Business & Its Environment

0. How AS differs from O Level

• ~60–65% of the syllabus is the same as O Level (e.g. "management & its functions"), but ~35% is extra & deeper — e.g. Mintzberg & Fayol theories, types of capital, intrapreneurs.
• Difference 1 → assessment criteria. O Level gave marks for knowledge + application (good definition, format). AS gives marks for analysis & evaluation: causes, impact, suggestions, conclusion, decision-making.
• Difference 2 → syllabus depth. Topics are more extensive and detailed.

Learning outcome = the result of your learning process (lectures, book, past papers). The examiner checks it through the exam (CAIE) — mode of expression = writing only (no project / research work).

To write well you need: ① good content ② business terms & terminology ③ the right format / criteria for each mark-size (2, 5, 8, 12 marks demand different things).

The 4 Assessment Objectives (AOs)

1. The Syllabus Checklist (Unit 1)

5 units in total; Unit 1 = Business & its environment. Key terms matter for 2-mark "Define…" questions (e.g. define opportunity cost / entrepreneur).

(Ownership types — sole trader onwards — are listed on the checklist but not yet covered in this lesson.)

2. Purpose of Business Activity

Business vs non-business

Any activity of buying/selling (exchanging) goods & services with the objective of profit = business.

Purposes — why people start a business

1. To utilise resources — money kept idle loses value over time; empty land can be used to earn profit.
2. To quit a job & get freedom — some people dislike taking orders; want decision-making power & authority.
3. To fill a market gap → an idea the market lacks but customers need.
4. To satisfy needs & wants by providing goods & services (more goods → more needs met → customers pay).

3. Factors of Production (FOP)

Production = a process that converts input → output (raw material → finished goods). Factors = things that are must-have to set up / start the business — no FOP, no business.

① Land

Land itself is a resource (vacant plot for factory / school / farm) + all natural resources: coal, oil, gas, water. No land → no farming / construction / factory.

② Labour

= workforce = manpower = human resource (don't think "mazdoor" — all four mean the same). Two types:

Hospital with equipment but no doctors / school with building but no teachers ⇒ cannot operate. Labour is required.

③ Capital

= amount of money / finance invested in the business or man-made resources (machinery, tractor, tools, equipment, fixtures & fittings, school chairs/projectors/boards).

Money changes shape: a hotel owner invests $100,000 (finance) and uses $10,000 of it to buy kitchen equipment; a farmer's cash becomes a tractor; owners' cash becomes machinery. So money or man-made resources are both capital. No capital → no business.

④ Enterprise

• Risk-taking ability of an individual — you never know if the outcome is success or failure; without taking the risk you won't find out.
• Combining factor of production — it combines land, labour & capital (risk → arrange land, hire labour, organise capital).
• Interpersonal skill — an inner ability that varies from person to person. Elon Musk: SpaceX failed twice; for the 3rd launch he put everything in (sold his house, took a loan to pay rent).
• Cannot be borrowed! Land can be inherited, labour hired, capital borrowed from a bank — but nobody can lend you the guts (jigra).

Types of Capital (AS only — not in O Level!)

Capital = any input into a business. 5 types:

4. Needs & Wants → Scarcity → Opportunity Cost

Standard of living differs by socio-economic class (elite → lower class) because of different incomes; if a person can't meet needs, even the minimum standard isn't met.

Scarcity — the basic economic problem

Unlimited wants + limited resources = SCARCITY = the basic economic problem.

• Why are resources limited? When a number / quantity is attached to a thing, it is finite. Elon Musk's $400 billion is a number → can run out.
• Even USA, China, Apple, Nvidia & Elon Musk face limited resources.
• Why "basic"? Everyone faces it — individuals, businesses, governments, countries.
• It cannot be solved (otherwise it wouldn't exist today) → so we make choices.

Opportunity Cost (2 marks)

• "Real cost" → the two options compared must have the same financial / monetary value (iPhone $1000 vs PS4 $1000 ✓; PS4 vs a Corolla ✗).
• "Next best" → what you choose = best for you; what you give up = next best (if PS4 wasn't there, Sonu would go for the iPhone).
• Monu with the same $1000 may choose the iPhone — different satisfaction/preferences ⇒ that's why there are many varieties of cars & goods.
• Opportunity cost is not a solution — it is something we consider because of scarcity.

Opportunity cost varies with the economic agents

Vary = change (like weather & prices). Economic agents = those who represent the economy: producer · consumer · government (without any one, the economy can't run: no goods / no revenue / no laws).

• Why producer chose hotel, not college? Private-sector objective = profit. COVID: pharma firms cut medicines and made masks & sanitisers; toy firms made fidget spinners — demand high ⇒ profit max.
• Govt chose park, not hospital? Healthcare is already good → the need was entertainment.

5. Revenue & Profit

Owners & entrepreneurs work to earn revenue & profit — that's the main purpose of business activity. (Cost $5,000 = cost of making/buying the 1000 remotes.)

6. The Concept of Adding Value

O Level topic, but more advanced at AS. Value added = a profit-maximisation strategy (not the objective).

Objective vs Strategy

Profit = objective · value addition = one strategy (there are other routes to profit too).

Value added — definitions (2 marks, either accepted)

Simple chain (worked) — student chair

Selling price = final price the producer charges the consumer. Cost of production = material cost + labour cost + variable expenses. In accounting, deductions are written in (brackets).

Adding value = process of increasing the difference between selling price (SP) and cost of material (COM). Two ways: ↑ SP (20→25→30) or ↓ COM (10→8→5).

Fix: raise SP by improving the product so customers get more benefit → marketing decisions allow a higher SP; operational decisions (Unit 4) cut COM without hurting quality.

• You don't need all methods — 2 or 3 are enough.
• Relaxo chair: convenience → online booking + free doorstep delivery · enhance → 4 colours, cushion, foldable hand-rest, basket underneath · promotion → product placement in a TV drama shot at a college · packaging → not relevant for a chair.
• Extra costs follow: COM $10→$15, expenses $5→$10 (free delivery).

Importance of adding value

1. Allows the producer to pay out expenses — if value added were zero, labour & other costs couldn't be paid.
2. Allows a higher selling price → profit ↑ (that's why it's a profit-max strategy).
3. Makes the product innovative & satisfying — new features keep customers loyal (Nokia & BlackBerry failed to innovate/adapt).
4. Makes the product competitive — in high-competition industries (fashion, tech) customers switch if rivals give more for the same money.

7. The Business Environment is Dynamic

Dynamic = changes / fluctuates frequently (like stock prices). Anything that changes is responsive — something influences it (price ↑ ⇒ quantity demanded ↓). Business profit, revenue, objectives never stay the same: e.g. COVID — firms went from growth / profit-max to survival.

• Open vs closed system: a sound-proof room with shut door/windows = closed. Open the door/window → noise comes in, noise goes out. Business is like that.
• Influence / impact / affect can be positive (+) → enable or negative (−) → constraints. Not always bad!
• COVID: airlines, hotels, cinemas, schools ✗ hurt · pharma (vaccines, masks, sanitiser) & Zoom ✓ boomed. Dollar ↑: importers suffer, exporters benefit. A threat for one = opportunity for another.

Relationships (used to explain influence)

Internal vs External environment

Competition ↑ when: govt lowers trade barriers (cheaper imports) · govt welcomes MNCs (Mercedes/Audi vs local cars) · industry has no entry barriers (e.g. teaching: ₹10,000 + social media). ⇒ profit, revenue ↓, cost ↑.

• External → internal: govt bans plastic bags → a plastic-bag factory can't operate. Internal → external: Lucky Cement's automated plant — 700 workers → 4 operators, 696 unemployed ⇒ economy disturbed.
• You cannot control the external environment (policies, inflation) — you can only change the internal one (methods, techniques).

8. Business Structure: Local → MNC

4 structures of business (not to be confused with sectors = private/public, formats = sole trader/partnership/company, or activities = primary…quaternary). Local / national / international — just the concept; multinational is the main AS content (became part of AS from 2023; also in A2 "international influences").

Why do national firms not go international? ① Risk — lack of competitiveness (Outfitters vs Zara, H&M, Pull&Bear who work at international standards) ② Nature of the product — traditional / cultural goods (desi mithai) have no demand abroad.

Home country (country of origin) = where the business started. Host country = every country where the MNC locates its production units / facilities.

Why do businesses become MNCs? (reasons)

1. To bypass trade barriers → duties & taxes on imports make exports expensive ⇒ produce inside that country to avoid them.
2. To get government support → grants / subsidies, tax relief, land (developing economies want GDP growth; Bangladesh's tax-free textile zone → now makes for Pull&Bear, Hollister, American Eagle).
3. To get access to cheaper labour → in high-unemployment countries people work at lower wages ⇒ production cost ↓.
4. To get access to quality & sufficient supply of raw material → locate near the source (avoid import duties & high material cost).

9. Entrepreneurs, Intrapreneurs & the Business Plan

Entrepreneur

Qualities of a successful entrepreneur

Past-paper style: "Analyse two qualities of an entrepreneur that might lead to success" → don't just list — link each quality to success of the business.

1. Risk-taking ability — measured risk: take the opportunity where success chance is high and risk low. Most important (you only learn the outcome by trying).
2. Ability to bounce back — after a failure, don't sit back: change the strategy / plan, not the objective (same plan again = no wisdom). Elon Musk & SpaceX.
3. Multi-skilled — alone at the start (customers, accounts, sales, purchases); later needs skills to guide & monitor staff (an accountant could fool you if you have no accounting skills).
4. Leadership skills — a boss gives orders; a leader leads by example (stays late with workers) ⇒ motivates & influences.
5. Self-confident / self-motivated — no one pushes you at the start; restart after failing.
6. Visionary / decisive / optimistic — long-term clarity (mission/vision) · clear decision-making · positive mindset (glass half full).
7. Innovation — new ideas fill market gaps ⇒ can charge a higher price (Shark Tank).

Barriers to entrepreneurship / problems of entrepreneurs

"Barriers" and "problems" mean the same — examiner may use either word.

1. Lack of capital / financial barriers — personal savings are limited; don't meet bank-loan criteria → ineffective business plan · no past records · lack of collateral (nothing to mortgage); investors may also reject a weak plan.
2. Amount of competition — big firms: heavy promotion, economies of scale, can cut prices, loyal customers (Nike, Adidas).
3. Lack of customer base → revenue ↓ → cash-flow problem; no brand name/image.
4. Poor determination of location — best locations have huge rent (Louis Vuitton Hong Kong store ≈ $50m a year).
5. Lack of ideas / opportunity — primary research (surveys, interviews) is expensive; ideas come from exhibitions, science fairs, or turning a hobby into a business (A2 case "Mountain Tours").
6. No relationship with the supplier → no credit ⇒ must pay cash ⇒ cash-flow problem.

Role of business enterprise in the development of an economy

Govt should encourage entrepreneurs (fewer regulations, financial help, training, tax cuts). Then:

1. Creation of employment → unemployment ↓, income ↑ → spending → growth ↑
2. Contribution to GDP → economic growth
3. Social cohesion ↑ (khush-haali) — jobs & income reduce crime, divorce, suicide, depression
4. Innovation ↑ → wider choice, more spending, competition → new ideas
5. Exports ↑ → foreign-exchange reserves, balance of trade/payments improve
6. Revenue for govt ↑ → taxes ↑ → spend on infrastructure, healthcare, education, subsidies

Intrapreneur (new at AS)

intra = within (like intranet / intercom inside an organisation vs internet across the world). An intrapreneur is an individual — an EMPLOYEE — within an organisation, responsible for its growth & innovation.

Role of intrapreneurs — needs an "intrapreneurial culture"

Management must give autonomy / freedom, democratic leadership, listen to employees' ideas — otherwise intrapreneurs can't bring change.

1. Bring innovative ideas & change → business stays competitive (can't control the external environment, but can change internal methods).
2. Competitive advantage → USP (unique selling point = distinctive feature rivals lack → longer life, more profit). Also responsible for growth when the owner can't do everything.
3. Encourage them to maximise profit & stay in the league (or the business gets kicked out — Steve Jobs started Apple, intrapreneurs continue his legacy).

Business plan

Made by the entrepreneur at start-up. Planning is crucial — without a plan, chances of success drop by almost 50%. (O Level has asked 6-markers: "Is an effective business plan important for success? Justify.")

A detailed plan can be 60–80 pages; banks & investors require one.

10. Chapter 2 — Business Sectors & Economic Systems

All businesses in an economy together = the whole economy (100%). It is split into two sectors: private and public (e.g. 70% / 30% — not fixed, can be 75/25, 60/40…).

• Own = ownership of FOP / resources → profit / loss belong to the owner (govt just gets tax). Control = authority → decision-making (what, how, for whom to produce) — within the law.
• Accountable = answerable for something you are responsible for (zimmedari = responsibility, jawabdehi = accountability). Public-sector bosses are appointed by govt and funded by taxes paid by the public → must report to govt. PIA air crash 2020 → PM summoned the PIA chairman to report. Private sector has no such accountability (private investment).

Differences / indicators (private vs public)

PIA example: loss-making partly due to ~2,200 extra staff — govt objective of creating jobs conflicts with laying off.

Economic systems

• Free-market / market: 100% private — all resources & businesses owned & controlled by individuals.
• Planned / command: 100% public — govt owns land, FOP, businesses.
• Mixed: private + public. More towards free market ⇒ larger private sector; more towards command ⇒ larger public sector.

Privatisation vs Nationalisation

Advantages of the public sector

1. Welfare in society ↑ — govt fulfils needs / basic necessities.
2. No need to worry about finance — runs on taxes (but this can cause inefficiency, e.g. Pakistan Steel Mills loses billions yearly yet keeps running).
3. Employment creation — an aim of public-sector businesses.
4. Operations continue until social benefit > loss — no profit motive (private firms would shut down & sack workers).

11. Types of Business Activity

Section A of Paper 1 can assess this — know every detail (a single mark can move your grade).

Goods: tangible vs intangible

• Primary: basic activity — extraction of natural resources (farming, fishing, oil drilling, coal mining, forestry). Provides inputs / raw material → secondary (wood → paper, wooden furniture).
• Secondary: manufacturing / production / processing of goods (all three words mean the same) — tangible goods. Input → FOP → output: wood → FOP → wooden furniture.
• Tertiary: provision of services (intangible) — to individuals (consumer), firms (audit, marketing, accountancy), or both (banking, internet). Consumer good (Pepsi) vs producer good (tractor).
• Quaternary (new at AS): also provision of services, but specifically tech-based (IT firms, software companies) or knowledge-based (training centres, consultants). Quaternary is a sub-branch of tertiary. Boosted after COVID (Zoom etc.).

Industrialisation & de-industrialisation

Why it happens is an economics topic — here just know the concept.

Economic structure (≠ economic system!)

Economic system = free market / command / mixed. Economic structure = under-developed · developing · developed (indicators: income per capita, education, literacy, standard of living — and which sector is biggest).

• Structure changes over time (Bangladesh & India: under-developed → developing; Sri Lanka slid back after its debt crisis) = structural change (can cause structural unemployment). Relative importance of each activity changes too.
• Developing → under-developed: secondary ↓, primary ↑ ⇒ de-industrialisation (backward shift: income per capita ↓).
• Developing → developed: secondary ↓ as services (lawyers, doctors, IT, accountants) rise ⇒ also de-industrialisation, but a forward shift.

Which business activity is more important?

Contingency approach = it depends on the situation (not that one is always best). Pakistan (agro-based) → primary matters; USA → tech matters; Bangladesh → manufacturing. Decide using these situational factors:

1. Employment rate — which sector employs the most people (Pakistan: agriculture & related industries — sugar mills, feed mills).
2. Contribution to GDP (output) — which gives the most output (Pak. mangoes; USA: Amazon, Apple, Microsoft).
3. Revenue for govt (taxes) — income tax from employment + business taxes.
4. Availability of resources — fertile soil & climate allow farming; skilled IT workers allow tech. e.g. KSA: oil → tourism (oil demand will fall with solar/EVs; Vision 2030).

Examiner may ask: "Explain one reason / benefit…" — know every area in depth.

12. Quick Recap — Chapter Cheat-Sheet