Business Environment

Introduction

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Table of Content

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Understand the Organizational Purposes of Business

LO1.1 Identify the purpose of different types of organizations
Identify the different types of organizations
An organization is an arrangement of people, pursuing common goals, achieving results and
standards of performance. There are different types of organizations. According to
ownership we can identify different types of organizations. They are;

Sole Proprietorship/ Sole Trader

Partnerships
Company/ Corporation
Private Limited
Public Limited
Profit and Non-Profit companies (NGO)
Co-operatives
Franchise System
Voluntary/ Charity

Identify the purposes of the different types of organizations

Organizations can divided into four types. They are;

According to its Purpose

According to its Output
According to Ownership
According to its size

When explaining about the purpose of an organization, it may differ from one organization to
another. Therefore we can say that, there are organizations that work towards its Profit and
organizations that do not work towards its Profit which are also known as NGOs.
When talking about the organization ownership, it can be divided mainly into three types.
They are;
Sole Proprietorship/ Sole Trader
Partnership
Companies / Corporations
Sole Proprietorship / Sole Trader
Sole Proprietorship or Sole Trader is a business that is owned and usually managed by one
person. It is the most common form. It is not a must that we must register the business. The
advantages and disadvantages in Sole Trader are as follows;
Advantages
o
o
o

Easy to start and end

You can be your own boss
Pride of ownership
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o
o
o

Can leave a legacy

Can retain Profit
No special Taxes

Disadvantages
o
o
o
o
o
o
o

Unlimited Liability
Limited Financial Resources
Management Difficulty
Time Commitment
Few Fringe Benefits
Limited Growth
Limited Life Span

Typical Sole Traders include tradesman such as plumbers, electricians, television repairing
people etc. Now a days many people are setting up their own businesses by creating small
web based companies working from home.
Partnership
Partnership is a legal form of business with two or more owners. Partnership can be divided
into two forms. They are;
o
o

General Partnership
Limited Partnership

General Partnership
General Partnership is a partnership in which all owners share in operating the business
and in assuming liability for the businesss debt.
A General Partner is an owner (partner) who has unlimited liability and is active in
managing the firm.
Limited Partnership
Limited Partnership is a partnership with one or more general partners and one or more
limited partners.
A Limited Partner is an owner who invests money in the business but does not have any
management responsibility on liability for loses beyond the investment.
In unlimited partnership all the partners are liable for any third party, even from their
private assets. For example if partnership at the time of dissolving and the partnership
has no money to settle the loans taken from the third party, partners should settle such
loans from their personal assets.
The partnership is not considered as an entity by law. Partnerships are typically found in
professional services such as Accountants, Solicitors, Doctors and Dentist where the
partners can share expertise and skills. They can also share the workload, organizing
work rotas to allow for time off and holiday. Partners also pool their capital.

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Partnershi
p

Limited
Liabilit
y

Unlimited
Liability

More
General
Partners

One or More
Limited
Partners

Invests
Money
(Limited
Liability)
Companies
Companies are owned by Shareholders that each contributes a stock of money into a central
pool. This pool of capital is used to provide a core sum of finance which is added to by
borrowing and other forms of finance. Directors run the company on behalf of Shareholders
who receive a share of the profit as Dividends.
A company should be registered under the companies act No 07 of 2007. When a company
is registered under the companies it is registered by law as a person. It is separate and
distinct from the Shareholders who own the company. Shareholders can change from time to
time but will continue to exist till liquidization.
The characteristic of a company is as follows;

Legal Personality
Ease of Finance
Limited Liability
Formal
Incorporation

Limited Liability is the liability of shareholders f a company is limited only to the extent of the
nominal value of shares that those who own the amount guaranteed. The Advantages and
Disadvantages of a company is as follows:
Advantages
o
o
o

Limited Liability
More money for investment
Size
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o
o
o
o

Perpetual life
Ease of ownership change
Ease of drawing talented employees
Separation of ownership and management
Disadvantages

o
o
o
o

Extensive paperwork
Double Taxation
Two Tax Returns
Conflicts with stock holder and Board

There are three types of companies. They are;

Private Limited
Public Limited
Non Profit
Private Sector organizations are set for personal gain and funded by shares allotments or
borrowings from financial institutions. But in the Public sector organizations are set up in the
interests of the community which has socio-economic goals and is funded mostly by the
public funds of the government.
Co-operation is another type of company. A co-operation is the result of voluntary linking
together of consumers, producers or retailers into a trading organization, which is then used
to represent its constitutions in the market place. Its is owned and controlled by people who
use it. It is also a pool of resources.
eg : Producer Co-operation (Salu Sala)

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LO1.2 Describe the extent to which an

objectives of different stakeholders

organization meets the

Explain the different types of stakeholders in an organization

All organisations have stakeholders. These are individual or groups who are affected by or
affect the performance of the organisation in which they have an interest. Typically they
would include employees, managers, creditors, suppliers, shareholders and society at large.
The legal structure of an organisation has an impact not only on the type of stakeholders
involved but also to a large degree on how their interests are represented. In Sole traders,
partnerships and smaller private companies, the coincidence of ownership and control limits
the number of potential clashes of interest, given that objectives are set by and decisions
taken by the firms owner-manager.
In larger companies, and in particular public limited companies, the division between
ownership and control means that the controllers have the responsibility of representing the
interests of the organisations shareholders and creditors and as suggested above their
priorities and goals may not always correspond.
A similar situation occurs in public sector organisations, where the interest of taxpayer is
represented by both government and by those individuals chosen government to run the
organisation. In this case, it is worth recalling that the broader strategic objectives of the
enterprise and the big decisions concerning policy, finance and investment tend to be taken
by politicians, operating with advice from their officials and within the context of the
governments overall economic and social policies.
In an organization there are different types of stakeholders. These different types of
stakeholders can be divided into two categories. They are:
Micro environment
Macro environment

Macro Environment:
Under Macro Environment we can categorise stakeholders as external stakeholders.
They are :
Community
Government
Pressure Groups

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Micro Environment:
In Micro Environment, stakeholders can be divided into two categories. They are:
Internal Stakeholders
Employees and Management are considered as Internal Stakeholders
Connected Stakeholders
Shareholders, Customers, Suppliers and Financiers are considered as Connected
Stakeholders.

Describe the extent to which an organization meets the objectives of

different Stakeholders

Shareholders
There main interests are Profit growth, Share price growth and dividends.
Election of Directors is their main power and influence.
Banks and other Lenders
Their main interests are interest and principal to be repaid and to maintain credit
rating.
Can enforce loan covenants and withdrawal of banking facilities is their main power
and influence.
Directors and managers
Salary, Share options, Job satisfaction and status are their main interests.
Making decisions having detailed information are their power and influence.
Employees
Salaries and wages, Job security, Job satisfaction and motivation are their main
interests.
Main power and influence are Staff turnover, Industrial action and service quality.
Suppliers
Long term contracts, Prompt payment, Growth of purchasing are their main their
main interests
Power and influence is Pricing, Quality, Product availability.

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Customers
Reliable quality, Value of money, Product availability and Customer service are their
main interests.
Revenue/ repeat business, word of mouth recommendation are their power and
influence.
Community
Their main interests are Environment, Local jobs and Local impact.
Their main power and influence is indirect via local planning and opinion leaders.
Government
To operate legally, Tax receipts, Jobs are their main interests.
Main power and influence are Regulation, Subsidies, Taxation and planning.

LO1.3 Explain the responsibilities of an organization and strategies

employed to meet them
Explain the responsibilities of an organization
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In an organization there many different types of responsibilities. Mainly there are two types.
They are:
Legal Responsibility
Ethical and Moral Responsibility
Legal Responsibility
Legal Responsibility is enforced by the law. Rules and regulations that are governed by law
and can be enforced in the event of breaking the law. (breech of law)
Ethical and Moral Responsibility
Enforced only by the strength of the societys approval or disapproval.
For example Womens rights in Saudi Arabia are defined by Islam and tribal customs. All
women, regardless of age, are required to have a male guardian. If you employ a women,
then you are expected to allow a guardian. (usually husband or brother to accompany her at
the companys expense)
Other major responsibilities of an organization

Social responsibility
Environment responsibility
Ethics and Business code
Management Responsibility
Public relation and Corporate image

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Social Responsibility
Balance profit

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LO2.1 Explain how Economic Systems attempt to allocate

resources effectively
What is an economic system?
According to Adam Smith economics is a study of wealth and Sir Alfred Marshal defined
economics as a study of human lifestyle.
But the basis of economics is Scarcity. All the resources are limited and they have different
uses. Because of that there is a definite question of choice.
Economics can be divided into two categories. They are;
Macro Economics
Micro Economics
Macro economics is that part of economic study that looks at the operation of a nations
economy as a whole.
Micro economics is that part of economic study that looks at the behaviour of people and
organisations in particular markets.
Basic economic problems
Mainly there are three basic economic problems. They are;
What to Produce and what quantities?
How to Produce?
Whom to Produce?
The market system is an economy in which all of the basic choices are made through the
market. The market is a place where buyers and sellers of a product are brought together.
The nature and the location of the market depend on the product.
For example within the local town there is likely to be a vegetable market where one would
go to buy vegetables. Here, buyers and sellers meet face to face in the same location, but
this is not always the case. The market for used cars might be the local newspaper classified
section, the sales stock and shares passes through a broker so that the buyer never meets
the seller.
There are many different types of market, involving different buyers and sellers. Firms sell
the goods and services they produce to households on the Product market while in the factor
market firms are buying resources such as labour and raw materials.

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Alternative economic systems
There are four types of economics systems. They are;
Market system all production decisions are taken based on the price and freedom
of decision making exist.
Command systems economic behaviour and decisions are determined by the
central authority, centralisation in decision making can be observed.
Mixed systems more realistic system where application of planned and market
systems are observable.
Traditional system behaviour of the members of the society decided by the
traditions, customs, habits. Activities such a fishing, hunting, farmingetc.

Circular Flow Model of the Free Market Economy

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In the Resource Market (top part of the model)

Business demand resources

Households own the resources (factors of production)
Income from providing these resources flows back to the households
The price of these resources set by laws of supply and demand

In the Product Market (lower part of the model)

Businesses use these resources to create goods and services
Households (individuals) demand these goods and services
Individuals use their income to purchase goods and services
Operation of free market/ Market system
In a free market system, decisions about what to produce and in what quantities are
made by the market.
Consumers send signals to producers about what to make, how many, and so on
through the mechanism of price.
The price tells producers how much to produce, reducing the changes of a long-term
shortage of goods.
Price in a free market are not determined by sellers. Buyers and sellers negotiating in
the market place determine them.
Price is determined through the economic concepts of supply and demand.
Supply refers to the quantity of products that manufactures or owners are willing to
sell at different prices at a specific time.
The amounts supplied will increase as the price increases (direct relationship).
The quantity producers are willing to supply at certain prices is illustrated on a supply
curve.
Demand refers to the quantity of products that people are willing to buy at different
prices at a specific time.
The quantity demanded will decrease as the price increases (inverse relationship).
The quantities that consumers are willing to buy at certain prices are illustrated on a
demand curve.

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Why do we need to allocate Resources Effectively?

Organizations assign resources by identifying all the technical and equipment
requirements to fulfil the strategy goals, which include the capacity building needs
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within the organisation. This can effectively be done by having a team in charge of
the specific task to develop, implement, maintain, and review the strategy.

LO 2.2 Assess the Impact of Fiscal and Monitory Policy on

Business Organisations and their Activities
What is the theory of Fiscal Policy ?
Fiscal Policy involves varying total public sector expenditure and the overall level of
taxation to influence the level of demand in an economy.
It involves
o Taxation and other source of income
o Government spending
o Borrowing whenever spending exceeds income
o Re-paying debts when income exceeds expenditure
A feature of fiscal policy is that a government must plan on what it needs to spend,
and so how much it needs to raise its income or borrowing. It plans how much
taxation and from which sectors (firms, household, rich or the poor) it will tax heavily.
Expansionary Fiscal Policy
Expansionary fiscal policy may be used during an economic recession to boost
demand for goods and services to tax cuts or increase public sector spending.
Firms may respond by hiring more labour and increase in output.
However, increase in demand can force up market prices and involve spending more
on imported goods and services.
Increasing imports will have a negative impact on the balance of payments.
Contractionary Fiscal Policy
Contractionary fiscal policy may be used to reduce price inflation.
It involves reducing demand in an economy through tax increases or cuts in public
sector spending.
However, firms may respond to falling demand by cutting their output and reducing
employment.
Increased taxes may also reduce work incentives and therefore, productivity.

What is the theory of Monetary Policy ?

Monetary Policy involves varying the interest rates charged by the Central Bank for
lending money to the banking system in an economy.
Monetary Policy involves attempts to influence economic activity through
o Interest rates
o Exchange rates
o Control of money supply
o Controls over bank lending and credit
o

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Monetary Policy can be made to act as a subsidiary support to fiscal policy and
demand management, since fiscal budgets are an yearly event, a government uses
non-fiscal measures to control and balance the economy.
Contractionary Monetary Policy
Contractionary Monetary Policy may be used to reduce price inflation by increasing
the interest rate, because banks have to pay more to borrow from the Central Bank,
they will increase the interest rates they charge their own customers for loans to
recover the increased cost..
Banks will also raise interest rates to encourage people to say more in bank deposit
accounts, so that they can reduce their own borrowing from their Central Bank.
As interest raise rise, customers may save more and borrow less to spend on goods
and services.
Firms may also reduce the amount of money they borrow to invest in new equipment.
A reduction and capital investment by firms will reduce their ability to increase output
in the future.
Higher interest rates may therefore reduce economic growth and increase
unemployment.
Increasing a demand can push up prices and may increase consumer spending on
imported goods and services.

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LO 2.3 Evaluate the Impact of Competition Policy and Other

Regulatory Mechanisms on the Activities of a Selected
Organisation
What is meant by a Competition Policy ?
Competition Policy is generally defined as government policies that directly affect the
structure and behaviour of an industry. This aims at enhancing competition in local
and national markets, to maximise economic efficiency and at the same time to
ensure consumer welfare.
The main aims of Competition Policy
Is to promote competition; make markets work better and efficiently and
competitiveness of the economy.
Wider consumer choice in the markets
Technological innovation
Price competition between suppliers
Investigating allegations of anti competitive behaviour which is negative on consumer
welfare
There are four pillars of competition policy:

Antitrust and Cartels

Market Liberalisation
State Aid control
Merger control

Antitrust and Cartels

o

A cartel is a formal agreement among competing firms.

It is a formal organization where there is a small number of sellers and usually

involve homogeneous products.

Cartel members may agree on such matters as price fixing, total industry output,
market shares, allocation of customers, allocation of territories, bid rigging,
establishment of common sales agencies, and the division of profits or
combination of these.

The aim of such collusion (also called the cartel agreement) is to increase
individual members' profits by reducing competition.

Market Liberalisation
o

Liberalization involves introducing fresh competition in previously monopolistic

sectors e.g. energy supply, telecommunications, air transport and postal services
together with new arrangements for car retailers inside the single market.

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State Aid control
o

Competition policy analyses examples of state aid measures by member state

governments to ensure that such measures do not artificially distort competition in
the Single Market
Ex: the prohibition of a state grant designed to keep a loss-making firm in
business even though it has no prospect of long-term recovery

Merger control
o

This involves the investigation of mergers and take-over between firms (e.g. a
merger between two large groups which would result in their dominating the
market).

Explain about the Sri Lankan Competition Policy and other regulatory
mechanisms which affect to the business organisation activities.
Economic liberalization and the privatization program.
The liberalization policy, aimed at promoting sustainable economic growth in a
market friendly environment where the private sector was perceived as the engine of
growth.
In 1987, privatization was announced as a government policy with a view to improve
economic efficiency, profitability and accountability as well as to generate revenue
and reduce the financial burden of state owned enterprises (SOEs)
In Sri Lanka, competition law was introduced in 1987, with the enactment of the Fair
Trading Commission Act (FTCA)
The wide scope of the FTCA covers
o The power to control monopolies
o Mergers and anti-competitive practices
o Formulation and implementation of a national price policy
The implementation of the Act is entrusted to the Fair Trading Commission (FTC),
which is a quasi-judicial body that comes under the Ministry of Commerce and
Consumer Affairs.
The FTC was dormant from its inception and has not been able to make a visible
impact on the behavior of firms in the market or attract legitimacy in the eyes of
players in the market or of consumers.
The law has sometimes been found ambiguous and weak in terms of penalties for
contravention.
Exclusion of several areas such as banking, conduct of professionals etc. from the
scope of the competition law has further complicated matters.
The FTC's position vis a vis institutions such as the Public Enterprise Reform
Commission (PERC) and the Board of Investment (BOI) is not clear and questions
have arisen as to whether monopolies granted to firms by these institutions come
within the scope of the FTC.

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Further complications have arisen due to the lack of demarcation of boundaries
between the FTC and sector specific regulatory authorities such as the Telecom
Regulatory Commission and the National Transport Commission.
Legislations :
o Consumer Protection Act No. l of 1979
o Fair Trading Commission Act No. 1 of 1987
o Industrial Promotions Act No. 46 of 1990
o Intellectual Property Act No. 52 of 1979
o Consumer Protection Authority Bill

Powers of the Authority and the Council

Control and eliminate
o restrictive agreements
o arrangements amongst enterprises with regard to prices
o acquisition or abuse of a dominant position with regard to domestic trade or
economic development within the market or substantial part of it
restraint of competition adversely affecting domestic or international trade or
economic development.
Investigate into mergers, monopolies and anti-competitive practices and abuse of a
dominant position.
Maintain and promote effective competition between persons supplying goods and
services.
Promote competitive prices wherever possible and regulate prices in markets where
competition is less effective.
Undertake public and private sector efficiency studies and provide information
relating to market conditions and consumer affairs.
Promote consumer education with regard to good health, safety and security of
consumers.
Promote the exchange of information relating to market conditions and consumer
affairs with other institutions.

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LO 3.1 Explain how Market Structures determine the Pricing

and Output decisions of Businesses
Explain Four Market Structures
Monopoly
Pure monopoly where only one producer exists in the industry
Monopoly exists therefore, one firm dominates the market
Maintain barriers to entry
o Economies of scale
o Product differentiation and Brand Loyalty
o Lower Costs for an established firm
o Ownership / Control over outlets
o Legal Protection
o Mergers and Takeovers
o Aggressive Strategy
o Intimidation
The monopolists demand curve
o Downwards sloping
o MR below AR
Equilibrium price and output
o Equilibrium output, where MC = MR
o Equilibrium price, found from demand curve
Monopolistic Competition
Monopolistic competition refers to a market structure in which a large numbers of
sellers sell differentiated products which are close substitutes for one another.
The element of monopoly in monopolistic competition arises from the fact that each
firm has an absolute right to produce and sell a brand or patented product. Other
firms are prevented by laws from producing and selling a branded product of other
firms. This gives a firm monopoly power over production, pricing and sale of its own
branded products.
The element of competition comes from the fact that each branded product is a close
substitute from one to another and firms selling branded products of the same
generic category have to compete from the market share.
Characteristics:
o Large number of firms in the industry
o May have some element of control over price due to the fact that they are
able to differentiate their product in some way from their rivals products are
therefore close, but not perfect, substitutes.
o Entry and exist from industry is relatively easy few barriers to enter and exit.
o Consumer and producer knowledge imperfect.
Some important points about monopolistic competition;
o May reflect a wide range of markets
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o

Not just one point on a scale reflects degrees of imperfection

Eg:
restaurants,
hair
dressers,
private
schools
plumbers/electricians/local builders

and

Firms have some degree of market power

o But demand curve typically flatter than in monopoly since there is more
competition.
Output pricing decision is defined by MR = MC as always
o The absence of entry barriers means that super normal profits are competed
away.
o Firms end up producing where p = AC, but AC not at its minimum as in
perfect competition, also p > MC.
o The firm may enjoy a short run profit.
o In the long run due to the emergence of substitute the demand start to shrink.
Oligopoly
Non co-operative oligopoly is a market where a small number of firms at
independently but are aware of each others actions.
Typical assumptions of oligopolistic markets
o Consumers are price takers
o All firms produce homogeneous products
o There is no entry into the industry
o Firms collectively have market power; they can set price above marginal cost
o Each one sets only its price or output (not other variables such as advertising)
Behaviour of firms in oligopolistic markets
o Firms are rational
o Firms reason strategically
Perfect Competition
A perfectly competitive market has the following characteristics
o There are many buyers and sellers in the market
o The goods offered by the various sellers are largely the same (many
substitutes, homogeneous products)
o Firms can freely enter or exit the market
As a result of its characteristics, the perfectly competitive market has the following
outcomes.
o The actions of any single buyer or seller in the market have negligible impact
on the market price
o Each buyer and seller takes the market price as given (price takers).
A competitive has many buyers and sellers trading identical products, so that each
buyer and seller is a price taker.
o Buyers and sellers must accept the price determine by the market.

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Explain how market structures determine the pricing and output

decisions of the business
Price Discrimination
Is the business practice of selling the same good at different prices to different
customers, even though the cost for producing for the two customers is the same.
Price discrimination is not possible when a good is sold in a competitive market since
there are many firms all selling the same market price. In order to price discriminate,
the firm must have some market power.
Perfect price discrimination
o Perfect price discrimination refers to the situation when the monopolists know
exactly the willingness to pay of each customer a different price.
Two important effects of price discrimination
o It can increase the monopolists profits
o It can reduce deadweight loss
Examples of price discrimination
o Movie tickets
o Airline prices
o Discount coupons
o Financial aid
o Quantity discounts
Price discrimination are
o First degree
o Second degree
o Third degree (the most common form)
First degree price discrimination
Seller must know each consumers total willingness to pay
Effect is for producer to extract total consumer surplus as a profit
Second degree price discrimination
Charging different prices based on customer used rates
Third degree price discrimination
Charging different prices to different types of consumers
Examples include
o Geographical price differences
o Prices aimed at educational and private sector markets
o Variation prices between domestic and commercial customers

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LO3.2 Illustrate the way in which market forces shape

organisational responses using a range of examples
Illustrates the market forces shape organisational reponses with
reference to demand, supply, elasticity of supply, elasticity of demand,
cost and output decisions, economies of scale in the short run and long
run
Elasticity of Demand
The price elasticity of demand is a ratio of percent change in the quantity demanded
to the percent change in the price as we move along the demand curve.

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Demand for
Vaccinations
When price rises to $21 per barrel,
world demand falls to 9.9 million
barrels per day (point B).

Interpreting the Price Elasticity of Demand

Two extreme cases of price elasticity of demand
o Demand is perfectly inelastic when the quantity demanded does not respond
at all to changes in the price. When demand is perfectly inelastic, the
demand curve is a vertical line.
o Demand is perfectly elastic, when any price increase will cause the quantity
demanded to drop to zero. When demand is perfectly elastic, the demand
curve is a horizontal line.

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Quantity of tennis balls (dozens per year)

Elasticity of Supply
The price elasticity of supply is a measure of the responsiveness of the quantity of
a good supplied to the price of that good. It is the ratio of the percent change in the
quantity supplied to the percent change in the price as we move along the supply
curve.

Two extreme cases of price elasticity of supply

o There is perfectly inelastic supply when the price elasticity of supply is zero,
so that changes in the price of the good have no effect on the quantity
supplied. A perfectly inelastic supply curve is a vertical line.
o There is perfectly elastic supply when even a tiny increase or reduction in the
price will lead to very large changes in the quantity supplied, so that the price
elasticity of supply is infinite. A perfectly elastic supply curve is a horizontal
line.

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At any price below $12, quantity supplied is zero.

Supply and Demand

A competitive market
o Many buyers and sellers
o Same good or service
The supply and demand model is a model of how a competitive market works
Five key elements;
o Demand curve
o Supply curve
o Demand and supply curve shifts
o Market equilibrium
o Changes in the market equilibrium
Demand Schedule
A demand schedule shows how much of a good or service consumers will want to
buy at different prices.

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Demand Schedule for Coffee Beans

Price of Quantity
coffee
of coffee
beans
beans
$2.00
7.1
(per
demande
pound)
d (billions
7.5
1.75
of
8.1
1.50
pounds)
1.25

8.9

1.00

10.0

0.75

11.5

0.50

14.2

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As price rises, the quantity demanded falls

What causes a demand curve to shift ?

Changes in income
o Normal goods; when a rise in income increases the demand for a good the
normal case we say that the good is a normal good.
o Inferior goods; when a rise in income decreases the demand for a good, it is
an inferior good.
Changes in tastes
Changes in expectations
Supply Schedule
A supply schedule shows how much of a good or a service would be supplied at
different prices.
Supply Schedule for Coffee Beans
Price of coffee beans(per pound)

Quantity of coffee beans

supplied(billions of pounds)

$2.00

11.6

1.75

11.5

1.50

11.2

1.25

10.7

1.00

10.0

0.75

9.1

0.50

8.0

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Supply curve, S

What causes a supply curve to shift ?

Changes in input prices
o An input is a good that is used to produce another good

Changes in the prices of related goods and services

Changes in technology
Changes in expectations
Changes in number of producers

Equilibrium
Equilibrium in a competitive market; when the quantity demanded of a good equals
the quantity supplied of that good
The price at which it takes place is the equilibrium price.
o Every buyer finds it seller and vice versa.
o The quantity of the good bought and sold at the price is the equilibrium
quantity.

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Equilibrium quantity

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LO3.3 Judge how the business and cultural environments

shape the behaviour of a selected organisation
What is the Business and Cultural Environment of an Organisation
In very broad terms, culture refers to the prevailing norms and values which guide
the way people behave in a society or in an organisation. Culture at the level of an
organisation is referred to as organisational culture, and culture at the level of a
society is referred to as national culture.

Organisational culture refers to an organisation's own values, beliefs and learned

ways of doing business. This is reflected in its structure and in the people who work
in the organisation. The culture of an organisation is derived from its aims and
purpose, its past, its present and its current ways of managing its people and
resources. Because every organisation is unique in terms of these features, each will
have a culture that is unique.
Analysis of culture is important within an organisation because, as we will see it
impacts on everything the organisation does. But very often these values and beliefs
are not explicit and people take them for granted. This taken-for-grantedness is what
frequently makes culture problematic in organisations. People assume that everyone
views things in the same way. But as you will see as you work through this unit,
nothing could be further from the truth.

National culture, in turn, is the culture that exists outside the organisation at the level
of a society or country. National culture is made up of the societal values and belief
system of a country and is influenced by several factors, including its languages,
religions, gender roles, age profiles of its population, socio-economic groups and
government policy.

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LO4.1 Discuss the significance of international trade to UK

business organisations
What is International Trade ?
Trade between countries take place because resources are un-evenly distributed
through the world and the mobility of the factors of the production is limited.
Consequently, some countries are better at producing certain goods than others.
Some countries could not actually produce a particular good Eg. Britain cannot
produce minerals that are not indigenous or fruit that can only be grown in tropical
weather conditions.
It is easy to see that if country A can produce video cameras than cheaply than
country B and country B can produce wheat more cheaply than country A,.
Specialisation should occur and country A should produce video cameras and
country B should produce wheat and should trade with one another.
Free trade free trade brings the advantages of higher world output and higher
standard of living. Countries will produce the goods in which they have a cost
advantage and trade with other countries for other goods.

Discuss the significance of an International Trade to Developed Country

and Developing Country (Eg. Developed Country UK / Developing
Country Sri Lanka)
The United Kingdom's economy is dependent on foreign trade. The government
supports free and unrestricted trade and has championed international trade
organizations such as the World Trade Organization and the EU. Because of its
dependency on trade, the British have few restrictions on foreign trade and
investment. Of the kingdom's 500 largest corporations, 60 are American.
The United Kingdom's main trade partner is the EU. Some 58 percent of the
kingdom's exports go to EU nations. Its main EU partners are Germany, which
accounts for 12 percent of exports; France, with 12 percent; and the Netherlands with
8 percent. The United Kingdom's largest single market is the United States, which
accounts for 13 percent of its exports.
The United States also provides 14 percent of the kingdom's imports. As a combined
group, the EU provides 53 percent of British imports. Germany provides 13 percent,
France 9 percent, the Netherlands 7 percent, and Italy 5 percent. The United
Kingdom has trade treaties with 90 different nations.
The strength of the British pound and the state of the economy has made the United
Kingdom an attractive investment area for foreign investors. The kingdom is the
world's second-largest destination for investment. About 30 percent of all foreign
investment going into the EU is directed at the United Kingdom. The British also
invest heavily in other nations.
In 1998, the United Kingdom had US$120 billion invested abroad. The United States
is the largest single investor in the United Kingdom and accounts for 44 percent of all
foreign investment in the United Kingdom. In 1997, U.S. investment in the United
Kingdom amounted to US$138.8 billion. The total U.S. investment in the United
Kingdom is more than the total American investment in Germany, France, Italy, and
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the Netherlands combined. In overall terms, foreign investment accounted for 5

percent of GDP.
For several decades, the United Kingdom has had a trade deficit, as it has imported
more goods and services than it has exported. In 1998, the trade deficit amounted to
US$35 billion or 1.5 percent of GDP.
However, because of the attractiveness of the kingdom to foreign investors, new
investment capital continues to allow the British to fund this deficit because the new
investment monies exceed the money the kingdom loses through its trade deficit.
Foreign companies provide 40 percent of British exports and they have a significant
presence in the manufacturing sector. About 20 percent of manufacturing companies
are foreign-owned and 16 percent of employment in the sector is tied to foreign firms.
In 1998 there were 25,800 foreign companies in the United Kingdom.
the major international companies in the United Kingdom are DuPont, with sales in
1998 of US$2.7 billion, the Swiss chemical company Ciba, with sales of US$2.3
billion, and Coca-Cola, with sales of US$2.1 billion.
In order to attract foreign businesses and foreign investment, the British government
has adopted a variety of programs. For instance, the Parliament allows local and
regional governments to establish enterprise zones. In these zones, companies
receive exemptions from property taxes and reimbursement for costs involved in the
construction of new factories or business locations.
These inducements may be extended for up to 10 years. There are also programs
that provide incentives for companies to locate in economically depressed urban
areas that are known as "Assisted Areas."
In 1998, the total value of these programs was US$315 million. There are 7 free
trade zones in the United Kingdom (Birmingham, Humberside, Liverpool, Prestwick,
Sheerness, Southampton, and Tilbury). These zones allow goods to be stored for
shipment without tariffs or import duties.

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LO4.2 Analyse the Impact of Global Factors on UK Business

Organisations
Analyse the Impact of Global Factors on Developed and Developing
Country with reference to inflation, deflation, economic recession,
international competition, WTO and IMF (Eg. Developed Country UK /
Developing Country Sri Lanka)
Globalization
Organisations function in an worldwide investment that is differentiated by bigger and
more powerful affray, and at the equal time, bigger economic interdependence and
collaboration. More items and services are being consumed out-of-doors of their
homeland of source than ever before as globalization brings about bigger
convergence in time span of purchaser tastes and preferences.
Yet at the equal time, in the midst of bigger convergence, there is the converse force
of divergence at work where businesses have to acclimatize enterprise and
enterprise designs, swapping concepts, and yield efforts to localized house markets.
There is not a single accepted definition for Globalization, it is a term used to
describe the process of integration on a world wide scale of markets and production.
World is moving away from a system of national markets that are isolated from one
another by trade barriers, distance or culture
National boundaries are not so important economically free trade and movement of
labour and other resources result in the breakdown of these boundaries.
Arguments on Globalization
Pro globalization arguments
o Increased globalization leads to greater specialization so that all countries
involved benefit from the increased international trade.
o Countries that are open to all international trade have experienced much
faster growth than countries that are not.
o Eg; china opening up to world trade in 1978 increased GDP per capita $1460
to 1980- $5400.
o Barriers to trade encourage industries to be inefficient and uncompetitive
o It is not just the large multinationals that benefit from globalization. Small and
medium sized companies are also engaged in global production and
marketing.
Anti- globalization arguments
o The benefits of globalization have not been shared equitably through out the
world
o Globalization undermines the power of nation state- it empowers the large
multinationals at the expenses of governments- many multinationals are
financially bigger than nation state
o The large organizations that promote free trade- WTO and IMF are not
democratically elected and their decisions are not made in the public eye.

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o

The policies of these organizations are only aimed at trade human rights
and environmental concerns are often ignored.

Internationalization
On the other hand increased links between nations states with respect to trade and
the movements of the resources.
Regionalism
Regionalism and regional trade agreements are important for the Globalization and
internationalization.
o Eg; European Union
The main difference is that with internationalization is the nation state remains
important whereas the process of globalization breaks down the barriers between
nations.
Inflation

Too much money in the economy and not enough goods and services to purchase.

Inflation is a rise in the prices of goods and services.

If consumers have high demands for goods and services, but the supply of these
goods and services doesn't increase to meet the demands, producers can raise
prices and consumers will still be willing to purchase the goods and services at
higher prices
Consequences of Inflation

Inflation Measurement is Consumer Price index (CPI).

The CPI is a market basket of goods and services that consumers regularly buy.
Inflation leads to devaluation of the currency
Printing money ( quantitative easing) also leads to inflation that leads to devaluation

Application of Inflation
Inflation is measured using the Consumer Price index(CPI).
The CPI is a market basket of goods and services that consumers regularly buy.
As the prices of these goods and services rise, so do the Consumer Price Index and
all prices in general.

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Recession
If there are two consecutive quarters of decline in economic activity as measured by
a decrease in GDP, the economy is said to be in a recession.
During a recession, prices fall, consumers don't buy as many products (especially
high-priced items), and businesses begin to fail.
A recession has severe consequences for the economy, highlighted by high
unemployment and an overall drop in living standards. When the fear of a recession
begins to surface, government expends considerable effort to change the course of
activities.
Deflation
The opposite of inflation, deflation means that prices are going down.
The CPI goes down because the prices of the goods and services that are used to
measure it are in general decline.
Deflation often follows inflation but normally is shorter in length and of a lesser
magnitude

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LO4.3 Evaluate the Impact of Policies of European Union on

UK Business Organisations

Explain about the Policies in European Union

The European Union
The EU was established in 1958 by the Treaty of Rome.
The six original members France, West Germany, Italy, Holland, Belgium and
Luxemburg.
As a result of the enlargement of the EU, a new constitution was put forward which
included changes in voting rights, the size of the EU commission and maintaining
national sovereignty.
The primary aim of the treaty of Rome was to create a common market in which
member states were encouraged to trade freely and to bring their economies closer
together, ultimately culminating in the creation of a single market within the union
The Policies of the European Union
To bring a single market protected free trade area or customs union was
established, which involved the removal of tariff barriers between member states and
the institution of a common external tariff (CET) on goods from outside the union.

Common agricultural policy (CAP)

European Monetary System

Majority of member states undertook to fix their exchange rates within

agreed limits.
Single European Act 1992 target is a single European Market without internal
frontiers, in which the free movement of goods, services, people and capital was to
be ensured within the provisions contained in the treaty.
European Economic Area (EEA) Which permits members of the European Free
Trade Area (EFTA) to benefit from many of the single market measures.
Increased economic and monetary union between member states
A single currency
A social charter to protect workers rights
A common foreign and security policy
Community citizenship
The Euro zone is effectively a single economic zone since it operates with a single
currency the Euro and members have given up sovereignty over monetary policy
which is now determine by the European Central Bank.

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Evaluate the Impact of Policies of the European Union on UK Business

Organisations
A vast majority of UK law is derived from the EU, estimated at 80% of law currently in
force in the UK. As such, withdrawal from the EU will have a huge effect on
legislation applied in the UK.
The Treaties (the TEU and the TFEU) would cease to apply, including as part of
those, the fundamental freedoms (free movement of goods, services, capital and
persons/workers) meaning that the protection of UK citizens either living in or
intending to move to an EU Member State will disappear.
UK nationals will require visas just to visit any MS and stringent requirements will
apply to workers visas. Such rights, which derive from fundamental freedoms and are
directly enforceable in UK courts, will be deprived to nationals of other Member
States residing in the UK.
Treaties, Regulations and Decisions (the latter explicitly addressed to the UK or UK
party) are directly applicable, i.e. they are automatically legally binding without the
need to implement such provisions into national law. All of this legislation currently in
force will automatically become inapplicable in the UK and any rights derived will
cease to exist. This will leave huge gaps in the UK legal system.
For example, the Regulation on compensation to passengers for delayed or
cancelled flights will no longer apply. Likewise, competition law regulations such as
the vertical agreements block exemption, which exempts thousands of common
commercial agreements from UK competition law enforcement, will no longer apply.
Identifying such national legislative measures which are affected by Regulations or
Decisions (as these are not explicitly given effect into national legislation) and
revising them, would be a daunting task.

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Conclusion

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Reference List

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