OxfordAQA IGCSE Business: Business in the Real World — Revision Notes

Condensed for the final weeks. For the full explanation, use the Business in the Real World study guide.

Purpose and enterprise

Businesses exist to meet needs (essential) and wants (desirable), and to create added value:

added value = selling price - cost of bought-in materials

Increase it by branding, better design, superior service, or convenience — or by lowering input costs. Added value is not profit; wages, rent and overheads still have to be paid from it.

Entrepreneurs take risks, organise resources and make decisions. Motives include profit, independence, and pursuing an interest. Risks include losing personal savings and, for sole traders, unlimited liability.

Business sectors

Primary (extraction), secondary (manufacturing), tertiary (services). As economies develop, output shifts from primary and secondary towards tertiary.

Ownership

Structure	Liability	Advantages	Disadvantages
Sole trader	Unlimited	Easy to set up, all profit, full control, privacy	All the risk, limited capital, long hours, no continuity
Partnership	Unlimited	More capital, shared workload and expertise	Shared profit, disagreements, decisions bind all partners
Private limited (Ltd)	Limited	Separate legal identity, easier to raise capital, continuity	Formation costs, accounts must be filed, shares not publicly traded
Public limited (plc)	Limited	Large capital via the stock exchange, prestige	Expensive, public accounts, takeover risk, divorce of ownership from control

Unlimited liability means the owner’s personal assets can be taken to pay business debts. Limited liability means the owner can lose only the amount invested. That phrase — personal assets — is what mark schemes reward.

Franchising: the franchisee gets a proven brand, training and support, and so faces lower risk, but pays fees and royalties and has little independence. The franchisor expands quickly with limited capital, but risks damage to the brand from a poorly run outlet.

Business objectives

Objectives change with circumstances: survival is the priority for a new start-up, then attention shifts to profit, growth, market share, or social and environmental goals as the business matures. Objectives frequently conflict: pursuing growth consumes cash that might otherwise be paid out as profit, and ethical or sustainable sourcing typically raises costs, reducing profit in the short term.

Stakeholders

Owners, employees, customers, suppliers, government, local community, and lenders.

Conflict is where the marks are. Do not list stakeholders — explain how two interests oppose:

• Owners want to cut costs; employees want higher wages.
• Owners want higher margins; customers want lower prices.
• Expansion creates jobs for the community but also traffic and pollution.

A top answer then judges whose interest should take priority, and justifies it in the context of the specific business.

Location

Influences: proximity to market, to raw materials, to labour supply, transport links, cost of premises, competitors, and government incentives.

Weight-losing industries (steel, food processing) locate near raw materials because it is cheaper to transport the finished lighter product. Weight-gaining and service industries locate near the market. Online retail weakens the pull of the physical market but strengthens the need for good transport links.

Growth

Internal (organic) — new outlets, new products, new markets. Slower but retains control and is lower risk.

External — merger or takeover:

Type	Meaning
Horizontal	Same industry, same stage — buying a competitor
Vertical forward	Towards the customer — buying a retailer
Vertical backward	Towards the supplier — securing inputs
Conglomerate	Unrelated industry — spreads risk

Economies of scale reduce average cost as output rises — purchasing, technical, financial, marketing, managerial. Diseconomies of scale raise average cost when a firm grows too large — poor communication, weak coordination, and falling staff motivation.

Note the word average. Total costs still rise with output; it is cost per unit that falls.

The external environment also shapes growth decisions and is frequently tested alongside it: interest rates affect the cost of borrowing and the level of consumer spending; exchange rates affect import costs and export competitiveness; inflation, unemployment, legislation and technology all shift the conditions a business is growing into. A strong answer links the specific factor to the specific business, rather than listing the six factors generically.

Exam traps

• Confusing added value with profit.
• Saying limited liability means limited debts.
• Treating a plc as government-owned — a public limited company is private sector.
• Listing stakeholders without explaining a conflict.
• Saying economies of scale reduce total costs.
• Giving generic advantages instead of applying them to the business in the case study.

Self-test

1. Define added value and give two ways to raise it.
2. Distinguish unlimited from limited liability.
3. Give one advantage and one disadvantage of franchising for the franchisee.
4. Explain one stakeholder conflict fully.
5. What are diseconomies of scale, and give two causes.
6. Why do a start-up’s objectives typically differ from those of an established business?
7. Give three factors in the external environment that can affect a business’s growth decisions.

Answers: 1. Selling price minus the cost of bought-in materials; raise it through branding or improved design and service, or by reducing input costs. 2. Unlimited liability means the owner’s personal assets can be taken to settle business debts; limited liability restricts the loss to the amount invested. 3. Lower risk from an established brand and support; but fees and royalties reduce profit and independence is limited. 4. For example, owners want to reduce costs to increase profit, while employees want higher wages and better conditions — the same money cannot do both. 5. A rise in average cost as a firm grows too large, caused by poor communication and coordination, and by falling staff motivation in a large impersonal organisation. 6. A start-up typically prioritises survival, since cash flow and establishing a customer base are the immediate concerns; an established business has already survived, so it can turn its attention to profit, growth, market share or social and environmental goals. 7. Any three: interest rates, exchange rates, inflation, unemployment, legislation, technology.