AQA GCSE Business: The purpose and nature of businesses and Business ownership (8132) – Revision Notes

These notes condense sections 3.1.1 (The purpose and nature of businesses) and 3.1.2 (Business ownership) of the AQA GCSE Business (8132) specification, for first teaching from September 2017. For full explanations, use the study guide for this unit. Then try the practice questions.

Also useful: the AQA GCSE Business hub, the printable checklist, the earlier topic overview, the earlier topic revision notes and the free diagnostics.

3.1.1 Purpose and nature of businesses

How to use this page: read a section, cover it, then write the key terms from memory. Finish with the self-test and mark it honestly. Anything you miss goes on a short list to re-read in the study guide the next day.

Why businesses start

The specification lists five reasons. Learn them as a set.

Reason	Cue in a case study
Producing goods	Makes or manufactures items
Supplying services	Does something for customers
Distributing products	Moves or sells on goods made by others
Fulfilling a business opportunity	Spots something missing locally
Providing a good or service to benefit others	A cause or community aim

Key definitions

Term	Definition
Goods	Physical products
Services	Activities done for customers
Needs	What people must have to live
Wants	What people would like but could live without
Opportunity cost	The next best alternative given up when a choice is made
Enterprise	Spotting an opportunity, taking a risk and organising resources
Entrepreneur	The person who does this

Factors of production

Land (natural resources and sites), labour (people), capital (man-made resources such as machines and vehicles), enterprise (organising the rest and taking the risk).

Memory aid: a printing firm’s plot of land is land, its press operators are labour, its printing press is capital and its owner’s decision to set up is enterprise.

Sectors

Sector	Activity	Examples
Primary	Extracting or growing natural resources	Farming, fishing, mining
Secondary	Manufacturing and building	Furniture making, construction
Tertiary	Services	Retail, banking, hairdressing

Opportunity cost method

1. List the options and the value of each.
2. Pick the best (the one chosen).
3. Opportunity cost is the value of the second best, not the sum of all the rest.

Worked reminder: Zephyrwick Loft Conversions can take one job this month: a loft conversion earning £4,800 profit, or a garage conversion earning £3,900 profit, or two small repair jobs earning £2,100 between them. It takes the loft conversion. The opportunity cost is £3,900.

Entrepreneurs

• Characteristics: hard working, innovative, organised, willing to take a risk.
• Objectives: be their own boss, flexible working hours, pursue an interest, earn more money, identify a gap in the market, dissatisfaction with a current job.
• Tip: in an exam, quote the evidence. A case study that says an owner “left her job after a manager ignored her ideas” shows dissatisfaction with a current job.

A changing business environment

The four named causes are technology, economic situation, legislation and environmental expectations. For each, ask what changes and which function it affects.

Cause	Possible effect
Technology	New ways to sell or produce, so operations and marketing change
Economic situation	Less spending power lowers demand, affecting finance and marketing
Legislation	New rules that can add costs or alter how people are employed
Environmental expectations	Pressure to cut waste, changing operations and marketing

The specification also asks you to be aware of the effect on the four functional areas: business operations, human resources, marketing and finance.

3.1.2 Business ownership

Liability

Unlimited liability: the owner is personally responsible for all business debts, so personal assets such as a house can be used. Limited liability: owners can lose only what they invested.

Structure	Liability
Sole trader	Unlimited
Partnership	Unlimited
Private limited company (ltd)	Limited
Public limited company (plc)	Limited

Not-for-profit organisations: do not assume. State the position only if the question gives it.

Worked reminder: Cordell & Finch Joinery owes £41,000 and its assets sell for £17,500. The shortfall is £41,000 − £17,500 = £23,500. As a partnership, the partners are personally liable for it. As a ltd, a shareholder who invested £8,000 loses that £8,000.

Comparison table

Structure	Control	Finance	Profits	Main benefit	Main drawback
Sole trader	One owner decides	Owner’s funds, loans	Owner keeps all	Control and simplicity	Unlimited liability, limited capital
Partnership	Shared between partners	More capital than one person	Shared as agreed	Shared skills and workload	Disagreements, unlimited liability
Private limited (ltd)	Shareholders elect directors	Shares sold privately, loans	Dividends per share	Limited liability	More paperwork, shares not freely sold
Public limited (plc)	Directors run it for many shareholders	Shares sold to the public	Dividends to many	Large capital	Takeover risk, high costs, public scrutiny
Not-for-profit	Trustees or volunteers, guided by a cause	Donations, grants, trading income	Surplus reinvested	Focus on a cause	Uncertain income

Ltd versus plc

• Both have limited liability.
• A ltd cannot offer shares to the public; a plc can.
• Plc is private sector. “Public” means the public may buy shares.
• Plc owners can lose control to a takeover; a ltd owner can usually decide who buys shares.

Method in steps: which structure?

1. Underline what the business needs (capital, control, risk protection).
2. Match each need to a structure’s benefit or drawback.
3. Weigh both sides, make a judgement and justify it.
4. State what would change your decision.

Examples of judgement language: “A sole trader is suitable for a low-risk start-up, as long as the owner is willing to accept unlimited liability”, or “A plc suits a firm that needs very large capital, though the owners must accept the risk of takeover”.

Calculation reminders

Profit shares in a partnership: multiply total profit by each partner’s agreed fraction. Dividend per share: total dividend ÷ number of shares. Shareholder’s dividend: dividend per share × shares held. Debt shortfall: debts − asset sale proceeds.

Check: a ratio of 3:1 on £36,000 profit gives £27,000 and £9,000. Dividends of £12,000 on 40,000 shares give 30p per share.

Must-know distinctions

• Goods versus services: goods can be touched; services are carried out.
• Needs versus wants: needs are essential.
• Capital (equipment) versus finance (money).
• Enterprise (the activity) versus entrepreneur (the person).
• Limited liability versus limited company: liability is the feature, company is the structure.
• Ltd versus plc: who may buy shares.
• Profit (kept by owners) versus surplus (normally reinvested in a not-for-profit organisation).

Quick self-test

1. State the three sectors and give one example for each.
2. Define opportunity cost.
3. A baker can make 100 loaves (profit £70) or 60 cakes (profit £84) or 30 pies (profit £51) with the same oven time. She chooses cakes. State the opportunity cost.
4. Name the four factors of production.
5. Outline two characteristics of an entrepreneur.
6. State two named causes of a changing business environment.
7. Which two structures have unlimited liability?
8. Explain one difference between a ltd and a plc.
9. Two partners share profit 5:3. Profit is £40,000. Calculate each share.
10. A company declares dividends of £30,000 on 50,000 shares. Calculate the dividend for someone holding 2,500 shares.
11. Give one benefit of being a sole trader and one drawback.
12. State what happens to surplus in a not-for-profit organisation.

Answers

1. Primary (farming), secondary (manufacturing furniture), tertiary (retail). Other examples are acceptable.
2. The next best alternative given up when a choice is made.
3. The next best is the loaves at £70, so the opportunity cost is £70.
4. Land, labour, capital and enterprise.
5. Any two of hard working, innovative, organised, willing to take a risk, each with a short explanation.
6. Any two of technology, economic situation, legislation, environmental expectations.
7. Sole traders and partnerships.
8. A plc may sell shares to the public; a ltd may not.
9. 5/8 × £40,000 = £25,000 and 3/8 × £40,000 = £15,000.
10. £30,000 ÷ 50,000 = £0.60 per share; 2,500 × £0.60 = £1,500.
11. Benefit: full control and all the profit. Drawback: unlimited liability.
12. It is normally reinvested into the organisation’s purpose, not shared out among owners.

Where marks are usually lost

• Naming the opportunity cost as the money spent, not the next best alternative.
• Stating that limited liability means the business cannot lose money.
• Giving a generic list of benefits for each structure without linking to the business in the scenario.
• Saying a plc is run by the government.
• Giving only one side in an evaluation, or no judgement.
• Describing entrepreneurial characteristics without showing how they help the business.
• Classifying a business into the wrong sector because of the product it sells rather than the activity it carries out.
• Forgetting to show a calculation step, such as the shortfall before deciding who is liable.

Frequently asked questions

What are the four factors of production? Land, labour, capital and enterprise. In GCSE Business, capital means man-made resources such as machinery and vehicles, not money.

What are the five reasons for starting a business in AQA GCSE Business (8132)? Producing goods, supplying services, distributing products, fulfilling a business opportunity, and providing a good or service to benefit others.

Which business structures have unlimited liability? Sole traders and partnerships. Private and public limited companies have limited liability, so owners can lose only the money they invested.

What is the difference between a ltd and a plc? Both have limited liability, but a plc can offer its shares to the public while a private limited company cannot. Plc owners can therefore lose control through a takeover.

Official syllabus

AQA GCSE Business (8132) specification, for first teaching from September 2017, published by AQA. Sections 3.1.1 and 3.1.2.