Business Production and Economic Systems Analysis

Factors of Production and Business Basics

The Four Factors of Production

• Land: All natural resources used to make a product or service.
• Labour: The effort of workers required to make a product or service.
• Capital: Finance, machinery, and equipment required to make a product or service.
• Enterprise: The skill and risk-taking ability of the entrepreneur.

Entrepreneurs are people who combine these factors of production to make a product.

Opportunity Cost and Specialisation

Opportunity cost: The next best alternative given up by choosing another item.

Division of Labour/Specialisation is when the production process is split up into different tasks and each specialized worker or machine performs one of these tasks.

Business Objectives and Stakeholders

Business Objectives:

• Profit
• Increase added value
• Growth
• Survival

Stakeholders:

Stakeholders are a person or a group which has an interest in a business for various reasons and will be directly affected by its decisions. Stakeholders also have different objectives, and these also conflict over time. Key stakeholders include:

• Owners
• Workers
• Managers
• Customers
• Community

Economic Activity and Business Growth

Levels of Economic Activity

• Primary sector: The natural resource extraction sector. E.g., farming, forestry, mining. (This sector typically earns the least money).
• Secondary sector: The manufacturing sector. E.g., construction, car manufacturing, baking. (This sector earns a medium amount of money).
• Tertiary sector: The service sector. E.g., banks, transport, insurance. (This sector typically earns the most money).

Types of Economic Systems

• Free market economy: All businesses are owned by the private sector. There is no government intervention.
• Command/Planned economy: All businesses are owned by the public sector. There is total government intervention, fixed wages for everyone, and private property is not allowed.
• Mixed economy: Businesses belong to both the private and public sectors. The government controls part of the economy.

Privatisation and Expansion

Privatisation involves the government selling national businesses to the private sector to increase output and efficiency.

Types of Expansion:

• Internal Growth: Organic growth. Growth paid for by the owner's capital or retained profits.
• External Growth: Growth by taking over or merging with another business.

Understanding Business Mergers

Horizontal Merger

Merging with a business in the same business sector. Benefits include:

• Reduces the number of competitors in the industry.
• Achieves economies of scale.
• Increases market share.

Vertical Merger

Forward Vertical Merger:

• Assured outlet for products.
• Profit made by the retailer is absorbed by the manufacturer.
• Prevents the retailer from selling products of other businesses.
• Market research on customers is transferred directly to the manufacturer.

Backward Vertical Merger:

• Constant supply of raw materials.
• Profit from the primary sector business is absorbed by the manufacturer.
• Prevents the supplier from supplying other businesses.
• Controlled cost of raw materials.