Saturday, 29 July 2017
Understanding the
nature and purpose
of business
A Level Business 3.1.1
Why businesses exist
Objectives (by the end of this lesson you will be able to);
Understand
the significance and relationship between business input and output
Categorise the resources employed in a business in the ‘factors of production’
Identify the mix of inputs for different business outputs
Explain the concept of ‘value added’
Identify the features of the three sectors of industry – primary secondary and
tertiary (and understand the term Quaternary)
Why do people start businesses*?
 They are able to supply something at a price
someone is prepared to pay above the cost it
took to get it to them
INPUTS
Process
*Not in reference to ‘not-for-profit’ organisations
OUTPUTS
The Factors of Production
 Land: all the natural resources of the earth
including the sea, also including premises
 Labour: all the human mental and physical
effort that goes into production
 Capital: anything that ‘assists’ production, but
which is not consumed in production
 Enterprise: the risk taken in organising the
above
LAND
LABOUR
CAPITAL
ENTERPRISE
Capital or labour intensive?

Do you think new
businesses are more
likely to be capital or
labour intensive?

What are the shortterm and long-term
implications?

What other factors
will impact on labour
intensive production?

What other factors
will impact on capital
intensive production?

Are there occasions
where being capital
or labour intensive is
relatively
predetermined?
Adding Value
Why are the ‘Saville Row’ suit higher priced?
Adding Value
 Added value is the process by which a business is
able to produce a product that customers value more
highly than the cost of production
 For a service this means that the action or process
makes the product more desirable
 It can be measured as the difference between ‘cost’
and ‘price’
What does VAT stand for, and why is the VAT 20% on a pasty sold hot, but 0% on a
cold pasty?
How can value be added?
 DESIGN – new technology or innovative
features (e.g. Dyson, or the MacBook Air (just
1.93cm thick)
 PRODUCTION – Quality and efficiency,
higher quality = higher price; greater
efficiency = lower production cost
 MARKETING – Brand Image, USP (e.g. Gap
T-shirts)
 LOCATION
The benefits of added value





Differentiation from the competition
Ability to charge a higher price
Lower sensitivity to price changes
Higher profit margins
Ability to target different market segments
How can VA be maximised?
1. Essentially any way that reduces production cost or
increases the price customers are prepared to pay
2. Gather feedback from the market to ‘improve’ the
value of the product or service
Complete the activity on page 5
The three sectors of industry
We can divide business activity into three categories, or sectors of industry;
Primary
All business activity concerned with the extraction of raw resources
from the land and sea, e.g. Farming, Fishing, Mining, Quarrying, and
Forestry.
Secondary
Secondary activity involves turning raw materials into finished goods,
therefore this sector includes; assembling, processing, constructing and
refining.
Tertiary
Tertiary sector businesses provide services to businesses such as
banking, insurance, retailing, transport, and warehousing
Quaternary
Service industries whose main purpose is the transformation of
information, such as IT-based, consultancy and Research and
Development businesses.
Number crunching
Primary, Secondary and Tertiary Output
100
90
80
% of workforce
70
60
Primary
50
Secondary
40
Tertiary
30
20
10
0
1700
1750
1800
1850
Year
1900
1950
2000
Primary Sector Trends
 Agriculture is one area where productivity has
increased.
Technological developments
 Improvements in seeds and fertilisers

 Coal mining has decreased sharply in Britain, as
reserves have dried up and alternatives take the lead.
Secondary Sector Trends
 The UK is experiencing ‘deindustrialisation’ – a
tendency for the manufacturing sector’s total share of
output to decrease.
 Industries such as ship building and textiles have almost
disappeared unable to compete with cheaper imports.
 There are 50% less textile production in the UK today
(2005) than 25 years ago.
Why is this happening?
Tertiary Sector Trends
 In contrast the tertiary sector is growing steadily, Britain’s
biggest export is The City of London
The growing industries include:
 Financial services (including banking and insurance
 Communications (such as mobile phones and the use of
computers for email)
 Catering
 Leisure industry, which includes hotels, fitness centres and
holidays
 Distribution industries
Structure of industry in the UK
Sector
1964 1969 1973 1979 1990 1995 1999 2006
Primary
5.7
4.5
4.2
6.7
3.9
4.2
3.0
2.5
Secondary
40.6
42.2
40.9
36.7
31.6
28.2
27.2
21.2
Tertiary
53.7
53.3
54.9
56.6
64.5
67.6
69.8
76.3
% share of GDP
Structure of industry in the UK
Sector
1964 1969 1973 1979 1990 1995 1999 2006
Primary
5.2
3.4
3.0
3.0
2.1
1.7
1.6
1.6
Secondary
46.9
42.3
38.5
35.5
26.6
22.7
21.9
17.7
Tertiary
47.9
54.3
58.5
61.5
71.3
75.6
76.5
80.7
% of total employment
Changes in output in the UK
 Financial and business services have
doubled their output in the UK since
1980, from under 15% to 29% in 2007
 In London and the South East, the
increase has been from 20% to nearly
42%
 In London and the South East these
businesses employ 28% of workers
Over to you
 Pick a product and draw the stages it
goes through before reaching the tertiary
sector (the transformation process)
 Try and be as creative as possible
Practice Exercise
 Define the term “land”
 Define the term “capital”
 Explain how a business can improve the efficiency of its:
Capital
 Labour
 What is the fourth factor of production?
 Explain two undesirable outputs that might arise from a
transformation process
