The Need for and Nature of Business Activity

Ch 1

Needs
Human requirements which must be satisfied for survival are called needs.
Wants
Want means human desires which are unlimited.
Basic Economic Problem
There are Scarce/insufficient resources in any country. These resources are not enough to
satisfy all consumers needs and wants. This is known as basic economic problem. This
means business, individuals, and Govt. must make choice when allocating scarce resources
between different uses.
Choice
Due to insufficient goods to satisfy all our needs and wants at any one time, we have to go for
choice. Which need or want we will satisfy now and which we will forgo? If we are careful
and rational we will choose those things that gives us greatest benefit leaving out those things
of less value to us.
Opportunity Cost
Opportunity cost is the benefit of the next best option foregone when making a choice
between a numbers of alternatives.
Economic Activity
Any activity through which further generation of income is taking place is called Economic
Activity.
Business Activity
Identifying the need and wants of consumers or other firms, then purchase/arrange resources
(factors of production) in order to produce goods and services which can satisfy that needs
and wants, place them into the market with the aim of making profit is called business
activity.
Classification of Business Activity
Business activity can be classified into three types/sectors/stages. These are;
Primary Sector
Those activities which involve the extraction of raw material from the earth and growing
food are called primary sector business activity. Like farming, fishing, oil extraction etc.
Secondary Sector
Those activities which involve in manufacturing of goods by using raw material and
produced finished goods are called secondary sector business activity. Like baking,
construction, clothes making etc.
Tertiary Sector
Those activities which involve in providing services to consumers are called tertiary sector
business activity. Like retailing, transport, banking etc.
Important Terms

Factors of Production
These are the resources used by business to produce goods and services. These resources
include;
Land- not just a plot of land, it also includes all natural resources like coal, diamonds,
forests, rivers etc.
Labour- work force of the business. It includes all manual workers, skilled workers and
management also.
Capital- not just the finance/ money, it also includes man made resources which are used
in production like tools, machinery, computers etc.
Enterprise/Entrepreneur/Businessperson - he is a driving force. He takes risk and
organizes the other three factors of production to carry out the activity.
Consumer
Written by: Muhammad Saleem Ullah Khan
B. Comm., ACMA, AICSP, APFA, ACPA, M Sc, M S, B Ed
009868-91107381

Consumers are individuals who use or consume goods and services to satisfy their needs
and wants. Consumers are also called end users.
Consumer Goods
These are that goods which are produced for general use by public. They can be durable
and non durable.
Consumer Services
These are non tangible products that are sold to general public, it includes hotel
accommodation, insurance services etc.
Customers
Customers are individuals who buy goods and services supplied by businesses.
Capital goods
Capital goods are used to produce other goods by businesses like tools, machinery,
equipments etc.
Industrialization
The importance of different sectors in business activity is changed over time in different
countries. Industrialization is the term used when secondary sector of business activity got
importance instead of primary sector in any country.

Benefits
- increase in national output
- more jobs

Problems
- people move from villages to cities for jobs in factories
- increase in imports for raw material
De- Industrialization
This term is used when there is a general decline in the importance of secondary sector
activity and an increase in importance of tertiary sector business activity in any country.
Reason
-an increase in the income level of general public
Public Sector
Organizations owned, financed and controlled by the state through government or local
authorities are called Public Sector Business Activity.
Objectives of Public Sector
Access available to all regardless of location or income
Quality high quality services that do not cut corners
Affordability services offered at prices that are cheaper than private sector or free at
the point of use
Equity available to anyone whatever their background, status, income, class,
religion, etc.
Private Sector
Organizations owned financed and controlled by private individuals or group of individuals
are called Private Sector Business Activity.
Objectives of Private Sector

Written by: Muhammad Saleem Ullah Khan

B. Comm., ACMA, AICSP, APFA, ACPA, M Sc, M S, B Ed
009868-91107381

Satisfying

Profit
Survival

Environment
Image and
Reputation

Share Price

Objective
s

Quality and
Innovation

Social Issues

Efficiency
Sales and Sales

Market Power

Revenue

Legal Structure of Private Sector Business Organizations

Private
sector
businesses

Sole
trader

Partnerships

Private
(LTD)

Limited
companies

Cooperatives

Public
(PLC)

Sole Trader
Owned, financed and controlled by one individual but can employ other staff
-Common in local building firms, small shops, restaurants, butchers, etc.
Advantages
Easy to set up
Personal incentive
o keep all the profits
o make key decisions
o high degree of control
Flexibility
Ability to offer personal service
Disadvantages
Unlimited Liability
Limited access to capital
Potential for long hours
Pressure of being solely responsible
Lack of continuity business ceases once owner dies
Partnerships
Owned, financed and controlled by 2 to 20 partners for any kind of business except banking
where limit of partners is 2 to 10. Terms of partnership agreed through contract which is
called Partnership Deed. It is working under the Partnership Act 1890. examples of
partnership business are lawyers, accountants, architects, surveyors, estate agents, etc.
Advantages
Greater access to capital
Shared responsibility
Greater opportunity for specialisation
Written by: Muhammad Saleem Ullah Khan
B. Comm., ACMA, AICSP, APFA, ACPA, M Sc, M S, B Ed
009868-91107381

Easy to set up
Disadvantages
Unlimited liability
(However since 2001, Partnerships can apply to be Limited Partnerships)
All partners liable for the debts of the others
Partnership dissolved on death of one partner
Potential for conflict
Limited access to capital
Limited Companies
There are certain legal formalities in setting up a limited company. These companies have
some key features which are;
Limited Liability - in case of loss owners are only liable for the original amount of
money invested in the business.
Legal Personality companies have a separate legal identity from its owners. It can
sale, purchase of any thing, make agreements, can sue.
Continuity business of company will remain continue in the case of death of any
shareholder or director.
Private limited companies (LTD)
It is a one type of limited company, Owned by 2 to 50 shareholders. It is a relatively small to
medium-sized business that is usually run by the family or within friends that owns it. It must
have Ltd after the company name. It can not sell its shares to general public in stock
exchange. To sale and transfer of shares, all the shareholders must be agreeing.
(For advantages and disadvantages see page 10 table 1.4)
Public limited companies (PLC)
The second type of limited company tends to be larger business. It use plc at the end of name. It
can sale its share to general public. PLCs are the only type of company allowed to be quoted on
the Stock Exchange.
(For advantages and disadvantages see page 11 table 1.5)
Legal Formalities to set up a Limited Company
Limited companies must register with Registrar of Companies at Companies House.
Formalities are;
Memorandum of Association (M.O.A)
It is a document includes the details of the nature, purpose, structure of the
company, name of the company, address of the head office and maximum share
capital. (We can say the external picture of the company.)
Articles of Association (A.O.A)
It is a document includes the details of the internal rules of the company and the
names of directors. (We can say the internal picture of the company.)
After the completion of both documents (M.O.A, A.O.A) Registrar will
issue a Certificate of incorporation. Now Private limited companies can
start business but Public limited companies have to take another
certificate, by showing evidence to Registrar of 50000, which is called
Certificate of trade to start business.
Cooperatives
An organization runs by a group of people, each of whom has a financial interest in its
success and a say in how it is managed. Ownership, finance and control are in the hands of
members. Some types of cooperatives are;
Consumer cooperatives members buy goods in bulk, sell to members, divide profits among
members
Worker cooperatives workers buy the business and run it decisions and profits shared by
members

Written by: Muhammad Saleem Ullah Khan

B. Comm., ACMA, AICSP, APFA, ACPA, M Sc, M S, B Ed
009868-91107381

 Producer cooperatives producers organise distribution and sale of products themselves

Franchises
Method of business ownership backed by established brand name.
Owner gets to run a business with less risk
Owner buys the right to use the established companys name, format products, logos, display
units, methods, etc.
Speedy way for business to expand
Become very popular
Owner (Franchisee) responsible for debts, pays a royalty to owners of the brand, keeps any
remaining profit
Franchisee pays a fee for the purchase of the franchise
Common franchises Body Shop, McDonalds, Costa Coffee, Subway
Joint Ventures
It is an agreement between two businesses to work together on a particular project. For this
they create a separate business division which will end on the completion of project.
Reasons of joint ventures
To share the cost and risk
Due to different strengths and expertise
Problems
Due to different management styles and culture, there is a chance of conflicts among
workers.
Holding Companies
A holding company is one which holds a majority of the shares of other companies and thus
controls them without direct involvement in their running. The degree of influence can vary
depending on the management style of the holding company.

Written by: Muhammad Saleem Ullah Khan

B. Comm., ACMA, AICSP, APFA, ACPA, M Sc, M S, B Ed
009868-91107381