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Certificate in Business Management INTRODUCTION TO BUSINESS

Study Unit 1
Nature and Purpose of Business Activities

One of the key divisions within the economy is that between the private and public sectors. We consider the issues involved in government intervention in economic activities, ownership and control and the accountability to the various stakeholders.

Objectives

A. THE ECONOMIC CONTEXT OF BUSINESS

items on your list. This would still be true if you looked at your income over a year or even a lifetime. What is true for you is also true for virtually everyone else.

Perhaps we can now see the real reason why we cannot have all the items on our list – the economy simply does not have enough resources to make all the outputs of goods and services we want from it.

This gives us a definition of economics. It is concerned with how limited resources are used to produce outputs of goods and services. However, "use" can be an ambiguous term –economists are not concerned with the way in which metal and rubber are transformed in a factory to make a BMW. They are, rather, concerned with the availability of metal and rubber, and why those scarce resources are used to produce a BMW as opposed to, say, a bus. In other words, economics is concerned with the way those resources are allocated between alternative uses – how limited resources are allocated in the production of goods and services.

Every economy has a workforce – i.e. the total number of people who are available to work, for gain, to produce goods and services. In the UK at present, this is
approaching 28 million people.

 buildings – factories, offices, etc.;

 plant, machinery and tools;

(c) Natural resources

This includes anything which comes from planet Earth and can be used as a resource. It includes unimproved land, minerals (oil, coal, etc.), water and so on.

 a certain stock of capital assets;

 given natural resources.

You will have noticed that with capital and labour, a quality dimension can exist: with labour, it could be the skill level; with capital, the better performance of newer units of equipment. The same can apply to natural resources.

Natural resources essentially cost us nothing to produce – land, minerals, water, etc.

Overall then, we can see that, as far as resources are concerned, it should be possible to increase the available amounts of labour and capital, but there are problems with natural resources, especially the non–renewable variety.

Types of Economy

made – essentially about how scarce resources are allocated in the production of goods and services.

In most modern economies these decisions are made by a combination of state provision and free market provision.

(a) Market economies

 resource markets.

Households contain consumers. Consumers are free to express their wants by demanding (i.e. being prepared to buy) goods and services in end product markets. They will want to buy those goods and services which they think will best satisfy their wants. This demand is represented by the arrow A in the diagram.

In a market economy, the ownership of resources is vested in households. This may seem strange at first. We can appreciate that households will own labour, but surely capital, as we have defined it, and natural resources are owned by organisations, not individual households?

This brief outline of the market economy shows clearly that decisions about resource allocation lie with individuals, not the state. Ultimately, consumers have the final say in what will and will not be produced. Firms only produce those goods and services that consumers will buy. And firms will then only buy/hire resources to produce those goods and services that consumers want to buy.

This is what is referred to as consumer sovereignty.

We shall consider the issue of public and private sector activity in a mixed economy later in this unit.

So, what is a market?

A market is an organised situation which enables buyers and sellers to be in contact for the purpose of exchange.

In most developed economies, the market system is predominant. The "market economy" describes an economic system where goods and services are exchanged for money through markets, although a "pure" market economy in which all goods and services are exchanged in markets does not exist.

You can imagine that the market economy will consist of a network of many thousands of individual markets which will all be inter-related in different ways. We can try to make some sense of this mass of markets by classifying them into a system. We have already made a start on this in the diagram in the previous section. We shall now develop this.

 financial.

These may be defined as follows:

As the name implies, these are markets in which finished goods and services are traded. "Finished" means that the buyers do not intend to process them further or sell them on. Most of these markets will be for consumer goods and services and will include all those retail markets with which we are familiar.

(b) Resource markets

Money is needed by firms and households to fund various types of economic activities.

If they do not have access to the necessary funds at the time they need them, they may be able to get them through the financial markets. Financial markets are those in which funds are traded. There are a wide range of these markets in which various types of funds are traded – for example, there are markets for very short-term funds (where money is needed for short periods, such as overnight or for a few days or weeks), long-term markets where firms can obtain funds to finance capital expenditure, and the foreign exchange market where the £ is traded against other currencies.

Classifying Productive Enterprise

There are a number of ways in which business enterprises can be classified.

Some organisations depend heavily on labour to achieve their objectives, while others depend heavily on capital items like machinery or computers. Hence, we can classify organisations as being labour intensive (such as retail shop organisations or the Health Service) or as being capital intensive (such as manufacturing firms which use robots, or enterprises which depend on expensive computers or machines).

(c) Product or service enterprises

UK Industry

As countries develop, the structure of their industries tends to change. The importance of agriculture and then manufacturing falls and services provide a growing proportion of Gross Domestic Product (GDP – the sum of all production in the economy). Thus, there is a movement through the primary, secondary and tertiary sectors in terms of their overall importance to the economy. The share attributable to each sector depends on things like the availability and abundance of resources, history, government policy, and ability to compete in the world market.

In 2006 the output of the primary sector accounted for a little over 3% of GDP, the secondary sector for 2% and tertiary industry for 73%.

Resources

The structure of industry in Britain has been greatly affected by foreign investment attracted into the country. Many famous names among the merchant banks, like Rothschild, came to London because it was the leading financial centre in the world. Singer, the sewing machine manufacturer, was the first American multinational to set up in the UK, a hundred years ago. Since then there has been a steady stream of firms setting up UK operations or buying into British companies.

In more recent times two events have increased overseas investment in the British economy.

There are many examples. In the 1960s Britain had several television manufacturers, but foreign competition put them out of business; in the 1990s the UK became an exporter of TVs manufactured in the country but the firms were Japanese owned. Japanese car firms also used England as their entry to the EU. Toyota made the UK its base for European manufacture. This was a Japanese version of the seventy year-old establishment of American car firms – Ford and Vauxhall (General Motors) – in England. Apart from a few small specialists, all of the British car industry is foreign owned. This inward investment creates jobs in the investing firms and in their suppliers; the additional employment means that there is more spending throughout the economy and helps to create, or maintain, jobs in other areas. Dividends and profits are remitted to headquarters abroad, thus affecting the balance of payments. However, exports from foreign-owned firms benefit the trade balance.

Investment in assets is known as foreign direct investment; buying stocks and shares is called portfolio investment and does not involve ownership of the company. In the 1980s,

C. POPULATION AND THE LABOUR FORCE

The population of the world is over 5 billion people. Between 1950 and 1985 the number of people on the globe doubled. This growth has mainly occurred in the less developed countries (LDCs) as population growth in the industrialised nations has fallen to around or below replacement levels.

Britain has the world's sixteenth largest population at 60.7 million. The age distribution is very different from Kenya, with 17% under age 15 and 16% aged 65 or over. There is 67% in the working age-group of 16 to 65. There are slightly more women (51%) than men (49%).

The proportion of elderly people is predicted to rise especially in the over 80s range. This change in the age structure will mean more demand for retirement homes, health care for the aged and leisure pursuits for the elderly.

efficiently. Too large a population can mean too many small, inefficient agricultural holdings and capital going to housing instead of productive investment; too small a population means land remaining unused and resources unexploited. The concept does concentrate attention on the importance of the labour supply.

The number of women of working age in jobs has grown. This is due both to more women demanding jobs and the increased availability of suitable employment, especially part-time. The proportion of the self-employed has also grown from 11% to approximately 15% of the labour force.

There has also been a change in the type of jobs. The proportion of manual workers has fallen while the number of workers in the service sector has risen. This change is due to changes in technology and the organisation of work. It is also a result of the fact that employment in manufacturing has more than halved since 1979, such a decline being common to all the industrialised economies.

The Public Sector

Before 1980 a large part of British industry was in the public sector. Around 13% of GDP was produced by nationalised industries responsible for 10% of employment. Some
organisations, like the BBC and Bank of England, were taken into public ownership because it was felt that they had a special place in the nation's affairs. Most were nationalised by the post-war Labour government in accordance with the Labour Party's constitution, which called for the public ownership of the more important parts of industrial activity. The nationalised industries were taken into public ownership by setting up public corporations to operate them. Since the Conservative government came to power in 1979, most of these public corporations have been privatised. In addition many economic activities have been
deregulated. Banks, building societies and road transport are examples of industries which have had government regulations and controls removed. The role of the public sector as a provider of commercial activities has been greatly reduced.

A significant amount of spending of these kinds is controlled by public sector organisations of different types. We will examine the structure and objectives of these organisations in the next study unit.

Even without these activities, the public sector is a major purchaser of goods and services from private firms. Government rules enforcing competitive tendering for public service operations mean that public organisations which want to win the contracts must be as efficient as their competitors in the private sector.

Government bodies are required to oversee the activities of private sector organisations. For example the privatised water companies are regulated by Ofwat and the gas industry by Ofgem. There will be a continuing role for central and local government activities which are concerned with the operations of commercial enterprises including the Inspectorates of Health and Safety, Pollution, and Weights and Measures.

In some activities the technical advantages of large-scale production are so important in reducing costs that only a few firms can serve the market. Similarly there are areas where mass marketing or bulk buying give huge economies and a few large firms dominate the industry. Car production and supermarket retailing are examples. As well as the dominant firms there may be a large number of specialist producers or local suppliers filling the niches which the large companies do not want to serve.

In these industries there is a danger that firms will exploit their position to the detriment of consumers and society. The government has to provide a specific regulator, like Ofgem, or approve arrangements for self-regulation, as in the financial services covered by the Personal Investment Authority (PIA) and its specialist industry subsidiaries.

Secretary of State for Trade can order it to stop and impose conditions like a maximum price.

Mergers can be stopped if the result would be a firm in a dominant position. There are similar EU rules which apply to cases affecting more than one country. These are some of the ways in which public sector organisations may have a direct impact on commercial enterprises in the private sector.

Ownership and Control

(a) Private sector

The one feature that is common to all government owned and controlled organisations is that all activities have to be within the powers specifically granted to the organisation by Parliament or under the authority of Parliamentary legislation. As a result the way in which activities are carried out and authorised becomes as important as the activity itself and its results. There can be no possibility of a desirable end justifying means