liability for the fi rm’s debts, as mentioned above. Many family fi rms also operate in this way, with the families maintaining control through their ownership of shares.

Firms that are owned by shareholders, but are listed on the stock exchange are public joint-stock companies. Again, the liability of the shareholders is limited to the amount they have paid for their shares. Such companies are required to publish their annual accounts and also to publish an annual report to their shareholders. Day-to-day decision-making is normally delegated to a board of directors (who are not major

The owner of an independent shop in Mauritius is liable for the debts but is able to keep the profi ts

Firms play a central role in the operation of markets. This chapter introduces the theory of the fi rm by examining some of the key concepts that are needed for this important part of economic analysis. The discussion will explore the relationship between costs and production, and how fi rms may act to maximise profi t.

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Firms and how they operate 15.3 Profi t maximisation

121

15.3 Profi t maximisation

The opening section of this chapter stated that fi rms exist to organise production by bringing together the factors of production in order to produce output. This begs the question of what motivates them to produce particular levels of output, and at what price.

Traditional economic analysis has tended to start from the premise that fi rms set out with the objective of maximising profi ts. In analysing this, economists defi ne profi ts as the difference between the total revenue received by a fi rm and the total costs that it incurs in production:

profi ts = total revenue − total cost

Total revenue here is seen in terms of the quantity of the product that is sold multiplied by the price. Total cost includes the fi xed and variable costs that have already been discussed. However, one important item of costs should be highlighted before going any further.

Consider the case of a sole proprietor – a small local business such as a gym or a taxi fi rm. It seems reasonable to assume that such a fi rm will set out to maximise its profi ts. However, from the entrepreneur’s perspective there is an opportunity cost of being in business, which may be seen in terms of the earnings that the proprietor could make in an alternative occupation. This required rate of return is regarded as a fi xed cost, and is included in the total cost of production.

The same procedure applies to cost curves for other sorts of fi rm. In other words, when economists refer to costs, they include the rate of return that a fi rm needs to make it stay in a particular market in the long run. Accountants dislike this, as ‘opportunity cost’ cannot be identifi ed as an explicit item in the accounts. This part of costs is known as normal profi t.

Profi ts made by a fi rm above that level are known as supernormal profi ts, abnormal profi ts or economic profi ts.

Key terms

Normal profi t: the rate of return that a fi rm needs in order to remain in business – it is the opportunity cost of being in a market.

Abnormal, supernormal or economic profi ts: profi ts above normal profi ts.

In the short run, a fi rm may choose to remain in a market even if it is not covering its opportunity costs, provided its revenues are covering its variable costs. Since the fi rm has already incurred fi xed costs, if it can cover its variable costs in the short run, it will be better off remaining in business and paying off part of the fi xed costs than exiting the market and losing all of its fi xed costs. Thus, the level of average variable costs represents the shut-down price, below which the fi rm will exit from the market

Quantity

Quantity

Demand (AR)

Total revenue

Elastic

Inelastic

Unit elastic

MR

qr

A

B C D

Price

Price

0

Figure 15.7 Elasticity and total revenue

Summary

� A fi rm may face infl exibility in the short run, with some factors being fi xed in quantity and only some being variable.

� The short run is defi ned in this context as the period over which a fi rm is free to vary some factors, but not others.

� The long run is defi ned as the period over which the fi rm is able to vary the input of all of its factors of production.

� The production function shows how output can be effi ciently produced through the input of factors of production.

� The law of diminishing returns states that, if a fi rm increases the input of a variable factor while holding input of the fi xed factor constant, eventually the fi rm will get diminishing marginal returns from the variable factor.

� Short-run costs can be separated into fi xed, sunk and variable costs.

� There is a clear and immutable relationship between total, average and marginal costs.

� For a U-shaped average cost curve, marginal cost always cuts the minimum point of average cost.

� The total revenue received by a fi rm varies with the price elasticity of demand.

� There is a clear relationship between total, average and marginal revenue.

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Designing macroeconomic policy27

266

One particular problem faced by the government is the time lag that exists between initiating a policy and its effects on the economy. It may sometimes be that by the time a policy has an effect, the economy has moved on, so that the original issue which required a solution has gone away. In some cases, problems are triggered by external shocks that are beyond the government’s control. In other situations, an attempt to make fi nancial markets more fl exible may mean that lax regulation results in unanticipated problems. The fi nancial crisis that began in the late 2000s has been partly attributed to this. Alternatively, it may simply be that fi rms and households do not react to policy interventions in the way that governments expect, so that adverse consequences follow.

At the heart of many of these explanations is the idea that governments do not have enough knowledge about how the macroeconomy operates, or do not have suffi cient up-to-date information about the economy to take perfect decisions. This is sometimes known as bounded rationality: a situation in which a government takes decisions with the best intentions and with the best possible information available, but still fails to produce the required effects because knowledge and information are inadequate. This is partly what makes economics such an exciting challenge – we are still learning about how the world around us works.

Exercise 27.4

Given the following list of policy objectives, discuss the possible confl icts that may arise between them, and discuss how these might be resolved:

� low infl ation� low unemployment� high economic growth� a low defi cit on the current account of the balance of

payments� maintenance of a high environmental quality� equity in the distribution of income.

Summary

� Macroeconomic variables are inherently interconnected.

� This means that there are also likely to be interrelationships between policy instruments.

� Policy design must therefore take into account the possibility of trade-offs between variables, and confl icts between alternative policies.

Examination questions1 Tourism and the local workers

Here are two accounts of the tourist industry in Africa.

Article 1The Gambia, on the west coast of Africa, is ranked 160th out of 173 on the United Nations Human Development Index. Over half the population live on less than one US dollar a day and survive on subsistence agriculture and cannot compete with subsidised American farmers.

However, things are changing as The Gambia expands its tourist sector, which is now a signifi cant part of the national economy, accounting for 7.8% of GDP. It employs 5000 directly and creates work for 6000 others. Large European tour operators play a vital role in marketing, assuring quality, and providing fl ights and accommodation. Tourism has the major advantage that developed countries cannot place tariff barriers on tourist exports. Tourists spend on average US$40 to US$50 a day on meals, souvenirs, crafts and tours. One third is spend in the informal sector, where income is not recorded, providing a livelihood for taxi drivers, craft workers and local guides.

However, there are disadvantages. Tourism is highly seasonal, and tour operators negotiate low prices which keep profi t margins low – so low, in fact, that many hotels have closed because they could not cover costs.

Article 2A union offi cial in Tanzania said that the tourism sector is expanding in Tanzania but the return to the country’s economy is low and the benefi t to the workers is about 0.5% of the total industry’s income. In the hotels the lowest wages are around US$50 a month, from which tax and rent have to be deducted. Someone who has been working for 5 years or more receives no extra pay or promotion. Contracts are short-term, lasting for a year.

Hotel operators oppose workers joining trade unions. Most tour operators come from outside Tanzania. Only 10% of each US dollar earned by the tourist industry remains in the country, and most of that goes to the management not the workers. Top managers are usually foreign workers paid two or three times as much as a Tanzanian manager.

Source: Development Magazine, Issue 27, 2004

a What evidence is there that The Gambia is a developing country? [4]

b What does Article 1 mean when it says that tourism created work for 6000 others? [3]

c Article 2 mentions the low pay of hotel workers. Why might many hotel workers receive low pay? [5]

d Does the evidence provided enable you to conclude that tourism merely exploits resources and is of little benefi t? [8]

Cambridge AS and A Level Economics 9708, Paper 4, Q1, November 2007

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Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 00

AS LevelFinancial accounting 000

Chapter 1 The double-entry system ................................................................................................................................ 000

Chapter 2 The books of prime entry ............................................................................................................................... 000

Chapter 3 The ledger accounts in detail ......................................................................................................................... 000

Chapter 4 The cash book ................................................................................................................................................. 000

Chapter 5 Discounts ........................................................................................................................................................ 000

Chapter 6 Preparing simple fi nancial statements ........................................................................................................... 000

Chapter 7 Accounting concepts ...................................................................................................................................... 000

Chapter 8 Closing down the double entry system .......................................................................................................... 000

Chapter 9 Accruals and prepayments ............................................................................................................................. 000

Chapter 10 Control systems – the trial balance ............................................................................................................. 000

Chapter 11 Suspense accounts ....................................................................................................................................... 000

Chapter 12 Control systems – bank reconciliations ....................................................................................................... 000

Chapter 13 Control systems – ledger control accounts .................................................................................................. 000

Chapter 14 Statements of fi nancial position .................................................................................................................. 000

Chapter 15 Profi ts ........................................................................................................................................................... 000

Chapter 16 The trading section of an income statement ............................................................................................... 000

Chapter 17 The profi t and loss section of an income statement ................................................................................... 000

Chapter 18 Bad debts and provision for doubtful debts ................................................................................................ 000

Chapter 19 Depreciation of non-current assets ............................................................................................................. 000

Chapter 20 The valuation of inventories ........................................................................................................................ 000

Chapter 21 Financial statements .................................................................................................................................... 000

Chapter 22 Incomplete records ...................................................................................................................................... 000

Chapter 23 Partnerships ................................................................................................................................................. 000

181432_CAM_A LEVEL_00_FM.indd 5 7/29/14 1:23 PM

vi

Contents

vi

Chapter 24 Partnerships – structural changes ................................................................................................................ 000

Chapter 25 The fi nancial statements of limited companies ........................................................................................... 000

Chapter 26 Company fi nancing ...................................................................................................................................... 000

Chapter 27 Interpretation and analysis of fi nancial data .............................................................................................. 000

Cost and management accounting 000

Chapter 28 Absorption (total) costing ............................................................................................................................ 000

Chapter 29 Marginal (variable) costing .......................................................................................................................... 000

Chapter 30 Unit, job and batch costing ......................................................................................................................... 000

Chapter 31 Business planning ........................................................................................................................................ 000

A LevelFinancial accounting 000

Chapter 32 Manufacturing statements ........................................................................................................................... 000

Chapter 33 Clubs and societies ...................................................................................................................................... 000

Chapter 34 Published company fi nancial statements..................................................................................................... 000

Chapter 35 IAS 7 Statements of cash fl ows ................................................................................................................... 000

Chapter 36 International accounting standards ............................................................................................................. 000

Chapter 37 The role of the auditor and directors........................................................................................................... 000

Chapter 38 Business purchase ........................................................................................................................................ 000

Chapter 39 Consignment accounts ................................................................................................................................. 000

Chapter 40 Joint venture accounts ................................................................................................................................. 000

Chapter 41 Computerised accounting systems .............................................................................................................. 000

Chapter 42 Investment and other ratios ........................................................................................................................ 590

Cost and management accounting 000

Chapter 43 Budgeting and budgetary control ................................................................................................................ 000

Chapter 44 Activity based costing .................................................................................................................................. 000

Chapter 45 Standard costing .......................................................................................................................................... 000

Chapter 46 Capital investment appraisal ....................................................................................................................... 000

Chapter 47 Social responsibility ..................................................................................................................................... 000

Answers................................................................................................................................................................................ 000

Index .................................................................................................................................................................................... 000

181432_CAM_A LEVEL_00_FM.indd 6 7/29/14 1:23 PM

42

The cash book4

Question 5

The cash book of Rowe is shown:

Dr Cash book Cr

Date Particulars Folio Cash Bank Date Particulars Folio Cash Bank

2 Jan Hatters SL17 238 9 Jan Postages GL21 45

5 Jan Cash sales GL7 1458 11 Jan Blagg PL25 347

9 Jan Funders SL34 2376 14 Jan Wages GL6 905

15 Jan Rodders SL10 349 16 Jan Defroux PL13 312

Required Balance the cash and bank columns of the cash book on 16 January and carry any

balances down.

4.6 Contra entries in a cash book

Clearly, it is unsafe to keep large amounts of cash and cheques on the business premises for prolonged periods of time. The cashier will arrange for the monies received to be taken to a bank and deposited when the amount in the till or safe warrants it.

A transaction that appears on both the debit and credit sides of the double-entry system is called a contra entry. Contra entries have no effect on the well-being of the business.

Always bring balances down. This is important, so make sure you get in the practice of doing so.

Expert tip

Example

The following is an extract from the cash book of Grant:

Dr Cash book Cr

Date Particulars Folio Cash Bank Date Particulars Folio Cash Bank

4 Jul Cash sales GL32 4397 5 Jul Purchases GL7 48

4 Jul Bradley SL51 74

Grant has more than $4000 cash on his premises – this represents a security risk. He pays $4000 into the business bank account on 5 July.

Talk yourself through this transaction.

Grant takes $4000 from the till … the cash column ‘loses’ $4000.

Date Particulars Folio Cash Bank

5 Jul Bank C 4000

Note

• the date of the transaction• the particulars telling where the ‘corresponding’ entry is to be found (in the bank

column)• ‘C’ is for ‘contra’ showing that Grant’s business is neither better nor worse off because

of the transaction• $4000 in the cash column shows that cash has been ‘lost’.

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45

The cash book 4.6 Contra entries in a cash book

Self-test questions

6 What does the word ‘contra’ mean? 7 Complete the sentence: ‘The cash book is not only a book of prime entry, it is also

part of the system.’ 8 Complete the sentence: ‘Money taken from the safe and deposited in the

bank would be in the cash column of the cash book and be in the bank column.’ (Enter ‘debited’ or ‘credited’.)

9 Which book of prime entry would you use to record a sale of goods on credit?10 Name two source documents used to write up a cash book.11 Is it possible to have a credit balance in the cash column of a cash book?12 Is it possible to have a credit balance in the bank column of the cash book?13 Complete the sentence: ‘Money withdrawn from the bank for use in the

business would be in the cash column of the cash book and be in the bank column. (Enter ‘debited’ or ‘credited’.)

14 Under what circumstances do we write ‘C’ for contra against transactions in the cash book?

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49

Discounts 5.3 Recording cash discount received

You can see that discount allowed is credited to the customer’s account, thus reducing the amount to be paid in settlement. It is debited to the discount allowed account in the general ledger. Ahmed did not qualify for a discount – he did not pay before the end of August.

5.3 Recording cash discount received

Worked example

Yung has three creditors on 1 August (for illustrative purposes only, Yung does not keep a cash book).

Supplier Amount owedCash discount available if payment

made before 31 August

$ %

Hameed & Co. 400 2

BTQ plc 7400 5

Carot Ltd 200 3

Yung settled the amounts she owed by cheque on 26 August.

Required

The ledger accounts in Yung’s books of account recording the payments made by her

Answer

Purchases ledger

Dr Hameed & Co. Cr

26 Aug Bank GL3 392.00 1 Aug Balance b/d 400.00

26 Aug Discount received GL4 8.00

Dr BTQ plc Cr

26 Aug Bank GL3 7030.00 1 Aug Balance b/d 7400.00

29 Aug Discount received GL4 370.00

Dr Carot Ltd Cr

26 Aug Bank GL3 194.00 1 Aug Balance b/d 200.00

29 Aug Discount received GL4 6.00

General ledger

Dr Bank account Cr

26 Aug Hameed & Co. PL1 392.00

26 Aug BTQ plc PL2 7030.00

26 Aug Carot Ltd PL3 194.00

181432_CAM_A LEVEL_05_47-54.indd 49 7/29/14 2:00 PM

50

Discounts5

Dr Discount received account Cr

26 Aug Hameed & Co. PL1 8.00

26 Aug BTQ plc PL2 370.00

26 Aug Carot Ltd PL3 6.00

You can see that discount received is debited to the supplier’s account, thus reducing the amount that Yung has to pay in settlement. The discounts are credited to the discount received account in the general ledger.To summarise: � Discount allowed is debited to the discount allowed account in the general ledger

and is credited to the customer’s account in the sales ledger.� Discount received is credited to the discount received account in the general ledger

and is debited to the supplier’s account in the purchases ledger.

5.4 Entering cash discounts in the general ledger

To write up the discount accounts in the general ledger in the way outlined above means that all the accounts in the sales ledger must be scrutinised and all the accounts in the purchases ledger must also be examined and lists must be made of all the discounts allowed and discounts received in order to post them to the general ledger. This could be a mammoth task. We simplify our work by adding an extra column to those already found in the cash book.

We have already used a ‘two-column’ cash book (cash columns and bank columns). The principles used still hold good. We introduce a third column on the debit and credit sides for discounts, so that we now have a ‘three-column’ cash book. The three-column cash book headings look like this:

Date Particulars Folio Discount Cash Bank Date Particulars Folio Discount Cash Bank

The discount columns are memorandum columns only; they record the discounts but are not yet part of the double-entry system. This is a much more effi cient way of collecting the information necessary to write up the discount accounts in the general ledger rather than examining every account in the sales ledger and every account in the purchases ledger.

Note that we will now dispense with the folio columns in most examples and questions. You will not usually need to include them in your answers to questions.

The entries to record the above transactions in Yung’s cash book would look like this:

Memorandum columns record information that is not part of the double-entry system.

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591

38.2 The amalgamation of two sole traders’ businesses

● An increase in market share may lead to disadvantaging a rival(s).● The new company will be able to take advantage of internal economies of scale;

these could include:• technical economies – larger businesses can often be more effi cient since costs

are generally not proportionate to the increase in size• managerial economies – larger businesses can generally afford specialist

managers who concentrate on one or two major areas of expertise• fi nancial economies – larger business are generally able to raise fi nance more

easily and they tend to have a greater variety of potential sources from which to choose

• purchasing economies – larger businesses are more likely to purchase materials in larger quantities and therefore take advantage of bulk discounting.

● Research and development can be undertaken more effectively by a larger business.● Diversifi cation is easier in a larger business; a more diverse portfolio of products

will open up further markets and reduce the risks associated with a limited range of products.

Self-test questions

1 Explain the term ‘synergy’.2 Explain the difference between vertical and horizontal integration.3 Explain why a business might wish to acquire another business.4 Identify and explain two types of economies of scale.5 A manufacturer of television sets starts production of microwave cookers. This is

an example of diversifi cation. True/False?

You will need to be able to show the effects of the business purchase on the statement of fi nancial position for the ‘new’ business. Make sure you get practice in doing this.

38.2 The amalgamation of two sole traders’ businesses

The process here simply involves the fusing together of the two statements of fi nancial position. This takes place after the owners of the two businesses have agreed on values for all the assets and liabilities that are to form the basis of the new partnership business.

After the assets have been valued it may be necessary for the partners to make payments or withdrawals of capital in order to achieve the required capital accounts balances that the two partners have agreed upon.

A merger takes place when two or more businesses join together to form a new business. The term is generally applied to the agreed takeover of one limited company by another.

Unincorporated businesses is the term used to describe all businesses that are not limited companies.

Worked example

Aiisha and Borak are sole traders. They agree to merge their two businesses into a partnership as from 1 January 2013.

The following information relating to the two businesses is given:

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Student’s Book Andrew Gillespie &

9781444181395 September 2014 £30.00

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Teacher’s CD Andrew Gillespie &

9781444181418 April 2015 £80.00

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Revision Guide David Milner &

9781444192032 Published* £14.99

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Revision Guide Terry cook 9781444191974 Published* £14.99

AccouNTING

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9781444192001 Published* £14.99

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