LEARNING OBJECTIVES
What you will be able to do
- explain needs, wants, scarcity, specialisation and added value
- classify businesses by sector and ownership
- analyse enterprise, growth, size and failure
- recommend ownership forms and evaluate stakeholder objectives
AT A GLANCE
INTRODUCTION · THE BIG IDEA
Understand why businesses exist, how they grow and how ownership and objectives shape decisions.
Business activity organises scarce resources to produce goods and services that satisfy needs and wants. Entrepreneurs accept risk because they see an opportunity to add value.
The most suitable size, ownership and objective depend on context. Strong exam answers apply each advantage or drawback to the business described rather than listing memorised points.
SECTION 01
Purpose, specialisation and added value
Scarcity forces choices because resources are limited while wants are unlimited. Opportunity cost is the next best alternative forgone. Businesses combine land, labour, capital and enterprise to meet demand.
Specialisation can raise productivity through skill and repetition, but may create boredom and dependence. Added value can rise through better quality, branding, convenience or lower input cost—not simply by raising price if demand then falls.
Added value per meal
- A café sells a meal for $14.
- Ingredients bought from suppliers cost $5.
- Added value = 14 − 5.
Answer: Added value is $9 per meal; wages and rent are paid from this amount, so it is not the same as profit.
SECTION 02
Sectors, enterprise and business size
Primary businesses extract resources, secondary businesses manufacture or construct, and tertiary businesses provide services. As economies develop, employment often moves toward secondary and then tertiary activity.
Entrepreneurs identify opportunities, organise resources, innovate and take risks. Business plans clarify the idea, market, operations and finance and can support a loan application, but forecasts remain uncertain.
Size may be measured by employees, output, sales or capital employed. Each measure has limits and profit is not a valid measure of size. Small businesses may stay small because of owner preference, limited demand, personal service or lack of finance.
| Route | Meaning | Possible risk |
|---|---|---|
| Internal growth | expand using the firm's own operations | slow and finance-intensive |
| Merger or takeover | combine with or buy another business | culture conflict and high cost |
| Franchise | franchisees operate an established format | less control over service consistency |
SECTION 03
Ownership and limited liability
Sole traders and partnerships are easy to establish and retain owner control, but usually have unlimited liability and limited finance. Private limited companies sell shares privately; public limited companies may offer shares to the public and can raise more capital but face disclosure and control issues.
A franchise uses another firm's name and system in return for fees. A joint venture shares resources for a project but also shares control. Public corporations are owned by the state and may pursue service objectives as well as financial ones.
| Form | Useful when | Main limitation |
|---|---|---|
| Sole trader | small, personal service and quick decisions | unlimited liability; continuity risk |
| Private limited company | growth needs more capital with owner protection | shares cannot be offered to the public |
| Public limited company | very large capital requirement | costly regulation and possible loss of control |
SECTION 04
Objectives, stakeholders and failure
Objectives give direction and allow performance to be measured. Survival may dominate for a start-up; established firms may pursue profit, growth, market share, social goals or shareholder return. Public-sector organisations may emphasise access and service.
Owners, employees, customers, suppliers, lenders, government and local communities have different interests. Higher wages may conflict with owner profit; lower prices may conflict with supplier or employee income. Objectives change as conditions change.
Businesses fail through weak demand, poor management, excessive cost, cash shortages, over-expansion or external change. New firms are especially exposed because they lack experience, reserves and an established customer base.
QUICK CHAPTER SUMMARY
The ideas to carry forward
- Businesses use scarce resources to satisfy demand and add value.
- Sector, size and ownership classifications answer different questions.
- Limited liability reduces owners' personal financial risk.
- Objectives and stakeholder conflicts must be judged in context.
QUICK REVISION CHECKLIST
Can you do each of these without your notes?
- explain needs, wants, scarcity, specialisation and added value
- classify businesses by sector and ownership
- analyse enterprise, growth, size and failure
- recommend ownership forms and evaluate stakeholder objectives