Cambridge O Level
Business Studies
Module 1
Written By:
Osama Abdullah Nagda
Contact: +923343341737
Osamanagda@gmail.com
WHATS INSIDE THE DOCUMENT?
A complete guide of section one and two including exit tests and Multiple-choice questions.
TABLE OF CONTENTS
Key Examinations Prompt words
Pg. 2
Section 1: Understanding Business Activity
Business Activity
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Chapter Overview
Definitions and Creative passage
Exit Test
Pg. 3
Pg. 4
Pg. 5
Classification of Businesses
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Chapter Overview
Definitions and Creative passage
Exit Test
Pg. 6
Pg. 7
Pg. 8
Enterprise Growth and Size
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Chapter Overview
Definitions and Creative passage
Exit Test
Pg. 9
Pg. 10
Pg. 11
Types of Businesses Organizations
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Chapter Overview
Definitions and Creative passage
Exit Test
Pg. 12
Pg. 13
Pg. 14
Businesses Objectives and stakeholder’s objectives
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Chapter Overview
Definitions and Creative passage
Exit Test
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Pg. 15
Pg. 16
Pg. 17
KEY EXAMINATION PROMPT WORDS YOU NEED TO KNOW
1. What is meant by
You’ve to Clearly show the examiner that what a term means. A single sentence answer is sufficient.
2. Identify
‘Identify two factors that could influence the price of the product.’
It means write down, without explanation or discussion the required number of points. For instance,
Answer:
1: Costs of production 2: Prices of competitors’ products
3. Calculate
Use the figures provided, for instance Calculate the net profit margin of the given business
4. Explain
‘Explain two ways in which a school could promote its services.’
Give more details with relevant justification. You must support your answer with the details given in the
case for instance
Answer:
1 The school could use a colorful and effective website to promote its services to the parents searching for
school information online.
2 The school should also contact their existing student’s parents who can spread the word of mouth for
the special offers or discounts
5. Consider
‘Consider whether the car manufacturer should reduce prices to increase demand.’
Such questions require advance skills and the best approach is to write the advantages and disadvantages
of the given scenario. one can also use the case material for a strong argument. In order to conclude the
argument do compare both the sides of given scenario.
6. Recommend
‘Recommend which method of production the soft drinks manufacturer should use.’
Your recommendation must be justified with relevant points most importantly advantages and
disadvantages of the given situation. It should also be supported by the given data, lastly your
recommendation should also explain why other options are less suitable.
7. Do you think That
‘Do You think Sara was right to choose the city center location for her new shop? Justify your
answer.’
A simple Yes or No will get you no marks until and unless a concrete paragraph justifying your side is
not given. All the options given must be understood carefully and one should know their advantages and
disadvantages. final decision should be based upon the points given in the first part.
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CHAPTER OVERVIEW: BUSINESS ACTIVITY
Business Activity
Economic Problem:
Needs wants and
scarcity
Purpose of Business
activity
Specialization
Added Value
It all start with needs and wants. It is a fact that one cannot achieve everything that he/she wants, as once a
certain standard is achieved, a person strives for something better. This confirms that we have limited
resources and unlimited wants. Due to this, a person has to make a choice among different alternatives. The
cost of next best alternative forgone is known as opportunity cost. As a business person it’s his/her objective
to use the limited resources in the best possible manner. In order to achieve this, one needs to concentrate
on what they are best at. This situation is described as specialization.
Specialization is then followed by Division of labor. The whole production process is divided into different
tasks and soon worker becomes a specialist in their respective task.
The basic purpose of any business is to add value to the initial components and raw materials. For instance,
a plain piece of wood worth 1000 rupees is converted in to chair worth 5000 rupees. The added value is
4000 rupees, which is calculated by taking out the difference between the selling price and the cost of
bought in raw materials and components.
In order to increase the added value business can either increase the selling price or decrease the cost of
bought in raw materials and components.
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DEFINITIONS
Need Is a good or service essential for living
A want is a good or service which people would like to have, but which is not essential for living. They are
unlimited
Economic Problem It results due to limited resourced and unlimited wants. It leads to scarcity
Factors of Production are those resources needed to produce goods or services. There are four factors of
production and these include land labor capital and Enterprise.
Scarcity Is the lack of sufficient products to fulfil the total wants of population
Opportunity Cost is the cost of next best alternative forgone
Specialization occurs when people and businesses concentrate on what they are best at.
Division of Labor when production process is split in to different tasks and each worker performs their
own task.
Businesses combine factors of production to make goods or services
Added Value is the difference between selling price of a product and the cost of bought in materials and
components
MEET MR. OSAMA NAGDA
Mr. Nagda believes that one should focus on his basic needs i.e. food, cloth, water and Shelter rather than
wants, which are not essential for living. He is a teacher by profession and teaches Mathematics, Economics
and Business studies to O level students. Mr. Nagda is thinking to start his own tuition center. However,
he has also planned to become a Government officer. The opportunity cost of becoming a CSS officer is
high as he would have to leave the next best alternative i.e. Own Tuition center.
Mr. Nagda then realized that, teaching is his Passion and he must start his own tuition center. After
Completing his bachelor’s degree, he started combining factors of production for his institute i.e. Land,
Labor, Capital and Enterprise. After analyzing the secondary research, he identified that he should
specialized in a particular subject rather than focusing on three subjects at the same time. He considers
himself to be suitable for Economics only. Finally, He chose himself as a specialize economics teacher.
Mr. Nagda strongly believed in Division of Labor. He had 5 members in his team and divided all the
subjects to each team member. Each member was responsible for dealing his own subject. He further
explained his members to focus on the added value as, it will help them to achieve greater revenues.
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EXIT TEST
PDF FILE ATTACHED
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CHAPTER OVERVIEW: CLASSIFICATION OF BUSINESSES
Classification of
businesses
Stages of economic activity
i.e. Primary Secondary and
tertiary
Relative
importance of
economic sectors
Private Sector
and Public Sector
Mixed Economy and recent
Changes
There are three main stages involved in a production process. The first stage is known as primary stage,
which involves activities like farming, fishing, forestry and the extraction of natural materials. The second
stage i.e. secondary sector involves, taking the raw materials and converting them in to finished products.
The last stage i.e. tertiary sector provides services to both consumer and businesses. Now, the question
arises that which sector is the most important sector? They are usually compared by looking at the number
of employees working under each sector, the value of output contributed by each sector in the total output.
With the passage of time the relative importance of each sector can change. For instance, since 1970s UK
has seen a decline in the importance of their secondary sector and moved towards Tertiary sector. A decline
in Secondary or manufacturing sector can also be referred as de industrialization.
Furthermore, Businesses can also be divided as per ownership as well. A business can either be owned by
Government or Private individuals. Businesses owned by state are called to be in Public Sector I.e. Defense,
Public Transport etc. Whereas businesses owned and controlled by private individuals are called to be in
Private sector i.e. a private retailer or a restaurant etc.
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DEFINITIONS
Primary Sector: This industry extracts and uses the natural resources of the earth to produce raw material
used by other business.
Secondary Sector: This industry manufactures goods using the raw materials provided by the primary
sector.
Tertiary Sector: This industry provides services to consumer and the other sectors of industry.
De-Industrialization: This occurs when there is a decline in the importance of the secondary,
manufacturing sector of industry in a country.
Mixed economy: It has both private sector and public sector.
Capital: It is the money invested in to a business by the owners.
MR. NAGDA AS AN ENTREPRENEUR
Mr. Nagda believes that Mixed economic system is the best form of economic system as it combines the
positive characteristics of both free market and planned Economy. He also believes that, too much influence
of private sector can have a negative impact on the society. He recently decided to start his own business
but he is confused in choosing the right business sector. If he goes towards primary sector, which involves
extraction of natural resources, he believes that, he does not have the right experience. In case if he starts
his business in the secondary sector, also known as Manufacturing sector, he does not have enough capital.
Whereas Tertiary sector is the best suitable option for Mr. Nagda. It involves providing services to both
primary and secondary sector.
Considering a disheartening situation of Public sector schools, he believes that he should start his venture
in the field of education. He is also concerned about intense competition from the private sector schools.
So finally, he decided to start a tuition Center named Inception Tuition Centre (ITC).
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EXIT TEST
PDF FILE ATTACHED
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CHAPTER OVERVIEW: ENTERPRISE, BUSINESS GROWTH AND SIZE
Enterprise, Business
Growth and Size
Enterprise and
entrepreneurship
Characteristics of
Successful entrepreneurs
Business Plan
Size of Business
Why Businesses Remain
Small
How businesses Grow
Business failure
Problems in Business
Growth
Why Government support
startups
Entrepreneurship is a commonly used term in Pakistan nowadays. It is the process of starting a new venture.
An entrepreneur must possess some qualities which will contribute toward success of the business. For
instance, the owner of Ali baba Jack Ma is an amazing example of successful entrepreneur in Asia. Some
of the qualities include Hard working, Risk Taker, Creative, Optimistic, Self-confident, Innovative
independent, effective communicator etc.
As it is said, careful planning is the first step towards a successful business. An entrepreneur must have a
business plan before starting any venture. It is a document containing the business objective and important
details about the operations, finance and owners of the new business.
As time passed by, Business starts growing in terms of sales turnover, capital employed, number of
employees, market share etc. Businesses can either have internal growth or external growth. Internal growth
is also known as organic growth where the business expands its existing production capacity. It could be
achieved through investing in technology or launching new products. For example, introduction of bake
parlor’s Fruit Cake in the Pakistani market will be an example of Internal Growth. Whereas external growth
is achieved through mergers and acquisitions. For instance, Pakistan Mobile Communications Limited
(Mobilink) and Warid Telecom merger together into single brand called Jazz. However, such growth
strategies may create problems for the company. These problems may include Diseconomies of scale, poor
communication, finance problems and management conflicts.
In contrary some businesses choose to remain small. This might be due to owner’s personal objective, lack
of financial resources, industry type and size of the market. For instance, a bakery is likely to remain small
in reference to the above-mentioned reasons. According to Bloomberg, 8 out of 10 entrepreneurs who start
businesses fail within the first 18 months. The possible reasons for the failure are, poor management, failure
to plan for change, poor financial management, over expansion and risk of new business startups.
In order to encourage the entrepreneurship spirit in the society government must intervene through
monetary and nonmonetary aid. This will help to increase employment opportunities, competition and
output and variety of goods and services.
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DEFINITIONS
Entrepreneur: It is a person who organizes, operates and takes the risk for a new business venture.
Business plan: It is a document containing the business objective and important details about the
operations, finance and owners of the new business.
Capital employed: It is the total value of capital used in the business.
Internal growth: occurs when a business expands its existing operations.
External growth: is when a business takes over or merges with another business.it is often called
integration as one firm in integrated in to another firm.
Merger: when the owner of two business agrees to join their firms together to make one business
Takeover acquisition: It is when one business buys out the owners of another business which then
becomes part of the ‘predator’ business (the firm which has taken it over).
Horizontal integration: it is when one firm merges with or take over another firm in the same industry at
the same stage of production.
Vertical integration: It is when one firm merges with or takes over another one in the same industry but
at a different stage of production. Vertical integration can be forward or backward.
Conglomerate integration: it is when one firm merges with or takes over a firm in a completely different
industry. This also known as diversification.
IF YOU FAIL TO PLAN YOU PLAN TO FAIL
Mr. Nagda is currently working on his Business Plan. He believes that planning is the first step towards
success. He is trying to meet one his best friend Sunny Guneta to discuss how much capital must be needed
to start a tuition center. Mr. Guneta advised him that in order to ensure adequate return on Capital employed
he must focus on the business plan. He also advised him to prepare possible ways of internal and external
Growth. In case of internal growth Mr. Nagda can offer more number of subjects. Moreover, he can also
opt for merging or acquiring other famous tuition centers to grow his business.
While thinking about Mr. Guneta’s suggestions, Mr. Nagda recalls some of the integrations during his
childhood. Once he was in grade 5, his tuition center merged with another tuition center setting an example
of horizontal integration. Later in time a book manufacturer took over a retail shop i.e. Vertical forward
integration and a company making papers took over of wood cutting firm i.e. Vertical Backward integration.
He was shocked when his school took over a shoe manufacturer i.e. conglomerate integration.
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EXIT TEST
PDF FILE ATTACHED
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CHAPTER OVERVIEW: TYPES OF BUSINESS ORGANISATIONS
Types of Business Organization
Sole trader
Partnership
Public Sector: Public Corporations
Private Sector Private limited Co.
Public limited co.
Co-operatives
franchise
Businesses can be classified in two categories, it could either operate in private sector, that is owned and
controlled by private individuals and groups, or in Public sector, that is owned and controlled by
Government. A business could be owned by single individual also known as sole trader. It could also be
owned by two or more individuals and is referred as partnership. Moreover, it could move towards private
limited company that is owned by family members and relatives entitled with limited liability.
A business could also be operated by a board of directors and owned by general public that is known as
Public limited company. Such organizations are also entitled by Limited liability in which owners of the
are not held responsible for the debts of the company. The second last form of business organization is
known as cooperatives in which a group of individuals unite together to meet their economic social and
cultural needs. The last form is known as a Franchise, it is a buying an existing business model and the
brand name for a specific period of time for instance Mc. Donald, Burger King, Subway etc.
It is true that Government also have their business. They are also known as Public sector businesses which
are owned and controlled by the State. Example for public Capital Development authority (CDA),
Civil aviation authority (CAA) etc.
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DEFINITIONS
Sole trader: It is a business owned by one person.
Limited liability: means that the liability of shareholder in a company is only limited to the amount they
invested.
Unlimited liability: means that the owner of a business can be held responsible for the debts of the
business they own. Their liability is not limited to their investment they made in the business.
Partnership: is the form of the business in which two or more people agree to jointly owns a business.
Partnership agreement: it is written and legal agreement between business partners.it is not essential for
partners to have such an agreement but is always recommended.
Unincorporated business: it is the one that doesn’t have a separate legal identity. Sole traders and
partnership are unincorporated business.
Incorporated business: are companies that have separated legal status from their owners.
Shareholders: are the owners of a limited company. They buy shares which represent part ownership of a
company.
Annual meetings: is a legal requirement for all companies. Shareholders may attend ad vote on who they
want to be on the board of directors for the coming year.
Dividends: are payments made to shareholders from the profits (after tax) of a company. They are the
return to shareholders for investing in the company.
Joint venture: is when two or more business start a new project together sharing capital, risk and profits
Franchise: it is a business based upon the use of brand names, promotional logos and trading method of
an existing successful business. The franchisee buys the license to operate this business from the
franchisor.
HE IS CONFUSED!
Mr. Nagda is mired in confusion while deciding upon the type of his business organization, his father
advised him to work alone and do not involve anybody in the decision-making process. His father himself
is a sole trader since past 25 years. He can recall his father’s fight with one of his best friend. His father
insisted his best friend to form a partnership but just after sometime they both had some serious conflicts.
They ended up dissolving their partnership agreement. On the other hand, Mr. Nagda is deeply concerned
about unlimited liability as if in case of bankruptcy he will be held responsible for the debts of the company.
He decided to form a private limited company to get away with unlimited liability. He also decided to buy
some shares of public limited companies in order to diversify the risk. In case, if he is not able to earn
money from his tuition center he will get the dividend from the shares he bought.
Some days later he met his Uncle living abroad. Out of the blue, his uncle suggested him to leave everything
and get a subway franchise. It was a good idea but this was not the right time.
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EXIT TEST
PDF FILE ATTACHED
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CHAPTER OVERVIEW: BUSINESS OBJECTIVES AND STAKEHOLDERS OBJECTIVES
Business
Stakeholders
Owners:
Profits
return on
Capital
Managers:
Salaries,
status and
Control
Workers:
Incomes, Job
security and
Satisfying
Work
Customer:
Quality and
Good value
Community:
Jobs, Clean
environment
and safe
products
Government:
Employment
, Taxes and
increasing
national
output
One should clearly understand the difference between stakeholders and shareholders. Shareholders are
individuals and groups who are directly and indirectly related to the organization. Whereas Shareholders
are the owners of the organization they are under the heading of stakeholders.
Each stakeholder plays a distinguish role and have some responsibilities. Owners are rewarded with profits,
it could be in the form of dividends or capital gain. Managers are rewarded with salaries, status and control.
Workers get monetary and nonmonetary benefits for their services rendered. Customers get the desired
product with a good value for money. Community get jobs because of business activity with clean
environment and safe products. Lastly Government get their taxes and contribution towards the total output
i.e. GDP.
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DEFINITIONS
Business Objectives are the aims or targets that business work towards
Profit is total income of a business i.e. Sales revenue less total cost
Market share is the proportion of total market sales achieved by one business
Social Enterprise has social objectives as well as aim to make a profit to reinvest back into the business
Stake Holder is any person or group with a direct interest in the performance and activities of a business
MR. NAGDA MEETS HIS FRIEND SARMAD JAMIL
It’s was a bright Sunday, Mr. Nagda decided to meet his friend Sarmad Jamil. He is running an online store,
selling branded ladies apparel. His current business objective is to increase his market share. In order to
achieve this, he is working on a lower profit margin. Simultaneously he is also running a social enterprise
working towards educating underprivileged students. He has planned to expand his social enterprise in the
near future. Currently he is worried about individuals and groups who are directly and indirectly related to
his business also known as Stakeholders. He believes that Customers are the most important stake holders
as they are the one who brings revenue for the business. However, he also takes in to account the remaining
stakeholders including employees, Suppliers, community, government etc. Mr. Nagda had lunch with his
friend and then left for some household work.
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EXIT TEST
PDF FILE ATTACHED
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