The Nature of Business Activity. The BIG questions: What is a “business”? What are the purposes...
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The Nature of Business Activity
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The BIG questions:
What is a “business”?What are the purposes of business
activity?
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Objectives:1. Identify inputs, outputs and processes of a business
A. Factors of ProductionB. ProductsC. Markets, value-added
2. Evaluate the opportunity costs inherent in business decision making
3. Explain the role of different functional departments in a businessA. Production/OperationsB. MarketingC. FinanceD. Human Resources
4. Explain the nature of business activity in each sectorA. PrimaryB. SecondaryC. Tertiary
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Inputs, Processes, Outputs
Insert scanned graphic here
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Inputs a.k.a. “Factors of Production”
To produce any good or service, 4 vital factors of production are required:
1. Land
2. Labour
3. Capital
4. Enterprise (Entrepreneurship)
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LAND
All natural resources found on the planet
FISH, WATER, WOOD, OIL, MINERALS, METAL ORES
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Physical and mental effort of people used in production of good or service
LABOUR
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CAPITAL
Non-natural resources used in the creation and production of OTHER PRODUCTS
Money, buildings, equipment, tools machinery, vehicles
These are MANUFACTURED, not NATURAL
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Capital investment
Spending on capital items (stocks)It is called investment because…
It increases the productive capacity of an economy
It is crucial for growth
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ENTERPRISE (Entrepreneurship)
Manages the other 3 factorsAssumes all riskResponsible for the success of the
organization
This is why the entrepreneur IS NOT included in Labour
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Financial Returns
Land
LabourCapitalEntrepreneur
Rent
Wages/Salaries
Interest
Profits
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Specialization
Increases productivityIncreases efficiencyWhat’s the difference between
PRODUCTIVITY & EFFICIENCY?
Productivity= overall outputEfficiency = “waste”
(time/materials)
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Division of Labour
Specialization of people, rather than the organization
Problems:Boredom InflexibilityLack of autonomyCapital costs
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Outputs: Products
Products can be Goods or Services
Goods
Tangible
Have physical substance and monetary value
Can be touched
Services
Intangible
Only their results can be seen
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Products can be consumer goods or capital goods
Consumer goods:Gum, clothing, food, education, cell phone
Capital goods:Tool and die machine, jet airplane,
lathe,computer,mixing vat
How would you define consumer and capital good?
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Definitions
Consumer goodsProducts sold to general public, for
individual consumptionCapital goods
Purchased by businesses and are used to produce other products
Think critically – Is a refrigerator a consumer or capital good?
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As we have seen, businesses exist to provide products or services that people want to consume
They do this by organising the firm’s resources to meet customers’ needs (PROCESS)
Many organisations arrange these resources into different business functions
What are an Organisation’s Functions?
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What are an Organisation’s Functions?
Many businesses will also have the following activities that need managing:
Sales Purchasing or buying Research and development Information technologies
Whether they do or not depends on their industry or sector
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What are an Organisation’s Functions?
Many businesses will also have the following activities that need managing:
Sales Purchasing or buying Research and development Information technologies
Whether they do or not depends on their industry or sector
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What is a Market?
ShopRite is a marketCluck U is a marketE-Bay is a market
Challenge- If we open MHS every Friday evening to come together to trade our unwanted music CD’s, is it a market?
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“Market” Defined
A place or process that brings buyers and sellers together to trade “value”.
Money does not have to trade hands
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Is there a difference between a “Customer” and a “Consumer”?
A customer BUYS a productA consumer USES a product
Why is this an important distinction for a business? It determines who the business should be
marketing to (the target market). IOW, who the business will communicate, advertise or promote to.
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Challenge
Who is Gerber Baby Food’s target market ?
Who is Disney’s Hanna Montanna target market?
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Value Added
The difference between the value of all inputs (materials, labor, capital) to produce a product and the price a consumer is willing to spend to purchase the product.
The value of all inputs to produce a car = $6,000, The price paid for the car = $18,000. Difference = $12,000
Value added= profit=$12,000
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Challenge
The inputs to produce a pair of Nike sneakers = $6.80. Consumers pay $120 for the sneakers. What accounts for the value added (profit) of $113.20?
Wal-Mart sneakers cost the same $6.80 to produce yet, consumers will pay only $9.97 for the sneakers. What accounts for this comparatively reduced value added (profit) of $3.17?
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Business Sectors
Farming Accounting Autos Mining Restaurants Shoes Oil drilling sales
Primary Tertiary Secondary Primary Tertiary Secondary Primary tertiary
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Primary Sector
Extraction and harvesting of natural resources
Less Economically Developed CountriesLEDC’s
Why?Little value added – low prices“Tea leaves and coffee beans”
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Secondary Sector
Developing CountriesCalled the “Wealth Creating sector”
WHY?Value is added in the manufacturing
processGoods can be exported to earn income
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Tertiary Sector
Service sectorHighest value added
What is the most important input factor in this business sector?
LABOUR
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Chain of Production
All three sectors are interrelatedAs one moves up the chain, more value
is added