1 Understanding business activity

Student’s Book Chapters 1–5

1 Business activity
Farah opened her business, Farah’s Salon (FS) just after leaving school. She offers hairdressing and beauty
services for women. She employs three workers who have quite different skills. One is a hair stylist, one is
a beauty specialist and the other is a receptionist. This means that Farah is able to offer a very wide range
of beauty and hairdressing services very efficiently. Shampoos, hair sprays and many other beauty products
are bought in from several suppliers. Farah’s business is now very busy. Farah is planning to use some of
FS’s capital to buy a computer to keep customer records of treatments they have received and to allow an
accurate record of appointments to be kept. However, she is worried about the opportunity cost of this.
Farah is keen to increase the added value of her business. She has not yet decided on how to achieve
this but she thinks that buying cheaper shampoos and other beauty products is probably the best way.
Farah needs to recruit another employee. She has to choose between one applicant who is an
experienced and specialist hair stylist but who has no other beauty experience and the other applicant
who has some experience of both hair and beauty but is not a specialist in either.
1 a Identify two different factors of production used by Farah. [2 marks]

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b Define ‘opportunity cost’. [2 marks]

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c Outline two ways in which specialisation of its employees could benefit FS. [4 marks]

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 1 Business activity

d Explain two examples of how the business activities undertaken by FS benefit the
local economy. [6 marks]
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e Do you think that buying in cheaper shampoos and other beauty products is the
best way to increase added value by FS? Justify your answer. [6 marks]

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 1 Understanding bUsiness activity

2 a Define ‘capital’. [2 marks]

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b Identify two pieces of equipment or furniture that Farah could purchase if she did
not buy the computer. [2 marks]

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c Outline two ways in which the economic problem affects FS. [4 marks]

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d Do you think that Farah should employ the experienced and specialist hair stylist or
the other applicant? Justify your answer. [6 marks]

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 2 Classification of business

2 Classification of business
FS operates in country X. The business uses several suppliers to obtain all of the materials, furniture and
other equipment it needs. FS is in the tertiary sector of industry and depends on other businesses in this
sector for important services.
Country X industrialised over 100 years ago and used to have some major secondary sector businesses.
Now, tertiary businesses employ more people and produce a higher value of output than manufacturing
businesses. Average incomes are high in country X and the demand for important public sector services
such as healthcare and public transport is growing.
The government of country X plans to increase the importance of the public sector by buying out some
private sector businesses in transport and energy. Taxes might have to be increased to pay for these
state purchases of other businesses (nationalisation).
1 a Define ‘tertiary sector’. [2 marks]

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b Identify two examples of services provided by other businesses that FS needs. [2 marks]

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c Outline the role of two secondary sector industries that supply products to FS. [4 marks]

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 1 Understanding bUsiness activity

d Explain two likely reasons why the relative importance of the secondary sector in
country X has declined. [6 marks]

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e Do you think that FS would benefit from the government policy to expand the public
sector of the economy? Justify your answer. [6 marks]

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 3 Enterprise, business growth and size

3 Enterprise, business growth and size

Farah is very ambitious and she wants to expand her business quickly. She works long hours and
her commitment as an entrepreneur is a good example to her employees. She likes taking important
decisions by herself. Her many ideas for expanding the business include offering a wider range of
services to male customers as well as female. FS now employs 10 workers. The average sized business in
hairdressing and beauty employs five workers. The total value of FS sales this year increased by 15 per
cent. Farah believes that FS has more advanced equipment – such as sunbeds and steam baths – than
local competitors.
Farah is considering both internal growth and external growth for FS. She could open a new hair and
beauty salon in another part of the city. She also knows about two other businesses for sale. Business
A is a men’s hairdressing salon that has been trading for many years. The owner is retiring and wants to
sell quickly. Business B is a specialist producer of hand-made organic cosmetics. FS uses some of these in
the salon and they are very popular. The owner is ill and no longer wants the stress of harvesting natural
products and meeting production deadlines. Farah wants to draw up a new Business Plan to help guide
her through the next expansion stage of FS.
1 a Define ‘entrepreneur’. [2 marks]

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b Identify two important characteristics that allow Farah to be a successful entrepreneur. [2 marks]

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c Outline two ways the size of FS could be compared to similar businesses. [4 marks]

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 1 Understanding bUsiness activity

d Explain two ways the Business Plan drawn up by Farah will help when she expands the
business. [6 marks]

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e Do you think Farah should use internal growth or external growth for FS? Justify your
answer. [6 marks]

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 3 Enterprise, business growth and size

2 a Define ‘Business Plan’. [2 marks]

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b Identify two reasons why Farah decided to become an entrepreneur. [2 marks]

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c Outline two possible business problems Farah might experience as she expands FS. [4 marks]

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d Farah has decided to use external growth to expand FS. Do you think she should
buy out Business A or Business B? Justify your answer. [6 marks]

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 1 Understanding bUsiness activity

4 Types of business organisation

Farah set up FS as a sole trader. She financed the start-up with her own savings and loans from parents
and her bank. As she is planning further growth for the business, she has been advised to take at least
one partner. Alternatively, she could convert the business to a private limited company in which the
shareholders would benefit from limited liability. A friend has some savings he has offered to invest and
become a partner in FS. He has no business experience and is often on holiday. A business consultant
who advises Farah has suggested that his wife could become a partner in FS. He told Farah: ‘She has
savings to invest, is an experienced business person and likes being in control.’
FS has contracts with many suppliers. Electricity and water are supplied to FS by public corporations.
Furniture for the salon is supplied by a large private limited company. It is owned by a wealthy family
who converted their business into a public limited company three years ago. The family regretted its
decision because of the limitations of this form of business organisation.
Farah has been asked by a large national chain of beauty salons – called Spa Town – if she is interested
in buying its franchise. It would give FS national advertising coverage but Spa Town would insist on
changes to the way Farah operates her business. Farah has rejected this offer.
1 a Define ‘sole trader’. [2 marks]

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b Identify two drawbacks of being a sole trader. [2 marks]

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c Outline two advantages to Farah of remaining a sole trader. [4 marks]

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 4 Types of business organisation

d Explain two reasons why forming a public limited company would not be suitable for
FS at the present time. [6 marks]

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e Do you think Farah should form a partnership? Justify your answer. [6 marks]

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 1 Understanding bUsiness activity

2 a Define ‘limited liability’. [2 marks]

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b Identify two features of public corporations. [2 marks]

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c Outline two reasons why some owners of private limited companies do not want to
convert their business to a public limited company. [4 marks]

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d Do you think Farah should convert FS into a private limited company? Justify
your answer. [6 marks]

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 5 Business objectives and stakeholder objectives

5 Business objectives and stakeholder objectives

Farah’s business objective has changed since she started FS several years ago. It is now a private limited
company which means that FS must keep the owners satisfied with a return on their investment.
FS now owns several salons in the capital city. Farah plans to completely redevelop one of these sites.
She wants to remove the existing building and construct a large apartment block in its place. The lower
level will contain a newly equipped beauty salon and a gymnasium. The gymnasium will allow FS to
enter the fitness market for the first time and will appeal to men and women. There will be many new job
opportunities. The redevelopment will take six months. Local residents are not happy about the plans.
Some FS customers think that prices will be higher to make sure a profit is made. Farah told some senior
managers: ‘All stakeholders will benefit from the expansion of FS.’ Farah’s plans for business growth will
be expensive and some shareholders are worried about the cost. They would prefer Farah to concentrate
on making the existing salons more profitable.
Recent increases in the costs of electricity and water are worrying Farah. The public corporations that
supply these utilities claim that the price rises are necessary to meet their objectives.
1 a Define ‘shareholders’. [2 marks]

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b Identify two objectives of shareholders. [2 marks]

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c Outline two reasons why Farah’s business objectives for FS have changed. [4 marks]

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 1 Understanding bUsiness activity

d Explain two ways in which one stakeholder group, apart from employees, might be
affected by plans to redevelop one of the salons. [6 marks]

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e Do you think Farah is right when she says that ‘all stakeholders will benefit from the
expansion of FS’? Justify your answer. [6 marks]

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 5 Business objectives and stakeholder objectives

2 a Define ‘business objective’. [2 marks]

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b Identify two objectives of public corporations. [2 marks]

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c Outline two likely objectives Farah set for FS when it was first established. [4 marks]

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d Do you think that the objectives of FS customers will always conflict with the objectives
of FS shareholders? Justify your answer. [6 marks]

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 1 Understanding bUsiness activity

Understanding business activity: end of section case study

Use all the information at the start of Chapters 1, 2, 3, 4 and 5 to help you answer the following question.
1 a Explain two advantages and two disadvantages for FS of continued growth of the
business. [8 marks]

b Farah wants to expand FS. Explain the advantages of each of the following methods of
expansion. Recommend which one she should choose. Justify your recommendation. [12 marks]

i Redevelop existing salon including a new gymnasium.

ii Sell FS franchise licences to other businesses.

iii Take over another hairdressing and beauty salon business.

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 Understanding business activity: end of section case study

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iii .................................................................................................................................

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recommendation

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