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PRINCIPLES OF BUSINESS

SECTION 1- NATURE OF BUSINESS

NAME__________________________________________________________

GRADE_________________________________________________________

OBJECTIVES

i. Explain the development of barter

ii. Describe the role of money

iii. Identify the instruments of exchange

iv. Interpret information on various instruments of payment

v. Differentiate between private and public sectors

vi. Describe the various forms of business organizations and arrangements

vii. Differentiate among the types of economic systems

viii. Describe the functional areas of a business

ix. Identify the stakeholders involved in business activities

x. Discuss the role and functions of the stakeholders involved in business activities

xi. Explain the ethical and legal issues in the establishment and operations of a business

xii. Explain the principles that must be adopted in the establishment and operation of a
business

xiii. Explain the consequences of unethical and illegal practices in business

xiv. Describe the careers in the field of business

1.1 DEVELOPMENT OF THE BARTER SYSTEM

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● Early people had a simple way of life, they would provide all their needs themselves without
the help of others, this is called direct production.

● People would hunt animals and gather plants and berries. Some farmers would grow crops
and keep animals for the purpose of feeding themselves. They were living in a subsistence
economy [that is providing just enough to survive but there was no surplus for trade.].

● In time people began to improve their way of living by building permanent homes
and making tools to satisfy their way of living. They began to produce more goods
than required, thus resulting in a surplus.

● As a result of the surplus, people began exchanging goods for surplus of others. The
exchange of one thing for another without the use of money is called Barter.

ADVANTAGES BARTER
i. It allows people to get rid of any surplus goods and at the same time allows them
to obtain a wide variety of things they needed.

ii. It facilitated an improvement in the way people lived

iii. It allowed people to specialise in producing the thing they could do best

iv. It increased productivity and resulted in more surplus and further wealth

DISADVANTAGES OF BARTER
i. Coincidence of Wants
● An individual must have what another person needed and be prepared to exchange it.
● E.g. Jim wants to acquire shoes in exchange for wheat then he must find another
person who wants the wheat for the shoes

ii. An Exchange Rate

● This involves deciding on the right quantity of goods acceptable in the exchange
process.
● E.g. How many chickens should be exchanged for an axe-head/hammer

iii. Divisibility of Goods

● The rate of exchange would be difficult because some goods used could not be split
into smaller parts.
● E.g. if the price of a horse is equal to 10 shirts then a person having one shirt cannot
exchange it for the horse because it is not possible to divide the horse in small pieces
without destroying its usefulness.

iv. Storage of Wealth

● Many goods which had to be exchanged could not be saved for use at a future date
because they could not be stored for a long period of time.

1.2 BRIEF HISTORY OF TRADING INSTRUMENTS

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1) Money is anything that is generally accepted as a medium of exchange and used to

purchase goods and services. Money is a legal tender- that means, it is acceptable as
a means of payment.

2) In early societies the barter system was used as a method of exchange in which one
good or service is exchange for another before a system of money was used.

3) The barter system allowed farmers and hunters to swap surplus goods, beads or
shells in exchange for goods they could not produce themselves. However, the barter
system had several limitations such as: double coincidence of wants, exchange
rates, divisibility of good and storage of wealth

4) To overcome the disadvantages of the barter system a common medium of exchange

had to be developed. The problem was solved with the use of money, gold and silver
were used as money.

5) Today money is in the form of notes, coins and other modern means of instruments
of exchange [bill of exchange, credit card, debit card, cheques etc.]

Characteristic of Money Functions of Money

Durable-does not rot or wear out easily A medium of exchange - for quick and easy

purchase

Divisible-so that change can be given A measure of value - to determine prices

Portable- it can be carried A store of value-it can be saved

In limited supply-this prevents people from A standard of deferred payment- it can be

spending more without working to earn it used to pay in the future

1.3 INSTRUMENTS OF EXCHANGE

● In today’s economy there are other trading instruments apart from money. These include;
barter system, bill of exchange, electronic transfers, telebanking, e-commerce, a cheque,
money order, debit cards, credit cards, bank – draft, telegraphic money transfer [t/t],
internet banking, mobile money and mobile wallets.

1.4 INTERPRET THE INSTRUMENTS OF EXCHANGE

● Barter System - a method of exchange in which one good or service is exchanged for
another, no money is used.

● Bill of exchange – a document that instructs one person to pay a fixed amount of money
to another at a future date.

● Electronic transfers- involves the movement of funds from one account to another
electronically.

● Telebanking – carrying out banking transaction via telecommunications net- work,

customers can telephone from home/office and instruct the bank to make payments.
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● E-commerce –the buying and selling of goods and services or transmitting of funds or
data via the internet. It involves business to consumer transaction or business to business
transactions.

● A Cheque- is a written instruction to the bank to transfer certain sum of money to the
account of the payee [person receiving the money].

● Money order -is used as a method of payment which is sold by the bank to persons who
wish to make overseas payment for good and services. It clearly states the amount to be
paid and the name of the person it is to be paid to.

● Debit Cards - are ATM cards issued by the banks that can be used to buy goods and
services. They are swiped by the shop assistant to obtain authorisation from the issuing
bank computer centre. If there is sufficient funds, the card is approved for purchase

● Credit Cards - are used to pay for goods and services on credit from a business, card
holders have a limit and cannot exceed that amount. The amount paid must be repaid by a
due date, if not interest rates are charged.

● Bank – Draft - is a cheque from one bank to another bank for payments in the name of a
particular person or organization. It is used to make payments for goods and service in a
foreign currency.

● Telegraphic Money Transfer [T/T] - is an electronic means of transferring money from

one bank account to another. The bank communicates by computer , telex or cable in
order to carry out the transactions.

● Internet Banking- allows customers to have direct access to their own accounts on-line
where they can check the balance on their accounts and make payments to suppliers.

● Mobile Money and Mobile Wallets - this is an app on the phone that is connected to the
individual’s bank account that allows paying for an item using your phone E.g. Grace
Kennedy’s PayPak

1.5 DIFFERENCE BETWEEN PRIVATE SECTOR AND PUBLIC SECTOR

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● The private sector is that part of the economy which consist of businesses owned and
operated by private individuals. [private enterprise]

● The public sector is that part of the economy which consist of businesses owned and
operated by the government. [public enterprise]

DIFFERENCES

Private Sector Public Sector

Ownership private individuals government
Aims to make profits to provide social services
Source of finance profits and loans the government
Distribution of profits dividends from profits are profits goes to the
paid to shareholders government
Type of products goods and services demanded public goods such as street
by consumers lights and health care
Type of business sole trader, partnership, Ministry of Education,
company, franchise, Health, Agriculture etc.
cooperatives

1.6 FORMS OF BUSINESS ORGANIZATIONS

Sole Trader

● Definition- a business in which one person provides the capital and gets all the profit.

Characteristics

● Formation – no legal formation but the firm must be registered with the registrar of
companies
● Management – managed by one person
● Examples – retailing, hairdressing, catering services

Advantages

● Easy to set up, that is a small amount of capital needed and no legal formalities
● Owner has complete control and can take decisions quickly, he is not answerable to
anyone
● Owner keeps all the profits, this can be used to develop the business
● The business is based on the personal interest or skills of the owner rather than
working for someone

Disadvantages

● Unlimited liability –owner’s personal assets can be used to pay off debts if the
business fails
● Usually experience difficulty in raising capital therefore the business remains small
● Owner usually work long hours and suffers all losses if the business fails
● Lack of continuity- when the owner dies the business comes to an end

Partnership
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● Definition - a business formed by 2 to 20 persons providing capital and shared

responsibilities

Characteristics

● Formation- the business must be registered with the registrar of companies, they must
submit a legal document called a partnership deed, that sets out the guidelines for
the operation of the partnership
● Management – managed by the partners
● Examples of partnership businesses – law and accounting firms
● Types of partnerships: joint ventures, syndicates, and limited partnership

● Joint venture: is a special type of partnership established to perform a

single business activity and closes when the activity has been completed.
E.g. NHT joins with the Matalons to build houses, where the
government provided the land and WICHON built the houses.

● Syndicates: is a group of persons or business organization that are given

legal authority to carry out a specific business transaction. E.g. a group
of persons coming together to build a children’s park.

● Limited Partnership: consists of a business that has both unlimited

liability and a limited liability partners.

Advantages
● Better management - partners may specialise and have different skills
● Better decisions- partners discuss issues before arriving at a decision
● Larger capital - more capital can be raised since more people contribute to the
running of the business
● Sharing of losses and problems –the burden is for all and not just one person

Disadvantages

● Unlimited liability – partners personal assets can be used to pay off debts if the
business fails
● Lack of continuity - new partnership will be formed upon death or resignation of a
partner
● Delay in taking decisions - partners have to discuss issues before arriving at a
decision
● Lack of capital to expand – the capital is more than a sole trader, but it is still
difficult for the business to expand

Co-operative
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● Definition- a business owned, controlled and operated by a group of users for their
own benefit.

Characteristics

● Formation- formed by a group of persons who might be producers or users of a

product or service.
● Management – a committee is formed to handle the day to day activities of the
business.
● All members have one vote and contribute to sharing responsibilities and decisions
● Cooperatives fall into two main categories mainly
- service cooperatives e.g. credit unions (St Catherine Cooperative Credit
Union), housing, marketing, insurance
- agricultural cooperative – assist members with different kinds of assistance
such as providing farm supplies/equipment, agricultural technology or transport
service.

Advantages

● Betters decisions are made as members work together to solve problems and make
decisions
● Profits are shared in the form of dividends based on the number of shares held by
each member
● Members can trade with the cooperative society i.e. they can buy from them and sell
to them

Disadvantages

● Unable to expand due to limited finance – members do not have resources and
profits may be low
● Inefficient management - members may not have the experience of running a
business
● Delay in decision making – all the members have to be consulted on major issues

Franchise

● A business that uses the name, logo and trading system of an existing business. E.g.
Burger King, Pizza Hut, Dominoes, KFC, Federal Express, Wendy’s.

Characteristics

● Formation – the parent company (franchisor) is the owner of the franchise and the
franchisee has to pay a fee.
● Management – the franchise is managed by the franchisee, however, he/she has to
abide by the rules and regulations of the parent company.

Advantages

● Less chances of the business failing as a well-known name is being used

● Advice and training are offered by the franchisor
● Supplies are obtained from established suppliers

Disadvantages
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● Revenues have to be shared with the franchisor

● Initial license fee is expensive
● There is no choice of supplier

Limited Companies

(i) There are two types of companies: private limited and public limited.
(ii) A limited company raises capital by selling shares and debentures.
(iii)The business must be incorporated i.e. it has a separate legal identity from its owners.
(iv)A company has limited liability, i.e. in case the business fails the shareholders will
lose capital contributed and not personal assets.

Private Limited Company

● Definition - a business with 2-50 shareholders who are often family members.

● Formation- the business must give the registrar of companies the following
documents: (i) the memorandum of association, (ii) the articles of association, and
(iii) statement of authorised capital and then it receives a Certificate of
Incorporation to start operations.

● Management - by individuals/family members involved in the business.

● The company’s name must include the word limited (Ltd)

Advantages
● Limited liability – in case the business closes down the shareholders will only lose
their capital and not personal assets
● Can raise capital by selling shares privately to individuals
● It has a separate legal entity, that is, a company can sue and may be sued (but not its
owners)
● Greater continuity means that shares can be sold to someone and the company
continues

Disadvantages

● Too many legal formalities, this may be costly and time consuming
● Too many legal requirements that is, end of year accounts must be published
● Selling of shares is restricted to private individuals only and not to the general public

Public Limited Company/Joint Stock Company

● Definition – a business with at least seven members that offers shares to the public. It
must have the words ‘Plc’ or ‘Inc’ after the company’s name.

● Formation – the business must give the registrar of companies the following
documents in order to be registered; (i) the memorandum of association; (ii) the
articles of association; (iii) the statement of authorised capital and ; (iv) the
prospectus and then it receives a Certificate of Trading to start operations.

● Management - by a board of directors who appoints an executive director.

Advantages
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● Limited liability – in case the business closes down the shareholders will only lose
their capital and not personal assets
● It can raise capital by selling shares publicly
● It has a separate legal entity, that is, a company can sue and may be sued (but not its
owners)
● Greater continuity – it does not close down on the death of a shareholder

Disadvantages

● Too many legal formalities – this may be costly and time consuming
● Too many legal requirement – that is, end of year accounts must be published
● Risk of takeover- control may be lost if another company obtain enough shares in the
company

Documents that Must be Summited by Limited Companies

(i) Memorandum of Association

● It governs the company’s relationship with the outside

● It contains: The company’s name with the word ‘limited’, the address, and the
objectives of the company

(ii) Articles of Association

● This document controls the internal running of a company

● It contains: procedures for calling annual general meetings (AGM), procedures
for election of directors and a statement concerning borrowing powers of the
company

(iii) Statement of Authorised Capital

● This is the maximum amount of capital which a company is allowed to raise

(iv) The Prospectus

● This is an invitation to the public to buy shares in a public limited company

● It contains the following information:
✔ information about the business venture

✔ objectives of the company

✔ details of the types of shares and the amount of shares being sold

✔ instructions how to apply for shares

Capital Structure of Limited Companies

(i) Authorised capital

● The maximum amount of share capital a company is allowed to raise through

issuing/ selling shares

(ii) Shares
● A share is a unit of a limited company’s capital. The two types of shares are
Preference and Ordinary shares
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● When a person buys a share, he/she is given a share certificate and receives
dividend when the company makes profit

100 X $200 = $2000

(iii) Debentures
● This is a loan given to a company from members of the public
● The person who lends the company money receives a fixed rate of interest
whether or not the business makes profit.

1.7 ECONOMIC SYSTEMS

● An economic system is the way in which a society allocates scare resources to
produce goods and services to satisfy wants of the population.

Types of Economic Systems are:

1. Traditional [Subsistence]
2. Free Market [Capitalist Economy]
3. Planned/Command or Socialist Economy
4. The Mixed Economy

. Traditional

● This is based on traditions and customs where nearly the entire population is engaged
in agriculture and produce enough food for their needs.
● E.g. in early societies, the Taino tribe produced enough food to satisfy their needs
using the barter system.
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Free Market

● Economic resources are owned by the private individuals with very little government
intervention. E.g. USA and Japan
● The consumer influences the producers’ decisions on what to produce
● Goods and services are bought and sold in the market

Advantages

● Incentive to work is high, as a result, the labourer is free to work where he is paid the
best
● Competition among firms results in greater efficiency and reduced prices
● Consumers are free to spend their money in any way therefore the firm produces
more goods that are in demand
● A large variety of goods and services are made available

Disadvantages

● Great inequality with income and wealth, this contributes to poverty being a major
issue
● Large sums of money are spent on advertising, this creates an artificial demand for
goods
● Wealthy people have more economic power than the poor
● People’s basic needs may not be met e.g. health and education

Planned/Command Economy

● One in which all the resources are

owned and economic decisions are
made by the government e.g. health,
education
● E.g. countries with planned economy-
North Korea, Cuba, China

Advantages

● Basic needs of the population are met

● There is little inequality of wealth and income
● There is less waste of resources

Disadvantages

● Private firms do not exist to compete with each other and force prices down
● There is less incentive to work hard to earn more or make profits
● There is limited consumer choice

The Mixed Economy

● One in which economic resources are owned and controlled by both private and
public sector. E.g. Jamaica, Trinidad and Tobago
● E.g. the government provides services such as; defence, hospitals, schools, and
public health

Advantages
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● The government is free to make laws to protect consumers from unfair trading
practices
● A wide variety of goods are provided by both government and private individuals

Disadvantages

● Too much government intervention may result in conflict between private and public
sector
● State owned firms are allowed to operate inefficiently wasting resources

1.8 FUNCTIONAL AREAS OF A BUSINESS

● Functional areas of a business refer to how the organization is structured for efficient
operation. This means that the activities of the business are grouped accordingly to
the nature of what is required.

● A small business will be managed by one person, however, a large business will be
managed by more than one persons with specific skills.

● Functional areas of business include: marketing, production, personnel, finance

and research and development.

Production

● This department is responsible for converting raw materials into goods and services
needed by customers to satisfy their needs and wants.
● The functions include: buying raw materials, ensuring high quality production,
storing material and finish products.

Marketing

● This department is responsible for finding out what customers want and how this
can be promoted and sold.
● The functions include: pricing the product, promotion and advertising, distribution
and selling and market research.

Personnel/Human Resource

● This department responsible for recruiting the right person with the expertise to carry
out the job, it is responsible for the employee’s welfare
● The functions include: recruitment of staff, staff training, disciplining of workers,
staff wages, sick leave and pension schemes.

Finance

● This department is responsible for managing the finances and cash flow of the
business.
● The functions include: keeping up-to-date accounts, keeping cash flow records,
keeping within the budget and obtaining new finances.

Research and Development

● This department is responsible for seeking to improve its product or service in order
to maintain its competitive edge.
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● The functions include: redesigning or rebranding, financial research, and conducting a

feasibility study

1.9 STAKEHOLDERS IN BUSINESS ACTIVITY

● It is important to identify stakeholders in a business so that the organisation

knows who depends on it for survival and knows who has an interest in the business.

● Stakeholder - an individual or group with direct interest in the operations and

performance of a business

● Examples of Stakeholders - employees, employers/owners, customers, suppliers,

government and members of the society.

1.10 ROLE OF STAKEHOLDERS IN BUSINESS ACTIVITY

Role of Employer/owner

● To provide goods and services of high quality and reasonable prices

● To manage resources (employees, raw material, equipment) efficiently
● To provide good working conditions, fair payment of wages etc.

Role of Employees

● To provide the labour needed to allow goods and services to be provided

● To efficiently use resources placed in their care

Role of Customers

● To purchase and use the products it was intended to be used for

● To provide feedback on the product through complaints and suggestions

Role of Government

● To protect customers through laws

● To receive tax
● To provide law and order to allow legal business activity to take place

Role of the Society

● To provide local services and infrastructure to the business

1.11 ETHICAL AND LEGAL ISSUES IN A BUSINESS

● Ethical and legal issues are laws and regulations that guides the decisions of an
entrepreneur. Ethical issues are basic principles of what is legally right.

● Legal issues refer to activities that are guided by the laws of a country. These laws
must be followed, or persons will suffer the penalties such as paying a fine or going
to prison.

● Ethical and legal issues relating to the establishment and operation of a business
include:
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✔ ensuring that the business is a bona fide firm establishment and not using it as
a front for money laundering and other illicit activities.

✔ ensuring that capital is legally obtained and not tainted with illegal operations
as the source of funding.

✔ ensuring that national insurance contributions and taxes are paid

1.12 THE ETHICAL AND LEGAL PRINCIPLES THAT MUST BE ADOPTED

IN THE ESTABLISHMENT AND OPERATION OF A BUSINESS

● Ethical and legal principles that must be adopted in establishing the operation of a
business include:

✔ adopting an organization’s code of ethics

✔ adopting good environmental practices

✔ handling personal information carefully

✔ getting a legal source of funding

✔ ensuring taxes are paid to the government

✔ ensuring that the business is registered

1.13 CONSEQUENCES OF UNETHICAL/ ILLEGAL PRACTICES IN BUSINESS

Advertising
● The law states that a business should create honest and realistic advertisements.
● Consequences of misleading advertising – the firm will lose customers as they
may boycott the product.

Payment of Taxes
● The law states that all taxes must be paid over to the state, this money will be used
for the development of the country.
● Consequences of not paying taxes - this may lead to legal actions being taken
against the business leading to heavy fines or imprisonment.

Environmental Issues
● The law provides guidelines about disposal of waste and packaging to be used
however, some businesses may go undetected for years.
● Consequences of unethical disposal of waste- this may lead to pollution in the
environment and fines being imposed by the courts.

Use of Safe and Good Quality Raw Material

● A business should use safe and good quality raw material to make its products.
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● Consequences of making cheap and unsafe product – this may create health
problems or a loss of customer support.

Not Accepting or Offering Bribes

● An entrepreneur should not accept or offer bribes, this will encourage the
customer that the business is always doing the right thing.
● Consequences of accepting or offering bribes - this may result in the entrepreneur
being fined or imprisoned.

Money Laundering
● A business should avoid the practice of money laundering, this is where an
entrepreneur receives money illegally through serious crimes such as drug trafficking
but makes it appear legal.
● Consequences of money laundering – this may result in the entrepreneur being fined
or imprisoned.

1.14 DESCRIPTION OF CAREERS IN THE FIELD OF BUSINESS

i. Advertising and public relations

ii. Compliance officers
iii. Strategic planners
iv. Educators (online and face to face)
v. Information Officers
vi. Entrepreneurs
vii. Resource Personnel
viii. Web designers
ix. Web Planners
x. Software Developers

Advertising and Public Relations [PR]

● An Advertising and PR job involves a number of activities, these include; ensuring

advertisements are posted, writing and editing press releases and newsletters as well
as answering customer service calls and emails.

● Job candidates applying for jobs in advertising and public relations must be proficient
in reading, writing and good communication skills.

Compliance Officer

● A compliance officer ensures that the business functions in a legal way while meeting the
objectives of the firm. They have to comply with product safety legislation and health
and safety legislations.

● A compliance officer needs to have good people skill because they need to talk to key
persons who create company laws to find out what is expected.

Strategic Planners
● They are responsible for identifying long and short-term goals of the firm and developing
ways to accomplish them.

● To be a successful strategic planner you must have excellent analytical skills, be able to
look at the company’s current methods and make improvement where needed.

Education (online and face to face)

● The education sector provides rewarding careers such as teachers, school principals,
college lecturers, education officers, librarian among others.
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● Teacher/lecturer provides education and training courses within an institution.

● Online learning, or virtual classes are offered over the internet and has become popular
because the student can learn the content at any-time convenient to them.

Information Officer
● An information officer is responsible for storing data, managing data, safe keeping of the
data and ensuring it is easily accessible.

● They should have good computer skills as most of their work involve using computers.

● E.g. the role of an information officer in a pension department of a company would

involve keeping an employee’s record of how much pension he/she has contributed.

Entrepreneur
● An entrepreneur is someone who shows vision and creativity, taking the financial risk
of starting and managing a new business.

● An entrepreneur needs to have a number of characteristics in order to be successful, these

include; being self - motivated i.e. being able to push yourself to succeed, be willing to
take a risk and being flexible i.e. being willing to change when necessary.

Resource Personnel
● The human resource personnel is responsible for recruiting, screening, interviewing
and placing workers.

● They are also responsible for training, creating job descriptions, creating job
advertisements and creating questions that will be asked in the job interview.

ACTIVITY #1

Make brief notes on the following careers

a) Web designers
b) Web Planners
c) Software Developers

The description should include: definition, roles and skills needed . (15 marks)

REVIEW QUESTION #3 [CSEC January 2017/2018

a) Define each of the following terms

(i) Barter (2marks)

(ii) Mobile wallet (2marks)

b) State two characteristics of cooperatives [2marks]

c) Distinguish between EACH of the following pairs of concepts

(i) Sole trader and partnerships (4marks)

(ii) Private sector and public sector (4marks)
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d) State TWO characteristics of each of the following types of economic systems

(i) Planned economy (2marks)

(ii) Free market economy (2marks)
(iii) Mixed economy (2 marks)