The Nature of Business Activity

The BIG questions:

What is a “business”?What are the purposes of business

activity?

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

Inputs, Processes, Outputs

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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)

LAND

All natural resources found on the planet

FISH, WATER, WOOD, OIL, MINERALS, METAL ORES

Physical and mental effort of people used in production of good or service

LABOUR

CAPITAL

Non-natural resources used in the creation and production of OTHER PRODUCTS

Money, buildings, equipment, tools machinery, vehicles

These are MANUFACTURED, not NATURAL

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

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

Financial Returns

Land

LabourCapitalEntrepreneur

Rent

Wages/Salaries

Interest

Profits

Specialization

Increases productivityIncreases efficiencyWhat’s the difference between

PRODUCTIVITY & EFFICIENCY?

Productivity= overall outputEfficiency = “waste”

(time/materials)

Division of Labour

Specialization of people, rather than the organization

Problems:Boredom InflexibilityLack of autonomyCapital costs

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

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?

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?

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?

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

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

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?

“Market” Defined

A place or process that brings buyers and sellers together to trade “value”.

Money does not have to trade hands

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.

Challenge

Who is Gerber Baby Food’s target market ?

Who is Disney’s Hanna Montanna target market?

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

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?

Business Sectors

Farming Accounting Autos Mining Restaurants Shoes Oil drilling sales

Primary Tertiary Secondary Primary Tertiary Secondary Primary tertiary

Primary Sector

Extraction and harvesting of natural resources

Less Economically Developed CountriesLEDC’s

Why?Little value added – low prices“Tea leaves and coffee beans”

Secondary Sector

Developing CountriesCalled the “Wealth Creating sector”

WHY?Value is added in the manufacturing

processGoods can be exported to earn income

Tertiary Sector

Service sectorHighest value added

What is the most important input factor in this business sector?

LABOUR

Chain of Production

All three sectors are interrelatedAs one moves up the chain, more value

is added