Professional Documents
Culture Documents
Human wants are goods and services that people desire but they are not necessary for survival. Wants
make life comfortable and enjoyable but people can still survive without them. Human wants include
mobile phones, cars, pets, entertainment and holidays abroad.
Factor Explanation
1 Land Land refers to all natural resources found on earth together with space
. required to set up factories for production take place.
2 Capital Capital refers to money, machinery, equipment and buildings required
. for production to take place.
3 Labour Labour refers to the human effort involved when goods and services are
. produced. People who produce goods and services are paid wages and
salaries.
4 Entrepreneurship Entrepreneurship refers to people who take the risk to start businesses.
. (enterprise) These people are rewarded through profit earned from their businesses.
The above factors of production (resources) are not always available to meet all the needs and wants of
people. This leads to an economic problem. This economic problem is called scarcity.
Therefore, scarcity means that there are limited (fewer) resources to meet unlimited wants.
Thus, a choice must be made since resources used for one product cannot be used for another. The choice
made is called opportunity cost.
Opportunity cost refers to something forgone (sacrificed) for the next best choice.
Illustration:
A business may be faced with two choices; (1) to buy a delivery vehicle or; (2) to
build a new office. Due to limited capital, only one choice must be made.
(a) Which choice should be made?
(b) What is the opportunity cost of that choice?
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How can businesses use specialisation to satisfy needs and wants?
In-order to maximise on the use of limited factors of production, businesses can specialise.
Specialisation is where by an individual, business or country focuses only on producing goods or services
they can do best.
Examples:
Shell specialises on producing oil and gas. Japan focused on car manufacturing.
Review Questions
(a) Define the following terms:
(i) human needs
(ii) human wants
(iii) scarcity
(iv) opportunity cost [8]
(b) Identify and explain two advantages and two disadvantages of specialisation. [4]
Selling price
$1 800 Cost of inputs
Added value
$1 200
$600
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Method Explanation
1 Increasing the selling price If the business has the opportunity to increase selling prices while
. costs remain unchanged, it can do so. This means more revenue
(income) is earned, increasing added value.
2 Buying cheaper raw The business can look for cheaper suppliers who can provide the
. materials same raw materials at a lower price.
3 Using cheaper labour If the business is able to employ workers at a lower wage rate, it can
. do so. The worker employed should be able to maintain the same
quality of the product.
4 Branding Branding involves the business coming up with a unique name,
. colour or packaging for its product. Branded products can be sold at
a higher price leading to added value.
5 Reducing waste Reducing waste means saving on cost of production. This means the
. business produces the goods or services at a lower cost, increasing
added value.
6 Adding extra features to the The business can include extra features or services that customers
. product. can pay for as they buy the product. This further increases the
selling price for the product.
2. Secondary sector
The secondary sector is made up of businesses involved in changing raw materials into finished goods.
Activities involved in the secondary sector are: manufacturing, processing, construction and assembly.
3. Tertiary sector
The tertiary sector is made up of businesses that provide services to individuals. These are called personal
services. Services are also provided to businesses. These are called commercial services. Activities involved
in the tertiary sector are: transport, banking, insurance, education, health care, catering, retailing, training
and communication.
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Manufacturing businesses in developed countries are losing market to cheap products from developing
countries.
Tertiary sectors employ more people that primary and secondary sectors. In secondary sectors, labour is
being substituted by robots and automation.
Review Questions
Jean owns a restaurant in the city centre. She provides meals including meat and vegetables. All ingredients
are imported from other countries. A village close to the city has farmers producing restaurant ingredients.
Jean’s friend, Pearl, has advised her to increase value added at her restaurant.
Required
(a) What is added value? [2]
(b) In which sector of the industry is Jean’s restaurant? Give a reason for your answer. [2]
(c) Identify and explain two ways in which Jean could increase added value as suggested by Pearl. [6]
What is entrepreneurship?
An entrepreneur is a person who takes the risk to start and operate a business enterprise. An entrepreneur
brings together the other three factors, land, labour and capital, to produce goods and provide services.
1 Risk taker An entrepreneur should have the courage to start a business enterprise
. even if it may lead to loss of money invested.
2 Hard working Successful entrepreneurs work long hours including rest days in-order to
. achieve their goals.
3 Creative A good entrepreneur is one who comes up with new ideas to create new
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. (innovative) product or to be ahead of competitors.
4 Self-confident The entrepreneurs should have trust in their ideas and be able to convince
. others that the idea can work.
5 Ambitious The entrepreneur should have a strong desire to succeed.
.
6 Optimistic The entrepreneur should always look forward to a better future even if the
. business is making a loss.
7 Good A good entrepreneur is one who is able to share ideas with employees,
. communicator customers and other investors.
Section Details
1 Business details This shows names of owners, business address and a brief summary of
. (Executive summary) the main activities of the business.
2 Aims and objectives Outlines the intentions and targets of the business.
.
3 Marketing plan Shows the product and the different ways it will be sold to customers.
.
4 Production plan It outlines how the product will be made and the resources required.
.
5 Finance plan It shows the source of finance for the business, the cash flow forecast
. and the profit forecast.
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How business plans assist entrepreneurs?
1. It act as a guideline- by following a business plan, an entrepreneur is able to turn a business idea into
a successful business.
2. It gives the entrepreneur a planning culture- the entrepreneur will have the ability to plan activities
before implementing them.
3. It is required when applying for loan- bank managers request for detailed business plans to assess if
the businesses will be able to pay back loan applied for. They look at the cash flow forecast to see if
the businesses will generate enough cash to pay back money lent including interest charges.
4. It helps to monitor performance of the business- as the business operate the entrepreneur is able to
compare the profit made to the forecasts made in the business plan. The entrepreneur will then take
action to get the business back on track.
Review Questions
Kemo was bored with her job in a clothing factory. Her main passion was fashion and she had always been good
at selling clothes, since she helped her father at his market stall. She encouraged her parents and some friends
to invest in her idea of opening a shop selling good quality ladies clothes. Kemo would put her personal savings
into the business. “I think I should draw up a business plan”, said Kemo to Pearl. “I don’t think you will need it,
your business will be too small to need a business plan”, replied Pearl.
Required
(a) What is a business plan? [2]
(b) Give two reasons why the government may assist new entrepreneurs such as Kemo.[2]
(c) Do you agree that a business plan is not useful to Kemo? Justify your answer. [6]
1. Number of employees
This method involves comparing the number of workers employed by each business. In this case, a large
business is the one that employs many employees.
Illustration
Name of business PetroChina Walmart
Activities involved Oil and gas producer Retailer
Employees 550 000 2.2 million
Value of assets (capital) $350 billion $200 billion
Annual sales $850 billion $850 billion
Value of output $640 billion $430 billion
Market share 20.9% 35.7%
In the above illustration, Walmart may be considered to be a large business when compared to PetroChina
because it employs 1.650 million more employees. Using number of employees to compare business sizes is
easy as it only involves counting employees for each business.
However, some businesses employ less people because they use machines and equipment which are
automated. This makes their output to be higher than businesses employing humans. Other businesses hire
employees on a part-time basis. These employees may not be included in the records of the business but
they would have contributed to production for that business.
2. Capital employed
Capital employed is money invested in a business to buy productive assets such as buildings, machinery and
equipment. This money comes from owners or it is borrowed from banks. A business with more capital has
a higher chance to produce more products and expand its activities. Thus, a business with higher capital
employed is considered to be a large business.
In the above illustration, PetroChina may be considered to be a large business because it has $150 billion
more assets than Walmart. Using capital employed is suitable when comparing businesses in different
industries.
However, some businesses may be labour intensive which means they may require more employees than
machines. Such businesses may still be large but they are considered small due to low capital employed.
3. Value of output
This method involves comparing businesses basing on value of their annual production. Thus, a business
that produces goods with more value in a year is considered to be a large business. In the above illustration,
PetroChina is considered to be a large business because it produces $210 billion more than Walmart. Using
value of output is suitable when comparing businesses in the same industry as the output (goods being
produced) will be the same.
However, not all goods produced by a business are sold. A business may produce more but fail to sell all
goods produced. This makes it to be a smaller business when value of sales is used. This method is not
suitable when comparing businesses producing different products like in the case of PetroChina and
Walmart above.
4. Value of sales
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Value of sales compares businesses using annual sales income made by a business. It is often used to
compare businesses in the retail industry as the success of those businesses depends on selling more.
In the above illustration, both businesses have an annual sales value of $850 billion. They are considered to
be of the same size.
Value of sales is suitable when comparing businesses in the same industry and the same market.
However, the nature of products sold differs between businesses. One business may sell only one product
to reach the same sales value as a business with many branches and employing many people. This method
is only useful when comparing businesses in the same industry and same market.
5. Market share
Market share refers to the percentage of the total market that is controlled by a business. A business has
high market share when it can sell to many customers. In the above illustration, Walmart controls 35.7% of
the market while PetroChina controls 20.9% of the market. Thus, Walmart is considered to be a large
business basing on market dominance.
Comparing business sizes using market share is suitable for businesses selling similar products and
operating in the same market.
However, a lot of research and data collection is required for this method to be useful. Some businesses
may not provide true sales figures for the market share to be calculated. It is not useful to compare
businesses basing on market share when they are not operating in the same market and selling similar
products like in the case of PetroChina and Walmart above.
Review Questions
1. The following table shows details for businesses in Country X.
The Finance Minister for Country X thinks that Business C is the largest business in Country X. Do you agree?
Justify your answer. [6]
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(a) Survival
Survival is the most important objective for new businesses. This is because the business is entering a
market with businesses already operating there. Competition will be very high. So, the business’ goal will be
to survive before making a profit. If a new business does not seek to survive, it may fail. Survival can be
achieved through lowering prices to attract customers, advertising and creating unique products that are
not currently offered by existing businesses. Survival is also important to large businesses when there is an
economic recession. Demand for goods and services will be low and unemployment is high.
(b) Profitability
Profit is the objective of every entrepreneur. Entrepreneurs set up businesses to earn profit. Profit is the
rewarded for their investment. A business makes profit if its sales revenue is greater than its costs. Profit is
important to a business because:
it is a measure of business success.
it is used to reward entrepreneurs for their investment.
it can be used to expand the business.
it attracts investors.
In-order to maximise profit, businesses should find ways to reduce costs such as buying from cheaper
suppliers.
(c) Growth
Growth means expanding the business. Business owners are interested in increasing the size of their
businesses to increase sales, market share and to fight competition. A large business has advantages such
as; ability to get loans from banks, gaining trade discounts when buying goods and producing more goods at
a lower cost. These are called economies of scale.
Growth involves; opening new branches, buying additional machinery and equipment, developing new
product and employing more employees.
Review Questions
Waste Concern (WC) is a private sector business in country X. The business was formed to recycle waste. It
achieves its aims by collecting waste from households and factories and turning it into organic fertiliser that is
sold at cheaper prices to communities in country X. The Managing Director, Yan Yem, believes that besides
achieving its objectives, the business is also helping the government of country X to achieve its objectives.
Required
(a) What is a business objective? [2]
(b) Give two objectives of Waste Concern. [2]
(c) Do you agree with the Managing Director that Waste Concern is assisting the government to achieve its
objectives? Justify your answer. [6]
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more workers, buying additional machinery and equipment or developing new products. Internal growth is
funded by using internal resources such as:
a. using profit earned by the business from previous years.
b. the owners introducing more capital into the business.
2. External growth
External growth involves a business expanding by taking over or merging with another business. The
process of taking over or merging with another business is called integration.
(i) To take over a business means to buy it completely and take full control of that business. This may
happen with or without an agreement with the original owners of that business.
(ii) To merge means to join two businesses into one business that operates under one name or a shared
name.
Illustration:
1. Takeover
Tiger
Tiger Airways
Airways Buys Fast Jet becomes (now larger
than before)
2. Merger
Fast Tiger
Tiger
Airways Join with Fast Jet becomes
Airways
(now larger
than before)
Illustration:
Car Dealer shop
vertical
vertical
2. Vertical integration
Vertical integration is where by a business merge or takes over another business at a different level of
production. The other business taken over or merged with is usually a supplier or a customer to that
business. In the above illustration, a car manufacture takes over a car dealer (shop). This is called forward
vertical integration. The car dealer is a customer to the car manufacturer.
If the car manufacturer takes over a car parts supplier, it is called backward vertical integration.
3. Conglomerate
Conglomerate involves the business merging or taking over businesses in completely different industries. In
the illustration above, the car manufacture may buy a cloth manufacturing business or a fishing company.
This is called diversification.
Review Questions
1. Copy and complete the following table, putting a tick in the appropriate box.
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2 A travel agent merges with an online
. holiday company.
3 A clothing retailer takes over a clothing
. manufacturer.
4 A bank buys a mobile phone company.
2. Rufas is a fruit jam producer. He buys the fruits from a nearby farm and sells his jam to a grocery shop
in the city centre. In the past five years, his jam business was doing well and it earned him enough
profit to save. Recently a new jam producer came into the city. The demand for his jam is declining.
Rufas wants to grow his business.
Required
Explain the one advantage and one disadvantage to Rufas of using each of the following methods to
grow his business.
(a) opening a new branch in the city centre.
(b) merging with the farm.
(c) taking over the new jam producer. [9]
Review Questions
Glass Warehouse (GW) is a glass manufacturing company that makes glassware products such as windows
and bottles. The company is owned by two partners Grace and Kai. Grace thinks that they can expand their
business to other cities in the country as it has managed save $400 000. Kai is afraid because he has read
that 80% of business fails when trying to expand.
Required
(a) Give two reasons why some business owners may want their business to remain small. [2]
(b) Identify two reasons why new businesses might fail. [2]
(c) Do you agree with Grace that they should expand their business to other cities in the country. Justify
your answer. [6]
BUSINESS ORGANISATIONS
1. Sole trader
A sole trader is a business owned and controlled by one person. It is the most common type of business set
up by new entrepreneurs.
The following are the key features of a sole trader:
It is owned and controlled by one person.
The owner is both the employee and the manager.
The owner has unlimited liability- the owner has legal responsibility to pay for the debts of the business
if the business fail to pay its debts.
A sole trader is unincorporated – there is no separation between the owner and the business.
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There is no one to share the work load with. If the owner is sick or is not available, there will be no one
to manage the business.
The business lacks continuity. If the owner dies, the business stops to operate.
2. Partnership
A partnership is business owned and controlled by two or more people who share ideas and risks. The
partnership business has the following features:
The business has two or more owners called partners.
Partners may sign an agreement called a Deed of Partnership.
The partners raise capital together.
The partners share management of the business.
Profits and losses are shared between partners.
The partners have unlimited liability - this means that the partners can lose their personal property to
creditors if the business fails to pay its debts.
Each member can make a decision on behalf of the partnership.
If one partner dies or withdraws, the business is dissolved.
Review Questions
Keren is an accountant. She wants to set up her accounting consultancy company. Her research has
shown that she needs $12 000. She has managed to save $8 000. Her sister who is a teacher is willing to
join her as a partner but she will continue to teach at a local school. Keren has approached a city bank
and the branch manager has advised her to provide a business plan.
Required
(a) What is a sole trader? [2]
(b) Give two features of a partnership. [2]
(c) Identify and explain two advantages and two disadvantage of Keren forming a partnership with her
sister. [12]
3. Companies
A company is an incorporated business formed by shareholders and managed by a board of directors.
An incorporated business is one in which there is separation between the business and its owners. The
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business is responsible for all its debts. The company can take legal actions against its owners and the
owners may also take legal action against their own company. Companies are divided intoprivate limited
company and public limited company.
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This makes their products to be cheap to customers.
Public limited companies have high status. They are very large companies with branches in several parts
of the world that are well known. Every other business wants to associate with them.
The shareholders have limited liability. This means that if the company fails to pay its debts, the
shareholders may not lose private assets to pay for the debts of the company. They only lose the capital
they have invested in the company.
The company has continuity. If one shareholder dies or retires, the business will continue to operate
because it is regarded as a separate person.
Public limited companies can easily get loans from banks because banks trust them. They are
considered to be less risky to lend them money.
Review Questions
Kallis Engineering (KE) is a private limited company. It is a small engineering company responsible for
manufacturing and repairing of farm equipment. The directors of KE are planning to expand their business to
other parts of the country. A specialist has advised them to change their business into a public limited
company.
Required
(a) What is limited liability? [2]
(b) Identify and explain two advantages of Kallis Engineering operating as a public limited company. [4]
(c) Do you agree that Kallis Engineering should change to a public limited company before it expands? Justify
your answer. [6]
4. Joint ventures
A joint venture is a business enterprise formed and controlled by two or more businesses that join for
specific purpose. Businesses may form joint ventures for the following reasons:
To develop a new product.
To undertake a large construction project.
To expand into a new market.
To share knowledge and expertise.
Company A Company B
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(China) (Africa)
Joint Venture
Company
5. Franchises
A franchise is a business agreement in which one business sell its products under the name or identity of
another business. Thus, a franchise agreement involves three things namely; the franchisor, the franchisee
and the franchise.
The franchisor is the business with well-known brand name, logos, trading rights and products that
another business wants to use.
The franchisee is any other business that pays for the right to use the brand name, logo, product or
trading rights of another business.
The franchise is the agreement allowing one business to use the brand name, logo, products or trading
rights of another business.
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franchisor. The business will continue to use these benefits even after the end of the franchise
agreement.
Banks are willing to lent money to a business operating using a recognised brand name because it is
considered to have low risk. This helps the franchisee to quickly raise money required to expand the
business.
Sometimes, the business gets products directly from the franchisor. This ensures that all products sold
to customers have the same quality, increasing chances of satisfying customers.
Review Questions
Diamond is a car repair mechanic. He operates a successful workshop, Diamond Car, in a small town in
country X. The success of his workshop has motivated him to think of expanding his car repair business to
three major cities in the country. The expansion requires $120 000. Diamond is considering two options to
use for expanding.
Option 1: Diamond Car enters into a joint venture with another motor repair company from country Y,
which will bring new workshop equipment. Diamond will manage the new company formed. The joint
venture partner will get 60% of profit made.
Option 2: Diamond Car buys a franchise for Xtreme Cars, a leading car repair business in country Y. The
franchise will provide the full amount required by Diamond but he will pay 20% for every car repaired.
Required
(a) What is a joint venture? [2]
(b) Give two advantages to Xtreme Cars of selling their franchise to Diamond. [2]
(c) Which option do you think Diamond should choose? Justify your answer. [6]
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5. community (pressure groups)
6. trade unions
Internal stakeholders
Stakeholder Why are they important? What are their main objectives?
s
Owners or These are people who invested money They want the business to make profit.
shareholders to start and expand the business. Profit is the reward they get from their
They might lose their investment if the investment.
business fails. Profit also increases their wealth. They use profit
to expand the business.
Managers Managers are people who hold higher Managers are interest in the success of the
positions in the business. They make business because it gives them more power, more
important decisions that determine the status and they may earn higher salaries through
success or failure of the business. bonuses.
Employees Employees are people who work for Employees want the business to succeed so that
business and in return they are they continue to be employed and receive their
rewarded with wages and salaries. salaries and wages. They also expect an increase
in salaries and wages and improved working
conditions.
External stakeholders
Suppliers These are people or businesses that sell Suppliers are more interested in selling to a
goods and provide services to the business that is able to pay them on time.
businesses. They may supply the goods Suppliers may refuse further credit if a business is
and services on credit to the business. failing to pay them.
Banks Banks lent money to the business. They Banks are more interested on the ability of a
check the business’ finances to see if business to repay the loan plus interest. A
the business is making enough cash to business that has a poor cash position may not
get a loan. get a loan from a bank.
Customers These are people or other businesses Customers are interested on good quality and
that buy goods and services from the reasonably priced products. Customers prefer to
business. If customers are not satisfied buy from businesses they trust and which protect
they leave for other businesses. their rights.
Governments The government, through its various Government departments are interested in:
departments departments, put in place laws that the profit made by a business so that they
affect the operation of every business. can levy tax on the business.
supporting new and small businesses so that
the economy may grow.
checking whether the business is following
laws relating to environmental, employment
and consumers protection.
Trade unions A trade union is an organisation formed Trade unions are more concerned with higher
by a group of workers who join together salaries and wages for employees and better
to fight for their rights. working conditions for their members.
Trade unions may organise labour action
that can disrupt productivity of the
business.
The The community is made up of different The community wants the activities of the
community people and organisations that benefit business to improve the living standards of the
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from the business’ goods and services. community. They want businesses to employ
The community is also negatively affected people from their own communities and to
by the activities of the business such as produce goods and services without damaging
pollution, damage to the natural the environment or causing pollution.
environment and unemployment.
They may form pressure groups to
disrupt or stop productivity of the
business.
Review questions
TurnUp is a private limited company that makes bricks by recycling waste plastic. The company is located in a
small busy town. The main objective of TurnUp is to maximise profit by keeping wages and other costs low.
One of the community leaders has written to the government requesting that the company should be closed
as its ovens are ‘a hazard to the town’. The company employs 50 full time employees and over 200 recyclers
from the town.
Required
(a) What are stakeholders? [2]
(b) Identify and explain the interests of two stakeholders of TurnUp. [4]
(c) Do you agree with the community leader that the government should close TurnUp? Justify your answer.
[6]
MOTIVATION OF EMPLOYEES
What is motivation?
Motivation is the desire or drive that makes employees work hard and produce more goods and services.
Employees are motivated by the following factors:
1. Money (salaries and wages)
People require money for them to pay for goods and services and to take care of their families. They work,
even more, if there is a promise of being paid higher wages and salaries. Some manufacturing businesses
pay their employees according to number of units produced in order to encourage them to produce more
goods.
2. Their work
Employees work more because they are enjoying the job they are doing. They have an internal feeling that
their job is interesting. They feel more satisfied by doing their work and achieving set targets. This is
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common for sports personnel.
3. Recognition
Employees are more motivated if their effort is acknowledge by positive comments and awards of
achievement. They feel that they have something to contribute to the job and society. Employers may also
delegate important duties to employees who are performing better to further encourage them.
4. The working environment
The physical and social working environments are very important for employees. Employees should be able
to contribute their effort in an environment that is free of injury, pollution and other dangers. The working
environment should offer employees an opportunity to give their opinions without fear.
5. Job security
People are motivated if the job offers them an assurance of being employed for a long time. Employees
work harder if they are sure that their jobs are safe. A workplace where employees regularly lose their jobs
is demotivating to employees.
f. Satisfied customers
Motivated employees are willing to work extra hard to ensure that customers’ needs and wants are
satisfied. This may include providing free advice to customers and making follow up on products sold to
them. At the end, when customers are satisfied, they come to buy again leading to more sales for the
business.
THEORIES OF MOTIVATION
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What does Maslow’s Hierarchy of Needs Theory say?
Maslow suggested that people, including workers, have needs that can be placed in a hierarchy as follows:
Self-
actualisation
Safety and Security The business must ensure that employees are working in an environment
needs free from injury, pollution and death.
Employees must be provided with adequate protective clothing suitable
for their work.
Employees should be afforded the opportunity to sign employment
contract so that they feel confident to perform their duties and have job
security.
The business can pay for medical insurance for its employees so that if
they are injured at work, they can be treated without paying for their
medical bills
Social needs The business should ensure that employees feel belonging to the
organisation by involving workers on issues that affect them.
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Employees should be able to build friendships, build teams and share
ideas about their work.
The business can hold events that unite and encourage social interactions
such as ‘end of year parties’ and sporting events.
Review Questions
CWB is a small business owned by Cherry. The business makes a range of pottery products that includes
plates, cups and display pets. The products are sold to overseas markets. It employs 30 employees. Most of
the work done in CWB involves human skill. Machines are only used when drying the products. The owner,
Cherry, is looking at ways of motivating employees in order to meet production targets.
Required
(a) What is motivation of employees? [2]
(b) Identify two effects of a demotivated work force. [2]
(c) Using Maslow’s hierarchy of needs, identify and explain ways that could be used by Cherry to motivate
employees to achieve the following.
(i) Physiological needs.
(ii) Self-esteem.
(iii) Self-actualisation. [6]
Review Questions
CWB is a small business owned by Cherry. The business makes a range of pottery products that includes
plates, cups and display pets. The products are sold to overseas markets. It employs 30 employees. Most of
the work done in CWB involves human skill. Machines are only used when drying the products. The owner,
Cherry, is looking at ways of motivating employees in order to meet production targets.
Required
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(a) What are ‘hygiene factors’? [2]
(b) Give two proposals made by Herzberg in his theory. [2]
(c) Using Taylor’s theory, identify and explain two ways that could be used by Cherry to motivate
employees to meet production targets. [6]
(a) Salaries
Salaries are normally paid to office employees and public sector employees such as teachers and nurses. A
salary is a fixed monthly payment. The salary is not linked to the effort of the employee. It is mostly based
on time (month). A salary is not based on units produced. It is an agreement between the employee and
the employer. Salaries are not normally motivating for employees to work harder. Employees who earn
salaries are motivated if they are promised bonuses or promotions.
(b) Wages
Wages are financial rewards for employees who are paid according to units produced or time worked.
Wages are paid daily or weekly. They are classified into piece rate and time rate.
(i) Piece rate
Piece rate are wages paid based on number of units produced. The basic rule is that an employee who
produces more units will also earn more wages. Paying employees using piece rate has the following
advantages:
The business is able to reward employees who are putting more effort to their work as their work can
be measured easily.
The business is able to meet orders from its customers as employees produce more goods in order to
earn more money.
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(d) Commission
A commission is paid in addition to a wage or salary for sales staff. Thus, an employee who sells more goods
and services will also earn more money. This motivates them to find more customers. However, paying a
commission to employees may be stressful to them in times when the products are not in demand.
Fringe benefits
o Providing accommodation. o Free or discounts on products produced by
o Providing transport to and from work for low the business.
level employees. o Retirement pension paid by the business.
o Company car and company house for senior o Free membership to a sport or social club.
managers. o Paid school fees for employee children.
o Paid health care insurance. o Free holiday abroad.
o Meals at work (breakfast and lunch).
(iv) Teamworking
Teamworking involves giving groups of employees responsibility for certain tasks which they do with little or
no supervision. Each team has the opportunity to decide its objectives and design ways of achieving those
objectives. This method is used most in production. Teamworking has the following advantages:
Less supervision is needed as each team has the opportunity to set its targets and achieve them.
It encourages planning and organisation on the part of employees.
Employees become more involved in problem solving and decision making.
Employees are more motivated as they have more control of their work.
However teamworking can have the following disadvantages:
Employees may need training for them to be able to take responsibility of their work. This may add
costs to the business.
Working in teams may create conflicts among workers if they do not share the same vision. This may
have reduces productivity.
Employees might demand a salary increase if they realise that their responsibilities have increased.
Review Questions:
Metal King is public limited company that mine iron and process it into iron sheets that are sold to other
manufacturing companies. The company employees 1 300 employees. The Human Resources Manager is
concerned as many employees are leaving the company. ‘I don’t understand why motivation is poor. We
time rate and offer bonuses’.
Required
(a) What is meant by bonus? [2]
(b) Give two fringe benefits that Metal King can use to motivate its employees. [2]
(c) Explain one advantage and one disadvantage of each of the following methods of motivating employees
for Metal King.
(i) Job rotation
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(ii) Job enrichment
(iii) Teamworking. [9]
Manging Director
Chain of
Sales Persons Market Researchers Factory Supervisor Qualaity Controller Bookkeeper command
Factory Staff
Managing Director
span of control
The chain of command- this refers to the different levels within the organisational structure that allows
instructions to be passed from senior management to lower level employees. In the above
organisational structure, the chain of command has three levels from the Managing Director to Branch
Managers.
The span of control – this refers to the number of sub-ordinates working directly under one manager. In
the above organisational structure, there are two branch managers directly under Area Manager 2.
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Delegation of tasks - it shows subordinates that can be given authority by management to perform
important tasks.
Employees are less motivated as their feedback is less valued. Due to the many levels of management,
issues raised by employees are not given value because it passes through many levels before it reaches
senior managers.
The business has high costs as there are many managers in the structure who are paid high salaries.
However, with a tall organisational structure;
Managers have fewer subordinates to supervise and therefore, managers are able to interact with their
subordinates.
Managers and employees are able to specialise because they have fewer responsibilities.
Review Questions
LFC owns a chain of ten sports clubs across country K. Each club has a similar structure. The Directors of LFC
believes that a good organisational structure is important for the success of the club. The directors propose
the following structure for each club.
Managing Directors
What is Delegation?
Delegation means giving subordinates the authority to perform important tasks and make decisions.
The subordinates are given authority but the responsibility remains with management. That is, any decision
made by the subordinate that may have negative effect on the organisation will still be the responsibility of
management who delegated the authority. They cannot blame the subordinate.
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promotion.
The employees may have better experience and skill in the task to be performed, so it will be good for
the manager to delegate authority to the subordinates to perform that task.
LEADERSHIP STYLES
What is leadership?
Leadership is the ability of a manager to guide employees to achieve business objectives. Managers use
different leadership styles to achieve the goals of the organisation they are leading.
1. Autocratic leadership
Autocratic leadership is where leader is the only one with authority and power to make decisions without
consulting subordinates. An autocratic leader relies on specific rules and instructions to control all processes
within the workplace. Everything rests with the leader and employees follow instructions without
questioning them. That means all creative decisions originate from the leader.
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(d) It is good for handling crisis situations.
Autocratic leaders are able to handle a crisis situation easily because they are the ones who are in charge of
decision making. There is no need to consult subordinates. The leader will just issue commands or
instructions on the action that subordinates should take. This makes it suitable to be used in military and
government departments.
2. Democratic leadership
Democratic leadership is where by the manager encourage subordinates to participate in decision making.
Democratic leaders are willing to accept ideas from subordinates. It creates a form of shared leadership
where each team member is invited to share their ideas, knowledge and experience.
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other employees may feel like their ideas are not being valued. Over time, this may become demotivating
leading to a reduction in productivity.
3. Laissez-faire leadership
The Laissez-Faire management style is one that is based on delegation. It involves the manager delegating
decision making to subordinates. Employees are free to make important decisions that affect the business
or productivity.
(d) It creates more time for the leader to focus on important matters
Since most of the decision making process has been delegated to lower level employees, the manager has
enough time to make the most important decisions of the organisation.
Review Questions
Sasha owns a business which produces furniture. She employs 150 workers in the Production department, 15
in the Administration department and 2 security personnel. She uses a laissez-faire approach as she believed
her employees were responsible for their work. Productivity is low and she has delegated the Factory
supervisor to investigate.
Required
(a) What is delegation? [2]
(b) Give two disadvantages to Sasha for delegating work to the factory supervisor. [2]
(c) Explain one advantage and one disadvantage to Sasha of using laissez faire leadership style. [4]
(d) Do you think Sasha should change her leadership style to autocratic style? Justify your answer. [6]
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RECRUITMENT AND SELECTION
Selection involves choosing the suitable candidate to fill up the job vacancy.
Selection involves:
receiving curriculum vitae from various applicants.
short-listing candidates for interviews.
interviewing candidates.
choosing a suitable candidate.
1. Vacancy arises
A job becomes vacant because someone has left the job or its a new position created.
2. Job description
Job description gives the duties, roles and responsiblities of the required person. It also show the supervisor of that person.
5. Receiving applications
The business will receive letters of application and curriculum vitae from various candidates.
6. Short-listing candidates
A short list of suitable candidates is made and invited for an interview.
7. Interviewing candidates
Interviews involves oral and written questions for candidates to prove themselves. Candidates are tested on various skills required for the job.
They save wage costs – part-time employees are paid wages that are lower than full time employees
because they work fewer hours than full time employees.
They provide more skills and experiences – part-time employees may have worked for various
organisations. They bring the experience gained from those organisations to improve productivity.
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What are the disadvantages of employing part-time employees?
Part-time employees may not be available when required- some part-time employees may be holding
more than one job making them to be less committed to the business.
They may be less skilled- part-time workers may not have skills that are necessary to make them more
productive for the business.
They may miss important information- it is difficult to communicate with part-time employees if they
are not at work. They cannot attend meetings or get updates.
They can lack coordination with full-time employees - full-time employees may not cooperate with
them as they see them as their rivals.
Review Questions
Slash Active is health restaurant in a large city. The restaurant employs 6 full time employees and 2 part-time
employees recruited from the local communities as follows:
Tasks Number of full –time Number of part-time
employees employees
Preparing food and cooking 2 1
Making hot drinks 1 0
Serving tables 2 1
Cashier 1 0
The owner, Kausk, uses democratic style of leadership. He pays all members of staff the same wage of $8.00
per hour. The normal week has 35 hours and part time employees work 12 hours per week.
Required
(a) What is recruitment? [2]
(b) Identify two stages in the recruitment and selection of employees. [2]
(c) Give two differences between job description and job specification [2]
(d) Identify and explain two advantages to Splash active of employing part-time employees. [6]
TRAINING OF EMPLOYEES
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employees.
1. Induction training.
Induction training is offered to a new employee who has just joined the company. Induction training
involves giving an introduction to the employee about the company activities, customs, procedures and
employees. New employees are usually taken through the various departments of the company and
provided with company policy manuals to read and familiarize themselves. Induction training takes few
hours to a week depending on the size and nature of the organisation.
2. On-the-job training
On the job-training involve employees learning while doing their work by observing more experienced
employees doing the same tasks. This training is normally offered to unskilled and semi-skilled employees.
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The training is directly related to the work that the new employee will be doing. This increase chances
of producing better quality work.
Employees get the opportunity to interact and know each other while still doing their work.
The training is less expensive as the trainer is just paid a normal salary.
3. Off-the-job training
Off-the-job training involves employees learning away from their work place. This may involve taking up a
course at a college or training institution.
What are the advantages of off-the-job training?
The employees are taught a wide of skills by more experienced trainers.
Employees are able to focus on the training without having to worry about productivity.
Employees learn new skills and technology that is not currently being used by the business. They will
transfer those skills to other employees when they re-join the organisation.
The employee has chances of being awarded a certificate that can be used in future.
Review Questions
Wheels of Africa a business that sells new and used trucks to various African countries. They also provide
garage services for truck repairs. The garages are operated by highly trained workforce. They have recently
expanded their operations by opening a new show room and a garage in Country Z. This requires them to
recruit 50 new employees. The new employees will need to be trained.
Required
(a) Explain the term “induction training.” [2]
(b) Identify two benefits to Wheels of Africa of having a highly skilled work force. [2]
(c) The Managing Director is considering using on-the job training for the new employees. Do you agree?
Justify your answer. [6]
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relocation of the business to another area.
the business has merged or taken over by another.
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following should be allowed:
employees should have the opportunity to join a trade union of their choice.
pregnant women should be allowed to take leave of maternity.
employees should be given warning before dismissal.
employees should not be paid a wage that is below minimum wage.
If there is a disagreement between the employee and the employer, they should refer their matter to a
labour tribunal which may help them to come to an agreement.
Review Questions
Honey Moon is a luxury hotel. It has 45 rooms and it is located near six other hotels. Honey Moon has 20 full-
time employees and 40 part-time employees. Only full time employees are registered with the Catering
Employment Association. The owner, Honey Bee does not want part time employees to be members of any
employee association. When the hotel is busy, all employees work overtime. Part-time employees are paid
$4.50 per hour while full-time employees are paid $9.10 per hour. The catering industry minimum wage is
$7.80 per hour. The Association wants it to be revised to $9.30 per hour.
Required
(a) What is a trade union? [2]
(b) Give two reasons why a legal minimum wage is important for Honey Moon employees? [2]
(c) Do you agree that the legal minimum wage should be increased? Justify your answer. [6]
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COMMUNICATION IN BUSINESS
What is communication?
Communication is the exchange of information between two or more people.
SENDER
MESSAG
E
RECEIVER
FEEDBACK
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the message is sent and received by the correct person or people.
the receiver gives feedback to the sender to confirm that they have received and understood the
message.
Thus, for effective communication to be achieved, the sender must carefully plan the message and the
medium to be used so that the intended receiver is able to understand the message and give feedback.
2. On the message
The language used in the message may be difficult to understand for the receiver. The language used
may not be suitable type of business involved.
The message may be too long to read or listen to. Thus, the receiver may end up missing important
parts of the message.
4. On the medium
The message may be lost before it reaches the receiver due to the communication method used. For
example, poor network connection may make the sender and receiver fail to pass messages between
each other.
The sender may use a wrong method to send the message. For example, posting a letter for an urgent
matter instead of calling.
The channel may not provide the opportunity for feedback. Thus, the sender may not be able to check if
the receiver has received the message and acted upon it.
5. On the feedback
There may be no feedback from the receiver.
The feedback may take more time to be received.
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o The sender must provide a clear channel for feedback. Feedback can be in any form, verbal, written or
just a silent action. Ask the recipients to give feedback.
o The sender should use the shortest possible method. A long medium will distort the message.
o There should be trust between the sender and the receiver for the message to be given the importance
it deserves.
2 E-mails Messages are send directly to the Employees may ignore the e-mails.
. employees concerned. E-mails require internet connection
Other documents such as reports and which might not be available where
minutes of meetings may be attached the employees are located.
to the e-mail. Not all employees may have e-mail
They offer a permanent record for addresses for them to be reached.
future reference.
4 Notice Notice boards offer visual impart to Employees may not visit the notice
. boards message. board regularly to read the messages.
Messages posted on the notice board If the notice board is overloaded,
offer a constant reminder to employees may not see a new
employees. message.
Notice boards are suitable for other It is difficult for the sender to check if
methods such as memos, posters and all employees have seen the message
instructions. and understood it.
5 Internal They are suitable for updating They are not suitable for giving
. reports and employees for events that have taken instructions that require urgent action.
company place. The language contained in these
magazines They offer a permanent record of documents may not be understood by
information communicated for future all employees.
reference. Reports may not allow for feedback. A
They are suitable where detailed meeting to discuss the report is
information is requires such as cash required.
flow forecast, financial performance
and future vision of the business.
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Which methods of communication can be used for external
communication?
3 Websites Websites offer visual, verbal and Websites are expensive to maintain
. motion pictures which help to as a monthly fee is charged to keep
emphasise the message. the website active.
While passing messages, websites People without internet connection
can also be used for advertising may not be able to access
products. information on the business website.
Information on websites can reach It is difficult for recipients to know
people in different parts of the that there is new information on the
world. business website.
5 Posters Posters are good for attracting Posters can be ignored by the
. attention hence they can be used intended recipients making them to
together with notice boards. be less effective.
Posters are an effective way of There is no way readers can seek
advertising products and giving clarification about information
instructions to the public within a displayed on a poster.
small community. It is difficult for the sender to get
Posters provide a permanent feedback to ensure that people have
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reference. They can only be read and understood the information
removed if the communication on the poster.
expires.
Review Questions
FBC is a commercial bank. It has 50 branches and 800 employees across country X. The Managing Director, Mr
Chingwena, wants to improve internal communication by introducing new technology into its branches. He says,
“customers complain about slow service. Memos never reach me, documents are everywhere and many part-time
employees complain, they don’t know what is happening”.
Required
(a) What is internal communication? [2]
(b) Give two barriers to effective communication in FBC. [2]
(c) Identify and explain why improving internal communication is important for FBC. [4]
(d) Identify and explain two methods that can be used to communicate with customers to reduce complaints. [6]
MARKETING
1 Changes in incomes As disposable incomes rise, people will demand goods and services they
. could not afford previously. If unemployment is rising in an economy, people
demand less goods and services. They focus on survival.
2 Technological New technology has makes it possible for businesses to develop products
. changes that were previously not possible to make. Thus, people shift to new
products in order to improve their lives.
3 Changes in prices Price influence demand. As prices rise, customers demand few goods. They
. focus more on basic items such as food. A lower price makes it possible for
customers to buy more.
4 Changes in style, Demand for other products depends on the development of new styles,
. fashion and tastes. designs and tastes. This very common in the clothing industry.
5 Seasonal factors The demand for certain products depends on the time of the year. For
. instance warm clothes are demanded in winter.
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Why some markets have become more competitive?
More often, there are many businesses trying to sell to the same customers. This makes a market to be
highly competitive. Competition means two or more businesses produce or sell similar products to the
same customers. Markets become competitive because of the following factors:
(a) Globalisation
Globalisation means people and businesses have been exposed to international markets. This has allowed
more choices to be available for consumers even beyond national boundaries. People can buy products they
want from other countries.
3. It encourages innovation.
Businesses are forced to look for better ways of satisfying consumers at cheaper prices.
(c) Branding
Branding helps to differentiate the business’ products from its competitors. This allows the business to
advertise and charge high prices for its products to earn more profit than competitors. Branding also help
the business to identify its market segment and increase market share.
Review Questions
Trainer Sport is a public limited company that makes athletics shoes for Olympic athletes. The Marketing
Director has been looking at some data for the past two years. The market share for TS has been dropping.
Required
(a) What is ‘customer loyalty’? [2]
(b) Outline two roles of marketing. [2]
(c) Give two reasons why the athletics shoe market has become competitive. [2]
(d) Identify and explain two ways that the Marketing Director could use to increase market share for their
product. [6]
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Mass marketing involves selling the same product to the whole market. In mass marketing, the product is
designed to appeal to customers with different preferences. Niche marketing involves selling a product to a
small specialised market. Niche markets are made up of customers who prefer specialised and exclusive
products such as sports cars, designer suits and exclusive holiday resorts.
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shows segments in a car market.
Car Market
From the different segments, a business will then chose the customers it wants to serve. This is called a
target market. So, a target market is a group of customers that a business chooses to offer its product.
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Review Questions
Wyne is a qualified teacher. He has been unemployed for two years after college. He wants to set up a
home tutoring business. There are three private schools in his suburb. His target market is school drop-outs
who want to complete their IGCSE. This will be a niche market to his business. He is hoping to maintain
customer loyalty.
Required
(a) What is niche market? [2]
(b) Identify two factors that can consider when segmenting the market. [2]
(c) Identify and explain two benefits to Wyne of targeting a niche market. [6]
MARKET RESEARCH
Market research is the process of finding information about customers and products they prefer.
Businesses cause use both primary and secondary researches to find data about from its customers.
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involves gathering data from researches done by others. Secondary research is less expensive than primary
research, as it makes use of already existing data.
Government Data for secondary Data obtained from these agencies is There is a certain cost applicable
2 and non- research can also be authentic and trustworthy. to download or use data
government collected from some These agencies provided up to date available with these agencies.
agencies. government and non- information about countries and The data obtained may not be
government agencies their economic performance. specific to the business.
e.g tax office,
government statistics
office, the WTO.
Publications Local newspapers, These commercial information The data obtained may not be
and journals, magazines, sources provide first hand, up to specific to the business.
3 information radio and TV stations date information on economic Commercial agencies charge a
channels. are a great source to developments, products and new fee to provide relevant data to
obtain data for market researches. the business. This increases the
secondary research. Businesses can request to obtain cost of the research.
data that is relevant to their industry
or customers.
Method Explanation
1 Random Random sampling involves picking people without using any particular
. sampling method (at random). Every person has an equal chance of being
selected for the research.
Random sampling is important because it reduces bias on the part of
the researcher.
2 Quota sampling This involves choosing people according to certain characteristics. For
. example, the sample can be made up of people of the same age, gender
or income. This approach is necessary when the research is interested in
a specific group of people in the research. It means the researcher will
not waste time and money collecting data from people who are not
relevant for that research.
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placing bars side by side.
3 Pie charts Pie charts have good visual impact as It is hard to compare two sets of
A pie chart shows data presented in the size of each sector shows size of data with each other.
sectors of a circle. The size of each each data presented.
sector represents the percentage of Too many sectors make the pie
the data presented. Pie charts can be coloured to make chart to be less effective.
them to be interesting to users.
A pie chart cannot show trends
Pie charts can be used with people so it is not useful for data that
limited knowledge of data presentation. show changes over time.
4 Line graphs It is useful in showing trend over a Line graphs are not visually
A line is drawn joining points plotted period of time. interesting like other graphs.
on a paper. Two or more lines can be plotted on the
same paper to help compare them. For
instance, a business can use line graphs
to show sales of each product over
time.
Line graphs can be useful in predicting
future trend and any missing
information.
Review Questions
Brown Delight produces chocolate bars that are sold to retail shops across country S. During the period 2016
to 2019, the business collected the following sales data for its three best-selling. The average sales figures
and market share for each chocolate are provided in the table below.
Sales and market share
Chocolate name Sales Market share
$’000 (%)
Nutcake 2 000 10%
Brown milk 5 000 60%
Brown diamond 3 000 30%
The data was part of primary research about consumer preference of Brown Delight’s chocolates.
Required
(a) What is primary research? [2]
(b) Give two advantages of using secondary research when conducting market research. [2]
(c) Using data in the table, use the following methods of data presentation:
(i) a bar chart for sales
(ii)a pie chart for market share [6]
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1. THE PRODUCT
What is a product?
Product refers to anything offered by business to satisfy consumer needs and wants. Products can be in the
form of goods or services. Goods are classified into consumer goods and capital goods.
Consumer goods are products used by consumers on a day to day basis. Consumer goods that are used for
a long period of time are known as durable goods such as cars, radios and furniture. Consumer goods that
are perishable (used up quickly) are known as non-durable goods. Examples include food, clothing, soaps
and cosmetics.
Capital goods are products that mainly used in the production of other goods. They include machines,
equipment and raw materials used in the production of other products.
Services refer to intangible products. Services are classified as personal services and commercial services.
Personal services are offered directly to consumers. They include health care, banking, education and
catering.
Commercial services are offered to businesses involved in producing goods or services. They include
banking, communication, transport, insurance, security, transport and marketing research.
The business will have a Unique Selling Point (USP). That is, the business will have a product with
unique features that differentiate it from competitor products. Thus, customers are able to recognise
the new product.
To stay ahead of completion. A business may not continue to offer the same product. At some point, it
must be creative and develop a new product to stay ahead of it.
New or improved products have high chances of satisfying the needs and wants of consumers giving the
business a competitive advantage and an increased market share.
New products allow the business to diversify its products. This means that a business will now have a
wide range of products to sell, reducing the risk of failure if demand falls, especially, where it sells only
one product.
New products allow the business to expand into new markets that were not previously served by
existing products. This allows the business to extend its influence and increase market share.
It maintains customer loyalty. There are customers who are willing to continue buying the business’
products for as long as the business continues to improve its products.
New products may boost the sales of existing product if it becomes successful on the market.
Customers will begin to associate the success of the new product to all products in the business.
Productive time is reduced. Before a product is fully put on the market, some designs and testing will
have to be carried out. The process is repeated several times before a final product is sold. This process
takes away productive time that can be used for improving sales of the existing products.
Loss of sales of existing products. The new product may end up competing with existing products of the
same company. This may result in overall sales revenue declining as only the new one is demanded on
the market.
Marketing costs may rise. Launching a new product requires active advertising for customers to aware
of its existence. This may reduce the potential profits to be earned from the new product.
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Why is branding a product important?
Branding is the process of creating a unique image about a product in the minds of consumers.
The product will have a brand name that will help to identify it and separate it from other products on
the market.
A successful brand makes consumers to remember it when they go for shopping. This increases
company sales.
A brand name can be emphasised during advertising by using other features such as the logo, designs,
packaging and brand image.
A good brand enables the business to build and maintain brand loyalty. Consumers become associated
with that brand and they may want to continue buying the same brand in their life time.
Branding enables businesses to enter global markets. Branded products are usually associated with
high status, hence, a high price can be charged for them.
Review Questions
Choc Home produces chocolate bars that are sold to supermarkets across country S. Its bestselling brand of
chocolate is ChocDelight. It is put in expensive wrappers of aluminium foil and packaged in small glittering
boxes and transported in large card board boxes. The sales of the ChocDelight are at their highest level. The
business has been fined by the Environmental Management Authority for causing littering.
Required
(a) What is branding? [2]
(b) Give two advantages of branding a product. [2]
(c) Identify and explain two disadvantages to Choc Home of packaging a product. [6]
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The Product Life Cycle
Sales y
Time
2 Growth The business starts to enjoy economies of Promotional pricing is used where the
scale. Sales and profits are gradually rising. business lowers the price for short
Prices are being influenced by competitors. period in order to attract customers.
A lot of promotion is implemented. New Competitive pricing can also be used
businesses enter the market attracted by the in which the price is set at the same
success of the product. level as competitor prices.
3 Maturity At maturity, the product is well established. Prices are based on competitors. The
Sales are no longer rising significantly. business can use psychological pricing
The product is widely available. The business in which prices are set slightly below
concentrates on maintaining market share competitor prices.
and customer loyalty. There is product
modification and improvement.
Promotion is aimed at reminding customers
about the product.
4 Decline The market becomes saturated. Sales are Prices are lowered to maintain
declining. Customers are now switching to customers.
competitor products. The business looks for Cost based pricing is also used to
cheaper production methods in-order to determine the break-even point.
maintain profits. Prices are lowered. Promotional pricing is used to boost
Decision on whether to maintain the sales in the short-run while waiting to
product or stop it will have to be made. make a decision.
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Selling the products to new markets that were not previously served by the business.
Using a new advertising campaign that creates a new image for the product.
Introducing new, improved versions of the product.
Changing the packaging.
Selling the product through additional channels of distribution such as online retailing and us of agents.
A successful product extension strategy starts well before the decline stage.
Review Questions
MHC makes a wide range of electrical products including cameras and phones. It operates in a competitive
market with many phone and camera producers. All its products are sold under the same brand name. The
Marketing Director has suggested that one model of its cameras, Fotoshoot, has reached its decline stage as
its sales are below normal. The Managing Director thinks that Footshoot can still sell.
Required
(a) What is the product life cycle? [2]
(b) Identify and explain one advantage and one disadvantage to MHC of developing a new product. [4]
(c) Explain two extension strategies that MHC could use to increase sales of Fotoshoot. Which extension
strategy would you recommend? Justify your answer. [6]
2. PRICE
2. Competitive pricing
Competitive pricing is used in a market where competition is very high. The market has many businesses
selling the same product to the same customers. Customers have many choices. The objective is to
discourage competitors from entering the market by setting prices at the same level as competitors or
slightly below them. This pricing method may result in price wars in markets that have large businesses that
are highly competitive. That is, any attempt to lower prices will cause competitors to lower their prices
much more leading to cycles of price fights. Competitive pricing may not be profitable to most businesses.
3. Penetration pricing
This involves entering a new market at a lower price to attract customers, including those customers from
competitors. This strategy is suitable for new businesses or when launching a new product. The business
can gradually increase prices as it gains market share.
However, penetration pricing may not be profitable enough for the business as it may fail to recover costs. It
may take too long for the business to become profitable.
4. Price skimming
Price skimming is when a very high price is set when launching a new product on the market. Price
skimming is used for products that are seen as of high quality. This strategy is suitable where a new product
has been produced and the objective is to recover research and development costs before competitors start
to produce it. Price skimming is successful if competition is low.
However, price skimming may lead to high prices that may not be afforded by many customers leading to
low sales revenue. Price skimming cannot be used for a long period as a strategy because competition will
rise and sales will drop.
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5. Psychological pricing
Psychological pricing is based on the customers’ perception about the product. Marketers recognise that
customers link prices to product quality and value. A high price may suggest a high quality or high
performance product. Thus, high income earners may purchase the product as a status symbol.
Psychological pricing may also involve charging a price just below a whole number, ($0.99 instead of $1.00),
giving an impression that the product is cheap.
However, psychological pricing may lead to small loss in sales revenue due to the small reduction in price.
Competitors may use the same strategy making this pricing strategy less effective.
6. Promotional pricing
Promotional pricing involves charging a lower price for a product for short period of time. The objective is to
increase sales and market share by attracting new customers. Businesses may also use ‘buy one get one for
free’ strategy in which customers get two or more products after paying for one. This method is suitable as
a product extension strategy and also to increase sales of slow moving inventory.
However, profit is sacrificed in-order to boost sales. Competitors may also use the same strategy to retain
their customers. This promotional pricing is suitable for customers that look for bargains, usually, low
income earners.
7. Dynamic pricing
Dynamic pricing involves selling the same product to different groups of customers at different prices. It is
possible to charge the customers different prices because they have different preferences and they are also
price sensitive. For instance, passengers are charged different air fares in the same flight by classifying
different parts of the airplane.
Dynamic pricing has the following advantages:
increased sales revenue as prices can be adjusted according to demand.
increased market share as the business is able to satisfy different groups of customers using the same
product.
encourages demand by creating different social classes among customers.
Review Questions
GPS produces a wide range of sports based computer games. It is in a competitive market. The
Marketing Manager has been looking at the information of two products.
Game C is in maturity stage of the product life cycle. It is sold in most sports shops. Demand is believed
to be price elastic.
Game D is about to be released. It has been very expensive to develop. It includes latest graphics.
Demand is expected to be high. It will be sold in a few exclusive sports shops.
Required
(a) Explain the term ‘price inelastic demand’? [2]
(b) Suggest two pricing strategies that can be used at maturity to boost sales of Game C. [2]
(c) Which pricing method could GPS use to launch Game D? Justify your answer. [6]
3. PLACE
What is place?
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Place refers to the various methods of making the product available to consumers. If the product is not
available where consumers can buy it, they may give up looking for it. This may reduce the sales and profit
of the business. A business can use different distribution channels to make their products available to
consumers.
A distribution channel is a method or route by which a product is passed from the producer to the
consumer. There are four common distribution channels as follows:
Channel 1
Producer Consumer
The producer sells directly to the consumer. There is no intermediary in this channel. This is done through
the use of factory shops, sales agents and e-commerce.
Advantages
This method is suitable for specialised goods such as machinery, cars and houses.
The method is used for personal services since services depend on the good relationship between the
customer and the service provider.
It is the quickest method to sell perishable goods such as fruits and vegetables. They can reach
customers whilst still fresh.
The producer receives direct feedback from consumers.
The producer enjoys increase sales revenue as there are fewer distribution costs involved in this
method.
Disadvantages
o Access to the market may be difficult where the producer is selling to an international market.
o The cost of transporting goods to individual customer may be higher than when goods are distributed in
bulk.
o The market may not be large enough to give the business enough sales revenue.
Channel 2
Producer Retailer Consumer
Goods are sold to customers through retail shops. Retailers act as intermediaries by buying from producers
and selling to consumers.
Advantages
Sales volume increase as retailers buy in bulk.
Retailers may advertise the products on behalf of the producer.
The producer saves distribution costs such as transport and storage.
Any losses from expired goods are bone by the retailer.
Disadvantages
o The producer may offer trade and cash discounts to the retailer which reduces the revenue earned.
o The producer may not get enough feedback from consumers.
o Large retailers may end up controlling the producer in order to monopolize the distribution of goods.
Channel 3
Producer Retailer Consumer
r
Channel 4
Producer Agent Retailer Consumer
r
An agent is another intermediary that can be used by producers. Agents do not buy goods for resale but
they arrange sales on behalf of the producer. Agents receive a commission for their services.
Advantages
Agents are suitable where the producer sells to international markets. In this case, the producer has
little knowledge about the local market it is serving.
Agents perform marketing and distribution on behalf of the producer. This reduces the costs of
employing a marketing specialist.
Agents may offer specialist services such as repairs and training on behalf of the producer. This further
increase customer satisfaction and increase sales.
Disadvantages
o The producer has less control in the way the product is distributed as the agent has more information of
the local market than the producer.
o The final price charged for the product will be higher due to the commission paid to the agent. This may
make the product to be more expensive for customers.
Review Questions
D & D manufactures sports balls and sportswear. The products are sold throughout the whole world
using agents in different countries. D & D thinks that they can increase market share if they sell
through other channels.
Required
(a) What is meant by direct distribution? [2]
(b) Identify and explain one advantage and one disadvantage of two other channels that D & D could
use for its sports products. [8]
4. PROMOTION
WHAT IS PROMOTION?
Promotion is a marketing strategy done to inform customers about the product, price and place to buy it.
Promotion aims at the following:
informing customers about the product.
reminding customers about the product.
encouraging the customers to buy the product by showing the benefits of the product to them.
increasing customer loyalty and brand awareness.
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increasing sales and market share.
Promotion involves two main activities namely advertising and sales promotion.
1. Advertising
Advertising is done to inform or persuade customer to buy the product.
Informative advertising provides factual information about the product such as instruction on use.
Persuasive advertising provides information aimed at influencing customers to try the product or switch
from competitor products. This may lead to increase in sales.
2 Leaflets and They are suitable for small to medium Leaflets may be wasted as not
. brochures. businesses. everyone who receives them will read.
They can be physically distributed to Leaflets placed in letter boxes may just
individual customer in that area. be thrown away.
Leaflets are generally cheap to produce
than advertising in newspapers.
3 Posters and They are usually large to attract Billboards are expensive to install.
. billboards attention from a distant. If billboards and posters stay for too
They are permanent. They continue to long, they will no-longer attract
emphasise the message. attention.
They are suitable for local events hence They contain fewer details.
they can be placed in the area in which People are not able to seek clarity
the event is taking place. because they will be passing.
Electronic media
4 Television It combines both sound and moving Producing and broadcasting adverts on
. pictures. This helps to reinforce the television is quite expensive.
message. The messages are too short, hence,
Adverts can be targeted to different they may not give a complete
audiences depending on the message.
programmes on offer. Viewers may be annoyed by the advert
Adverts can be repeated many times to especially when they are watching
reinforce the message. their favourite programmes.
5 Radio It is cheaper than a TV advert. Visual messages cannot be broadcast.
. The message can be heard by a wider Listeners may not pay attention to
audience, especially, in rural areas radio adverts. They may take that
where there are no TVs. opportunity to do other things such as
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Adverts can be aired according to discussing the previous programme.
programmes.
6 Internet A large amount of detail can be placed Customers may not view the website
. on the company website. unless they are looking for that site.
It is suitable for both local and Pop ups and other websites are seen
international markets. as a scam, hence, people may not take
Pop ups can be used at different them seriously.
websites, increasing chances of users It is expensive to maintain a website
seeing the advert. due to monthly data charges paid to
the service provider.
2. Sales promotion
Sales promotions are incentives offered to the customers to encourage them to buy the product. Sales
promotions are aimed at increasing sales for short period of time. Sales promotion can be done as support
to adverting. The following are the different methods of sales promotion.
4. After-sales- Businesses can make a follow up on products sold to customers with the aim of
service assisting customer to use them or repairing them when they are not working properly.
This is suitable for capital goods and other specialist products. This approach gives
confidence to customers.
5. Point of sale Products are displayed close to the point where customers pay for them. This highlight
displays the product as it becomes more distinct. This may encourage impulse buying.
6. Loyalty cards Retails shops issue customers with cards that are used to earn points each time
customers make a purchase. After some time, customers are able to exchange their
points for certain goods in the shop.
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2. The objective of promoting the product- advertising is suitable for long period of time while sales
promotion is for a short time.
3. The type of product- specialist products may require personal selling while clothes may require sales
promotions.
4. Stage in the product life cycle- a product at introduction may require a lots of promotion while at
maturity, branding can be used.
Review Questions
Able Bakery (AB) makes arrange of oven products including cakes and bread. The products are sold in a variety
of shops and supermarkets across country J. The Marketing Director wants to increase sales. She cannot
decide on the best method of promotion to use.
Required
Explain how each of the following three methods of promotion could help AB increase its sales.
Free samples
Display shops
Discounts
Which method do you think AB should use? Justify your answer. [12]
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What is e-commerce?
E-commerce is the process of buying and selling goods through the internet. Businesses think much about
how to attract attention of consumers at their website and achieve a sale. E-commerce is done mainly
through websites and social networking sites.
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Failure to develop a good marketing strategy may lead to failure to achieve the desired objectives as:
products which meet customer needs are priced very highly.
products that meet the needs of consumers are not well known by potential customer.
customers know about the product but they cannot find where to buy it.
1. Lack of knowledge-the business may lack proper understanding of buying patterns of local
customers and their preferences.
2. Cultural differences- different countries have unique cultures that if the businesses fail to
understand them, it reduce chances of success. Some products have been rejected in certain countries
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because they undermined the cultures of those countries.
3. Legal restrictions- countries have laws that sometimes make it impossible for foreign businesses to
operate freely. This makes foreign businesses to have a disadvantage when competing with local
companies.
4. Exchange rate risk- the differences between the value of the local currency and that from an
international country may cause a loss to a business selling abroad.
Review Questions
K Kosmetics manufactures make-up for women. The company sells its products across Europe but wants
to start selling to African countries. The Marketing Director says ‘there are a lot of opportunities in these
markets and also several problems. We are reaching saturation in Europe and we need new markets’.
Required
(a) What is meant by ‘reaching saturation in Europe’? [2]
(b) Suggest two methods that can be used by Kosmetics to overcome problems of entering new
markets. [2]
(c) Identify and explain two problems for K Kosmetics of entering new markets abroad. [6]
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OPERATIONS MANAGEMENT
What is production?
Production is the process of making goods and providing services to satisfy consumer needs and wants.
In manufacturing businesses, production involves adding value as raw materials are converted to finished
goods.
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Why do businesses hold inventories?
Inventories can take various forms including raw materials, semi-finished goods, finished goods and
components. Holding inventories may help the business in the following ways.
Review Questions
TXW makes car parts which are sold to international car manufacturers. The Production Manager has been
looking at productivity data. The data for 2015 and 2016 is shown in the table below. All employees work 40
hours per week.
There are several types of waste that occur during the production process. Some of them are:
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1. Over-production- this involves producing goods without finding customers for them. This may lead to
high storage costs and damage of goods stored in warehouses.
2. Transporting goods unnecessarily – goods are normally damaged during transportation to
warehouses.
3. Defects- faulty goods require goods to be repaired or redone before they are delivered to customers.
1. Job production
Job production involves making a product according to the customer’s specifications. The customer places
an order with details of the preferences to be made on the product. The job is unique to the customer.
Examples products produced using job production include suits, wedding dresses, houses or jewellery.
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What are the advantages of job production?
There are higher chances of satisfying customers as the job is done according to the customers’
specifications.
Businesses are able to charge a higher price as the product is unique. This increases revenue earned by
the business.
Employees are more motivated to do work since there is variation of work done.
Losses are minimised since products are made for customers already identified.
2. Batch production
This involves producing a limited number of identical products in a block or batch. Batches allow for
variation in products due to colour, size or quantities. Bread, cakes, shirts medicines can be produced in
batches.
3. Flow production
Flow production involves making large quantities of identical products using a continuous process. It is also
called mass production. Large numbers of identical units are produced on a production line. Examples of
products produced through flow production include drinks, cars and food.
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Workers may become bored by repeating the same work.
Storage and inventory holding costs are high due to the bulk purchases of raw materials and storage for
finished products.
Machine breakdowns may stop the whole production line.
Review Questions
Carlos produces luxury leather hand bags for female celebrities around the world. Most of the work is done by
hand. Carlos has two skilled workers and 12 assistant employees. The demand for hand bags is rising due to the
coming fashion festival. In order to meet demand, Carlos is planning to use batch production using automated
robots.
Required
(a) What is batch production? [2]
(b) What is just in time inventory management? [2]
(c) Give two advantages of using job production in the production of hand bags. [2]
(d) Do you agree that Carlos could use automated robots to produce his product? Justify your answer. [6]
Illustration
Big Ball Ltd produced the following cost data for May 2019:
Method
Average costs per unit (unit cost) = Total costs
Number of units
(i) $35 000/10000 = $3.50 per unit
(ii) $55 000/ 20000= $2.75 per unit
(iii) graph paper required here.
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(selling price per unit – variable costs per unit)
= X units
Review Questions
AFC makes a wide range of animal feed. The Operations Manager produced the following data from the
previous month
Product A Product B
Fixed costs per month $60 000 $45 000
Variable costs per kilo $4 $3
Selling price per kilo $6 $6
Planned sales for next month (kilo) 80 000 30 000
Required
(a) Calculate the BEP output for the two products. [4]
(b) Calculate the profit to be made next month if AFC sells all the 30 000 units planned for product B. [4]
(c) Draw the break –even chart for AFC for product A. [6]
Review Questions
Brown Cake is a large bakery that makes bread, biscuits and cakes using batch production. The Operations
Director says, ‘I have been told of that lean production techniques in the bakery would help to increase profit’.
Brown Cake has 45 employees who are always looking for ways to improve how things are done. The business
is also looking at ways of achieving economies of scale in its production.
Required
(a) What is meant by ‘lean production’? [2]
(b) Identify and explain two lean production methods that Brown Cake can implement to improve profit. [4]
(c) Identify and explain two economies of scale that might benefit Brown Cake.[6]
Quality assurance
Quality control
1. Quality control
Quality control is the process of checking for quality of goods and services at the end of the production
process. The idea is to stop faulty and defective products from being sold to consumers.
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product or the business is avoided.
Less training of quality inspectors is required, saving costs of production.
2. Quality assurance
This involves checking for quality at each stage of the production process. The aim of quality assurance is to
achieve quality at every stage of the production process from designing, purchasing materials, delivery to
customers and after sales services.
Review Questions
Kemo owns a successful restaurant in the city centre. He employs 8 chefs and 16 kitchen assistants. Customers
expect Kemo to provide quality service. Kemo believes that total quality is the best way to improve annual profit
of $30 000 and remain competitive. In the same city centre, there is a Café with a well-known brand.
Required
(a) What is ‘total quality management’? [2]
(b) Identify two difficulties that Kemo may face when introducing Total Quality Management at his restaurant?
[2]
(c) Explain how the following factors may help Kemo to achieve total quality.
(i) Employees working for Kemo.
(ii) Ingredients used in the restaurant [6]
LOCATION OF BUSINESSES
Factor Explanation
1 Availability of raw Businesses that deal with bulky or heavy raw material may locate closer to
materials sources of raw materials to reduce transport costs. This also applies to
businesses that use perishable raw materials which should be processed
quickly while they are still fresh.
2 Availability of labour Manufacturing businesses that are labour intensive locate their factories in
areas where wage costs are low or where there is high unemployment.
3 Availability of good Transport is important for both the supply of raw materials and the
transport networks distribution of goods to retailers. For businesses that supply fresh, perishable
products, they should have good access to transport to take those products to
the final consumer before they perish.
4 Close to market If finished goods are bulky or expensive to transport to the market, being
close to the market will help reduce transport costs.
5 Availability of energy Most manufacturing firms require energy and water to operate machines and
and water sources purify products. They need reliable sources of energy and water for
production to take place. Being close to sources of energy and water saves
production costs making products to be competitive on the market.
6 Government influence Some government offer subsidies and grant to businesses willing to set up
. manufacturing businesses in certain areas. The government can allow such
businesses to operate for some years without paying tax.
Factor Explanation
1 Availability of market Being close to customers is very important for service businesses as most
. services are offered directly to users. However, the use of internet has made it
possible for service businesses to reach customers located in different parts of
the world.
2 Availability of labour Some services depend on the skills of labour available. Locating service
. businesses in places where people with the necessary skills stays is important
to reduce the cost hiring and training unskilled workers.
3 Access to Most services depend on transport and communication. These days,
. communication businesses network through internet connection. For international businesses
networks to invest in a country, they require good transport and communication
networks.
4 Availability of Services depend on direct access. Businesses locate services in places where it
. premises is easy for customers to receive the services. However, services may be
located away from busy areas because the rentals in cities and central areas
are very high. Services located in centralised areas are normally expensive
due to rentals involved.
Review Questions
Kape Foods (KP) processes a wide range of frozen foods such as fish, meat and vegetables. Its products are sold to
various supermarkets around country Y. the company is planning to open two new branches. The Production
Manager has advised that finding the right location was important. The new branches will create 300 jobs each.
Required
(a) Identify two ways in which the government of country Y may influence the location of KP’s new branches. [2]
(b) Explain why the following factors are important to KP when deciding the location of its new branches.
(i) competitors
(ii) water sources
(iii) road networks. [9]
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FINANCIAL INFORMATION AND DECISIONS
Why do businesses need finance?
Businesses require finance for a variety of reasons as follows:
1. To start up a business
Businesses require money to start operating. This money is called start-up capital. The capital is required to
purchase assets such as motor vehicles, land and buildings. Money is also required to purchase goods that
are sold to customers or to buy raw materials for producing other goods.
2. To expand an existing business
An existing business may need money in-order to expand it. Expansion can be done by opening new
branches in other locations, increasing assets such as buildings and machinery or taking over other
businesses.
3. To provide working capital
Working capital is the money needed by a business to pay for day to day expenses. Such day to day
expenses may include wages, raw materials, rentals and electricity bills. A business may have all other
assets it needs to operate but if it fails to have enough working capital, it may fail to operate.
3. Selling inventory
This involves selling goods held for resale. Selling inventory is necessary when the aim is to increase liquidity
(cash available).
What are the advantages of selling inventory?
Selling excess inventory reduces other costs such as inventory holding costs (storage and security costs).
This helps the business to raise money for other purposes such as opening new branches.
Selling inventory is a quicker way of improving liquidity if there are ready buyers for that inventory.
Selling inventory saves the cost of borrowing money. Banks are not willing to lent money to small
businesses.
What are the disadvantages of selling inventory?
Sometimes inventory is difficult to sell, especially, where the demand for the goods being sold is price
elastic and there is high competition.
The business may not raise the required capital as inventory only improve liquidity but not overall
capital of a business.
Over-selling inventory may result in stock-outs and disappointment to loyal customers.
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Which are the long term internal sources of finance?
1. Retained Profits
Businesses may not distribute all the profit earned to shareholders. Some profits are kept in the business
for future use.
Review Questions
Amvita wants to start up a flower shop. The business requires $1 000 start-up capital. She has managed to raise
$800 from her previous job. She thinks that by selling her personal car for $500, she can raise the balance.
Required
(a) What is ‘start-up capital’? [2]
(b) Why is start-up capital important for Amvita? [2]
(c) Give two internal sources of finance that a business could use other than sells of assets and capital from
the owner. [2]
(d) Identify and explain one advantage and one disadvantage to Amvita of selling her personal motor vehicle
to raise the balance of the start-up capital. [4]
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day operations.
o Most trade credits are interest free. The supplier can only charge interest when the business exceeds
the due date.
o Goods bought on credit can pay for themselves. That is the business may sell the goods before it pays
for them.
What are the disadvantages of trade credits?
o The supplier may refuse to give future trade credit in cases where the business has previously failed to
pay for the goods. Trade credit depends on the trust between the business and its suppliers.
o The business may lose the opportunity to buy goods at cheaper prices as it loses on cash discounts.
2. Bank overdraft
A bank overdraft is an arrangement between the business and its bank in which the business is allowed to
overdraw its bank account. The business spent more cash than its bank balance.
What are the advantages of bank overdrafts?
The business can still write cheques to its suppliers even though it does not have enough money in its
bank account.
If a bank overdraft is used properly, it allows the business to pay other short term debts.
What are the disadvantages of bank overdrafts?
Interest is paid daily on the amount overdrawn. The interest charged on overdraft is usually higher than
on a loan. This further increases the cost of financing a business.
A business cannot rely entirely on a overdraft for its operations. The availability of overdraft depends
entirely on the trust between the business and its bank.
3. Micro-finance
Micro finance refers to small loans that are provided to less privileged people or small entrepreneurs to
finance their businesses. The loans are provided because:
(i) Commercial banks are not willing to lent money to small businesses.
(ii) Small loans are less profitable to banks.
(iii) Less privileged people lack assets that can be used as collateral for them to get loans from banks.
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business when investors buy shares.
More capital is raised since a large number of investors are free to buy shares from the stock exchange.
What are the disadvantages of issuing shares?
The original shareholders may lose control of the business as new shareholders become owners as well.
This may affect the objectives of the original owners.
The shareholders expect to receive dividends from their investment. If dividends are not paid they may
end up withdrawing their investment leaving the business with less capital again.
2. Issues of debentures
A debenture is a long term loan to a limited company. This loan is raised by issuing debentures to various
individuals and businesses willing to lend money to the business.
What are the advantages of debentures?
Debentures are long term sources of finance that can be used for a long period without the need to
repay them. This ensures that the business grows and become profitable before the debentures are
repaid.
No collateral security is required. Companies are not required to pledge their assets in order to raise
debentures.
The original owners of the business will maintain control of their business because debenture holders
do not vote to make decisions.
Debentures can be redeemed if the business no-longer require them. Cancelling debentures reduces
interest payments.
What are the disadvantages of debentures?
Since debentures are a loan, the company will have to pay interest to the debenture holders, whether
the business makes a profit or not. This will reduce the profit available to shareholders.
Paying interest and repaying the loan reduces the liquidity of the business. The business may end up
having less cash to pay for day to day expenses.
Repaying the debentures may deplete the capital of the business. This may create more capital
problems for the business if the debentures are not replaced by another source of capital.
3. Leasing
Leasing involves a business using an asset by renting it. The business pays monthly instalments for using the
asset.
What are the advantages of leasing?
The business has an option to buy the leased asset in future when profit and cash becomes available.
The business is able to use up to date expensive machinery and equipment that the business may not
be able to buy.
The business will reduce liquidity problems since it will not use a lot of cash to pay for the asset.
Care and maintenance of the asset is done by the leasing company. This means that the business will
save costs from operating the leased asset.
What are the disadvantages of leasing?
The total value of monthly lease payments is higher than buying the asset. This makes leasing to be an
expensive source finance.
At the end of the lease agreement, the leased asset may be returned to its owner, leaving the company
without an asset to use.
The leased asset does not belong to the business. Therefore, it cannot be used as collateral when
borrowing other loans.
4. Hire purchase
Hire purchase is a method of buying an asset on credit in which the buyer pays a deposit and make monthly
instalments.
What are the advantages of hire purchase?
o Unlike leasing, under hire purchase, the asset is owned by the business even before it is fully paid for.
o Hire purchase agreements are spread over a long period of time. This ensures that businesses do not
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have liquidity problems as they pay the monthly instalments.
o The business has the opportunity to earn revenue and cash while still paying for the asset.
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small amounts, a business may choose to apply for a bank overdraft, sell assets or buy on credit.
Review questions
Lara is a sole trader. She has successful small taxi business. Lara wants to expand by offering an airport taxi service to
and from the city centre. Lara needs to buy an eight-seater vehicle to carry people and their luggage. It will cost
$9000. She has fewer savings as she has invested everything into the business. Her current overdraft is $1500. She
thinks she has three options to raise the required finance.
Required
Consider the following three options that Lara might use to raise the required finance. Recommend the option that
Lara could use. Justify your answer.
Bank overdraft
Leasing an eight seater vehicle
Partnership with her uncle. [12]
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much cash means capital is not being put to good use. Thus, a business may plan the time to pay its
suppliers in cash so as to take advantage of cash discounts.
3. It is necessary when planning to start a business
When starting a business, it is important for the owners to prepare a cash flow forecast so as to estimate
cash needed in the first few months of operation. Many small businesses fail at start-up because they lack a
plan of cash needed to pay for day to day expenses.
4. It helps to prevent insolvency.
Insolvency means the inability of a business to repay its loans due to cash shortage. By having a cash flow
forecast, a business is able arrange better ways of paying its debts.
5. Repayments of debts
A business with a high level of debt faces cash flow problems as they repay the debts plus interest.
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is calculated as; current assets minus current liabilities.
What happens when a business does not have enough working capital?
The business will fail to pay for day to day expenses such as rent and wages.
The business may fail to buy goods for resale to its customers.
The business may fail to pay its short term debts on time leading to interest charges.
The business may fail to take advantage of cash discounts offered by suppliers.
The business may not enjoy economies of scale as it cannot buy in bulk.
4 Cash sales Cash is always received after each Customers may switch to businesses that offer credit.
. sale. Some products are difficult to sell for cash.
5 Delay buying non-current Not buying non-current assets The long term efficiency of the business may be reduced
. assets reduce cash outflows. since assets are needed to generate revenue for the
business.
6 Introduce more cash The cash available will increase for The owners may not have additional cash to inject into
. a long time as more cash is brought the business.
in by owners.
Review Questions
Star Cruise makes luxury boats. The Managing Director is always worried about cash flow. She says, ‘I pay all
suppliers after 30 days. My customers take 3 months to pay. Look at my cash flow? I need to do something ’.
Month 1 Month 2 Month 3
$’000 $’000 $’000
Cash inflows 20 80 40
Cash outflows 30 40 30
Net cash flow (10) 40 Y
Opening balance (20) (30) 10
Closing balance (30) X Z
Required
(a) What is a ‘cash flow forecast’ [2]
(b) Calculate the figures X , Y and Z. [4]
(c) Identify and explain two ways the Managing Director of Star Cruise can improve cash flow in Month 1. [4]
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What is the difference between profit and cash?
1. Profit is not the same as cash. Profit is the reward for taking a risk to form a business. Profit is the
excess of revenue to costs while cash is money available for spending.
2. A business can make a profit but without cash. This is possible where the business sells mostly on
credit. The business will show profit made from those sales but the customers have not paid for the
goods so cash will not be available.
3. A business can have cash without making profit because the business may sell some non-current assets
or borrow money to improve liquidity. This increases the cash available but the business may be making
a loss because its expenses may be high.
Review Questions
Tickers make watches and clocks. The following is Tickers’ income statement for the year ended
31 December 2019.
Revenue X
Cost of sales 180 000
Gross profit 120 000
Expenses Y
Profit 30 000
Required
(a) Calculate X and Y [2]
(b) Tickers has made a profit of $30 000 and thinks that the business can be more profitable. Identify
and explain two ways of improving profitability of the business. [4]
(c) Even after making a profit of $30 000, Tickers had $4 000 bank overdraft in its bank account. Identify
and explain two reasons for this. [4]
Review Questions
Paul has a take-away shop. He provides the following details for June 2019.
Definition of terms
1. Non-current assets are items owned by the business for a period of more than one year. Examples of
non-current assets are; motor vehicles, equipment and property.
2. Current assets are items owned by the business for a period of less than one year. Examples of
current assets are; inventory (stock), trade receivables (credit customers) and cash.
3. Inventory refers to goods held for resale, raw materials held for production and goods still in the
process of production.
4. Current liabilities are debts that should be paid with one year. Examples of current liabilities are
credit suppliers of goods and bank overdrafts.
5. Shareholders’ equity is the capital invested in the business by the owners plus any profit earned. For
limited companies, shareholders’ equity is made up of share capital plus reserves.
6. Non-current liabilities are long term debts of a business. Non-current liabilities are made up of long
term loans.
7. Capital employed refers to the long term capital of a business used by the business to earn revenue.
Capital employed is made up of shareholders’ equity plus non-current liabilities.
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Capital employed = shareholders’ equity + non-current liabilities.
Capital employed is also equal to Net Assets.
Review Questions
Buckle Up is a successful transport company. It plans to expand its business by offering more services to
its customers. The Finance Director provided the following statements of financial positions:
Required
(a) What are ‘non-current assets’? [2]
(b) Calculate X and Y. [4]
(c) Using the financial information provided by the Finance Manager, do you agree that Buckle Up
should expand its services? Justify your answer. [6]
1. Profitability ratios
Profitability ratios show the ability of a business to increase profit made by the business. Profit is important
it is the reward to investors.
Gross profit is the profit earned by a business after paying for cost of sales.
Gross profit is increased by:
Increasing selling prices.
Buying from cheaper suppliers
Negotiating for trade discounts from suppliers.
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Buying from cheaper suppliers
Negotiating for trade and cash discounts from suppliers.
Reducing operating expenses.
The best approach is to increase profit using the same capital or to earn the same profit using less capital.
All factors that increase gross profit and net profit, also, increases return on capital employed.
Illustration
Tickers make watches and clocks. The following is Tickers’ income statement for the year
ended 31 December 2019.
Revenue 300 000
Cost of sales 180 000
Gross profit 120 000
Expenses 90 000
Profit 30 000
The capital employed at 31 December was $850 000.
Required
Calculate;
(a) gross profit margin.
(b) net profit margin
(c) return on capital employed (ROCE)
Review Questions
Zee Foods produces mealie -meal and flour. The raw materials are obtained from local farmers. The
Finance Manager provides the following income statements for 2018 and 2019.
2018 2019
$’000 $’000
Revenue 300 450
Cost of sales 180 300
Gross profit 120 150
Expenses 80 60
Net profit 40 90
Capital employed amounted to $1 400 000.
Required
(a) Calculate the following ratios:
(i) Gross profit margin
(ii) Net profit margin
(iii) Return on capital employed (ROCE), for each year. [6]
(b) Identify and explain two reasons for the changes in the ratios calculated in (a) above. [6]
2. Liquidity ratios
Liquidity measures the ability of a business to pay its short term debts using cash. Liquid assets are cash and
other assets that can be converted into cash easily. A low ratio for liquidity shows cash flow problems. A too
high ratio shows that the business is not efficient in using cash resources.
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The current ratio shows the ability of a business to pay its current liabilities (short term debts) using its
current assets.
Current ratio = current assets
current liabilities
Illustration
MT Wholesale sells agriculture inputs. Their summarised statement of financial position is given below.
2018 2019
Inventories 20 000 30 000
Trade receivables 50 000 40 000
Cash 60 000 50 000
Total current assets 130 000 120 000
2. External users
(d). Banks
Banks provide loans to businesses. Banks want to see if the business will be able to pay back the loan. They
are more interested in the liquidity position of a business.
(e ). Creditors/ Suppliers
Creditors are people or organisations that supplied goods and services to the business on credit. They want
to see if the business will be able to pay for the goods in the near future. Businesses that are able to pay
creditors often get better credit terms such as cash discounts and longer credit periods.
(f). Government agencies
Companies are required by government to pay tax on profit made. Tax authorities check the profit made by
a business so that they can calculate tax to be paid by the business. Other government departments check
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the business’ compliance to environmental and safety laws by assessing money spend on these issues.
(g). Customers
Customers want to buy from businesses that will continue to exist for a long time. Customers want to see if
the business will continue to supply them goods in future.
Practice Questions
Buckle Up and Slik Ride are two businesses in the tertiary sector. Their statements of financial position are
given below.
2. Reducing unemployment
Unemployment refers to people who are able and willing to work but could not find suitable jobs.
Unemployment means fewer people have money to spend on goods and services. Demand for goods
and services decreases and economic growth is slow. The government may have to spend more money
in providing social services and social security payments to support unemployed families.
Reducing unemployment means more people are working and earning regular incomes. As employment
increases, demand for goods and services rises. Businesses are created to produce more goods and
services leading to economic growth and higher standards of living of people in a country. Government
spending on social services is reduced saving the money for further expansion of the economy.
3. Reducing inflation
Inflation refers to a general increase in the price levels of goods and services in a country over time. An
increase in prices by one business in a country is not inflation. As inflation rises, people will not be able
to buy the same goods as they bought in the previous year. For those who are working, the value of
their salaries and wages decline.
When there is inflation, business costs increase as a result of rising prices of goods and services and
demand for higher wages from employees.
If the government is able to lower inflation, businesses are able to produce goods and services that are
affordable to both local and export markets. Consumers will continue to demand more goods and
services leading to a rise in GDP.
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4. A favourable or positive balance of payment (BOP)
Balance of payment (BOP) is the difference between the value of exports and imports in a country.
Every country desires that its exports exceed imports so that it has a positive balance of payment. A
positive or favourable balance of payment means a country is earning more foreign currency from its
international trade. Foreign currency is important in that:
The local currency will not lose value against currencies of other countries.
The government will not have to borrow foreign currency from international banks to import goods
from other countries.
Businesses in a country are able to import raw materials and machines from other countries at a
cheaper cost.
GDP($)
Recovery/growth
boom
recession
slump
growth
Years
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High demand leads to prices rising as businesses
try to meet demand.
Firms compete to employ skilled labour leading
to higher wage costs.
Employees continue to demand high wages
leading to inflation.
3 Recession A recession is a stage of the At Recession;
. business cycle in which there GDP is falling.
is a gradual decline of Demand for goods and services fall as they
economic activity. become too expensive for consumers due to
rising prices.
Sales decline due to fall in demand.
Businesses reduce production.
Employees are made redundant due to low
production.
Incomes fall as businesses employ less expensive
labour.
Some businesses close due to rising fixed costs.
Review Questions
Country G is enjoying an economic boom. Economic data for the past two years has shown that GDP has
increased from 4% to 11%. The Small to Medium Enterprises (SME) department of country G has registered an
increase of 30% new start-ups. The Foreign Affairs department has recorded a rise of 35% in foreign business
registration. DZL is a private limited company in country G that produces and sells electrical gadgets to both
local and international markets. The components used by DZL are imported from other countries abroad.
Required
(a) What is an economic boom? [2]
(b) Give two characteristics of an economy with high inflation. [2]
(c) Give two economic objective of the government of country G. [2]
(d) Identify and explain two benefits of the economic boom to DZL. [6]
1. Fiscal policy
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(a) How the government influence business activity using taxes?
The government can encourage economic growth by reducing taxes for individuals and businesses. Lower
taxes for individuals mean they have more disposable income to spend on goods and services.
Lower taxes for businesses mean they buy raw materials and machines at cheaper prices. This leads to a
reduction in the cost of production. Businesses are able to charge low prices. Goods and services becomes
affordable to consumers hence they demand more goods and services leading to low unemployment and a
rise in the general standard of living for the whole country.
Low tax, also, means that businesses have more profits that can be used to expand their businesses by
opening more branches or extending their factories, employing more people.
The government may also use import tariffs and quotas. An import tariff is a tax charged on goods
imported from another country. An import tariff is aimed at reducing imports so that people buy products
produced locally. Import tariffs make imported products to be more expensive than local products. Thus,
consumers will buy locally made products leading to a rise in the GDP of a country.
An import quota is a limit on the quantity of goods that can be imported into a country. Quotas are mainly
used by the government to protect certain domestic industries from foreign competition.
2. Monetary policy
How the government influence business activity using interest rates?
An interest rate is the cost of borrowing money. The government, through the central bank, is the one that
determine the interest rates charged by lenders to people and businesses.
A reduction in interest rates means the cost of borrowing is lower. It becomes cheaper for businesses and
individuals to borrow money to use for expanding their businesses or starting new businesses. Low interest
rates means that businesses have low expenses, hence, they can produce goods and services cheaply
making them affordable to consumers.
However,
Low interest rates in a country may discourage people from saving their incomes to build wealth. People
who save money gain from interest earned from their savings.
At the same time, foreign businesses are not willing to invest or deposit their money in a country with
low interest rates because their reward will be very low.
Review Questions
Country G is enjoying an economic boom. Economic data for the past two years has shown that GDP has
increased from 4% to 11%. The Small to Medium Enterprises (SME) department of country G has registered
an increase of 30% new start-ups. The Foreign Affairs department has recorded a rise of 35% in foreign
business registration. DZL is a private limited company in country G that produces and sells electrical gadgets
to both local and international markets. The components used by DZL are imported from other countries
abroad.
Required
(a) What is an import tariff? [2]
(b) Give two reasons why the government of country G can implement import quotas. [2]
(c) Identify and explain two ways in which a business like DZL, producing luxury electrical gadgets, could be
affected by a rise in taxes in country G. [4]
(d) Identify and explain two ways in which an increase in interest rates by the government of country G
could affect DZL. [6]
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How business activities impact on the environment?
Businesses are involved in providing goods and services to satisfy consumer needs and wants. In doing so,
they end up having a negative impact on the natural environment. The following impacts have been noted:
1. Pollution
Pollution takes various forms such as water pollution, air pollution and poor waste disposal. In all forms of
pollution, business activities make it difficult for humans and animals to enjoy a clean natural environment.
For example, the use of non-bio degradable plastic has been a huge concern as it has polluted land and
seas.
2. Global warming
Business activities have significantly contributed to a gradual rise in global temperatures and melting of
glaciers, drying of underground water sources and persistent droughts. Main business activities that have
contributed to global warming are burning fossil fuels and cutting down trees.
1. Positive externalities
Positive externalities are social benefits that come as a result of business activities. These are gains that
society enjoys as a result of the business activities. The following are some external benefits:
Local communities are employed when businesses produce goods and services.
Consumers will have a variety of goods and services near them.
Businesses may develop infrastructure such as road, dams, malls and school that can be used by
communities to improve their lives.
The government may charge tax and collect more revenue that can be used to improve social services.
Small businesses may provide services to bigger businesses.
2. Negative externalities
Negative externalities are sometimes called social costs. These activities lead to suffering of communities.
Examples of external costs are:
Waste products that cause pollution.
Land destruction when mining.
Deforestation.
Global warming.
Other people and the government may incur additional costs in order to reverse negative externalities.
Review Questions
Red Tigers is a popular football club. It has top quality players as it scout players from local sports academies.
Each week, about 60 000 people visit their stadium to watch its matches. The stadium is located in a small town
10 km from the city centre. The local community pressure group, Ever Concern, has expressed concern on
negative externalities arising from the activities of the football club. He noted that besides other issues, very
young children were included in top matches. The club president has promised to look into the concerns raised
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by the community.
Required
(a) What are externalities? [2]
(b) Give two negative externalities arising from the activities of the football club. [2]
(c) Identify and explain two measures that the club president could use to create positive externalities for the
community. [6]
What is Globalisation?
Globalisation is the free movement of goods and services, labour, capital and technology all over the world.
Globalisation has been facilitated by:
The rise in free trade agreements in which countries agree to import and export goods without
restrictions in the form of tariffs and quotas. Consumers can purchase goods and services from other
countries with little import controls.
Improved and cheaper travel links and communication between all parts of the world have made it
much easier for free movement of people from one part of the globe to the other. This makes it easier
for customers to compare costs involved before they buy since the information is available on the
internet.
The increase in industrialised countries such as China, India and Brazil has made it possible for goods to
be affordable and accessible globally.
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investing?
Benefits Explanations
1 Infrastructure development. Multinational develop other structures such as roads, clinics and
. water points that will benefit society.
2 Employment opportunities As they set up factories and shops to produce and distribute
. goods and services, locals will have the opportunity to be
employed.
3 Increased choices for Multinational companies bring new products that were not
. consumers previously available in the local market. This gives consumers the
opportunity to buy a variety of products.
4 Increase in economic growth Having companies from other countries means an increase in
. investment as these companies bring in capital to a country. This
increases the economic activities of a country, increasing its GDP.
Review Questions
Net Care is a multinational company that produces and sell cosmetics and health care products such as toothpaste
and shampoos. It has several branches in other countries. It plans to open a new branch in country C.
Unemployment in country C is very high but market research has shown that Net Care will obtain cheaper raw
materials in country C reducing the cost of production. There are several small producers of cosmetics and health
care products in country C. The new factory will employ 400 workers at a wage rate of $8 per hour. The trade
minister in country C thinks this is too low. The Managing Director of Net Care says, “Everyone can benefit”.
Required
(a) What is the difference between an import quota and an import tariff? [2]
(b) Identify and explain two advantages to Net Care of opening a new branch in country C. [6]
(c) Do you think the trade minister should allow Net Care to open a new branch in country C? Justify your answer.
[6]
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1. Currency appreciation
Currency appreciation is a rise in the value of a country’s currency when compared to another currency.
That is, the currency of a country is now worth more than the currency of another country. It can now buy
more of the other currency than before. A currency may appreciate because of the following reasons:
The country exports more than it imports.
The country has a favourable balance of payment. Thus, customers outside the country must sell more
of their currency to buy products from the country.
The interest rates in the country are relatively high to attract foreign savings.
Inflation is lower than in other countries.
2. Currency depreciation
Currency depreciation is the fall in the value of a country’s currency when compared to another country’s
currency.
Currency depreciation means that the country’s currency is now worth less than another country’s currency.
It can now buy less of another country’s currency than before. This is caused by:
The country imports more than it exports.
Interest rates have fallen relative to other countries and as such depositors have moved their savings to
other countries.
Inflation has risen than in other countries.
Summary:
Currency appreciation is good for importers and bad for exporters while currency depreciation is
good for exporters and bad for importers.
Review Questions
Denzel owns a successful candy manufacturing business in country X. The sugar used to manufacture the
candies is imported from country S. In the past year, the currency of country X has fallen by 10% against
that of country S. Denzel is worried about the movement of the exchange rate.
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Required
(a) What is meant by exchange rate? [2]
(b) Give two effects to Denzel of a drop of 10% in the exchange rate. [2]
(c) Identify and explain two benefits to Denzel of an appreciation in the currency of country X. [6]
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