WHY BUSINESSES FAIL

Lack of experience : Many reports on business failures cite poor management as the number one reason for failure. New
business owners frequently lack relevant business and management expertise in areas such as finance, purchasing, selling,
production, and hiring and managing employees.

Insufficient capital (money)/Cash-flow problems:A common fatal mistake for many failed businesses is having
insufficient operating funds. Business owners underestimate how much money is needed and they are forced to close before
they even have had a fair chance to succeed. They also may have an unrealistic expectation of incoming revenues from sales

Poor location: Whereas a good business location may enable a struggling business to ultimately survive and thrive, a bad
location could spell disaster to even the best-managed enterprise.

Poor inventory management /Poor stock control: Poor inventory management might lead to too much of cash
being blocked as stock. Excess stock also brings in additional cost burden of maintaining it and the risk of getting obsolete or
damaged.

Over-investment in fixed assets: Blocking too much of cash in fixed assets can again pose danger for the business and
can contribute to business failure.

Poor credit arrangement management: Business might take too much of debt and might find it difficult to service
them. Poor credit management, forward planning and cash flow problems might contribute to it.

Personal use of business funds: Owners of small business usually don’t differentiate between business funds and
their own funds. The risk of utilizing business funds for personal use by the owner might lead to cash shortage for the
business

Poor sales estimates, overestimation of sales

Overtrading engage in more business than can be supported by the market or by the funds or resources available

poor management of cash flow,

poor inventory control,

attitude of lenders to releasing funds,

changing market conditions,

Unit 2: Business Structures and Process Prepared by Richard Ogutu page 86
CHANGING MARKET CONDITIONS
Economic factors affecting business
These are some of the economic environment factors which affect business
At what stage of the business cycle is the economy? If the economy is going through a recession it is obvious that businesses
generally will not be doing well due to low aggregate demand in the economy. On the other hand, a boom period will lead to
higher business profits and revenue for most of the businesses in the economy.

Inflation rate. High rate of inflation leads to lower purchasing power for consumers resulting in lower demand for goods and
services. Moreover, a higher inflation rate will make business uncompetitive in the international market leading to lower sales
for the business.

Prevailing interest rates. Higher Interest rates will lead to a fall in the aggregate demand in the economy thus leading to
difficulty for business to find customers willing to buy its product. Lower interest rates will lead to an increase in demand in
the economy.

Unemployment level. High level of unemployment in the country can also adversely affect a business. People will not have
enough money to purchase a firm’s product.

Labor costs. High labor cost will result higher production costs. This will make a firm’s product more expensive as compared
to other firms affecting its sales and profit margin.

Levels of disposable income and income distribution. High level of disposable income is good for business producing luxury
goods. A large disparity in income distribution will promote businesses dealing in luxury goods as well as inferior goods.

Taxes. High level of taxes will lead to low disposable income and contraction of demand in the economy. Business will find
it difficult to attract consumers.

Tariffs. Tariffs are taxes and imposed on imported goods. If the tariffs are low the domestic market may be flooded with
cheap imported goods and the local businesses will have tough time selling their products.

METHODS OF PRODUCTION
Introduction:
Definition of production
 Production is the provision of a product or a service to satisfy consumer wants and needs. The process involves firms adding value to a product.

 Added value is the difference between cost of inputs (e.g. raw materials or components) and the final selling price of the product or service.

 Also, production can be defined as the process of creating a product or service by combining the factors of production. It involves several stages, each of which adds
value to the unfinished product.

Types of Production
There are basically three types of production in business. The choice of which to use depends on:
 what is being produced and

 the scale (size) of production with which it is involved.

They include:
(a) Job production
(b) Batch production
(c) Flow (Mass) production

(a) Job production

 This is also called `unit’ production. It is found when a business makes a singleunique product from start to finish, according to the individual specification (the
requirements and design) of the customer. One job is completed at a time before moving on to another.

 Job production involves producing goods and services to a customer’s special orders. For example;

-a kitchen company will design and fit a new kitchen to meet the requirements of an individual customer.
- a doctor will respond to and prescribe medicines for an individual patient, while a tailor will make a suit to fit a specific customer.
 - many big one-off projects, such as the construction of roads or hospitals.

Main Features of Job Production

 skilledlabour is often used.

 labour costs tend to be high because the work is labour-intensive.

 employees have to be versatile (i.e. multi-skilled).

 flexible tools and equipment are often used.

 economies of scale are not possible, so the finished product is often expensive.

Advantages of job production

 Very flexible as it adapts to customers’ individual requirements.

 Workers are more likely to be motivated as they often have more varied jobs which require a variety of skills, knowledge and expertise. This should help raise the level
of job satisfaction.

 It is often used in the production of high-quality goods and services.

 Because only one job is done at a time, co-ordination, communication, supervision and inspection can be regularly carried out.

 Also, it is easier to identify defects and deal with them on time before completion of the product.

Disadvantages of job production

 Labour costs will be high because production tends to be labour intensive. The workforce is likely to be skilled and more versatile. Such employees will be more
expensive.

 The amount of time each employee spends on a particular job will also be long.

 Because there is a variety of work, to many specifications, the business would need a wide range of tools, machines and equipment. This can prove expensive.

 It may not be possible to achieve economies of scale because only one `job’ is produced at a time.

 Lead times can be lengthy e.g. when building a house the business has to incur costs which cannot be recovered until the house is sold. Sometimes the sale of a house can
take a long time.

(b) Batch production

This is where a group or block (batch) of items is produced at one time. The batch normally goes through each stage of the production process together before moving on to the next
stage. Once a batch has passed through one stage, the machinery will be re-set if necessary, ready for the next batch of items.
Examples of batch production include:
 building similar houses on an estate,

 making different styles of clothing or furniture,

 bakery making batches of bread.

Features of batch production

 Production is divided into a number of operations.

 A particular operation is carried out on all products in a batch.

 The batch then moves to the next operation.

 There is some standardization of products.

 Products can be produced in very large or very small batches depending on the level of demand.

Advantages of batch production

 It is a flexible way of working and production can easily be changed from one product to another.

 Producing in larger quantities is possible and this lowers unit costs.

 Employees can concentrate on one operation rather than the whole task. This reduces the need for costly, skilled employees.
  Less variety of machinery would be needed than in job production because the products are standardized. Also, it is possible to use more standardized machinery.

 It often results in stocks of partly finished goods which have to be stored. This means firms can respond quickly to an urgent order by processing a batch quickly through
the final stages of production.

Disadvantages of batch production

 It allows for the use of machinery to produce goods to the same specification, but this may have to be re-set between batches, causing delays in production and loss of
output.

 There is less flexibility than with job production, because once a batch of items is in production it is difficult to respond to a customer’s individual wishes.

 If goods produced in batches need to be stored until they are sold, this will increase the costs of production.

 The workforce may be less motivated, since they have to repeat operations on every single unit in the batch.

 Warehouse space will be needed for stocks of raw materials and components. This is costly.

 If batches are small then unit costs will remain relatively high.

(c) Flow Production

This involves producing goods in very large quantities in a continuous process. It is sometimes referred to as mass production because of the large quantity of a standardized
product that is produced. It is called flow production because products move continuously along a production line.
Examples of products produced in this way include: cars, cameras, televisions, packaged foods and drinks; in fact any mass produced, standardized product which is sold to a
mass market will be produced in this way.
Features of Flow Production
 Large quantities are produced.

 A simplified or standardized product.

 A semi-skilled workforce, specializing in one operation only.

 Large amounts of machinery and equipment i.e. is capital-intensive.

 Large stocks of raw materials and components to make high-demand products for a mass market.

Advantages of Flow Production

 Costs are kept low and therefore prices are also lower.

 It is easy for capital-intensive production methods to be used. This reduces labour costs and increases efficiency.

 Capital-intensive methods may only need relatively unskilled workers and therefore little training is needed.

 Low costs and therefore low prices usually mean high sales.

 Goods are produced quickly and cheaply.

 There is no need to move goods from one part of the factory to another as with batch production, so time is saved.

Disadvantages of Flow Production

 It is a very boring system for the workers, there is little job satisfaction.

 The capital costs of setting up the production line can be very high.

 If one machine breaks down the whole production line will have to be halted.
 PRODUCTIVITY AND EFFICIENCY
What is meant by efficiency?
Efficiency refers to organizing production so that waste is minimised and costs are the lowest possible. it also
means using resources in the most economical way possible. This means keeping cost to a minimum; business
try to organize their activities so that there is no wasting of employee time or of capital equipment they use.

Factors influencing efficiency

Location of production
Quality and availability of labour
labour turnover

What is meant by Productivity?

Workforce productivity is the amount of goods and services that a worker produces in a given amount of time.

Other definition

It refers to the volume of output produced from a given volume of inputs or resources
Productivity is the ratio of outputs to inputs.
If the firm becomes more productive, then it has become more efficient, since productivity is an efficiency
measure.

Labour productivity

TOTAL OUTPUT IN A GIVEN TIME PERIOD

= OUTPUT PER WORKER
QUANTITY OF LABOUR EMPLOYED
Capital productivity
TOTAL OUTPUT IN A GIVEN TIME PERIOD
= OUTPUT PER CAPITAL INPUT
QUANTITY OR VALUE OF CAPITAL EMPLOYED

How to improve productivity?

human capital, Raising the skill level of the workers through training
Using more technologically advanced equipment in the production process.
Improving the motivation level of the employees
By managing the available resource in a more efficient way.
Improved working Conditions
Insufficient Training to motivation
Lack of Knowledge of Process/development.
Lack of Materials Availabilities.
sufficient Skilled personnel’s/ workers
proper Production Planning
process innovation,
organizing resources,
Access to finance.
Capital Intensive vs. Labour Intensive
A business is capital intensive if it requires heavy capital investment in buying assets relative to the level of
sales or profits that those assets can generate.

Characteristics capital intensive business

high depreciation costs

high barriers to entry
Large amounts of fixed assets on the balance sheet

A labour intensive business is one in which the main cost is that of labour, and it is high compared to sales or
value added.

Just a capital intensive business may attempt to reduce operational gearing by, for example, leasing or renting
assets, a labour intensive one may try to reduce operational gearing by outsourcing or automation.
Tuesday 21 January 2014 – Afternoon 6BSA2/01
CAPACITY UTILIZATION
Capacity utilization
Capacity utilization measures the actual output as a percentage of maximum potential output, per period of
time. A firm’s productive capacity is the total level of output or production that it could produce in a given time
period. Capacity utilization is the percentage of the firm’s total possible production capacity that is actually
being used.

CU (%) = ACTUAL OUTPUT PER MONTH (OR PER ANNUM) X 100%

MAXIMUM POSSIBLE OUTPUT

For example,

If a firm could produce 1200 units per month, but is actually producing 600 per month, its capacity utilization is
as follows:

Capacity utilization (%) =

600 x 100%

1200

= 50%
Financial implications

A firm’s level of capacity utilisation determines how much fixed costs should be allocated per unit, so as a
firm’s capacity utilisation increases, the fixed costs (and therefore also, total costs) per unit will decrease.
For example, if the firm above had fixed costs of £12,000 per month, the fixed costs per unit would be £20
per unit at 50% capacity utilisation, but only £10 per unit at 100% capacity utilisation.
It therefore follows that a firm should be most efficient if it is running at 100% capacity utilisation.
Potential drawbacks full capacity

 There may not be enough time for routine maintenance, so machine breakdowns may occur more frequently
and orders will be delayed
 It may not be possible to meet new or unexpected orders so the business cannot grow without expanding its
scale of production
 Staff may feel under excessive pressure, leading to increased mistakes, absenteeism and labour turnover
 If the factory space is overcrowded, work may become less efficient due to the untidy working conditions
 It may be necessary to spend more on staff overtime to satisfy orders, increasing labour costs

In general, businesses would feel most comfortable at something between 80 to 90% capacity utilisation
because fixed costs per unit are relatively low and there is some scope to meet new orders or carry out
maintenance and training.

Causes of under-utilisation of capacity

There are a number of reasons why a firm might be experiencing low capacity utilisation, including the
following:

New competitors taking market share or causing over-supply in the market

Fall in market demand due to changes in consumer tastes or fashion
Unsuccessful marketing
Seasonal demand – this is especially apparent in the tourist industry where firms like hotels and leisure
parks are full in the summer but see much lower utilisation at other times of the year

Problems arising from low capacity utilisation

Higher fixed costs per unit mean reduced profitability

Spare capacity can portray a negative image, particularly in a business where it can be seen that it is no
longer busy
Staff can become bored and demoralized if they don’t have as much to do, especially if they fear losing their
jobs

Benefits of low capacity utilisation

A firm may have more time for maintenance and repairs and for staff training, to prepare for an upturn in
trade
There may be less stress for employees than if they were working at full capacity
The firm can cope with new orders; firms in expanding markets may expect to have low utilisation whilst
they build their sales
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 INVENTORY CONTROL/STOCK CONTROL
Inventory control: Is the process by which the business ensures that stocks of inputs are adequate to meet the
production requirements, and that stocks of the finished products are readily available to meet customers’ needs.

Types of Stock

Raw material
Work in Progress/Semi-finished goods
Finished goods
Plant and machinery spare parts.

Inventory control/Stock control charts

Maintaining a balanced stock level is important. Stock control chart is one of the methods to maintain optimum
level of stock at all times.

How to explain the curve

Depletion of stocks as a result of usage or sales is represented by the sloping lines. The rate of depletion can
be identified from the gradient of the lines. The steeper the gradient, the faster the depletion.
When stocks fall to the reorder level, a new batch is ordered.
But there is a gap between the order being made and the delivery of supplies, this time gap is known as the
lead time. The gap between the minimum stock level and the zero stock level is known as buffer
stock. Buffer stock are kept to ensure that the business never completely runs out of either inputs or
finished products
Re-order level is the stock level at which further supplies must be reordered.
Re-order Quantity the quantity that is reordered
Maximum stock-the most stock that the firm is able and willing to hold
Minimum stock-if stock falls below this level the firm is in danger of running out of the supplies
 The following decision need to be taken when managing the stock levels through a stock
control chart

The size of the buffer stock

The maximum level of stock to be held
The reorder quantity
The reorder level

Problems due to Overstocking( holding too much stock)

More stock more wastage.

Risk of stock becoming obsolete.
Holding stock cost money (High storage costs, higher insurance cost and opportunity cost)
Working capital is tied up leading to cash flow problem

Problems due to Stockout (total depletion of stock)

The lower the buffer stock level, the greater will be the likelihood of stockout. Stockout involves costs in terms
of:

Lost production
Customers demand could not be met leading to loss of customer goodwill and business losses
Frequent orders and handling cost may lead to higher cost for the business.

Ways of increasing efficiency and keeping down the cost of holding stocks

Producing good quality product and good customer service that maintain good reputation
Paying suppliers on time gets a business good reputation. Firms are able to get items on short notice
A lot of care about stock control especially in case of perishable goods
A build-up of stocks due to slow sales should be quickly recognized and orders can be cut to avoid holding
unnecessary stocks
Thursday 4 June 2015 – WBS02/01
 LEAN MANAGEMENT OR PRODUCTION

Therefore Lean production is set of techniques used by business to cut down any waste in operations (time and
operation). It is an integrated approach to design, technology, components and materials. The point of adopting
lean management techniques is to increase efficiency and develop a competitive advantage over rival firms is to
reduce

The ten rules of lean production can be summarized:

 Eliminate waste
 Minimize inventory
 Maximize flow
 Pull production from customer demand
 Meet customer requirements
 Do it right the first time
 Empower workers
 Design for rapid changeover
 Partner with suppliers
 Create a culture of continuous improvement (Kaizen)

Lean production techniques

Reducing lead times
Just in time (JIT) production
Continuous Improvement (Kaizen )
Total Quality Management (TQM) and zero defect production - see notes on quality management
Time based management
Simultaneous engineering
Just-In-Time (JIT) production and stock holding
JIT is a method of managing production that involves holding minimum stocks in order to maximize efficiency

Finished goods are produced just in time for them to be sold, rather than weeks or months ahead.
The parts that go into finished product (components) arrive just in time to be put together to make a final
product, rather than being stored in a warehouse.

Requirements of successful JIT production are:

A flexible, multi-skilled workforce needed

Strict quality control with zero defects
Excellent relationship with suppliers and subcontractors.
Continuous Improvement (Kaizen):

This technique focuses on continuous improvement of all functions of a business from manufacturing to
management and from the CEO to the assembly line workers. By improving the standardized activities and
processes, Kaizen aims to eliminate waste.

Attention to quality issues

Reducing defects (zero defects) so that products are right first time

Training and developing employees’ skills in other ways

Reducing product development times so that the business responds more quickly to changing customer
needs

Competitive advantage and short product development lead time

Competitive Advantage:

The advantage a firm gets over its competitors by offering customers greater value, either by charging lower
prices, because their costs are lower or, adding value that provides better service and justifies charging higher
prices.

Short Product development lead time:

Refers to the length of time between the first emergence of the product concept and its launch into the market
Advantage of Short Product development lead time

Creates a fast mover advantage. The firm will be first into the market and can enjoy super-normal profits
(exceptional profit) until other firms are attracted to the market and catch up.

Ways of Shortening Product development lead time include

Simultaneous engineering-making sure that different department tackles different aspects of the development
process at the same time, rather than one after another. Teams can be working on design, engineering and
marketing features of the product.

Time based management-shorter production runs run make it possible to update the product frequently.
Flexible capital and training for multi-skilling will make the business much more adaptable when change is
needed.

Main advantages of lean production

Waste of time and resources substantially reduced or eliminated

Unit costs are reduced, leading to higher profits
Working area is less crowded and easier to operate in
There is less risk of damage to stock and equipment
New products launched more easily

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 QUALITY MANAGEMENT TECHNIQUE

Quality product: A good or service that meets customers’ expectations and therefore fit for purpose

Quality standard: The expectations of customers expressed in terms of the minimum acceptable production

Advantages of producing quality products and services

Easier to create customer loyalty

Saves on costs associated with customer complains, for example compensation, replacing defective products
and loss of consumer goodwill
Less advertising may be necessary as the brand will establish a quality image
A higher price can be charged therefore profitable in the long run
Quality- how can it be achieved?
There are three stages in the development of quality:

Quality Control
Quality Assurance
 Continuous improvement
 Quality circles
 Customer consultation
Total Quality management (TQM)

QUALITY CONTROL

It is the traditional method of maintaining quality and involves inspecting, detecting and cutting out components
or final products which fall below set standards. This process takes place after these products have been
produced. Quality control is carried out by Quality control department which inspects and tests the finished
products.

Weaknesses of Quality control

Requires inspectors who have to be paid thus increasing cost

Inspection with an aim of finding fault or looking for problems is too late and ineffective
Time consuming especially when looking for the origin of fault
Takes away from workers the responsibility of for enhancing quality
It may involve considerable waste as defect products are scrapped.
QUALITY ASSURANCE

This is a system of agreeing and meeting quality standards at each stage of production to ensure consumer
satisfaction.

Features of the Quality Assurance

Occurs both during and after the production, and is concerned with trying to stop faults from happening in
the first place(continuous improvement)
The business will make sure quality standards are set and then it will apply these quality standards in the
production process.
Involves self-checking by workers of their own output against the agreed standard(Quality circles)
Quality assurance is the responsibility of the workforce, working in teams, rather than an inspector.

Why is it important for the businesses to establish quality-assurance system?

To promote team-work since staff are involved

To set good quality standard for all stages of production
To reduce cost of final inspection
To reduce total quality cost
To gain accreditation for quality awards. This can give business real status. The most widely recognized
quality award within the EU is ISO 9000
ISO 9000- an internationally recognized certificate that acknowledges the existence of a quality procedure
that meets certain conditions

To obtain ISO certificate the firms has to demonstrate that it has:

Staff training and appraisal methods
Methods of checking on suppliers
Quality standard in all areas of business
Procedures for dealing with defective products and quality failures

 Quality circles: A small group of employees (6-12) in same area of production who meet regularly to
study and solve all types of production problems

i. Quality circles meet

ii. Identifies problems
iii. Collect and discuss information
iv. Recommends a solution
v. Management considers the proposals
vi. Feedback
vii. Quality circles

 Consumer consultation: Ensuring that customers view are taken into account. Done through
market research
TOTAL QUALITY MANAGEMENT (TQM)

Total Quality Management, TQM, is a method by which management and employees can become involved in
the continuous improvement of the production of goods and services. It is based on the principle that everyone
within a business has a contribution to make to the overall quality of the finished product or service. Therefore
TQM is not a technique; it is a philosophy of quality being everyone’s responsibility. It is a combination of
quality and management tools aimed at increasing business and reducing losses due to wasteful practices.

Requirement for the success of TQM

Committed leadership
Communication skills
A change in culture
Increased training
Closer customer relationships
Closer supplier relationship
Zero-defects mentality- a system in place to spot defects as they occur, rather than through inspection, with
constant performance measuring and monitoring
A recognition of quality in all aspects of management
Recognition, celebration and reward
Quality Circles-Employee involvement and empowerment

Benefits of TQM
Improved quality
Increased productivity
Increased market share
Competitive advantage
A motivated workforce
Increased profits
A reduced waste as a result of zero defects

Arguments against TQM

High cost of implementation e.g. retraining, time etc
Unrealistic expectation about employee commitment
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 THE WIDER BUSINESS ENVIRONMENT
GOVERNMENT INFLUENCES ON BUSINESSES

Impact on businesses of government policy, e.g. taxation, spending levels

FISCAL POLICY

Fiscal policy is the means by which a government adjusts its spending levels and tax rates to control and
influence and manages a nation's economy.

Government Revenue

The main sources of government revenue are:

 Sale of goods and services: Many governments owned business earn substantial amount of revenue for
the government. This can be another major source of revenue for the government.
 Sale of state owned enterprises: Government might also earn revenue by selling state owned businesses to
private sector.
 Taxes: These taxes comprise of both direct and indirect taxes. Taxes are a major source of
government revenue. There are four common taxes:

 Income tax
 Profits tax or corporation tax
 VAT (Value Added Tax)

Income tax: Income tax is based on a percentage of your income. Income tax is usually progressive, meaning
that the percentage of tax you have to pay rises with your income. Effects on business and individuals if there
was a rise of income:

 People will have less disposable income.

 Sales fall because people have less money to spend.
 Managers will cut costs for more profit. Workers might be made redundant.
 Businesses producing luxury goods will lose the most, while others producing everyday needs will get less
affected.

Profits tax or corporation tax: This is a percentage of the profit a business makes. A rise in it would mean:

 Managers will have less retained profit, making it harder for the business to expand.
 Owners will get less return on capital employed. Potential owners will be reluctant to start their own
business if the profit margin is too low.

Indirect taxes

These taxes are a percentage on the price of goods, making them more expensive. Governments want to avoid
putting them on essential goods such as foods.
Example

Value added tax or VAT is an indirect tax, which is imposed on goods and services at each stage of production,
starting from raw materials to final product.

A rise it would mean:

 The effect would be almost the same as that of an increase in income tax. People would buy less but they
would still spend money on essential goods.
 Again, real incomes fall. Costs will rise when workers demand higher wages.

Government Expenditure

Government expenditure is the total amount spent by the government in the economy. It can be classified as:
Government spending on acquisition of goods and services intended to create future benefits: Infrastructure
investment e.g. roads Research spending
Expenditures incurred for the normal running of government departments and maintenance of services
The financial assistance given to sections of the society in order to uplift or maintain their standard of living
Governments use such payments as means of income redistribution: Example

 Social security fund,

 Old age pensions
 Disability pensions,
 Student grants,
Impact on businesses of government legislation e.g. health and safety, minimum wages

Health and Safety

Laws protect workers from:

 Protect workers from dangerous machinery.

 Provide safety equipment and clothing.
 Maintain reasonable workplace temperatures.
 Provide hygienic conditions and washing facilities.
 Do not insist on excessively long shifts and provide breaks in the work timetable.
 safe operation and maintenance of the working environment, plant and systems
 safe use, handling and storage of dangerous substances
 adequate training of staff to ensure health and safety
 adequate welfare provisions for staff at work

Managers not only provide safety for their employees only because laws say so. Some believe that keeping
employees safe and happy improves their motivation and keeps them in the business. Others do it because it is
present in their moral code. They are then considered making an ethical decision. However, in many countries,
workers are still exploited by employers.

Minimum wages

A minimum wage is the lowest hourly, daily or monthly wage that employers may legally pay to employees or
workers. The main aim of introducing minimum wages is to reduce poverty and the exploitation of workers who
have little or no bargaining power with their employers.

If a higher minimum wage increases the wage rates of unskilled workers above the level that would be
established by market forces, the quantity of unskilled workers employed will fall.
 Suppose the current equilibrium wage of unskilled workers is W1, determined by the intersection of the
demand and supply curves of these workers.
The government determines that this wage is too low and orders that it be increased to Wm, a minimum
wage.
This strategy reduces employment from L1 to L2, but it raises the incomes of those who continue to work.
The higher wage also increases the quantity of labour supplied to L3.
The gap between the quantity of labour supplied and the quantity demanded, L3-L2, is a surplus—a surplus
that increases unemployment.

Arguments in favour of Minimum Wage Laws

Increases the standard of living for the poorest and most vulnerable class in society and raises average.
Motivates and encourages employee to work harder.
Stimulates consumption, by putting more money in the hands of low-income people who spend their entire
paychecks.
Decreases the cost of government social welfare programs by increasing incomes for the lowest-paid.

Arguments against Minimum Wage Laws

Hurts small business more than large business.

Reduces quantity demanded of workers.
Reduces profit margins of business owners employing minimum wage workers, thus encouraging a move to
businesses that do not employ low-skill workers.
Businesses try to compensate for the decrease in profit by simply raising the prices of the goods being sold
thus causing inflation and increasing the costs of goods and services produced.
Government support for businesses, e.g. grants, subsidies

WHAT ARE SUBSIDIES?

A subsidy is a form of financial assistance paid by the government to a business or economic sector .

Why subsidies are given?

Subsidies might be given to

Lower the cost of necessary goods which might affects a major part of population. Example, subsidies given
to essential food items and oil
Help domestic firms become more competitive in the international market, also known as protectionism.

Effect of subsidy

Subsidy reduces the cost of production. Thus the supply curve for the product shifts vertically downwards by
the amount of subsidy provided.

Impact of subsidies on Producers

Subsidies are monetary benefits provided to the producer by the Government on account of production of
certain commodity. Subsidies lead to increase in producer revenue.
Diagram of Subsidy
A subsidy means the government pays part of the cost. For example, the government may give farmers a subsidy of 10 for every
kilo of potatoes. The effect is to shift the supply curve to the right, leading to lower price and higher quantity demanded

Diagram of Subsidy

The government will have to pay for the subsidy by taxes.

If the government subsidised all goods

It would be expensive; the government would have to raise a significant amount of tax revenue.
It is unlikely the government would subsidise all goods, if they wanted to subsidise goods it is more likely
they would want to subsidise ‘socially beneficial goods’ like public transport and education.
There is an argument that when government subsidises firms, it reduces incentives of firms to cut costs. For
this reason, it is argued that a government should avoid subsidising firms, unless there is a clear social
benefit to subsidising firms. For example, a firm that develops environmentally friendly technology may be
able to give society a net positive externality – and this could justify a government subsidy.

NB: Grants are non-repayable funds or products disbursed by the government department business to
encourage the businesses to set-up
 Government protection of businesses, e.g. trademarks, patents

Patents
A grant made by a government or sovereign state to an inventor or assignee that confers upon the creator of an
invention the sole right to make, use, and sells that invention for a set period of time

Copyright
Copyright gives legal protection against copying to authors, composers and artist. Infringement can be pursued
through legal action

The rights of authors of literary and artistic works such as

Books and other writings,

Musical compositions,
Paintings, sculpture,
Computer programs
Films(are protected by copyright, for a minimum period of 50 years after the death of the author)

Trademarks

The UK intellectual property office defines a trademark as sign which can distinguish your goods or services
from those of your competitors. It can be a symbol, word, or words legally registered or established by use as
representing a company or product.
Intellectual property right

A right that is had by a person or by a company to have exclusive rights to use its own plans, ideas, or

other intangible assets without the worry of competition, at least for a specific period of time.

It help them recoup the cost of creating their products

These rights can include copyrights, patents, trademarks, and trade secrets.

These rights may be enforced by a court via a lawsuit.

The reasoning for intellectual property is to encourage innovation without the fear that a competitor will

steal the idea and / or take the credit for it.

 Consumer protection legislation, e.g. product safety, product labelling

Reasons why customers need protection

Protect consumers’ from faulty goods and services

Protection against misleading advertisement. This is because consumers lack the technical knowledge and
advertising can be very persuasive.

The following are ways of protecting consumers from being exploited by businesses:

Laws
Regulations

THE LAW
Consists of laws that make businesses accountable to their customers. Most of the countries have consumer
protection laws aimed at making sure that businesses act fairly towards their consumers: A few examples are
 In the UK, the following laws are passed:

Sale of Goods Act: Makes it illegal to sell:

 Goods which have serious flaws or problems
 Products that is not fit for the purpose intended by the consumer.
 Products that do not function as described on their label or by the retailer.
Trade Descriptions Act: all advertisements must be truthful. Deliberately giving misleading
impression about the product is illegal.

Weights and Measures Act: to stop underweight goods being sold to customers.
Competition law-The Companies Act 1998 states that firms must not:
 Fix prices i.e. they must not agree prices with competitors
 Limit production to reduce completion and drive price up
 Charge different price to different customers

Product labelling: the law

Labels must not be misleading about things like:

 quantity or size
 the price
 what it’s made of
 how, where and when it was made
 what you say it can do
 the people or organisations that endorse it

You must include safety information for products that could be dangerous.

Roles of consumer association (CA) and regional trading standards services

Improve consumers’ awareness through media coverage

Educate consumers on their rights; legal procedure
Exposes careless practice and poor design on part of businessmen
Ensure that products are fit for purpose and accurately described

REGULATION
A method used by the government to control the activities of the industries that are very important to the
economy or those industries that the government feels has monopoly power

Regulators-Are independent bodies set up by the government for industries that had previously been
nationalized and had had some monopoly power. These industries still have a considerable market power
because the infrastructure they provide cannot easily be replaced by competing system
ECONOMIC INFLUENCES

Impact on businesses of unemployment, e.g. effect on demand, job recruitment

When people are unemployed, they want to work but cannot find a job. This causes many problems:

Unemployed people do not work. Therefore national output will be lower than it should be.
The government will have to pay for unemployment benefits. This is expensive and money cannot be used
for other purposes.
Higher unemployment leads to increased crime and vandalism.
Impact on businesses of exchange rates, e.g. exporters, importers

EXCHANGE RATE

The exchange rate measures the value of one currency in terms of another currency.

The daily value of the currency is determined in the foreign exchange markets (FOREX) where billions of
currencies are traded every hour.

Effect on changes in exchange rate

Appreciation of exchange rates occurs when the value of the currency goes up as compared to other currency.

Effects

 Cheaper imports for consumers: An appreciation leads to lower import prices – this boosts the real living
standards of consumers at least in the short run – for example an increase in the real purchasing power of
residents when travelling overseas or the chance to buy cheaper computers or motor vehicles from other
countries.
 Lower costs for producers: When the exchange rate is high, it is cheaper to import raw materials,
component parts and capital inputs such as plant and equipment – this is good news for businesses that rely
on imported components or who are wishing to increase their investment of new technology from overseas
countries.
 Exporters lose price competitiveness because they will find it more expensive to sell in foreign markets and
face losing market share – this can damage profits and employment in some sectors and industries.
 Slower economic growth: If exports fall, this causes a reduction in aggregate demand and reduces the short-
term rate economic growth as measured by the % change in real GDP
 If exports fall, then so will business confidence and capital investment – because investment is partly
dependent on the strength of demand

Depreciation of exchange rates occurs when the value of currency falls as compared to other currency

Effects

Effects of an exchange rate depreciation

Exporters should benefit. Depreciation makes a country’s goods cheaper priced in a foreign currency.
Imports -The demand for imports should fall as imports become more expensive. However, some imports
are essential for production or cannot be made in the county and have an inelastic demand - we end up
spending more on these when the exchange rate falls in value. This can cause the balance of payments to
worsen in the short run.
Economic growth (GDP)-Higher exports (an injection into the circular flow) and falling imports leads to
rising GDP levels.
Inflation -A fall in the exchange rate makes imported goods and services more expensive in the county.
Producers may then pass on higher costs of imported components and raw materials onto consumers. This
 causes extra "cost-push" inflation. Wages may rise in response to this triggering off the possibility of a
wage-price spiral.

EXCHANGE RATE POLICY

Impact on businesses of inflation, e.g. cost of supplies, competitiveness

Positive impact

Firms gain since they are likely to make more profit

Negative impact

Businesses will not be competitive internationally. Consumers from other countries will stop buying goods
from a country with high inflation.
Cost of suppliers rises.
Workers’ wages buy less than before. Therefore their real income (how much you can buy with so much
money) falls. Workers will be unhappy and demand for higher wages.
Prices of local goods will rise more than that of other countries with lower inflation. People may start
buying foreign goods instead.
It would cost more for businesses to start or expand and therefore it does not employ as many people.
Some people might be made redundant so that the business can cut costs.
Standards of living will fall

EXCHANGE RATES AND INFLATION

How the Exchange Rate Affects Inflation

If there is depreciation in the exchange rate, this depreciation should cause inflation to increase. A depreciation
means the currency buys less foreign exchange, therefore, imports are more expensive and exports are
cheaper. Therefore, we get:

Imported inflation. The price of imported goods will go up because they are more expensive to buy from
abroad
Higher domestic demand. Cheaper exports increases demand for UK exports. Therefore, there is an increase
in domestic aggregate demand, and we may get demand pull inflation.
Less incentive to cut costs. Manufacturers who export see an improvement in competitiveness without
making any effort. Some argue this may reduce their incentive to cut costs, and therefore, we get higher
inflation over the long term.
SOCIAL INFLUENCES

Impact on businesses of ethical considerations, e.g. Fair Trade, child labour

Ethical motives: These are reasons linked to what is ‘right’. For example setting up a business or
organization which benefits a section of the community, or which is committed to ethical employment
 ASSIGNMENT: DO RESEARCH ON THE
FOLLOWING
Impact on businesses of environmental considerations, e.g. the circular economy, climate
change

Impact on businesses of demographic change, e.g. an ageing population, migration

Impact on businesses of the digital economy, e.g. ecommerce, communications