PROFILE DIMENSION 1 - ORGANIZATIONAL PRINCIPLES

SECTION 1 THE NATURE OF BUSINESS

SECTION 2 INTERNAL ORGANIZATIONAL ENVIRONMENT

SECTION 3 ESTABLISHING A BUSINESS

SECTION 4 LEGAL ASPECTS OF BUSINESS

BUSINESS CONCEPTS AND DEFINITIONS

1. Enterprise: This refers to the taking of risks in establishing a business.

2. Entrepreneurship: The act of combining all the other factors of production (land, labour

and capital) with the aim of establishing a profitable venture for the

production of goods and services.

3. Barter: The exchange of one good/service for another.

4. Profit: The surplus funds which remain after all expenses have been covered.

5. Loss: The situation which exist when total sales are not enough to cover all

expenses.

6. Trade: The buying and selling of goods and services.

7. Organisation: A social arrangement which pursues collective goals such as the

production of

goods and services.

8. Economy: The system within a country which determines the production, exchange and

consumption of goods and services.

9. Producer: Any individual or organisation which makes goods and services.

10. Consumer: Any individual or organisation which uses goods and services.

11. Exchange: The voluntary trade of goods and services.

12. Goods: Tangible products which have been produced. e.g. car, rice, clothing etc.

There

are different types of goods

 Free goods- These are available to all without charge. They are

gifts of nature e.g. air, sea, sunshine etc.

 Public goods- These are goods which can be consumed by all

and are

usually paid for by taxation. Consumption by one person does

not

exclude consumption by others. E.g. national defence.

 Merit goods- These goods can provide benefits to the consumer

as well as to the rest of society e.g. health services and

education.

13. Service: Intangible products which have been produced. e.g. banking,

transportation,
 insurance etc.

14. Market: Any place where buyers and sellers meet to engage in trade. It is also

referred

to as the demand for a product.

15. Commodity: Any final good used for some purpose.

16. Capital: Money which is used in the organisation to acquire assets. It also refers

to

items (factories, equipment, machinery etc.) used to create final

products.

17. Labour: This is the physical and mental contribution of individuals to the

creation of

goods and services.

18. Specialisation: This is the division of labour into specific tasks. A whole process is divided

into several tasks. This helps to speed up the process and may result in

an

increase in productivity and a decrease in unit cost.

 THE DEVELOPMENT OF INSTRUMENTS OF EXCHANGE

Over the centuries, as commerce has developed, so have the various instruments of
exchange. In early times, people cultivated the land and reared animals to provide for
their
needs. The most basic of these needs were food, clothing and shelter. This production
was the earliest form of man as an ‘economic animal’ and is known as direct
production or subsistence economy. As production increased, there was a surplus of
goods. However, no individual could produce all their needs and the system of barter
resulted. This is where an individual exchanged one item for another, starting the earliest
forms of trade. It was simple and helped to create wealth but there were also problems.
These include:
 A double coincidence of wants -People could only trade with those who
had
something they wanted.
 An exchange rate -How much of one good was another
worth
e.g. how many chicken was a cows
worth.
 Divisibility of goods -Some goods could not be broken done
into
smaller parts. E.g. Live animals could
not be
sold in portions.
 Storage of wealth -Many goods could not be saved/stored
for
the future e.g. fruits/meat spoil easily.
To solve many of these problems, a system of ‘money’ was developed where things such
as shells, beads, arrowheads, fishhooks, gold and animal teeth were used. Eventually
when these also had limitations, money was created. Today, money does not only come
in the form of notes and coins. It also includes:
 Credit cards- Credit company pays for goods/services while consumer makes
payments to credit company
 Debit cards- Payment for goods through access of consumer’s bank account
 Cheques- Payment represented on paper to be taken from consumer’s bank
account.
 Electronic transfer- Funds are transferred from one bank to another via
computer.
 Tele-banking- The use of the telephone to manage bank accounts to make
payments.
 E-commerce- The use of the internet to make purchases. Payment can then be
made
via electric transfer, credit card etc.

PRINCIPLES OF BUSINESS
REASON TO START A BUSINESS
1. Financial independence

2. Wanting to be your own boss

3. Self-fulfilment

4. There is a need for a product/service, which is not being met

5. Redundancy

6. Poor job prospects

FUNCTIONS OF A BUSINESS
1. The provision of goods and services
2. The provision of jobs

3. Assistance with social activities through sponsorship

4. To make a profit

5. Contribute to economic growth

PRINCIPLES OF BUSINESS

FORMS OF BUSINESS ORGANIZATIONS

1. SOLE TRADER :

A person who owns his or her business

Characteristics

1. Easy to set up

2. Financed by the owner

3. Bears all risks and keeps all profits

4. Provides a personal service

5. Has no one to account to

Advantages

1. Easily and quickly formed and dissolved

2. Close relationship with customers

3. Decisions can be made quicker

4. Takes all profits

5. Pays lower personal tax not company tax

Disadvantages

1. Limited capital and it is not easy to get loans

3. Long working hours

4. Business usually dissolves if owner dies

4. Lack of specialized staff

Formation

The are usually no legal formalities needed excepted that in some cases, a special
licence (e.g. liquor

licence, health certificate) may be needed. The sole trader is usually required to register
their trade

name.

Management

The business is managed personally by the sole trader and the organisational structure
is
simple since it is usually only the owner and in some cases a few employees. This makes
reporting and decision making quick. Since the owner is usually providing a personal
service, he/she is able to set their own hours of work. There is no need to disclose the
business affairs of the business to the public as is the case of a company, except for tax
purposes ad creditors when seeking loans

2. PARTNERSHIP:

An association between 2- 20 people operating a business with the common goal of

making a profit.

There are two types of partnership

a) Ordinary Partnership where all profits and losses are shared equally

b) Limited Partnership where the limited partner stand to lose only up to the amount
which was invested.

Characteristics

1. Minimum of 2 and maximum of 20 for formation. However for professional such as

lawyers, accountants a maximum is not give since they are not allowed to form
companies.

2. Capital is provided by the partners

3. A limited partner cannot take part in the management of the partnership

4. Profits share equally unless stated in agreement

Advantages

1. Relatively easy to set up

2. More capital can be obtained than sole trader

3. Business will not end if one partner dies (continuity)

4. Specialization can occur thus leading to greater efficiency

5. Shared work load

5. Pays lower personal tax not company tax

Disadvantages

1. Unlimited liability

2. Personalities of partners may cause difficulties in decision making.

3. Some difficulty in raising capital.

4. In the absence of an agreement all profits must be shared equally regardless of

individual effort.

Formation

A partnership deed is usually written up to form the arrangement. This agreement

usually

indicates the number of partners, amount of capital from each partner, how profits are
to be divided, name of partnership, salary to be paid, how partnership is to be dissolved,
role of each partner, etc.
Management

This is carried out by the ordinary partners.

3. CO-OPERATIVES

Businesses that are formed, owned and operated by its members.

Characteristics

1. All members have a vote

2. Limited interest on money invested

3. Profits distributed among members

4. The members are the clients

5. Members usually have a common bond

Examples of Types of Co-operative

1. Financial co-ops: e.g. credit unions which offers methods of savings and loans

2. Consumer co-ops: These are involved in the provision of goods and services

3. Agricultural co-ops: provide agricultural products and equipment to farmers

Advantages

1. There is a market for members

2. Employment is provided

3. Owned and operated by members, therefore there is a greater commitment to

making it a success.

4. A medium through which government can channel aid to the society.

5. All profits shared among members

6. Shared decision making

Disadvantages

1. Poor, inexperienced and unqualified management. This can hinder growth.

2. Conflict among members can lead to slow decision making

3. Unable to attract skilled professionals

Formation

Each member purchases shares to form the capital base of the co-operative.

Management

They are governed by the membership through a management board elected by

members

4. COMPANIES
A company is a business entity which has been incorporated. It is a legal entity,
separate from its owner(s) i.e. it can enter into contract, can sue and can be sued.
There are two types of companies

a) Private Limited Companies (Ltd is usually written as part of the name)

b) Public Limited Companies (PLC is part of the name)

A. PRIVATE LIMITED COMPANIES

A company where 2-50 shareholders form a company.

Characteristics

1. Limited liability

2. A separate legal entity

3. Governed by a) memorandum of Association b) Articles of Association

4. Directors elected at AGM

5. Proper accounts must be kept for tax purposes

6. 2-50 shareholders

7. They tend to be owned by families and close friends.

Advantages

1. The company is separate from owners

2. Shareholders have limited liability up to the amount they have invested

3. Easy access to loans

4. Larger capital base than sole traders or partnerships

5. Privacy

6. Death of an owner will not affect the continuity of the business

Disadvantages

1. Shares are not traded publicly and therefore the capital base will be limited

2. Skills may be limited

3. Shares are not transferable without the director’s consent

Formation

Certain legal requirements are needed such as a) Memorandum of Association

b) Articles of Association

c) Statement of Authorised
Registered or

Nominal capital

Management

The owners manage the business or hire specialized personnel. Membership

must approve disposal of shares and their sale is restricted to the members.

B. PUBLIC LIMITED COMPANY

An incorporated company which offers shares to the public.

Characteristics

1. Limited liability

2. A separate legal entity

3. Governed by a) memorandum of Association b) Articles of Association c)

Prospectus.

4. Directors elected at AGM

5. Proper accounts must be kept for tax purposes

6. Shares are sold to members of the public

Advantages

1. The company is separate from owners

2. Shareholders have limited liability up to the amount they have invested

3. Easy access to loans

4. Death of an owner will not affect the continuity of the business

5. Risk is spread among shareholders

6. Easy transfer of shares

7. Specialists are hired to run the firm

Disadvantages

1. Objectives of managers may be different from owners (shareholders)

2. Workers are not part of decision making

3. Accounts must be submitted for inspection

Formation

Certain legal requirements are needed such as a) Memorandum of Association

b) Articles of Association

c) Statement of Authorised
Registered or Nominal capital

d) Prospectus

C. CONGLOMERATE

A group of companies, each of which operates in different industries. There is

usually no common identity or purpose except that of making a profit. E.g. BS&T
(B’dos), Neal & Massey (T’dad), Grace Kennedy (J’maica)

Advantages

1. Opportunities for training and transfer of staff between industries

2. Good cash position since all companies

3. Industries can advertise under the group name

4. Risk of group failure is spread over a range of industries.

Disadvantages

1. No common objective other than profit

2. Comparative analysis not possible

3. Outside control from the head office is resented

D. MULTINATIONALS

A firm of this nature is one which owns, controls and operates business activities
in several countries at the same time. Decisions are made by the parent
company. e.g. Cable and Wireless, Neal & Massey

Advantages

1. Provides investment in local economy

2. Provides training, expertise, employment and tend to pay higher wages

3. A source of taxation and foreign exchange

4. Provides markets

Disadvantages

1. Large amount of profits leave the country in which it operates to return to

parent company
2. May exploit natural resources of small countries

3. The welfare of the country is not the concern of the company

4. May leave country after tax holidays are over

5. May harm the environment

6. They nay leave if political ideas are not the same as theirs

E. FRANCHISE

A right which is bought by an individual/organisation (franchisee) from the

person/firm(franchiser), in order to sell goods by using the franchiser’s name. e.g.
McDonald’s, KFC etc.

Franchisee enjoys most of the profits but incur most losses. Lump sum paid to
franchiser (rent and shares of profits). Franchisee benefits from marketing and
promotional network of franchiser.

NATIONALIZED INDUSTRIES
Companies which have been taken over by the government via legislation to
achieve certain economic and political aims

Features

1. Legal entity

2. Managed by board of directors chosen by government minister

3. Annual reports are given to the minister who lay them in Parliament

4. Generally no shareholders

5. Funded by government by loans & grants

Advantages

1. The production of public goods in a manner which is not haphazard

2. Reasonable prices because profit it not the motive and so that the masses
would have access to product/service

3. Safe guard jobs

4. Obtain better borrowing terms than private companies

Disadvantages

1. Consumers must accept the product, especially if there is no competitor

2. Lack of initiative to improve product due to monopoly

3. “Red tape” causes delays

4. Not run efficiently

5. Accountability often lacking

PUBLIC VS PRIVATE SECTOR

All business can be classified as either being owned by members of the

public(private sector) or by the government (public sector). In some cases
however, there are operations, which may be joint ventures between the
governments and private individuals. The differences between private and public
are stated below.

Public Sector

1. Business is run by government

2. Provides most public goods

3. Usually not profit oriented therefore the pricing of goods usually covers the
cost of

production

4. Employs are greater portion of the labour force

5. Raises funds through taxation, borrowing(home/abroad), issuing government

securities

etc.
Private Sector

1. Driven by the profit motive which may be reflected by the prices

2. Raises funds by borrowing or issuing shares, loans

3. Controlled by families or shareholders

Nationalization

The transfer of ownership from the private sector to the public sectors. This may
be done for the following reasons:

1. To increase efficiency

2. To keep some industries going for the economy’s sake

3. To provide goods which may not be otherwise produced

4. To maintain a stable level of prices

5. To overcome inequalities in wealth distribution

6. To control entrepreneurs and to regulate the economy

7. To secure employment

The drawbacks of nationalization include:

1. Lack of motivation of workers

2. Inefficient production

3. Over employment

4. High cost of production

ROLES OF STAKEHOLDERS IN BUSINESS ACTIVITIES

Stakeholders

1. Owners

2. Employees

3. Customers

4. Government

5. Others (creditors, trade unions, society, suppliers)

Roles of Owners/Employers
 Provide relatively secure jobs and fair wages according to the position of
employee
 Comply with government legislation e.g. payment of taxes, publishing
annual accounts statements
 Provide a safe working environment
 Protect the surrounding physical environment
 Provide good conditions of employment e.g. working hours, holidays, paid
overtime, breaks during the day etc.
 To provide safe products and services to customers
 To maximise profit
Roles of Employees
 Provide honest labour
 Use equipment carefully
 Minimise wastage during production of goods and services

Roles of Customers
 Be well informed of rights and duties
 To make public any unethical practices
Roles of Government
 Provide adequate legislation to control the business and natural
environment
 Enforce laws relating/governing business activities

ROLE OF BUSINESS WITHIN THE COMMUNITY

Economic Role

Businesses have the responsibility to make a contribution to the economy

in which

they exist. This can be done through the payment of taxes, provision of jobs
and

its contribution to GDP(Gross Domestic Product) through the production of

goods and
 services. Goods exported all provide valuable foreign exchange for the
economy.

Financial Role

Each business not only seeks to maximise sales but also profits where
possible. It

also has a responsibility to its shareholders(if any) to provide dividends on

shares

issued.

Social Role

Businesses are required to ensure that their production in no way harms

consumers

or the environment. Many of them also see social responsibility as

becoming

involved in community activities such as sports, charities and the provision

of

scholarships. There is also the responsibility to ensure that employees are

working in a

safe and comfortable environment.

Political Role

Businesses are required to follow the legislation which may govern their
business

environment e.g. recognising trade unions, minimum wages, payment of

N.I.S.,

disclosing financial statements etc. Also by providing a successful business

environment, a stable political climate is created within the country. Some

companies

even go as far as sponsoring political candidates/parties at elections. This

can have both positive and negative effects

Ethical Role

Any business must ensure that their product is free from defects, they do
not

infringe on copyrights and do not engage in false advertising. They should

also

be willing to hear genuine complaints from consumers and attempt to

remedy

such situations where they are clearly at fault. Ethical issues are not
necessarily illegal
 but not be good for business. E.g. Is it right to sold products which are
considered

unsafe in one country to another country with less strict standards?

TYPES OF ECONOMIC SYSTEMS

Economic Questions

In any society there are three economic questions which must be answered:

 What to produce
 For whom to produce
 How much to produce

What is an economic system?

The system in which it is determined how goods and services will be produced.
There are FOUR main economic systems:

1. Traditional/Subsistence

2. Free or Capitalist

3. Command or Planned (Socialist)

4. Mixed (Public & Private Sector)

1. TRADITIONAL/SUBSISTENCE ECONOMY
In this type of economy, people live in groups and tend to grow most of their own
food. It is called a subsistence economy because people only provide for their
basic needs. This was a feature of the life of early man. Within this economy there
is little or no trade. However, there was little choice or variety in the types of
goods produced

2. FREE ECONOMY

1. Little government interference

2. Resources are owned by private individuals and companies.

3. What, how and for whom to produce is determined by the price system

4. Prices are determined by the interaction of supply and demand

5. Competition among producers

6. Freedom to enter or leave the market or particular industry

7. Profit motive

Advantages

1. Competition keeps prices low and quality high

2. Freedom to choose and greater variety

3. Creation of jobs

4. Lack of government intervention

Disadvantages

1. Uneven distribution of wealth

2. Little production of public goods

3. Profit is pursued which may result in the total welfare of society being ignored

3. PLANNED ECONOMY

Characteristics

1. All resources or factors of production owned by the government

2. Prices are set by government

3. Profits spent on all citizens

4. The decision of what, how and for whom to produce is made by the central
planning

agency

Advantages

1. Competition is avoided

2. The welfare of citizens is the primary goal

3. Social/Public goods can be adequately produced e.g. police, roads, hospital etc.

Disadvantages

1. Since there is no real way of determining the needs of the consumers,

situations of

shortages or glut of certain goods may occur

2. Choice of goods tend to be limited

3. Workers may be inefficient due to lack of motivation since there may be no

incentives to

work hard

4. Over employment can lead to inefficiency and high cost

3. MIXED ECONOMY
1. Combination of public and private sector

2. Factors of production owned by both private and public enterprise

3. An element of competition

4. The government provides public goods not for profit while the private sector
focus is on

producing goods and services for profit

5. Even though supply and demand is allowed to set price, the government may
sometime

intervene to control the price of certain products which it feels are needed by
all (basic

needs)

6. Some freedom to enter or leave the market or particular industry. Government

may control

entry to some industries

Advantages

1. The welfare of citizens is considered

2. Social/Public goods can be adequately produced e.g. police, roads, hospital etc.

3. Competition keeps prices low and quality high

4. Freedom to choose and greater variety

3. Creation of jobs

5. Government can set price ceilings on certain products

Disadvantages

1. There is some uneven distribution of wealth

2. Profit is pursued which at times may result in the welfare of society being
ignored by
 private sector

3. Workers (especially in public sector) may be inefficient due to lack of

motivation since

there may be no incentives to work hard.

4. Bureaucracy and ‘red tape’ exist in public sector.

PRINCIPLES OF BUSINESS
PD1:ORGANIZATIONAL PRINCIPLES
SECTION2 :INTERNAL ORGANISATIONAL ENVIRONMENT

FUNCTIONAL AREAS OF A BUSINESS

1. Production
This department deals with the actual manufacturing or conversion of raw materials
to a product for sale. It can include such activities as quality control, purchasing raw
materials, organising production, timing etc.
2. Finance
This area is concerned with the overall accounts of the business. E.g. preparing
` income statements, balance sheets, maintaining cash flows, making payments and
issuing receipts, advising on sources of capital, establishing hire purchase and credit
controls, paying wages and salaries etc.
3. Research & Development
This department carried out various types of research such as product research,
consumer research, financial research as well as feasibility studies. In this
department, new products are developed or improvements are made to currents
ones, as feed back is received from other departments such as the marketing
department.
4. Marketing
The department seeks to identify, anticipate and satisfy the wants/needs of
customers in a manner which is profitable to the organisation. Activities include
marketing research, choosing methods of promotion, setting prices, product distribution,
developing new products etc. This department often works closely with the R & D department to
design and develop new products.
5. Personnel
This department is concerned with the human element of the organisation. This
includes training and development, recruitment of labour, improving morale,
industrial relations, disciplining workers, administering leave, pension schemes etc.

FUNCTIONS OF MANAGEMENT
Management is the process of combining all the resources of an organisation
(human & physical), towards achieving the various goals of the organisation. Management comprises of
all those individuals who collectively carry out the processes necessary to achieve the organisational
goals. The functions of management include:
1. Planning:
This function is carried out by top management. It involves the overall formulation
Of policy, aims and objectives of the business. The structure of the organisation is
 determined and various duties of other managers are set out. It gives the
organisation focus and is necessary because the firm operates in an uncertain
environment.
2. Directing:
This is the giving of instructions, usually on a daily basis to workers. This is carried
out mainly by lower level managers.
3. Delegating:
Assignments/instructions are transferred from management to subordinates who are
also given power/authority to carry out the instructions. This ensures the sharing of
the work load. Mainly top/middle level management carries out this function.
4. Controlling:
This is the regulation and monitoring of activities for the purpose of achieving
profitable objectives and using corrective measures when the objectives are not
being met. It is carried out mainly by middle/lower level management. Top level management
would engage in this function on a long term basis especially by looking at the overall financial
position of the business.
5. Organising:
This is ensuring that everything is in place so that the operations can run smoothly
and effectively. It is carried out mainly by middle/lower level management.
6. Coordinating:
The bringing together of all functions of the organisation with the aim of
harmonizing all activities to successfully achieve a common goal. This is the
function of top and middle level management.
7. Motivating:
The process whereby management encourages and provides incentives to employees
To produce at their best so that the goals of the organisation can be met.

RESPONSIBILITIES OF MANAGEMENT
The management of any business has a number of responsibilities to the various stakeholders in the
business environment. These include the following:
To Owners/Shareholders:
 Achieving profit
 Providing information such as annual reports
  Protecting assets
 Reinvesting some of the profits to ensure growth
 Declaring dividends where possible
To Employees:
 Fair wages
 Good working conditions
 Training
 Benefits such as sickness, retirement
 Provision of procedures to handle grievances
To Customers:
 Quality product/services at reasonable prices
 Compensation for customers injuries on business compound
 Product/Services should be safe
 Conduct research to improve quality
 Provide adequate labeling and instructions
To Society:
 Avoid pollution/destruction of physical environment
 Conserve scarce resources e.g. water, fossil fuels
 Preserve culture and traditions
To Government:
 Pay taxes
 Abide by local and international laws which affect the industry

ORGANISATIONAL STRUCTURE
A well planned relationship among the individuals and the functions of the organisation, in accordance
with stated goals. It may be formal or informal. The FORMAL structure is the official and accepted
channel of communication of the firm. It is shown on the organisational charts, official standards,
statements and procedures. Its objective is the achievement of organisational goals. The INFORMAL
structure is the unofficial, social interaction which exist among employees.
There are FOUR types of formal organisational structures.
1. Line Structure
It shows the authority within the organisation from top to bottom(chain of
command) and who is responsible for the persons below them
2. Staff Structure
 Shows functions which are needed within the organisation but may not be directly
connected to production, distribution etc. It can include functions such as lawyers,
economists, architects etc. depending on the type of business
3. Functional Structure
This shows the specialized functioned within the organisation such as production,
marketing, personnel etc.
4. Committee
A group of persons set up to carry out certain duties, at the end of which the group
may be broken up

ORGANISATIONAL CHART
This diagram shows the structure of the organisation and indicates the links between different functions.
It also identifies the span of control and the chain of command within the organisation. The Span of
Control refers to how many subordinates report to a manager/supervisor. The Chain of Command
shows to whom an employee is to report to
immediately and at each level within the organisation. Organisational charts may be vertical, circular of
horizontal.
Diagrams of Organisational Charts

LEADERSHIP

Leadership is the style of management which is used to operate and control the
organisation.

CHARACTERISTICS OF A GOOD LEADER

1. Must be knowledgeable about the business
2. Be fair when dealing with employees
3. Good interpersonal skills with employees
4. The ability to make decisions quickly
5. The ability to motivate workers
6. Be able to resolve conflict

TYPES OF LEADERSHIP
There are FOUR main types of leadership styles
1. Authoritarian
With this style of leadership, employees are told what to do and how it is to be done.
There tends to be little delegation of responsibilities and authority. Only
management controls, rewards and punishes. The advantages are
 Decisions can be made quickly
 Everyone knows exactly what to do
The disadvantages include:
 No one’s opinion is heard
 Lack of employee motivation
 Individual creativity and initiative is stifled

2. Laissez-faire
Employees are given various tasks and when they are to complete them. It is then
their responsibility to determine how to achieve the objectives. There is minimal
supervision and may only succeed where workers are experienced. It has the
potential to be unstable. The benefits are:
 Creativity is encouraged
 Individuals can work at their own pace.
The problems include:
 Work not being completed on time
 Work not done to the required standard
 Greater likelihood of confusion

3. Charismatic
This leadership style is mainly based on the leader’s personality and his ability to
motivate others by leading from example. As long as the leader is present, there
individuals will function but when he/she leaves/dies, persons have no one to look to
and work suffers

4. Democratic
The leader seeks to find the middle ground. He/She maintains the necessary
authority to control and at the same time, employees are allowed to express their
views. Participation is encouraged but the leader maintains the power of decision
 making. The benefits of this leadership include:
 Members assist in decision making, allowing them to feel valuable
 Views are listened to
 Persons are motivated to participate.
The disadvantages include:
 Decision making may be a lengthy process
 Stronger members may overpower weaker ones.
IMPORTANCE OF A GOOD LEADER
1. To ensure the smooth running of the business
2. To ensure the viability and profitability of the organisation
3. To ensure that goals are met
4. To reduce or handle conflict which can affect productivity.

CONFLICT
In any organisation, there will always be differences between management and their
employees. The organisation may claim that it provides good wages, working conditions etc. yet
employees may complain about issues such as lack of communication, unfair and practices. Sources of
conflict at work include:

 Unfair practices
 Safety and health issues
 Union rights
 Working conditions
 Job security
 Recognition of workers
 Management/Leadership style of the organisation.

During periods of conflict between employees and management, various strategies are used by both
sides in an attempt to get the upper hand.

Employer Strategies

1. Lock Out
 Employees may not be allowed to enter the building until the matter has been

resolved. This may cause the organisation to loose money.

2. Scab Labour

This is the use of a skeleton staff, mainly management in an effort to continue

work as normal. Workers may not be paid if they do not attend work. This may

force employees to return to work.

Employee Strategies

1. Strike Action

This is the refusal to do work. It may /may not be sanctioned by the trade unions.

Workers may turn up for work and do nothing or remain on the outside.

2. Work to rule

Workers will only complete the tasks which are clearly set out in their job

descriptions or condition of employment. This may slow down production/service.

3. Sick Out

Employees may call in sick for the day or may get certificates for doctors for

prolonged period( usually more than 2 days)

CONFLICT RESOLUTION STRATEGIES

As a result of various internal conflicts between management and employees, a number of strategies
have been employed to resolve such conflict. These include:

1. Arbitration
 This is the settlement of a dispute by an outside or neutral person(s). The person is

called an arbitrator or there may be a Broad of Arbitrators.

2. The Chief Labour Officer

This individual may be informed that a situation exists and this individual may then

use his office to try to resolve the conflict through a mutual agreement of the parties.

3. The Minister of Labour

This individual may be called upon in the event that the Chief Labour Officer is

unable to resolve the issue

4. Industrial Court

This is an accepted court of law and the agreement is legally binding on both parties.

GUIDELINES FOR ESTABLISHING GOOD RELATIONS BETWEEN MANAGEMENT AND

EMPLOYEES
Good management-worker relationships are important to all organizations. This can be achieved if
management takes the following actions:

1. Maintain good communication with workers

Two way communication should be encouraged. This allows for employee views

and problems to be heard. Instructions should be given as clearly as possible to

avoid misunderstanding.

2. Establish grievance procedures

These must be used by both management and employees. This would eliminate

possible industrial action since there would be opportunity for dialogue and

mediation to occur.
3. Practice good leadership

Employees should be guided towards the organizational goals without being treated

harshly. Good leaders should give employees the opportunity to talk and be willing

to then listen. Feedback is also necessary and non-monetary rewards can be

included e.g. giving of praise for a job well done.

4. Seek to motivate employees with compensation and other incentives.

If workers feel that they are being adequately compensated for a job, then this helps

to build trust, loyalty and employees’ self worth.

5. Improve working conditions

Pleasant and clean surroundings help to lift the spirit of workers in an organization.

6. Where possible, jobs should be interesting and challenging.

This allows the workers to use a variety of skills which they possess. Training and

self improvement should also be encouraged.

TEAMWORK
In any organization there may be the element of teamwork which may prove to be of great importance

to the overall success. Teamwork is the use of individuals as a group, with different skills to accomplish

a particular task or group of tasks. It is designed to encourage production at rates above the minimum

required standard. It fosters cooperation and interaction among team members, thus resulting in a

pleasant working atmosphere.

Team members should:

1. Listen to others and consider their ideas

2. Be prepared to accept constructive criticism

3. Make suggestions and offer help and support

4. Whenever needed, act as peacemakers

5. Think carefully before speaking, respecting each other

Whenever forming a group, management should consider the following factors:

1. Common goals

2. Interests of members

3. Age

4. Length of time to complete tasks

5. Personalities of team members

Advantages

1. Various views are heard and the best solution can be sought

2. A larger pool of ideas

3. Individuals may feel a greater since of belonging to the organization

4. Tasks may be completed with better results since the best of skills of each team member can be used.

5. Increased productivity
Disadvantages
1. It may take longer to make decisions

2. Some individuals may be ignored

3. Increase in the level of conflict which can lead to reduced productivity

4. Individuals with “powerful” personalities may dominate/take over the group and refuse to listen to
others.

5. Good solutions may not be considered especially if they are coming from the “weaker” team
members

6. Deadlines may not be adhered to.

COMMUNICATION
This is the movement of information from one point to another which helps towards the understanding
and fulfillment of an objective. Effective communication requires a two-way flow of timely information.

Through communication, the different parts of the organization are linked. It also connects it with the
outside world (i.e. other firms, individuals, government etc.). If the communication process is not
effective, the following may happen:
1. Delays may occur

2. Production may cease

3. Increase in production cost

4. Closure of the organization

5. Increase in level of conflict

Process of Communication

The following elements are needed if communication is to take place.

SENDER: origin of message

MESSAGE: actual information

MEANS OF COMMUNICATION: method used to transfer information

RECEIVER: intended party

E.g. The Human Resource Officer placed a memo on the Office notice board stating that lunch would be
changed from 11:30-12:30 to 12:00-1:00. This would only apply to production staff.

Methods of Communication (Internal)

(Under each heading insert different methods of communication)

ORAL WRITTEN VISUAL

Methods of Communication (External)

ORAL WRITTEN VISUAL

Factors Affecting Effective Communication

1. The sender may not be trusted

2. The information may not be timely or accurate.

3. The method of communication may be experiencing technical problems or may not be

appropriate

4. The sender may not understand the message

5. Unresolved conflict between the sender and receiver

Ex. List at least 5 methods/strategies that may be used to improve the effectiveness of
communication.

MANAGEMENT INFORMATION SYSTEMS (MIS)

This is any system which has been put in placed within the organisation to provide management with
needed to make accurate and timely decisions. It is usually computer based but may also be manual

Benefits of MIS
1. Savings in time

It is easier to access information from a computer than from manually stored files.

2. Savings in money

In the long run it is easier to store files on a computerised system

3. Improvements in production and marketing techniques

4. Improvement in decision making

If management can get accurate information they are better equipped to make

decisions

5. Increase in profit margins

Better operations and decision making leads to increased profits

6. Increased competitiveness

If the needs of the market are better known, then the organisation can position itself
 to compete with others firms.

7. There is greater sharing of data among different departments

8. Savings in labour

Less people are neede3d to work if a system is computerised

9. It enhances communication by making information more readily available.

Challenges of MIS
1. Costly of setting up and maintenance

e.g. purchasing equipment, security system, maintenance personnel ( in-house or out

sourced)

2. Training

When introducing a new system, members of staff must be trained on its operations

if it is to work effectively. This is an additional cost to the organisation

3. Human error

There is always the issue of information being input to the system incorrectly. This

in term will affect the accuracy of information filtered through the organisation and

hence decision making.

MOTIVATION

As a part of managing or leading a group of individuals, motivation is the key to achievement of goals.
This can take a monetary or non-monetary form.

Monetary Incentives

 Increase in salary
  Bonus(maybe at year end)
 Merit pay( for persons who have excellent work)
 Profit-sharing
 Employee shares
 Commission (percentage of sales made by the employee)

Non-monetary Incentives

 Housing Allowance
 Health benefits
 Pension Schemes
 Employee of the Month Programmes

NEEDS SATISFIED THROUGH WORK

 Monetary satisfaction
 Achievement
 Status
 Social needs (friendship)
 Psychological needs met(personal growth)


Principles of Business

Section3: Establishing A Business

Entrepreneur

An individual who combines all the other factors of production (land, labour
and capital) with the aim of establishing a profitable venture for the production of
goods and services.
 ROLE OF THE ENTREPRENEUR
1. Conceptualising

Coming up with an idea which they enjoy and could be profitable. The aim
is to

provide something which is limited or lacking.

2. Planning

This is the overall formulation of objectives and policies of the business.

3. Accessing funds

Involves acquiring information from banks, credit unions, venture capitalist

etc. on loan terms, years and repayment terms. There may also be funds
from family, friends, and ones own savings.

4. Organising

Bringing together all the aspects of the production process and ensuring
that everything is in place at the right time so that operations can run
smoothly. Setting out tasks to be completed by various
persons/entrepreneur himself.

5. Operating

Actually running the business on a daily basis

6. Evaluating the performance of the business

The monitoring of the operations and comparing it to the

projections/budgets formulated. If the actual performance is below the
 budget, then corrective action may be taken after problem has been
investigated.

N.B The entrepreneur bears all the risk of being involved in the new enterprise
but is also entitled to the profits of the business.

PERSONAL TRAITS& LEADERSHIP QUALITIES OF

ENTREPERNEUR
1. Creative

2. Innovative

3. Flexible

4. Goal oriented

5. Persistent

6. Persevering

7. Be able to calculate risks

8. Self motivated

REASON TO START A BUSINESS

1. Financial independence

2. Wanting to be your own boss

3. Self-fulfillment

4. Self-actualization
 STEPS FOR ESTABLISHING A BUSINESS

1. Conceptualisation

This is the formulation of the idea of what to produce.

2. Research

This is a probe of the market to determine if the business is needed and if

there are sufficient persons/organisations to make operations viable.
Information can be gathered by questionnaires, interviews etc. Data is then
analysed and a decision is made.

3. Identification of resources

 Financial resources ( includes savings, money from family, friends, banks,

credit unions etc.)
 Human resources (individuals to operate the business)
 Material ( what will be used to produce the goods or services)
4. Creation of Business plan

This plan shows how the business will be organized, giving information on
projected sales, production cost, projected profits

5. Acquisition of funds

Getting money from relevant sources to purchase equipment, materials,

pay staff (if

any)
6. Operation of Business

Once all the necessary factors of production are in place, the business can

commence operation

RESEARCH

In order to remain competitive, the entrepreneur must be in touch with the

consumers’ needs. One way of gathering such information is through research.
There are two main types/categories of research

1. Primary Research

This includes gathering information from direct sources such as the

customers themselves. Methods used to collect primary information
includes:

a) sampling

b) questionnaires

c) interviews

d) observation

e) survey

2. Secondary Research
 This is information gathering from what has already been compiled and
documented by others. It includes: a) books

b) website information

c) newspapers

d) consumer review magazines

Why is research needed?

1. To be aware of consumer tastes and to identify if there is the need for a

product

2. To find ways to improve on existing products

3. To create new products/services which are lacking

4. To find out how one’s product/service is being received or competing with

others on the market.

5. To identify the target market to see if the production of a product is viable.

Principles of Business

Section3: Establishing A Business

THE ROLE OF DEPARTMENTS IN A BUSINESS

1. Production Department
 This is where the products/services are created. This is a vital department
and without it there would be no business. The entrepreneur has to ensure
that there are high standards and control measures to ensure that
products/services are always of a consistently high standard. Problems in
this department could cause the business to fail.

2. Marketing

This department is responsible for making customers aware of the product

and getting feedback on customers’ reactions and needs. This department
is also involved with determining packaging, distribution and promotion of
the products. Without proper marketing, consumers may not be aware of a
business’ products even if they are of excellent quality.

3. Finance

All the aspects of accounts are dealt with e.g. accounts payable, receivable,
payment of wages & salaries, purchasing of raw materials etc. This
department provides information to show whether expenditure is
exceeding income. Without proper financial records, the entrepreneur will
not be able to determine the profitability of the business or if corrective
measures are to be taken to reduce losses.

4. Legal Department

This department advises the entrepreneur as to the legal requirements of

operations e.g. contracts, paying of taxes (employee, corporate, VAT etc),
acquiring licenses, registration, trademark, copyrights etc. It is also the
 duty of those in the legal department to advise and or represent the
business in issues in court.

5. Research & development (R & D)

This is the “idea generation” department. Their job is to come up with new
and

innovative products and services before the competition to gain market

share. They may also improve on current products to mean changing
consumers’ needs.

PLANNING

When setting up a business planning is of great importance for the following

reasons

1. Plans act as a check point to compare actual to budgeted performance

2. Planning gives the entrepreneur something to strive towards.

3. Information found in plans maybe used by lending agencies to see the future
profitability and viability

of the organization.

4. Short term plans may be broken down into tasks to be completed

Types of Plans

1. Short term plans

 These plans are done daily/weekly or monthly, depending on the nature of
the

business. These plans maybe made by low level management or

supervisors. They

usually relate to day to day operations.

2. Medium term plans

These are usually done every six months to a year by mid-level

management

3. Long term plans

These give projections of what the organization wants to do over the future
five to

ten years. Planning at this level is carried out by top level management.
From these

overall plans, short term and mediums term goals and plans can be created.

N.B. Please note that depending on the size of the organization, all three levels
of planning can be carried out by one or two persons.

RULES FOR CONDUCTING BUSINESS

Within each business environment, whether local, regional or global, there are
rules for
conducting business e.g.

Local

 Business which are incorporated must first register with the registrar of
companies which require
M.O.A

Articles of Association

Audited reports

Disclosure of shares

Name, location of business etc.

 Corporation tax must be paid

 Employees’ N.I.S and income tax must be paid
 Licenses and health certificates are needed for selling alcohol or food
respectively
 Professionals(lawyers, doctors, architects, engineers etc.) must register
with their professional bodies and must be controlled/governed by their
rules

Regional

 How would CARICOM and CSME affect the operation of one’s business
 Some countries may have bi-lateral agreements which may affect the
business environment
Global

How will globalization affect the business environment

 Now that the world is being viewed as one large market, the traditional
ways/rules applying to business are now changing e.g.
1. no more preferential treatment
2. increase in requirements in areas such as labeling of goods showing
3. ingredients, nutritional value and calories etc.
4. greater rules relating to environment protection

OPPORTUNITIES & CHALLENGES OF TYPES OF ORGANISATION

The more popular business types which an entrepreneur may choose to operate
under are as follows:

 Sole Trader
 Partnership
 Company
Each of the above will be faced with various challenges and opportunities. For
each of the elements stated below explain how they can be seen as an
opportunity or challenge for each type of organisation:

1. Customer service/personal relationship with clients

2. Profits
3. Decision making

4. Creativity

5. Financing

6. Cost of raw materials

7. Overall cost of production

8. Competition

9. Death/ removal of entrepreneur

10. Specialisation of tasks/ access to skilled personnel

CAPITAL
SOURCES OF CAPITAL
Capital (financial capital) refers to the money that is required to start and operate
the business. It can be obtained from the following sources:
 Family & friends
 Personal savings
 Lending agencies e.g. banks (commercial or development), credit union,
insurance companies etc.)
 Venture capitalists

Principles of Business

Section3: Establishing A Business

 COLLATERAL
This refers to anything that may be used as a form of security, to safeguard
against possible default on payment of what is owed. It is often used as a means
of raising funds because it allows the lender the comfort of knowing that they will
not loose if the debt is not repaid. This makes them more receptive to lending.
Types of collateral include:

 Stocks/shares
 Life insurance policies which have cash values
 Title deeds to land & building (residential/commercial)
In the event that a debt cannot be paid, the items are sold to first recoup the debt
and any additional funds would then be given to the individual

ETHICAL & LEGAL ISSUES FACING BUSINESS/ENTREPRENEUR

1. Advertising

Ensure that products do what they say on the commercial e.g. if a good is
suppose to

take out stains, it should actually do the job.

2. Safety

Products should be free from defects and should not cause harm to users in
the

natural course of their use.

3. Taxation

Taxes and other deductions legally required by government should be paid

e.g.

personal income

tax, corporation tax, VAT, N.I.S etc.

4. Environmental Issues

 Ensure that production does not pollute the environment e.g. if production
produces smoke, make sure that you locate away from residential areas or
make sure that there is a filter on the smoke stack.
 Dispose of waste correctly
 Reduce noises to acceptable levels
5. Production

Ensure that the raw materials used to produce items are of good quality
and that

ingredients are clearly stated to reduce harm.

CONSEQUENCES OF UNETHICAL & ILLEGAL PRACTICES

1. Withholding taxes is cheating the government of vital revenue which can be

used to

improve the economy. It usually attracts penalties/fines.

2. Improper waste disposal leads to pollutions

3. Misleading ads. which are unfair and fraudulent on the population may be
brought

before a fair trading commission /consumer protection agency and in some

cases the law

courts.

4. In order to “clean” money made through illegal activity, money laundering may
occur.

The money passes through a legitimate business so that it cannot be traced.

5. Lawsuits may arise if products cause illness/death.

6. A decrease in sales/profits as word spreads about unethical/illegal practices.

PROFILE DIMENSION 2 – PRODUCTION, MARKETING AND FINANCE

SECTION 5 PRODUCTION

SECTION 6 MARKETING
SECTION 7 BUSINESS FINANCE

PROFILE 2: INTERNAL ORGANISATIONAL ENVIRONMENT

SECTION 5: PRODDUCTION

Production

The creation of goods and services to satisfy the needs and wants of consumers. It
may also be defined as changing inputs into outputs.

FACTORS OF PRODUCTION

1. Land

2. Labour

3. Capital

4. Enterprise/Entrepreneurship

1. LAND

This consists of all the natural resources on the earth including those in the sea
and the atmosphere around us. Each country in the Caribbean has various
natural resources which can be used in various industries to produce goods.
2. LABOUR

This includes all human resources which are needed to combine other factors of
production to produce goods and services. It refers to both physical and mental
ability. This factor is rewarded with wages, salaries and or profits. This factor is
very important since people are needed to operate equipment, program
machinery, make decisions, interact with clients etc. Without it, the other factors
would be useless. Labour can be divided into

 Skilled (engineers, doctors, teachers, nurses architects etc)

 Semi-skilled (driver, plumber, data entry operator etc)
 Unskilled (watchman, vendor, labourer etc.)

Factors Affecting the Labour Supply

 Wage rate
 Hours of work
 Size and structure of population
 Age at which people enter and leave the labour force
 Religious and cultural practices
 Adequacy of health services
 Mobility of labour
 Quality of labour force
 Government policies
 Willingness of people to work
 Migration patterns
  The number of women who opt to remain at home

PRODUCTIVITY

This is the rate at which goods are produced (efficiency of production). It may
also be the relationship between the amount which is produced and all the
inputs( raw materials, money etc.) which have to be used to produce those goods.

Factors Affecting Productivity

 Education and Training

 The amount and quality of capital
 Motivation
 Working Conditions
 Health of Workers
 Good Management

Human resource development is important if an organisation is to grow and

become more successful. The following areas need to be addressed when
developing any H.R. policies.

 Education- schools, universities etc.

 Skills- job related e.g. technical colleges and training boards, on the job
training e.g. SJPP
 Health- disease eradication
  Nutrition
 Working conditions

MIGRATION AND ITS EFFECTS ON LABOUR FORCE

Migration is the permanent movement of people from one area to another. It can
take to forms

 Rural to urban areas (domestic migration)

 One country to another (international migration)
Migration usually occurs for the following reasons:

 People are in search of betters jobs

 Educational opportunities
 Better standard of living
 Lack of social services e.g. schools, medical facilities etc. in rural areas
 Better infrastructure- electricity, water, roads etc.

Positive Effects
1. Workers send remittances in the form of money/goods to the families they left
behind

2. It can ease the population pressure in a country with scarce resources.

3. It can increase the pool of labour which organisations have to choose from.
 Negative Effects
1. “Brain drain”. This occurs where the skilled and professional persons leave the

community or country in search of better opportunities. This hinders

development

(economic, social, intellectual) of the area from which the workers originated.

2. More money has to be spent on training new workers as others leave.

3. Overcrowding in the receiving area can lead to the creation of slums, health
problems,

pressure on services such as schools, sanitation and recreational facilities.

4. Increase in the rate of unemployment.

5. Cultural and family life can be disrupted.

3. CAPITAL

Capital is the money and all other assets which are employed in the process of
production.

Types of Capital

(Diagram to be drawn here)

1. Physical Capital
This consists of fixed and working capital.

2. Working Capital

Items required for the day to day operation of the business and which are
continually being used up e.g. raw materials, cash etc.

3. Fixed Capital

This usually refers to items which are long lasting and are used in the production
of goods and services e.g. buildings, machinery, tools etc.

4. Financial Capital

Money which is used to run the operations of the organisation. It consists of loan
capital and share capital

5. Social Capital

This takes the form of government expenditure on factories, machinery, roads,

utilities etc. The infrastructure is then used by organisations to assist in effective
operations.

Role of Capital in Production

 Capital plays a vital role in the overall production of good/services. Money
is needed for overall operation of the business e.g. purchase of equipment and
raw materials, payment of wages/salaries etc. The use of fixed capital(tools,
equipment) increases the productivity of labour. E.g. the use of a tractor rather
than a hoe can increase the rate at which a field is ploughed.

The amount and type of capital a firm uses depends on the size and type of
industry in which it operates. E.g. the production of cars requires large factories
and specialised equipment while the production of leather goods can be done in a
small shop with little equipment.

With the use of capital, division of labour is made possible which in turn
can increase the level of productivity/ output per person.

Capital is also used for investment into various capital ventures. This can be
done by saving with financial institutions (banks, cooperatives etc.) which then in
turn loan the money to different organisations or entrepreneurs.

4. ENTERPRISE/ENTREPRENEURSHIP

This is the ability to coordinate and combine the various factors of

production in an

effort to successfully run the organisation. The entrepreneur is often seen as the
fourth

factor of production. This role is also carried out by the various managers within
businesses. Without its production is not possible. An entrepreneur can be seen
as

someone who has the following functions:

1. Creation of ideas

2. Takes the initiative and risks

3. Raises finances to fund production

4. Determines what , for whom and how much to produce

5. Ensures that factors are used in the correct proportions

Benefits of Being Self-employed

1. Receives all profits

2. Can set own hours

3. Makes all decisions and reports to no one

4. Close personal relationship with clients

Problems of Being Self-employed

1. Bears all losses

2. Work long hours

3. may not always get a salary

4. May find it difficult to acquire loans

Exercise

1. What is the difference between production and productivity?

2. List the factors of production and give an example of each.

3. What is migration?

4. Identify TWO effects of migration (one positive and one negative).

5. State THREE factors which can affect productivity.

6. Explain which capital is necessary for the running of a business.

7. Give THREE factors which affect the labour supply.

PROFILE 2: INTERNAL ORGANISATIONAL ENVIRONMENT

 SECTION 5: PRODDUCTION

PRODUCTION LEVELS

1. Subsistence Production

This is the production of goods to satisfy one’s own personal needs. E.g. kitchen
garden, sewing one’s own clothing etc.

Benefits

 It saves money
 One of a kind items are created
 Creativity can be explored

2. Domestic Production

The production of good/services for the local market

Benefits

 Use of local inputs e.g. labour, capital, raw materials etc.

 Provision of jobs
 Reduces imports
 Reduces the use of foreign exchange
 Economy may become self-sufficient

3. Surplus and export

The production of goods above what is needed to supply domestic needs. The
surplus is sold on the international market.

Benefits

 Foreign exchange earned

 The development of an external market
 Jobs
 Can improve Balance of Trade and current account of Balance of
Payment

TYPES OF PRODUCTION

1. Extractive/Primary Sector

This type of production involves the extraction of basic raw materials from the
land e.g. mining, agriculture, fishing, forestry. Some of these resources can be
used directly or are used as the raw materials of other industries to be converted
to other goods.

2a. Manufacturing/ Secondary Sector

This sector generally uses the raw materials of primary sector to create other
goods. E.g. sugar, oil refining, canning, furniture and garment making etc.

2b Construction
This is also part of secondary sector and uses products from the manufacturing
area e.g. building

3. Service/Tertiary Sector

This is known as the service sector where no “tangible” goods are produced. It is
divided into direst services which are needed for their own sake (education,
health etc.) and indirect services which are needed in order to exchange goods
(transportation, communications, banking etc.)

4. Quaternary Sector

Exercise: For the following countries, give examples of primary, secondary and
tertiary production

BARBADOS

Primary

Secondary

Tertiary

Jamaica

Primary

Secondary
 Tertiary

Trinidad

Primary

Secondary

Tertiary

Guyana

Primary

Secondary

Tertiary

COTTAGE INDUSTRIES

These are industries which are usually carried out in the home. They usually
require some form of skill in order to manufacture goods. These industries are
very important to rural areas as they provide income, employment and provide
goods and services which may only have been available in the town which may be
far away.
Characteristics

1. Work mainly carried out manually

2. Home based

3. Business carried out on a small scale.

4. Use of local raw materials.

5. Family members provide labour and in some cases help is hired.

Exercise: 1. Give 4 benefits and 4 problems of cottage industries

2. Identify the role of small firms in the economy

Benefits

Problems

LINKAGE INDUSTRIES

Industries which are dependent on another’s output to produce goods and

services. E.g. the rum distillery is dependant on the sugar industry. Linkage may
be:

 Backward
 Forward
Importance of Linkage Industries

1. Employment

2. Foreign Exchange earner

3. Self-sufficiency

4. Use of local resources

5. Close proximity between industries can reduce costs e.g. transportation

6. Reduction of imports

7. Increase in investment

8. Knowledge can be shared

Problems

1. Limited raw materials

2. Access to foreign market is not guaranteed

3. Shortage of capital

FACTORS INFLUENCING LOCATION OF INDUSTRIES

1. Geographical
2. Availability of raw materials and supplies
3. Infrastructure
4. Power
5. Water
6. Transport
7. Health Facilities
8. Labour supply
9. Governmental Regulations

ROLE/FUNCTION OF SMALL FIRMS

(Class discussion)

LARGE SCALE PRODUCTION

Advantages
1. They find it easier to raise large sums of capital

2. More capital is available for

 Advertising
 R&D
 Purchasing labour saving machinery
 Employing specialist personnel
3. Mass production allows for the possibilities of specialisation (division of labour)

4. Special prices and discounts can be obtained when buying in bulk

5. Mass production may lead to a reduction in production cost ( economies of

scale)

Disadvantages
1. Standardisation of products can lead to a reduction of choice

2. The union may become a problem for the firm in terms of wages/strikes etc.

3. Mass production may cause boredom in workers and thus reduced quality

4. It may become too complex to manage

 Economies of Scale
This is the reduction in unit(average) costs of producing a product in proportion to
the increase in the size of operation of the firm. There are two types of
economies of scale:

 Internal
 External
Internal Economies of Scale

These are those which are at the level of the individual plant or as a result of
how the firm is organised. They include:

 Technical Economies of Scale- The use of equipment to its full capacity

which will increase output.
 Financial Economies of Scale- Large firms can acquire capital (assets or
money)easier than small firms because borrowing is easier than small ones
which can then be used for expansion of operations.
 Marketing Economies of Scale- Buying raw materials in bulk attracts
discounts, thus reducing cost. This leads to cheaper production and overall
unit cost.
 Managerial Economies of Scale- This involves the use of division of labour,
specialists can be hired for greater organisation and control of operations.
This leads to increase in the efficiency of operations. The division of the
firm into various departments can also lead to economies of scale unlike
the sole trader who has to accomplish all tasks on his/her own.
  Risk-bearing Economies of Scale- A large firm can spread its risk by selling
more than one type of good. When one sells slowly, the other can pick up
the slack.

External Economies of Scale

These are achieved as a result of the location of the firm. They include:

 A supply of skilled labour may be located in the area

 The good reputation
 Similar firms which are located close together can pool efforts in R & D
 As the firm expands, more supporting companies may grow up in the
surrounding areas helping to reduce cost. E.g. banks, cleaning companies,
catering services etc.
Diseconomies of Scale
A firm cannot continue to grow infinitely. At some point in the expansion,
increasing costs will outweigh the output. This is known as diseconomy of scale.
Examples of such are:

 Increased managerial costs

 Problems with the control and flow of information
 Inability to adapt to change quickly
 Breakdown in communication between staff and management
 Poor quality products
 Lack of relationship with customers
 Greater government scrutiny
 Increase in waste and pollution
  Standardised products(mass production) limits choice

Law of Variable Proportion

This law, also known as the law of diminishing returns, states that as a firm
continues to add variable factors (e.g. labour) to fixed factors, initially there will
be an increase in production per person. Eventually, the addition variable factors
will result in less output per person(law of diminishing returns). Therefore it can
be said that initially production will increase, peak and then decline.

GROWTH OF BUSINESS AND ITS EFFECTS

How Firms Grow

1. Expanding their markets

2. Creating new products

3. Merging with another firm

4. Takeover

Why Firms Grow

1. To reduce cost & achieve economies of scale

2. To increase profits

3. To achieve grater security

 Effects of Growth
In any organisation growth will have an effect on the following

1. Organisational structure

It may become more complex, affecting the chain of command and the span of
control of individuals. New departments may also be created. There is also
implications for the increase in the amount of communication within the firm.
Authority may now be delegated among a greater number of personnel whereas
one or two persons may have held it.

2. Capital

More money is now required to finance operations. E.g. buying equipment,

paying workers, raw materials etc. In order to finance its operations the firm may
now have to increase its borrowing or issues shares where possible.

3. Labour

An increase in the number of workers usually occurs but the extent to which is
does may depend on if the

firm is labour or capital intensive. There may also be division of

labour/specialisation which increases output. Specialists may also be hired.
4. Potential for export

As production increases and the local market is being satisfied, surplus production
may be exported as a market is established.

5. Scale of production

This will increase as long as inputs have increased and are being used efficiently.
Various economies of scale can occur as production expands

6. Use of Technology

There will be greater used of technology as long as it will lead to reductions in

cost and increases in output. In turn it may cause a reduction in labour

CAPITAL INTENSIVE vs LABOUR INTENSIVE PRODUCTION

Capital intensive industries are those which use more machines than humans in
the production process e.g. automobile manufacturing. This method mainly
operates in developed countries which have access to the money to purchase
equipment. The quality of products can be standardised, output in usually
greater and fewer people are employed.
Labour intensive industries use large pools of human and animal labour e.g.
garment making. Employment is generated and the wage bill tend to be high. This
method of production is found mainly in developing countries.

N.B. In the Caribbean many jobs which were done manually are now seeing the

introduction of the use of machines e.g. in the past, sugar cane was cut by hand it
is now cut in many countries by the use of the combine harvesters which
complete the job at a quicker rate. In other areas such as pattern making and
drafting, architecture, engineering etc., CAD (Computer Aided Design) is becoming
more common. It speeds up the process and improves on quality and
standardisation. CAI(Computer Aided Instruction) is also a tool where the
computer is used for the giving of instructions. It allows a person to move at their
own pace, offering methods of testing, feedbacks and remedial work until the
learner understands.

TECHNOLOGICAL DEVELOPMENT & ITS IMPLICATIONS

Mechanisation
The replacement of and animal labour by machines to perform tasks in the
production process

Automation
A process in which a number of tasks are performed by machines with minimal
human intervention. It takes mechanisation one step further.
 Benefits of Technology
1. Reduction in labour cost and increase in profits

2. Errors are reduced and quality can be standardised

3. Reduction in per unit cost

4. Increase in production

5. Cost of products to consumers may be reduced

Problems of Technology
1. Increase in unemployment

2. Equipment may quickly become obsolete and have to be replaced thus

increasing cost.

3. The required skilled labour to operate the equipment may be in short supply

4. Only standardised products can be provided which do not take into account the
taste of consumers.

SECTION 6: MARKETING

Market

A market is any situation made up of a group of individuals,

organisations/institutions who interact in the process of buying and selling goods
and services. It may also be a place where buyers and sellers meet.
Marketing

The management process which consists of all the activities of identifying and
anticipating the needs of the consumer with the aim of satisfying those
requirements.

Marketing Activities

1. Market Research

2. Pricing

3. Packaging

4. Branding

5. Sales Promotion

6. Advertising

7. Distribution

8. Selling

9. After Sales Services

Marketing Mix

This is a collective term used to describe the major activities of marketing. It

consists of the four Ps:
1. Product:

This is the good or service to be produced.

2. Price

This is the dollar value given to the service or product.

3. Place

This refers to where the product will be sold. It also includes the distribution
channels.

4. Promotion

This includes whatever methods a firm chooses to attract its customers e.g.
branding,
advertising P.R. etc.

1. PRODUCT

Important aspects of the product are packing and branding. The package or
container of the goods is very important.

 It presents the product.

 It must be durable.
 It protects the product.
  It preserves the life of the product
 It provides information
 It sets it apart for other similar products
The branding of a product is usually accomplished by a symbol, name or design
e.g. MacDonald Arches, Cocoa Cola, NIKE, etc. The product must meet the
requirements of the consumers if it to at least have a chance of succeeding.

2. PRICE

The objectives of pricing are

 Survival
 Profit maximisation
 Market share Leadership
 Product quality Leadership
A number of methods can be used to determine the price of a product.

1. Break-even Analysis

The price is set to cover expenses, making no profit or loss. Unit cost price equals
selling price.

2. Penetration Pricing

This is mainly used for new products. The initial price is set lower than
competitors which should encourage new consumers to buy and existing
consumers to switch to their product. Eventually the price is raised with the hope
that not all consumers will switch to the competitors’ products.

3. Psychological Pricing

Some products are deliberately priced high to achieve the “snob effect”. It makes
the

consumer think that good things are not cheap.

4. Limit Pricing

The price is set low enough to discourage entry into the market by competitors.

5. Predatory Pricing

A pricing method used to get rid of unwanted competition. Prices are lowered by
a company which can afford temporary losses. When the desired effect as been
achieved the prices are increased again.

6. Cost-based Pricing/ Cost-Plus Pricing

The price is set with the following in mind

 Total Cost ( Fixed Cost + Variable cost)

 Mark-up
The final price = TC + Mark-up
3. PLACE/DISTRIBUTION

This refers to where and how the product reaches the market. In order for any
product to reach its final destination it will go through one or more links of the
distribution chain.

Distribution Chain

This is the link between the producer and the consumer

1. Manufacturer- The maker of the product

2. Wholesaler- Sells finish product to retailers or general public in bulk usually
at a lower price
3. Retailer- Sells to general public usually at higher prices.
4. Consumer- Final link in the chain where most goods and services are
consumed

Methods of Retailing

1. Shops
2. Department stores
3. Mail order
4. Auction
5. Internet
6. Door to door sales persons
 7. Vending machines

ASSIGNMENT
1. Describe 3 roles of the wholesaler
3 marks

2. Describe 3 roles of the retailer

3 marks

3. List the three types/forms of transportation

3 marks

4. Give two advantages and two disadvantages of each of the above transport
methods

5. List four distributions problems

4 marks

6. Suggest three solutions to the various problems of distribution.

3 marks

4. PROMOTION

This is the act of attracting attention and interest to the product or service.

Method of promotion
1. Advertising (tv., billboard, newspaper, magazines, radio etc.)
Its function is:

 To introduce new products and remind consumers of old ones.

 To increase demand for goods
 To create customer loyalty
The advantages are

 Increase in market share

 Increase in profits to fund research and development
 Provides information to prospective buyers
 Promotes competition among firms
The disadvantages are

 It may be very costly and can increase production cost

 Billboards can spoil the natural landscape
 Some ads are not t\in the public interest

2. Sales Promotions

These are short term methods or incentives used along with ads to encourage
purchases

 Rebates
 Coupons
 Free samples
 Exhibitions
 Contests
The advantages are
  Trial of products before purchase
 Reduced cost of products to customers

3. Public Relations

 Sponsorship of community activities

 Special awards or scholarships
 Donations to charity
 Business entertainment dinners
The aim is:

 To create goodwill or a pleasant image of the business and its products

through the media

4. Personal Selling

Sales persons are sent out into the market to sell the product

The advantages are

 Consumers do not have to leave their homes

 Personal contact allows producers to gather valuable info on use of
product, its quality, pricing etc.

Additional Required Reading

Describe the following types/forms of advertising

1. Informative Advertising
2. Persuasive Advertising

3. Competitive Advertising

4. Defensive Advertising

5. Reminder Advertising

MARKETING EXERCISE

1. For a market situation to have occurred there must be:

 A transaction
 A commodity/service provided
 The commodity must have value
 A buyer and a seller

Read the following scenario. A) Identify if a market situation exists.

B) Give reasons for your answer

John James stopped the bus, bought a ticket for $2.00 and went for a drive
to the countryside.

2. Complete the following sentences with the words listed below

Product, price, value, promotion, sell, known, quantity, specifications,

advertising, unwanted, place, commodity, sales promotion, predatory pricing,
personal selling
i) The _____________________ is the item to be manufactured. At this stage, one

considers the __________ to be made and the _____________________ required

for the product.

ii) The __________________ is the monetary _____________ customers are

willing to pay for the item. The firm must also be willing to _________ at that

______________ so that a profit can be made.

iii) ________________ is the method of making a product ________________ to

the public.

iv) This is done through __________________________,

____________________________ and __________________________.

v) ____________________________ is the strategy aimed to get rid of

_________________ competition.

vi) ________________ is the pattern of distribution to get the

_____________________ to the consumer.

3. The total cost of 100 dresses is $1,500.00. The mark-up is estimated at 20% of
the unit cost, the price of a single dress using the cost-plus method will be
 MERCHANDISING

This is a promotional tool used to present products in a way that will attract and
draw customers to buy. It involves

 Packaging
 Branding of goods- This can be done with a name or symbol e.g. Coca Cola,
NIKE,
 Physical layout of goods such as:
o Putting can goods in a pyramid rather than straight line
o Putting new products next to popular goods or next to ones, which
are used by many people.
o Placing goods at eye level rather than on the top or bottom shelves
 Decorating the business or a particular section to attract attention
 Offering goods in different sizes for convenience
 Having transparent packaging to allow customers to closely look at
products

Forms of Merchandising

 Contests
 Coupons
 Multi-buys i.e. buy one get one free
 Loss leaders i.e. reduce the price of a good to attract the customers
into the store
to expose them to other products.
  Trade fairs, exhibitions
 Free samples

MARKET RESEARCH

PRINCIPLES OFR BUSINESS

CONSUMER BEHAVIOUR

Factors Influencing Consumer Behaviour

1. Price of product:

Usually, as the price of a product increases, the demand for that product is
reduced

as persons are no longer able to buy or switch to a cheaper brand/product.

2. Price of substitutes:

As the price of these are reduced the demand for them will rise.

3. Quality:

Consumers may still purchase a high priced product if they perceive that it
is of a

high quality
4. Taste:

An individual with expensive tastes may only shop in certain areas or buy

certain products e.g. Ralph Lauren, Kenneth Col, Land etc.

5. Tradition:

Manu people will buy a product even if the price increases because it is
what they

are accustomed to.

6. Income:

The greater the disposable income, the greater the spending power. This
may cause

individuals to purchase more luxury items.

7. Brand loyalty:

Some consumers will only buy a particular brand of a product even if its
price rises

e.g. car tyres, shoes, clothing etc.

 PRINCIPLES OFR BUSINESS

MARKET STRUCTURES

In a world of buying and selling of goods and services, all activities can fall into
any one of the following market structures:

 Perfect Competition
 Monopolistic Competition
 Oligopoly
 Monopoly
At the two extremes are perfect competition and monopoly with monopolistic
competition and oligopoly represented along the continuum.

All market structures can be defined by FOUR main characteristics

1. The number of sellers

2. The nature of the product i.e. is it identical

3. The number of buyers

4. The conditions of entry

PERFECT COMPETITION

Characteristics

1. There are numerous sellers in the market place.

2. All products are identical and are considered to be substitutes for each other.

3. Everyone has perfect knowledge of the market. This is where all buyers and
sellers

know the price at which transactions are taking place and what the substitutes
are.

4. There are many buyers

5. No one seller (or buyer) can influence the price of the good by increasing or
decreasing

supply of goods. The price is set by the market forces of demand and supply. It
is

therefore stated that each firm is a price taker

6. There are no barriers to entry or exit of the market.

In the real world, it is difficult for perfect competition to really exist. Some of the
closest examples could be the selling of the same vegetables or flying fish at a
local market.

MONOPOLISTIC COMPETITION

Characteristics

1. Several sellers but usually not as many as with perfect competition

2. The product is similar but not identical. It may be differentiated by branding,
with each

product claiming to be different in some way

3. The are many buyers

4. There are no barriers to entry or exit of the market.

5. There is a lot of non-price competition such as advertising, sales promotion etc.

Examples include the selling of can soup, toothpaste, sneakers, manufacturing

furniture etc.

OLIGOPOLY

Characteristics

1. There are only a few firms which dominate the market and who may compete
with

each other. If they come together and agree not to compete it is called a
CARTEL

2. The product is basically the same such as oil. This occurs in a pure oligopoly. In
a

differentiated oligopoly, the product is somewhat different e.g. cars.

3. There is virtually no price competition. Firms rely heavily on advertising,

promotions,
 quality of goods or services offered etc.

4. There may be some barriers to entry to sellers

Examples include banks ( RBTT, Scotia, Royal Bank etc.), insurance companies
( CLICO, Trident, Co-operators General, Barbados Life Insurance etc.) Car
dealerships (Toyota, Honda, Simpson Motors etc.)

MONOPOLY

Characteristics

1. There is only one producer of the product. The firm and the industry are one
and the

same.

2. There are many buyers

3. The price is set by the supplier to maximise profits where possible. There are
barriers to

entry

5. There is no substitute for the product.

6. The firm can also fix the amount of the good/service to be supplied.

Examples include Cable & Wireless, BWA, BL&P, Cement Plant

 SUPPLY & DEMAND

SUPPLY

This is the amount of any commodity which a producer is willing to supply at a

given price. On a supply diagram, the curve slopes upward from left to right. This
implies that as price increases, so does production/supply of goods.

Diagram of Supply Curve

DEMAND

This is the amount of any commodity which a consumer is willing to purchase at a

particular price at a given time period. On a demand diagram, the curve slopes
downward from left to right. This implies that as price increases, the demand for
goods decreases.

Diagram of Demand Curve

COST PRICE

The price at which the cost of production would be covered.

SELLING PRICE

The cost price plus any profit which is then determined by the seller.

DETERMINANT OF SELLING PRICE

The selling price is determined when the market is in equilibrium. In other words,
the point at which the demand and supply are equal. At this point, the market is
said to be cleared.

E.g.

Price Demand Supply

$5 3,000 1,000

$10 2,500 1,500

$15 2,000 2,000

$20 1,500 2,500

$25 1,000 3,000

The price at which the market is in equilibrium is $15. Both demand and supply
are equal and this is where the market is said to be cleared. This is also known
as the optimum/optimal price.

As the price falls, the demand for the commodity rises and vice versa. The
opposite is true for supply. As the price increases, do does the demand for the
good

FACTORS AFFECTING DEMAND

1. The price of the commodity

As price increases, the demand of the product usually decreases.

2. The price of substitutes

Substitutes are goods which can be used to replace other goods. As the
price of these

decrease, demand will increase since buyers may be switching from the
purchase of

other goods.
3. The income of buyers

As disposable income increases, so does the demand for most goods.

4. Advertising

This alerts buyers to the presence of goods on the market, thus increasing
demand.

5. Buyers Preference

Buyers’ demand for a good may remain unchanged even though the price
of the

product increases. This is because it is the product of choice.

FACTORS AFFECTING SUPPLY

1. The price of the commodity

As this increases, so does supply since the producer is trying to maximise

profit.

2. The price of substitutes

 As the price of these decrease, supply will decrease since buyers may be
switching to the purchase of other goods.

3. Cost of factors of production

As the cost of land, labour and capital increases, so does the overall cost of

Production. This may have the effect of reducing supply.

4. Weather conditions

Bad weather can have the effect of reducing supply, causing a shortage. AS
a result

of this, prices may increase as consumers try to get the product before it is
no longer

available.

5. Availability of raw materials

Lack of raw materials will limit supply resulting gin a shortage.

6. Effects of taxes & subsidies

Taxes have the effect of increasing cost of production and can therefore
reduce the
 level of supply. The opposite is true for subsidies.

7. Levels of Stock

A reduction in stock means a reduction in supply

HOW PRICE IS AFFECTED BU DEMAND & SUPPLY

If supply remains constant

The price of goods will increase as demand increases. This is because a

shortage

will occur, causing persons to be more willing to buy at the higher price.
However,

if the demand decreases, there will be a surplus of goods. Suppliers will

now have to

reduce their prices if they are to get rid of the product, especially if it is
perishable.

If demand remains constant

There will be a decrease in price as supply increases because of surplus. If

supply
 decreases, prices will rise because of shortage.

TERMS OF SALE

Consumers have the access to the following options when purchasing

products and services. However, with each form, there are associated benefits
and problems

1. Cash Sale

The benefits:

 There is immediate movement of stock and money earned.

 This is also no added interest.
The disadvantage

 It does not allow the consumer to establish a credit rating for the future
when that individual wants to buy a product on credit/hire purchase.

2. Credit Sale

The benefits

 No money may be needed immediately

 Buyer enjoys the use of the product even before payment is made
 The seller encourages customers to buy therefore increasing sales
The disadvantages
  Bad debt- customer cant pay
 Due to inflation, the money may be worth less when it is finally received

3. Hire Purchase

A company hires the commodity to the purchaser, who pays an initial payment
followed by weekly/monthly instalments.

The benefits

 Use of commodity while still paying

 Company responsible for repairs to product within a certain period
The disadvantages

 Expensive form of credit due to high interest rates

 Goods do not become the buyer’s property until the final payment has
been made
 Company can reposes items

4. Cash & Trade Discounts

The benefits

 Encourage buyers to pay before the end of credit period

 Reduction in price for buyer
The disadvantage

 Reduction in income for seller if discount is taken

 CONSUMERISM

This involves the efforts made by organized groups to protect people’s interest as
buyers of goods and services. Such organizations provide information on
products, consumer awareness and lobby governments to enact legislation to
protect consumers.

Consumer Protection

In today’s society consumers need to be shielded from harmful and unethical

practice which may occur in the market place by suppliers. This is necessary for
the following reasons:

1. To prevent overcharging of consumers

2. To prevent businesses from making false claims about products

3. To ensure sanitary conditions of operations

4. To ensure consumers get the amount or what they paid for

5. To ensure that goods are fit for human consumptions

Forms/Arms of Consumer Protection

With the rise in consumer awareness of their rights, various agencies are now
playing their part to increase the level of education and the likelihood of
consumers being taken advantage of.
There are three main arms in the effort to protect consumers:

A. Government

 It monitors the importation of goods to ensure that they meet minimum

required standards
 Drafting of legislation such as antidumping laws. This legislation
prevents companies from sending low priced or low quality products to
poorer countries
 Establishing Public Health Division ( through Public Health Act) to set out
rules for selling e.g. acquiring health certificates, medical examinations,
dress code, food preparation and handling etc.
 Weight & Measures Act
 Sale of Goods Act- this stated that there are 3 main obligations of the
seller
a) Goods must be of merchantable quality/ fit for their normal
purpose

b)Goods must be as described on label

c) Good must be fit for use

 Setting up Price Commissions/ Price Control Departments to set price

ceilings on certain products so that everyone in the country can have
access and are not over priced
 Passing of Acts such as the Food & Drug Act, Hire Purchase Act to
supervise credit facilities
  Establishing of Fair Trading Commissions to hear and address the
concerns of individuals/groups
 The creation of Bureau of Standards to ensure that goods are labelled
with correct information such as contents, size, weight, ingredients,
nutritional value, health risks, manufacturer etc. This is to ensure that
consumers know what they are buying and if they may be at risk from
any product they use.
 The appointment of the Ombudsman
A government appointed person to investigate malpractices in
injustices brought to his attention by public.

B. Consumer groups/organizations

 Some co-operatives set up educational programmes for their members

to educate them about their rights, changes in buying patterns and
practices of sellers in the market place
 Within the media, consumers are allowed to report concerns which are
then investigated and findings made public. The mean also provides
information on consumer rights and responsibilities. There are also
journals which carry out tests on various products, giving reports on
their quality, durability, pricing, health risk etc.

C. The individual

An individual can take action to protect their own right by:

  Contacting the FTC to report unfair actions of sellers or simply to be
informed
 Shop around and compare products, prices and their quality
 Check expiry dates, guarantee and warranty
 Weigh goods where possible to see if you are getting what you pay for
 Ask for product information
 Shop with someone who is more knowledgeable about the product you
intend to purchase
 Reduce impulse buying

Rights of Consumers

1. To have truthful information about products

2. To choose between products of different quality and price to satisfy needs

3. To buy goods/services which are safe to consume

4. To complain to retailers/ other bodies about dissatisfaction with products

5. To get a fair settlement for a fair claim

6. The right to safety and protection from hazardous goods

Responsibilities of Consumers

1. Demand the best value for money

2. Report unsafe merchandise to consumer protection bodies

3. To tell other consumers about unfair treatment and unethical business
practices

4. To acquire as much information about a product before purchase.

5.Report defects to retailer/manufacturer

TRANSPORTATION

Form of Transport

1. Land (Railway/road)

2. Air

3. Water (Sea/River)

(Look at the advantages and disadvantages of each form)

Importance of Transport

Transportation is the means by which goods are moved from one place to
another. The sensible handling and transport of goods influences the
marketability of the product. It ca also affect whether or not the product reaches
its market (which may be domestic, regional or international) in a timely manner
and in condition for sale. An unreliable transportation network can lead to a loss
in sales and an increase in cost for a firm, thus leading to reduced profits.
Factors Governing The Choice of Transportation

1. Handling charges

2. Warehousing costs

3. Insurance cost

4. Work of port authorities

E.g. Efficiency of workers, labour unrests etc.

5. The type of goods

This includes the size, weight, perishability and value of the goods

E.g. Bauxite Railway/Ship

Oil & Gas Pipeline & Tanker

Timber River & Barges

Vehicles Land/Ship

Fresh fruits & Flowers Air

6. How urgently the product is needed

E.g. Air transport is most likely to be used if products are required

immediately

from very far away

7. Distance between producer and supplier

8. Availability of airport, harbour and docking facilities

N.B At times more than one of the above factors can affect a single product. The
organization/individual will then have to look at all possibilities and then
choose the option which is best for tem.

Problems of Distribution/Transportation

1. Delayed shipment due to improper labelling, mis-direction of goods etc.

2. Customs authority regulations

3. Spoilage

4. Breakage

5. Lack of security leading to theft

6. Inadequate warehousing facilities( e.g. goods not protected from elements)

7. Industrial unrest e.g. workers and management having problems

8. Bad weather

Solutions to Transportation Problems

1. Insurance

2. Refrigeration

3. Better packaging

4. Proper storage facilities

5. Screen workers and dismiss them for acts of theft

6. Modify or abandon policies that will lead to unrest

7. Clear and legible shipping information/labelling

PRINCIPLES OF BUSINESS

SECTION 7: BUSINESS FINANCE

COMMERCIAL BANKS

These are financial institutions, which are privately owned by shareholders

Functions of Commercial Banks

Acceptance of deposits
Supply finance (loans, investment)
Provide a system of payment for bills
Can act as executor/trustee
Provide safe keeping of documents 9wills, life insurance policies, title deed,
jewellery etc.)
Assist with foreign exchange rate
Provide credit rating to customers
Dispense cash
Buy government securities
Negotiate investments for customers
Services Offered

 Deposits (e.g. savings accounts, fixed deposit, chequing accounts etc.)

 Safety Deposit Boxes
 Mortgages ( long term e.g. houses, commercial buildings, land)
 Other Loans (shorter term e.g. cars, education, furniture, travel etc.)
 Credit Cards
 Retirement Savings Plans (RSP)

CENTRAL BANK

This is an institution controlled by the government and does not compete with
commercial banks.

Function of Central Bank

Issues and regulates bank notes (currency)

Acts as government’s bank (holds all government accounts & issues
treasury bills)
Responsible for foreign reserves
Executes government monetary policy by exercising control of money
supply, borrowing and saving interest rates.
Looks after borrowing from IMF
Supervises commercial banks’ operations
Acts as bankers’ bank (issuing notes and coins, holding banks’ reserves etc.)
Assists with the setting up of financial markets such as the stock exchange
 Relationship between Central Bank and Commercial Banks
 Banks are legally required to deposit with the central bank (as a
reserve) a percentage of their total deposits. This is called the legal
reserve requirement. This can be changed by the central bank
depending on its objectives. The higher the amount required, the less
money would be available for loans to the public.
 The Central Bank can also decide the amount of local assets which
commercial banks must hold as part of the total assets which they
hold
 There is also a liquidity requirement. This is the ratio of liquid assets
to the total assets held by the bank. Liquid assets are those which
can be easily converted to cash

MONEY MANAGEMENT

Savings

This is money is usually held by a bank or credit union on which interest is earned.
The principal amount remains the same unless some is withdrawn.

Investment
This involves the purchase of shares in an organisation. Dividends are usually paid
when profits are made. The value of the shares can increase or decrease,
depending on the profitability of the company. There the initial amount invested
can increase or decrease. Investments can be made on the stock market, mutual
funds or simply putting money into a new business.

What is money management?

Sound money management is a sensible way of spending and investing money.

One’s total expenditure should not exceed one’s income. Sound money
management should follow these guidelines stated below:

1. Set goals based on what is important to you

2. Prioritise goals
3. Provide for basic needs first
4. Save for the future(pay sheet deductions, credit union, banks etc)
5. Make wise decisions when buying (i.e. shop around)
6. Get the most out of your purchases (use items properly)
7. Live within your means

A budget can be made an essential part of money management. It is a document

showing all sources of income and the ways in which it will be used for a certain
period. A comparison can then be made between the planned and actual
expenditure. If necessary, adjustments can be made during or after the specified
planning period.
Saving should be included in one’s management of money. This can be done
through a number of organisations and informal groups such as

 Banks
 Insurance companies
 Credit unions
 Sou sou, lend- a- hand, meeting turn, box etc.

SOURCES OF FINANCE/CAPITAL

Capital is all the funds raised by individuals or organisations from savings or

borrowing. It may include short-term financing, long-term financing or a
combination of both

Money Markets

Money can be borrowed from commercial banks, credit unions, hire purchase
companies etc. These institutions are usually more concerned with short-term
lending but it is not uncommon to lend for longer periods e.g. mortgages.

Capital Markets

These specialise in long-term lending almost entirely to business and industries.

They include insurance companies, pension funds, stock exchange, development
banks and other government agencies
 STOCK EXCHANGE

This is the market place where buyers and sellers of securities (all stocks and
shares) can

meet to buy and sell. The Stock Exchange is responsible for making arrangements
for the

trading of shares. It also sets the rules of operation of the Stock Market and
ensures that

members adhere to the rules at all times. In the Caribbean Barbados, Jamaica and
Trinidad have stock markets on which cross border trading is allowed. That is, it is
possible to buy shares from the stock market of another country. Since the shares
which are being trading on the stock exchange were already sold once, the stock
exchange is said to be the market place for second hand trading.

On a stock market there are various risks and benefits. Usually, the higher the risk
the higher the gain. It is often wise to spread investments across high and low risk
investments to minimise losses.

Why is the Stock Exchange Important?

In the Caribbean, many companies (and governments) do not possess the

finances to purchase all they need for continued success. In order to acquire
these large sums of money (capital), businesses go to the public and encourage
persons/organisations to purchase shares. However, most persons will not invest
if they did not think that they could achieve some return on their investment.
The money acquired is then invested into the business but cannot be returned to
the individual/organisation. If the investor wishes to get back the money, the
shares can be sold to another investor. These transactions are facilitated by the
stock exchange. Stock exchanges also have international importance because they
provide a market for foreign investment.

Terms of Stock Market

 Bull market- Investors buy or hold on to shares in the anticipation of a rise

in price.
As the prices are rising in this market, investors will make a profit by selling
at the

higher price.

 Bear Market- In anticipation of a fall in price, investor will sell shares in

order to minimise losses. They may buy back the shares at a relatively low
price. In this market prices tend to be falling.
 Stag market- Investors buy new shares, with the aim of reselling at a profit
when second hand deal starts on the stock exchange.
 REVISION

1. List THREE functions of Commercial Banks.

2. Identify Two services offered by a commercial banks to citizens of a country.

3. Which bank can be called “the bankers’ bank”?

4. Which bank is responsible for the government’s finances?

5. Explain the difference between investment and saving.

6. Explain one reason why commercial banks need the Central Bank.

7. If you want to borrow money list TWO examples of sources from

a) the money market b) the capital market

8. Describe TWO functions of the Stock Market.

9. Name TWO Caribbean countries where stock markets can be found.

REVISION

1. List THREE functions of Commercial Banks.

2. Identify Two services offered by a commercial banks to citizens of a country.

3. Which bank can be called “the bankers’ bank”?

4. Which bank is responsible for the government’s finances?

5. Explain the difference between investment and saving.

6. Explain one reason why commercial banks need the Central Bank.

7. If you want to borrow money list TWO examples of sources from

a) the money market b) the capital market

8. Describe TWO functions of the Stock Market.

9. Name TWO Caribbean countries where stock markets can be found.

REVISION

1. List THREE functions of Commercial Banks.

2. Identify Two services offered by a commercial banks to citizens of a country.

3. Which bank can be called “the bankers’ bank”?

4. Which bank is responsible for the government’s finances?

5. Explain the difference between investment and saving.

6. Explain one reason why commercial banks need the Central Bank.

7. If you want to borrow money list TWO examples of sources from

a) the money market b) the capital market

8. Describe TWO functions of the Stock Market.

9. Name TWO Caribbean countries where stock markets can be found.

PROFILE DIMENSION 3 - THE BUSINESS ENVIRONMENT

SECTION 8 ROLE OF GOVERNMENT IN AN ECONOMY

SECTION 9 SOCIAL ACCOUNTING AND GLOBAL TRADE

SECTION 10 REGIONAL AND GLOBAL BUSINESS ENVIRONMENT

PRINCIPLES OF BUSINESS

SECTION 8: ROLE OF GOVERNMENT IN AN ECONOMY

Responsibilities of Government in An Economy

1. Security of the State:

The country must be protected from outside/foreign forces by the army, coast guard etc.
Assistance can also be received from other nations where a country lacks the ability to protect
itself.

2. Protection and General Welfare of Citizens:

It is the duty of any government to create and amend laws which would be beneficial and
protect the innocent of the society. Laws must also be enforced through the courts as well as
the police force. There should also be the provision of social services to safeguard the welfare of
the citizens.

These include:

 Education
 Health services
 Utilities
 Proper road network
 Telecommunication
3. Job Security and Severance benefits to workers:

Governments can help to make sure that the jobs of many of their citizens are protected by
having legislation through which government workers can be appointed to the government/civil
service. Government can also enact labour laws to ensure that workers in both the private and
public sectors are not treated unfairly or dismissed without just causes. Throughout the
Caribbean, workers and employers are required to pay national insurance. This is to make sure
that in the event of sickness, injury or severance, worker would still receive some payment as
long as the necessary contributions were made.

4. Protection of the Environment:

This can be carried out by the following measures:

 Legislation/acts of parliament which would make certain acts such as dumping and
other offensive practices illegal. There would be fines or other sanctions attached to
discourage the various forms of pollution. These laws can also indicate where industries
are to be located.
 The zoning of certain areas which would become national parks or reserves. This may
be done to protect certain species of plants or animals which may be considered
endangered.

 Various seminars, lectures and workshops and other awareness material can be
offered in schools and communities, especially among the young people, showing them
that what they do today will impact negatively on those to come.

 There can be regular impact studies and statements of the land, air and sea. This will
assist in keeping track of the conditions of the environment.

5. Management of the Economy:

It is the government’s duty to ensure that there is economic growth and development in the
country. The standard of living should also be improving, meaning that people can live better
lives, with better health care, education etc. The government needs to control the country’s rate
of borrowing, so that the national debt will not become unmanageable. There must also be
adequate foreign reserves to cover the cost imports for a reasonable amount of time.

6. Maintenance of a Safe Environment for Investors:

 Persons/organisations wishing to make investments into a country must feel that their
capital

will be safe. They should no be made to feel that there is political unrest which will destabilise
the economy. If there is growth, then investor will get a return on their capital. The level of
crime must also be controlled.

How can Businesses Protect the Environment (Physical & Economic)?

 Adhere to business laws e.g. taxation (income, corporation, VAT), copyright, health etc.
 Comply with labour laws
 Have a proper working environment which is safe for workers
 Having a good relationship with workers and their trade unions
 Proper disposal of waste

Importance of Environmental Protection and Preservation

 The quality of life is enhanced. e.g. a reduction in the greenhouse effect

 The flora and fauna is protected
 There is sustainable development. This is the careful use of elements of the
environments by people today, while ensuring that later generations will still be able to have
adequate use of the same resources.
 Harmony between workers and employers which can improve productivity.
 Increased investment may occur

Measures Used by Government to Protect Consumers

1. Price Controls:

These may include setting a price ceiling on goods so that all persons can purchase certain
products, especially necessities. This also keeps suppliers from charging excessive prices.

2. Encouraging/endorsing consumer protection agencies:

When this happens producers/suppliers will be sent the signal that substandard products will
not be tolerated on the market and that they are in fact being monitored.

3. Consumer Protection Legislation

This includes laws regarding:

 Food and Drug Standards

 Hire-purchase legislation
  Health and Safety Standards
 Laws relating to the sale of goods, looking at quality, labelling, weights and
measurements, guarantees etc.
All the above helps to make sure that consumers get a fair deal and receive what they pay for.

Government Regulatory Control on Businesses

1. Legislation:

Acts of parliament can cover such issues as, laws relating to zoning, disposal of waste etc.

2. Regulation:

Regulations have to be followed when setting up businesses e.g. filing with registrar of
companies, memorandum and articles of association governing the internal and external
operation of businesses which have been incorporated.

3. Taxation:

Sometimes governments may offer reduction in taxes or tax holidays to encourage businesses to
set up in the country or specific area.

4. Subsidies & Price Controls

Subsidies assist producers to purchase products at cheaper prices. Hopefully these saving will be
passed on to the final consumers. Price controls are used on goods which the government feels
should be available to all in society at a reasonable price. It usually includes goods such as
staples e.g. rice, flour, some milk products, public transportation etc.

5. Provision of training for workers

This can help to improve the productivity of businesses as workers are taught how to perform
their jobs more efficiently. This can lead to greater profitability and expansion of operations. As
businesses expand, the government will be able to collect greater revenue through taxes
(income tax, corporation tax, VAT and other duties)
6. Factory Space/Low Cost Rent

Government offers these incentives in an effort to reduce the overall cost of production of
business. This is in an effort to keep the cost of the final products at a reasonable level to
consumers. It is often used to help struggling local industries or to attract foreign investment.

Social Services Provided by Government

1. Educational Facilities

This includes pre-school, primary, secondary and tertiary institutions, training boards etc. This
encourages the improvement of skills as well as entrepreneurship. As the population becomes
more informed and literate, the overall effect will be an increase in employment and eventually
an increase of revenue for government.

2. Health Facilities

Hospitals, polyclinics, homes for the elderly (geriatric homes). As health care improves in a
country, it will positively affect the country in the following ways:

 Healthier citizens
 Longer life
 Reduction in diseases
 Reduction in death rate

As people live longer, there will be areas in the country which will be impacted upon such as the
availability of jobs, housing, national insurance and overall growth of the population.

3. National Insurance

Most countries have legislation regarding a national insurance scheme which includes:

 Unemployment benefits
 Death benefit
 Maternity leave and benefit
 Disability benefit etc.

The aim of the national insurance scheme is to act as source of income in the event of certain
adverse activities e.g. death, injury etc. It also provides security for the elderly upon retirement.
4. Infrastructure

This includes the provision of roads, running water, electricity, telecommunications etc. This
improves the standard of living of citizens and encourages investment from business, which in
turn will stimulate economic growth. There will also be greater access to goods and services.

TAXATION

Taxation is the compulsory payment made by citizens and corporations to the government, for which no
direct benefit is given in return.

Direct Taxes:

Taxes that are incurred directly by a person or organisation e.g.

 Income tax
 Corporate tax
 Capital transfer and estate duties

Indirect Taxes:

These taxes are placed on goods and services and are included in the final price e.g.

 VAT
 Sales Tax
 Customs duties

Role of Taxation

1. Raising Revenue

Governments will earn money as it collects the various forms of taxes.

2. Income Redistribution

Persons who are lower income earners will pay less tax.
3. Control of Spending

Higher taxes /duties are applied to goods for which the government hopes to reduce
consumption e.g. alcohol, tobacco.

4. To Protect Local Industries

Higher taxes are usually placed on imported goods to reduce their attractiveness, while
encouraging the consumption of the cheaper local product.

N.B. In some cases, the above can also be seen as positive effects of taxation.

Negative Effects of Taxation

1. Taxes such as VAT can raise prices creating higher inflation.

2. Taxes can lead to a poverty trap. As the pay of some people rise, they may not be able to collect
certain kinds of benefits and they may also have to pay higher taxes, leaving them worse off than
before.

Progressive Taxation

The higher the tax payer’s income, the higher the absolute amount of tax paid as well as the
proportion of income.

Regressive Taxation

As a person’s income increases, the percentage of tax paid will decrease.

Proportional Taxation

All taxpayers pay the same proportion of his income in tax. The wealthier individuals will pay
more in absolute terms but he will still be better off.
 Exercise

In 2004 and 2005, Paul’s income was $3000 and $6000 respectively. Below is a table showing the various
tax brackets for the years.

TAX BRACKET RATE OF TAX

The first $1000 0%

The next 2,500 10%

The next $2000 15%

The next $1000 25%

1. Calculate how much income tax was paid in each year. (8 marks)

2. Calculate the percentage of income which was paid as income tax each year (4 marks)

3. Is the method of taxation, progressive, regressive or proportional? (1 mark)

Show all working

Worksheet

Role of Government

1.For each of the following statement, determine which role of government applies:

a) Creation of laws -

b) Provision of utilities -

c) The Police force and the Army -

d) Unemployment benefits -

e) Education and health care -

f) Management of foreign loans -

g) Creating a budget -

h) Legislation on dumping -
 i) Labour laws -

j) Zoning of areas as parks or reserves -

2. What are TWO measures used by government to protect consumers?

3. State THREE functions (reasons) of taxation.

4. What is the difference between an indirect and a direct tax and give an example of each to support
your answer.

5. Explain ONE reason why the physical environment should be protected.

6. Explain ONE reason why the business environment should be protected.

7. State ONE which in which business can protect

a) the business(economic) environment

b) the physical environment)

PRINCIPLES OF BUSINESS
SECTION 9
SOCIAL ACCOUNTING AND INTERNATIONAL TRADE

Standard of Living:

This is the level of material well-being of an individual or nation. It may also

be

known as the quality of life which the people of a country have.

The Bottom Line
The main difference between standard of living and quality of life is
that the former is more objective, while the latter is more subjective.
Standard of living factors such as gross domestic product, poverty rate
and environmental quality, can all be measured and defined with
numbers, while quality of life factors like equal protection of the law,
freedom from discrimination and freedom of religion, are more difficult
to measure and are particularly qualitative. Both indicators are flawed,
but they can help us get a general picture of what life is like in a
particular location at a particular time.

Factors Influencing the Standard of Living & National Income

1. National/Natural Resources
The availability of resources such as fertile land and climate and how
effective it is used can affect output.

2. Industrial Development
As technology improves/increases and there is better equipment,
commerce can increase.

3. Quality of labour
The size, health and skill level of the labour force can affect output as well
as standard of living. Poor health, education and skills will lead to poor
output and hence standard of living.

4. Economic Stability
 This is the extent to which economic activity is spread across a wide range
of industries. The wider the spread, the greater the level of stability.

5. Political Stability
A stable government encourages investment which then can be used to
develop industries, education and other facilities which will encourage
output and improve standard of living

6. Life expectancy

As this rises due to factors such as improved health facilities, sanitation etc.
so will

the standard of living.

7. Literacy Rate or Education

With greater levels of education, individuals produce more and are even
encouraged

to become entrepreneurs, improving their standard of living as well as that

of any

employees.

8. Infant Mortality Rate

As more children are surviving pass the age of two, the likelihood of the
labour

force being larger in the future will increase. As the labour force increases,
so
 should output. Infant mortality will also be reduced due to better health
services,

both prenatal and antenatal.

9. Pollution

This can lead to negative effects on health and an unhealthy population will
not be

able to be productive in making goods and services. This therefore can

adversely

affect output if it continues to increase.

Other Indices or Indicators of Standard of Living:

1. Gross Domestic Product

GDP measures the total output within a country regardless of whether the
factors of

production are owned locally or not.

2. Gross National Product

The GNP is the value of output created by nationally owned factors of

production

whether at home or abroad.

3. Per Capita Income

The national income of a country divided by its population. The higher the
value,

the higher the standard of living.

PQLI

The Personal Quality of Life Index which is a measure of the standard of

living and

economic development which measures infant mortality rater, literacy level

and life

expectancy.

National Income and Its Variants

National income is the total output of a country for a given period of time,
measured in terms of the money value of total production of goods and services.
Its variants include

 GDP
 GNP
 NNP: Net National Product is GNP minus depreciation of capital
goods
 DI : Disposable Income is PI minus personal taxes
  PI : National Income (NI) minus taxes, profits, social security
contributions and transfer payments

Methods Of Measuring National Income (NI)

1. Income Approach

The sum of all incomes earned by households(individuals/labour), profits of

firms( & entrepreneurs), rents, interest/dividends etc.

2. Expenditure Approach

Sum of value of all expenditure on final goods and services produced in the

economy during the accounting period. This includes:

 Household consumption ©
 Government Expenditure (G)
 Investment Expenditure (I)
 Net exports (X-M)
Y = C+I+G+(X-M)

3. Output Approach

The sum of the value of the final output of all sectors

Uses of National Income Statistics

1. To indicate changes in the standard of living.

A decrease in N.I may indicate a drop in the standard of living.

2. To be used to make comparisons with other countries

3. To indicate economic growth

Comparisons are made over different years to show any changes.

4. Instrument of economic planning

Many governments use this information to assess effectiveness of past

policies, planning of

futures policies and development implementation of the methods for the

redistribution of wealth.

Growth verses Development and Their Relationship

Economic growth refers to a quantitative increase in the level of income or

output of a country and is measured by GDP. Negative growth indicates that a
country is doing worse that the previous year. Zero growth indicates that there
has been no change from the previous year.

However, economic development refers to changes in the economy and

improvements in the quality of life. It includes the provision of facilities that
enable growth to take place e.g. education, machinery, skills, utilities, housing,
health facilities etc. Economic development leads to economic growth e.g. highly
developed countries such as USA, Canada, England etc. are better able to exploit
their resources thus resulting in economic growth and better standards of living.
 SOCIAL ACCOUNTING AND INTERNATIONAL TRADE

International Trade

This is the exchange of goods and services between countries. It includes

 Visible Trade: Import and export of tangible goods.

 Invisible Trade: Import and export of services e.g. banking

Reasons For & Importance of International Trade

1. Countries can acquire goods and services it does not produce.

2. Countries can sell goods to earn foreign exchange.

3. International trade exposes local firms to greater competition which forces

them to use resources more efficiently.

4. It can promote political links between countries through the signing of trade
agreements.

5. It can promote economic growth.

6. The size of a producer’s market is increased which can lead to economies of

scale.

7. The quality of products should increase.

8. Increase in competition can lead to lowering of prices for the consumers.

Theory of Comparative Advantage

 As international trade increases, the theory of comparative advantage may
come into play. If two countries are producing the same good and allocating the
same amount of resources, then the country which produces the most is said to
have absolute advantage. However, the countries may still be able to trade if one
country has a comparative advantage in the production of one good while the
other has comparative advantage in the production of another good. In other
words, each country will produce the goods which the others cannot produce as
well as they can, then they will trade the different products.

Balance of Trade verses Balance of Payment

The Balance of Trade is the trade in visible exports and imports. It is also
known as the merchandise balance. It is shown as part of the current account on
the Balance of Payment.

The Balance of Payment is the record of the financial transactions between

on country and its trading partners over one year. It include the following
information

 Current Account
a) Visible exports – Visible imports

b) Invisible exports – Invisible imports

 Capital Account
Records the inflow and outflow of short, medium and long term
investment
  Official Financing
Indicates how the deficit (debt) of the Balance of Payment is
financed.

N.B. A favourable B.O.P exists when there is a net inflow of capital i.e. the
country has earned more than it has spent.

Impact of Balance of Trade, Balance of Payments and Devaluation on the

Country and Individual

When there is a Balance of Trade deficit, it means that the total value of
imported goods is greater than that of exported goods. This results in a net
outflow of foreign currency in order to pay for the imports. It is also showing that
the country is spending beyond its means.

Balance of Payment deficits can eventually have adverse effects on the

economy. Since there is a net outflow of funds, the country would need to use
valuable foreign exchange in order to finance its debts. If the problem continues,
the country may have to borrow money from lending agencies such as IMF.
These institutions may have certain requirements attached to the loan e.g.
devaluation, wage cuts/freezes etc. which can adversely affect the population.

Devaluation means the lowering of the value of a country’s currency in

relation to other currencies. This has the effect of making imports more
expensive and exports cheaper. If the country exports more (because they are
cheaper for foreigners), it may then cause an improvement on the current
account of the B.O.P. However, if the country is importing more, it now has to
use more money to pay for the same amount of goods. To keep the foreign
exchange, the country may decide to reduce imports by various methods (e.g.
import quotas, negative lists etc.). This means that fewer products are available to
consumers. Devaluation can also make prices of goods higher for consumers.

Internal Measures to Deal with an Adverse Balance of Payment

Short Term Measures

 Exchange controls such as changing the exchange rate

 Use reserves of foreign exchange
Medium Term Measures

 Tariffs (taxes) to make imports more expensive and less attractive.

 Licenses which limits the number of firms or people operating in a certain
trade.
 Quotas which limit the amount of a good which can be imported into the
country.
 Bans are placed on good which would no longer be permitted into the
country.
Long Term Measures

 Promoting the buying of local products to reduce imports.

 Subsidising of export-oriented businesses. This allows producers to be more
competitive with other countries to increase exports.
  Ensuring industrial peace. This should reduce the amount of strikes,
protests etc. which can affect of reduce levels of production.
 Improve the tourism product which brings in foreign exchange.

External Measures to Deal with an Adverse Balance of Payment

Short/Medium Term Measures

 Borrowing from other central banks

 Borrowing from the IMF
 Accepting gifts from other countries
 Importing on credit
Long Term Measures

 Government negotiated trade agreements to increase exports

 Promoting tourism through overseas agencies

Savings verses Investment

Saving is not spending part of one’s income or the postponement of present

consumption.

Investment refers to funds or money spent on producing capital goods e.g.

machinery, plant and equipment etc.

Saving and investment interact with each other in an effort to cause

growth. As individuals save money with financial institutions, the money is used
by other firms for investment purposes. Individuals can also invest by purchasing
shares issued by firms, government bonds and treasury bills. The government
then uses the money to invest in improving the country’s infrastructure ( roads,
health, schools, electricity, communications etc.)

Therefore, the more money that is saved, the greater the pool of funds
available for the investment in capital goods which can then lead to an increase in
growth an development of the country.

SECTION 10

MAJOR ECONOMIC PROBLEMS

1. UNEMPLOYMENT

High levels of unemployment inevitably leads to poverty and a low standard of living by
leaving some people with nothing or very little to live on. Most of them are unable to afford
adequate medical care, education and nutritious food. There are various types of unemployment:

Types of Unemployment
1. Cyclical unemployment:

This results from changes in the trade cycle e.g. when demand for goods is high,

industries will expand and so will employment. The opposite is true when demand
for

goods is reduced.

2. Seasonal unemployment:

Unemployment due to the seasonal nature of the activity e.g. tourism employment is

high from mid December to mid April.

3. Structural unemployment:
 This is as a result of changes in the economy e.g. if consumers change from one
product

to another (plastic instead of glass), unemployment will increase.

4. Frictional unemployment:

This is due to persons being unable to fill vacant positions because of lack of
knowledge

of their existence or the distance away from home.

5. Technical unemployment:

Unemployment which is due to the introduction of automation.

6. Voluntary unemployment:

Situations where persons are not looking for a job.

SOLUTIONS TO UNEMPLOYMENT

1. Encourage self employment (entrepreneurship) which can lead to further employment as the
business grows.

2. Have early retirement plans to increase jobs.

3. Provide better training and development of skills to meet the needs of employers. Individuals can

gain certificates in various subjects and skills which would make them more marketable.

4. Control the high birth rate which in the long term will reduce the size of the labour force,
therefore

reducing unemployment.

5. The creation of new industries by government.

6. Expanding current sectors such as agriculture by improving infrastructure, proper marketing, tax

relief, subsidies etc.

7. Processing local materials instead of exporting them in their raw state.

8. Regional cooperation- (e.g. CSME)

 This opens up and increases the size of one’s market for products and services. This
increase in
demand could mean an increase in workers needed.

 There is now a larger area or number of countries from which to choose a job instead of
just
one’s own country.

9. Set up unemployment offices which act as “go between”, matching jobs with suitable applicants

2. POPULATION DENSITY
This is the average amount of people living in a given unit area of land. Barbados has a high
population density because there are too many people in the country, given the total amount of
land

available for living. Large populations can put severe pressure on utilities (water & electricity),
health care and education. More people may also lead to increase in crime, pollution and traffic
congestion.

SOLUTIONS TO POPULATION DENSITY

1. Put measures in place to restrict migration in the country (emigration)

2. Long term goal of restricting the rate of natural increase through careful family planning policies,
access

to and education of proper contraceptive use.

3. MIGRATION
 This is the relatively permanent movement of people from one place to another. It may be
due to factors such as: Better job opportunities

Better education

Family ties

Political unrest/persecution

It is usually the young and more educated persons who tend to leave thus creating a situation
known

as ‘brain drain”. If the Caribbean continues to subsidize education and then individuals move
away,

the region will not benefit from its investment.

SOLUTIONS TO MIGRATION

1. Provide jobs at all levels especially professional ones which would encourage local talent to
remain in the region (reduction of ‘brain drain’)

2. Improvement to infrastructure and social services (education, hospitals, schools, utilities, roads
etc.)

3. Subsidizing local education and training by government.

4. Make it mandatory that individuals who receive subsidized local tertiary education must work
within the country or region for a specific time period

4. DEBT BURDEN
All Caribbean governments support their economies/people by using money borrowed
from institutions who are willing to lend, despite the heavy cost of repayment (principal and
interest) in the future. E.g. In Guyana, the debt burden can be as high as 80% of GDP. This means
that in theory, 80% of all income generated in the country goes(or should go) toward paying of
debts. That leaves only 20% to spend on the country. This can have a negative impact on the
development of the country.
SOLUTIONS TO DEBT BURDEN

1. Reduce imports (saving foreign exchange) and increase exports in order to generate income
which

can be used either to develop the country or pay off existing debt.

2. Increase taxes and use the funds to repay loans. This is not a popular solution and may only be
used

as a last resort.

5. SOURCING CAPITAL & RAW MATERIALS

The Caribbean is a developing region and this can make it difficult to acquire the necessary
capital (money, equipment) and raw materials for the creation of goods and services. This may be
due to the high prices and this can limit production.

SOLUTIONS TO CAPITAL & RAW MATERIALS

1. Attract outside investment e.g. by selling securities and shares to foreigners

2. Use local substitutes where possible

6. ECONOMIC DUALISM
This is the existence of two separate, largely independent economies(sectors) within a
single national economy e.g. agriculture versus tourism. Usually one economy is based on a modern
industry which uses state of the art technology, while the other is based on more traditional/old-
fashioned methods. The developed sector is the one which gets the majority of the investment
dollars. E.g. in Barbados, more is invested in tourism that agriculture. In Trinidad, more is invested
in oil & petrochemicals than agriculture. The modern sector also tends to pay higher wages and
attracts more educated persons. This can crate industrial unrest because those in the traditional
sector may try to get higher wages which cannot be paid by the employers.

SOLUTIONS TO ECONOMIC DUALISM

1. Develop the traditional sector through the use of technology and training for workers.

2. Encourage investment (local & foreign) in the traditional sector which would provide capital for

improvement.

3. Increase wages in traditional sector to attract trained/professional personnel.

7. INDUSTRALISATION
This is the development of businesses particularly in manufacturing, to the overall benefit
of the national economy. Industrialization has been hindered by:

 Difficulties in funding
 Industrial pollution
 Inefficient transport and other infrastructure (water, electricity, telecommunication)
 Taxes on imports
 ‘Red Tape’ which holds back trade

SOLUTIONS TO INDUSTRALISATION

1. Reduction of import duties on raw materials and other necessities from abroad

2. Subsidies on equipment, factory space etc.

3. Provision of adequate and timely waste disposal systems which would not harm the environment
/citizens

4. Encourage investment

5. Enact legislation which would make trading easier

N.B. Solution 1&2 for industrialization should help to reduce operation costs and can lead to
lower prices increase competitiveness

PRINCIPLES OF BUSINESS

MAJOR ECONOMIC PROBLEMS

“The Caribbean region must integrate if it is to solve its common economic problems.”

Write an essay including the following:

a) A definition of regional integration (2)

b) List the common regional economic problems (3)
c) Discuss THREE of the major problems (in detail) (9)
d) Explain TWO methods which can be used to deal with each of the
problems discussed above (12)

TOTAL 26 MARKS

PRINCIPLES OF BUSINESS

MAJOR ECONOMIC PROBLEMS

“The Caribbean region must integrate if it is to solve its common economic problems.”

Write an essay including the following:

a) A definition of regional integration (2)

b) List the common regional economic problems (3)
c) Discuss THREE of the major problems (in detail) (9)
d) Explain TWO methods which can be used to deal with each of the
problems discussed above (12)

TOTAL 26 MARKS

PRINCIPLES OF BUSINESS

MAJOR ECONOMIC PROBLEMS

“The Caribbean region must integrate if it is to solve its common economic problems.”

Write an essay including the following:

a) A definition of regional integration (2)

b) List the common regional economic problems (3)
c) Discuss THREE of the major problems (in detail) (9)
d) Explain TWO methods which can be used to deal with each of the
problems discussed above (12)

TOTAL 26 MARKS

PRINCIPLES OF BUSINESS

SECTION 9: REVISION

SOCIAL ACCOUNTING AND INTERNATIONAL TRADE

1. What is the standard of living?

2. What is the cost of living?

3. How does the following affect the standard of living?

a) Political Stability

b) Quality of Labour

c) Industrial development

4. How is the Per Capita Income calculated?

5. What is GDP?
6. What is the difference between the GNP & National Income and why is this
distinction important?

7 List the methods used to measure National Income.

8. Give TWO uses of National Income statistics.

9. Explain how economic development can lead to economic growth.

10. Give TWO reasons why international trade is important.

11. What is the difference between Balance Of Trade and balance Of Payment?

12. What are the THREE elements/sections of the Balance of Payment statement?

13. What is the significance of a Balance of Trade surplus?

14. What is devaluation?

15. Explain how a devaluation can negatively affect a country?

16 State THREE internal and THREE external measures which are used to deal
with a Balance of Payment deficit.