Roxanne williams

Principles of Business
(POB) CSEC Notes 2013 -
2015
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Reference Sites: wizznotes.com

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 Structure and Organization of the Syllabus
The syllabus is arranged into ten (10) sections consisting of specific objectives and related
content

Profile Dimension 1:
Section 1

- Nature of the Business

Section 2

- Internal Organizational Environment

Section 3

- Establishing a Business
Section 4

- Legal Aspects of a Business

Profile Dimension 2:
- Production
- Marketing
- Finance
Section 5

- Production
Section 6

- Marketing
Section 7

- Business Finance

Profile Dimension 3
- The business Environment
Section 8

- Roles of government in an Economy

Section 9

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 - Social Accounting and Global Trade
Section 10

- Regional and Global Business Environment

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SECTION 1: NATURE OF THE BUSINESS

SPECIFIC OBJECTIVES

Student should be able to:

Objective 1: Explain the terms and concepts related to business

Business

A business is any individual or group of individuals whose goal is to make a profit by selling
products and/or services.

Enterprise

Simply means “a business”. It is used to describe an undertaking or activity with some degree
of difficulty or risk.

Enterprise can also mean ‘initiative’ which is daring to do something new or different,
challenging or risky.

Entrepreneurship

The practice of identifying a new innovation or opportunity, organizing the financing and other
resources and taking the risks in hope of creating wealth.

Entrepreneur

The individual who identifies the opportunity and risk the times and money to start/to organize
this new venture.

Barter

The exchange of goods for other goods. This was the first type of trade.

Barter was the first form of trade, however it had several drawbacks:

i.) A double coincidence of wants

ii.) Rate of Exchange
iii.) Some goods are not divisible
iv.) Some goods are bulky and difficult to transport
v.) Store of value

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Profit

The money remaining after the cost of production, distribution and taxes have been paid.

It is the financial gain for the business or entrepreneur. It can be represented in the following
ways:

- Total Revenue
o Greater than Total Cost
=Total Revenue (TR) > Total Cost (TC)
- Revenue
o The money earned from the enterprise or business
E.g. TR = $600 TC = $400
Profit = TR – TC
= TR- TC
= $600 - $400
= $200 – Profit

Loss

The Opposite of profit, when the cost of production and other expenses are greater than the
revenue, this is called “making a Loss”

It means the business is not making enough money

A Loss is occurring when the total revenue is less than total cost.

Loss = TR < TC

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ACTIVITY
Brandon makes fruit juices in his neighborhood; below are his costs and revenues for
September and October in 2010.

September

Total Sales Revenue = $50,000

Total Costs for all Expenses = $55,000

October

Total Sales Revenue = $60,000

Total Costs for all expenses = $52,000

In which Month did Brandon make a profit?

Brandon made a Profit in the Month of October.

What is the amount of the profit?

The profit was $8,000

How much was the amount of the loss?

The loss was $5,000

Trade

Trading means buying and selling.

Organization

A group of persons using resources or things that are arranged in a certain way to carry out
specific activities in order to achieve a goal or objective.

Economy

A system that allocates or shares scarce resources be deciding what should be produced, how
and for whom.

Producer

A Person or business that makes or creates goods and services

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Consumer

A Person or group that uses goods and services to satisfy wants.

Exchange

The giving of one thing and the receiving of another

Goods

Tangible (can be seen or touched) things that are made to be sold and are otherwise called
products.

Services

Work that is done for another; assistance or benefit given.

Market

Any situation in which sellers and buyers meet and communicate in order to exchange goods
and services.

Commodity

An item that is traded, usually raw materials such as copper or coffee.

Capital

The money or other resources or other things that are used to start a business. The money,
machinery and man-made materials that are used daily in a business.

Labour

The physical or mental work of a person. It is another name for human resources.

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Specialization of Labour

Refers to the division of a task into a number of related parts.

Specialization

A form of division of labour in which each individual or firm concentrates its productive efforts
on a single or limited number of activities.

This concentrating on only one task and is an aspect of division of labour. In essence division
of labour leads to specialization.

Division of Labour

This is splitting up of a main task into several smaller tasks. Division of labour come about as
persons began to maximize their individual skills

Specialization Can:

- Occur at the product or occupational Level

- Be a process E.g. Making Butter
- Be a firm E.g. St. Vincent Brewery Specializes in bottling drinks
- Be industry related E.g. Bauxite Industry
- Be regional or international in score E.g. Caribbean Area is known for tourism

Advantages of Specialization

- It increases the skills of workers since the same task is repeated and workers learn
from repetition.
- It increases productivity, less time is used to change from one activity to another
- The costs of production is reduced since a greater number of items are made
- The quantity of a product can also improve since workers are more skilled and the use
of machines means that quality cannot be dissolved
- Less time is spent on training of workers because only a small part of the skill is
necessary

Disadvantages of Specialization

- The work is monotonous

- The work environment is impersonal since specialization leads to a larger scale
industries in which workers are no longer close family members
- Workers may lose pride in their job since they are not completing the entire job and
therefore, cannot fully appreciate the marking of the product
- Since processors require a large amount of capital to purchase the machinery.

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Levels of Specialization

- Product or occupation
- Process
- Firm
- Industry
- Region
- Nation

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Objective 2: Trace the development of instruments of exchange

Direct Satisfaction of Wants

This is where needs are satisfied directly from nature, hardly altering the original state of the
goods by cooking or applying any form of processing

A Subsistence economy is an economic system where needs and wants are satisfied directly
from nature.

Barter (See Topic: Nature of Business)

Limitations/ Draw-Backs of the barter system

- For bartering to be successful, one person must have what the other person wants and
be prepared to exchange. This condition is referred to as double coincidence of wants
- The process becomes very complicated when more than two (2) persons were involved
in the exchange, since persons would have to keep exchanging items until individual
wants and needs are met
- The rate of exchange or the right quantity acceptable in exchange for the other item
- The indivisibility of certain commodities
- The store of wealth and store of value
For example, perishable goods lost value with the passing of time, whereas precious
stones such as gold gained value with time. It became very difficult, therefore to settle
on trading principles and practices that guarantee a fair price for goods that were
exchanged.

How does production leads to the satisfaction of Needs and Wants?

Wants and needs are satisfied by the certain creation of goods and services which have the
abilty to satisfy needs and wants.

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Money

Is any commodity that is accepted as a measure of value and a medium of exchange.

Features of Money

To be accepted as money the commodity must have the following features:

i. The commodity must be acceptable – everyone must be willing to accept it

ii. It must be relatively scarce. In other words, the item must only be available in small
quantities. In this way, the value will be maintained
iii. The commodity must be capable of being divided easily into smaller fractions
iv. It must be homogenous, it must be identical in look, size and weight
v. Since the item must pass from hand to hand, it must be durable
vi. It must be portable, one must be able to carry it around easily

Functions of Money

1. Medium of Exchange – Everyone must be willing to accept it in exchange for goods and
services
2. Standard of Value – The worth of goods and services is measured in money, which sets
the price of the item.
3. Store of value – Money can be saved and used in the future. It makes saving possible
and hence brings out investment
4. Means of Defer Payment – Money is used to pay for goods bought on credit
5. Favorable Price Mechanism – It is the Price one is willing to pay to satisfy effectively

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Developments of Money

Barter

Commodity Money
(E.g. Cowrie Shells,
salts)

Money of Intristic Value

(E.g. Gold Coins, Silver
Coins)

Representative Money

Fiat Money (Legal

Tender notes or coins)

Near Money (Debit +

Credit Cards

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Types of Money

Coins

Refered to as token money and are legal tender only up to a small amount

Bank Notes

These are issued by the central bank in specific denominations

Bank Notes maintain its value in the outside world if the issuing country is able to produce an
export sufficient goods to be able to pay for the value of all imported goods

Bank Deposits

The holder of a bank deposit is allowed to draw cheques on his bank account. It is the most
common form of payment used in business today.

Near Money

It satisfies the needs for a medium of exchange, but is not legal tender.

NB: The seller does not have to accept these forms of payment, he can demand
cash if he so desires

Bills of Exchange

Is a written order from one person to another. The person who sends it is instructing the
person receiving it to pay a certain sum of money at a specific time in the future.

The person who is sending is called the “drawer”. The person receiving it is called the
“drawee” (who owes the money to the drawer). The drawer may give instructions for the
money to be paid to another person.

Bills of exchange are usually used by persons who are selling goods to others in another
country.

Credit Cards

A credit card is a card given by a financial institution to its customers which authorizes that
customer to purchase “on credit.” This card enables the electronic transfer of information and
money.

In order to receive a credit card, persons must first quantify that is satisfy the financial
institution that they will make the necessary payments when they are due. If payments are not
paid on time, then the cardholder may/ must pay interest charges.

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Debit Cards

Also known as a bank card or check card. Is a plastic payment card that provides the
cardholder electronic access to his/her bank account(s) at a financial institution. Some cards
have a stored value which at a payment is made, while most relay a message to the car
holder’s bank to withdraw funds from the payee’s designated bank account.

The card where accepted can be used instead of cash when making purchases. In some cases,
the primary account number is assigned exclusively for use on the internet and there is no
physical card.

Electronic Transfer

Is payment transferred electronically from one bank account to another. It is very fast and it is
a safe way of making payments.

A cardholder can insert their automatic bank card (also called ‘Debit Card’) into a machine
which is electronically linked to his/her Bank Account.

Telebanking & E-commerce

Ecommerce refers to any business transaction that is done through the internet. This may
include the transfer of money as well as information.

Telebanking is a system for conducting banking transactions over telephone lines.

Objective 3: State reasons why an individual may want to establish a business.

Reasons for establishing a business

A business organization is formed when a person or group of persons uses resources to

provide goods and services with the view of making a profit.

An individual will establish a business for several reasons:

- To produce either a good or a service or both;

 Manufacturing products
 Buying goods for resale
 Providing services to the public or other firms
- To create jobs by hiring and training employees;
- To make a profit;
- To become financially independent;
- To contribute to the development of the economy

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Objectives of a Business

Owner

- To the private owner the objective may be to produce a reliable stream of income to
allow the owner support his/her family and to pay debts
- A business may serve a place where the owner and his children can work. The children
earn extra cash and gain experience; and there is a dependable source of employees

Employees

Employees see the business differently which is:

- To make enough money to support themselves and their families

- Security of the employment is another objective of the employee. Some employees
expect to achieve personal grants, promotion and responsibility to achieve self-esteem.

Society

- The business must act firmly and responsibly, society expects the business to be a
good corporate ciitzens, to pay its fair share of taxes and to support important local
causes
- People expect the quality of the product produced must reflect on the value of money
spent
- Society expects to be informed about any changes and hazards associated with a
product. Finally, society expects a business to stand behind its products

Not for Profit Making Organizations

- State Cooperation
- Nationalised Industries
- Local and Municipal Authorities
- Government Departments

Reasons

1. Independence
2. Income

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 3. Redundancy
4. Poor Job respects

Independence

- Being in control of your working life

- Being in control of your business
- Having a secure job

Income

- Job Security

Poor Job Respects

- Individuals are not well educated

Objective 4: Describe the different forms of business organisations and

arrangements.

Sole Trader

- A sole trader is a person who has total ownership of and responsibility for managing
his/her business

Formation

- No Legal requirements however, trade names must be registered

Management

- Managed by the owner

Features

- Owned by one (1) person

- Easy and inexpensive to set-up
- Usually financed by the owner
- Capital is limited since the savings of the owner fund the business
- This type of business is not incorporated
- Soletrader takes all the risks and losses but enjoys the profit
- Have Unlimited Liability

How is Capital formed?

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- Personal Savings
- Borrowing

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Partnership

- An association of 2- 20 members/partners operating a business for the common goal of

making a profit

Formation

- No formal requirements, but it is best if a partnership deed is drawn up

Management

- Managed by ordinary partners

Features

- Each partner contributes to the business’ equity

- Have unlimited liability
- This type of business is not incorporated
- Limited Life (The partnership ends on change of members, if a partner dies or
withdraws from the partnership. Then the partnership will cease to exist)
- Profit or loss is shared among partners
- Joint Ownership
- Co-Ownership of contributing assets
- Each Partner is part of the management of the firm as such as the partnership
- Liable for the actions and decisions made by any partner on behalf of the firm

How Capital is raised?

- Each partner contribute to capital

- Borrowing/ Loans

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Limited and Unlimited Companies / Co-operatives

Private

- Is an incorporated business organization consisting of 2- 50 shareholders, whose aim is

to make profits

Public

- A public Limited Company / Joint Stock is an incorporated company that offers shares
to the public

Company

- A company is a business entity that has been incorporated that is, the company has
separate legal entity from that of the owners

Formation

- Certain level of requirements must be met before a company can commence trading.
Certain documents must be subtracted to the registrar of companies

Management

Private
- Managed by owners or may appoint a specialized personnel
Public
- The board of directors, which is elected by the shareholders at the annual general
meeting manages the company. The board of directors appoint an executive who heads
the company and reports to the Board on the Operations of the company.

Features

Public Limited Companies

- Shares are openly traded on stock market

- They must have PLC at the end of their name
- Without the certificate of incorporation the business cannot trade
- Have a minimum of 7 and NO maximum
- Have limited liability
- The life of the company is independent of the shareholder
- The company is managed and controlled by professional directors who are elected by
shareholders at an annual general meeting

Private Limited Companies

- The word “ltd.” must be included in the name

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 - Shares are sold only to family members and loyal employees
- Shareholders are between 2- 20 persons
- Shareholders have limited liability
- The company must be registered with the registrar of companies
- Accounting Statements must be prepared and an audit undertaken with a copy issued
to the registrar of companies

How capital is Raised?

- From private individuals

- Borrowing
- Profit is ploughed back
- From issuing shares
- Public Companies issue shares on stock market

Co-operatives

- A co-operative is a business that is formed and operated by their members.

Formation

- Each member purchases shares to form capital base of the business.

Features

- Members have a common bond (E.g. All the teachers or public servants all belong to a
particular community)
- There is the pooling of capital among the membership
- The members are also clients
- They are managed and controlled by their members
- They are voluntary, non-profit making organizations engaged in retail or other financial
activities.

How Capital is raised?

- Members contribute to the capital

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Memoandum of Associations

It is a legal document that founders of the company must submit to the Registrar of
Companies when they are registering a company.

It contains the company’s name, which must contain the word ‘limited’, the address of the
company’s registered office, the objectives of the company, the statement of the company,
liability of its shareholders, the authorized share capital and types of shares to be issued.

Articles of Association

These control the internal running of the company. They cover such areas as:

a. Procedures for calling an annual general meeting

b. Rights and obligations of the directors
c. Procedures governing the election of directors
d. Statement concerning the borrowing power of the company
e. Procedures dealing with the payments of dividends

Statement of Authorized/Registered

This is the amount stated in the memorandum, which is the maximum amount which the
company is authorized to make/raise.

Prospectors/ Prospectus

This is an imitation to the public to buy shares, in the public limited company. It contains
detailed information to enable investors to estimate its prospects.

Multi-national Co-operations

This is called Trans-National Corporations. They are a network of firms which operate in many
countries but are owned and controlled by a single group of shareholders. E.g. Courts

Characteristics

- Multinational Corporations are created through direct foreign exchange/investments

- Headquarters of multinational co-operations are usually located in a developed
country, while subsidiary companies are located in developing countries.
- These firms usually use the latest technology and invest heavily in research and
development.
- These firms are usually capital-intensive and therefore benefits from economies of scale

Economies of Scale are the cost reductions that can benefit a business as the industry ‘clusters’
and grows in one region.

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Conglomerate

A group of companies operating in many different industries. Some conglomerates have a

complexed structure. They may include

- A parent company which controls and owns other members of the group
- Holding companies which in turn owns other group companies
- Subsidiaries, which are majority-owned by the group with a wholly owned subsidiary.
The group owns 100% of the shares
- Associated companies where the conglomerate owns more than 20% and less than
50%
- Joint Venture- Their Ownership is usually spilt 50%/50%

Note: A Holding Company is formed for the sole purpose of holding shares in other companies
E.g. Coreas Hazells, Courts, Grace Kennedy and Company, ECGC

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Franchise
A franchise is a business which is licensed to use a brand developed by another company. The
franchisor owns the brand and moset franchise are internationally known.

The business must be conducted in a prescribed manner set out by the franchisor.

The Franchisee:

- Is Licensed to use the brand

- Pays an initial Start-Up fee
- Pays royalty, which are often 2-10% of sales
- Rent/ pays tax for building and also to employ staff
- Takes care of paper work and pays tax
- Buys signs and equipment from the franchisor
- Pays a contribution to advertising cost

The Franchisor:

- Provides advice, know-how and equipment

- Develops advertising materials and marketing campaigns
- Keeps a close eye on the business to make sure standards are maintained

Advantages

To Franchisee

- Can use internationally known brand name

- Receives advise and training from the franchisor
- Startup is fast

To Franchisor

- Gains sales and visibility in new markets

- Gains from the franchisee’s local knowledge and hard work

To customer

- Receives international standards of goods and services

Disadvantages

To Franchisee

- Cannot expand into new product or activities

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 - Makes regular payments to franchisor
- Loses some independence with running the business

To Franchisor

- Must rely on the management skills of the franchisee – if a franchise is badly run the
brand name will suffer

To Customer

- May loose local variety and choice

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Municipal Authorities

Are enterprises run by locally elected councilors to operate such units as municipal swimming
baths, theater arts

Municipal Authorities obtain their capital by borrowing against the security of the rates they
impose on households. They Price their goods and services at a rate that recovers the
operating cost, interest and capital repayments based on the life of the physical assets.

E.g. Town Board, local Government

Statutory bodies are setup by acts of parliament to handle the distribution of the goods and
services.

These authorities sometimes take the form of borough or country councils and after securities
such as water supply, drainage, health care, garbage disposal.

Each council is headed by a chairman or Mayor who presided over an assembly or elected
councilors.

Local authorities carry out their responsibilities with goals from the government together with
collection of local rates and taxes. E.g. House and Land Tax

Government Departments

The system of government in the Caribbean is divided into two (2) broad Categories

- Central Government
The central government consists of the ministries and departments such as Education,
Health, Housing, Police and Fire Department, Finance, Culture, foreign affairs, welfare
and transportation. Each ministry is headed by an elected official, the ministry and a
team of techno-crats are headed by a Permanent Secretary

- Local government
Consists of the municipal authorities for e.g. the city Corporations. This arm of the
government serve the community. They are mainly responsible for Local road
maintenance, garbage collection, maintenance of parks and road ways, cleaning of
gullies/ culverts, public cemetery and the consumer market. Funding is provided by the
central government and the collection of rates and taxes from the local resident. At a
Local government, election councilors are elected. From among these councilors the
mayor or chairperson for the borough council is appointed as head

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Concept of Private and Public Sector

- The public sector includes all business enterprises owned and manage and controlled
by government, for example water, transportation, radio, television, bauxite.
- Private sector is that part of the economy that is owned by the private citzens –
individuals/ private co-operation.
- The public sector seeks to regulate and se fair trading standards in the private sector.
It seeks to protect consumers against monopoly enterprises and wasteful competition.
It ensures certain goods are provided for consumers E.g. roads, Transportation

Private Sector profit is the driving force. Market forces of demand and supply determine the
prices and allocating resources, it allows for the movement of capital and labour to where they
are most profitable

Business found in the private sector are sole traders, partnerships, and public and private
limited companies, credit unions and Non-Profit Organizations such as the Lion’s Club

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Profit Motive of the Public Limited Companies and Public Co-Operation

Private Limited Companies

- The main motive/ aim is to make huge sums of profit

- Capital is obtained from many small investors as well as from large organizations
- Capital is obtained from private individuals, financial institutions, government agencies
or retained profits
-
Public Limited Companies

- Capital is obtained from many small investors as well as from large organizations

Public Co-operation

- Main motive is not to make a profit but to provide a service. Usually they are non-
profit making but in the long-term they have to be self-financing
- Where do they get their Capital to operate?

How Do they Raise Capital? (Private and Public Sector)

Private Sector

- Capital is funded from private individuals and funded by owners

Public Sector

- Capital is raised by the government through tax-payers

Objective 5: Differentiate among the different economic Systems

Definition

An economic system is a system of production and exchange of goods and services as well
as allocation of resources in a society. It includes the combination of the various institutions,
agencies, entities (or even sectors as described by some authors) and consumers that
comprise the economic structure of a given community

Formal Sector

Exist when there are clearly defined relationships, procedures and purposes between
individuals in an organization.

Informal Sector

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Refers to the unofficial relationships that exist within the firm, relationships are based on social
interaction.

Traditional (Subsistence) Economy

1. Command/Planned (Socialist/ Communist)

2. Free/ Capitalist
3. Mixed (Public & Private)

Economists exist because of limited resources and unlimited wants, leading to scarcity.

All economies must answer the questions of:

- What to produce?
- How to Produce?
- For whom to produce?

****Economic Systems exist to answer the Above Questions ^^****

Each Economic system has special characteristics

Traditional System

Where Needs and Wants were basic and were provided by direct satisfaction

Characteristics

- Countries with system are not usually modern

- These societies carry out subsistence farming, herding of cattle hunting
- The decision on what, how and for whom to produce was determined by the customs
and traditions handed down through generations
- The economy only had sufficient to survive on, any surplus would be traded

Planned System

Is where production is planned and all resources are owned by the state

Characteristics

- Use of officials may give rise to bureaucracy and corruption

- State makes all the decisions regarding economic activities
- Economic efficiency depends on the degree of accuracy with which wants are estimated
and resources are allocated.

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Free System/ Free enterprise/ capitalist / Market Economy

Is where there is little or no government control. Market Forces determine what is to be

produced, how and for whom

Characteristics

- Government plays little part in the economic activity

- Emphasis is on freedom of the individual
- All the economic decisions are made by the private individuals as consumers or
producers and are reconciled by the price mechanism
- Land and Capital are privately owned

Mixed

Is a mixture of communists and capitalists economies. Market forces are allowed to operate
but government controls and regulates the system

Characteristics

- The aim of the private sector is to maximize its profits

- The aim of the public sector is to maximize social welfare
- Economic decisions are taken by the price system and also by the state.

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Advantages and Disadvantages of Economic Systems
Free System/ Free enterprise/ capitalist / Market Economy

Advantages

- There is freedom from government interference

- There is complete freedom of choice for consumers and producers
- Price is mainly determined by the market or the ‘invisible hand’ of the price mechanism
- The system works for the self-interest of all groups in the system
- Competition among firms improves quality, keeps prices low and spurs new technology
and innovation
- Since resources are allocated to their most profitable use in free markets, efficiency is
promoted

Disadvantages

- This system leads to inequalities of wealth; the few rich get richer at the expense of the
many poor persons
- Large Companies, E.g. monopolies and cartels, can exert a powerful influence on prices
and supplies and can limit competition
- There is much pollution (E.g. noise, environmental, etc.) associated with this system
when industrialization gathers speed
- ‘Boom’ and ‘Slump’ are both characteristics of this type of economy. Periods of
prosperity usually give way to periods of recession, or a fall in business activity. This is
called the Trade Cycle. During periods of slump, resources are not fully used.
- Profit is pursued at the expense of all the members of society, especially the poor,
because only those who own resources profit from them.
- There is little production of Public Goods , such as roads and street lights, and limited
production of Merit Goods, such as health care and education, which only the rich can
afford
- There tends to be an over-consumption of Demerit Goods such as alcohol, cigarettes
and drugs.

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Planned Economy

Advantages

- The welfare of all citizens is the primary goal of the economic system
- Government possesses the information to be able to direct resources where they are
most needed
- Wasteful consumption is avoided
- As wages are controlled by the state there is no industrial unrest (such as strike action)
- There is a greater emphasis on the quality of life (Health, Education, Elimination of
Poverty, moral direction) than on the quantity of production (output) in the country.

Disadvantages

- There is no freedom of choice for consumers or producers

- The system is too rigid to adjust when changes occur; this can result in shortages
- Lack of incentive for workers results in low morale and efficiency. Managers are also
not motivated
- There are too many officials, and too much unnecessary procedures and paperwork
(known as red tape or bureaucracy – for example, visiting a government office to
obtain a permit).

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Objective 6: Identify the stakeholders involved in business activities

Stakeholders – Are the various groups within or outside an organization that stand to gain or
lose as a result of the organization’s activities

Internal
Owners

- They want to be sure that the business makes a profit

- Efficient management of revenues (Employees, equipment) Through planning, control
and other functions and strategies in the business
- They want to provide goods and services of high quality at a reasonable price
- They also have the satisfaction of owing a successful enterprise

Employees

- They want to see that their earnings increase

- Jobs are secured
- Working conditions are better
- An expanding company brings more chance of promotion and useful work experience

External
Customers

- Buy quality goods and services (dependence on your business)

- They want to be able to depend on the business for provision of goods and services

Community

- Benefit from increased employment

- The business support community organizations
- Employees have money to spend

Suppliers

- They want to be able to sell to a successful business, hence a guaranteed market

- They want to know that they will be paid in full and on time

Banks/Lending agencies

- Ensure principal plus interest would be repaid without difficulty

- Lend the business money to expand

Government

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 - Gains money from a profitable business pays taxes as do well-paid employees
- Successful business reduces unemployment and they earn foreign currency by selling
goods and services

If a business fails the stakeholders suffer:

Owners – Lose their investment and suffer from stress and worry

Employees – Lose their jobs

Customers – Have to go to a rival company if there is one

Bankers –May Lose funds lent to the business. This is called Bad Debt.

Suppliers – Loose a customer and may have to cut back their own business. They may also
be left with bad debt for unpaid supplies

The Community – Supermarkets and Other Local Business lose trade because workers have
less money to spend. Unemployment may create social problems and crime. Sports and other
Sponsorships may be cut.

The Government – Lose tax income and has to deal with social problems. Export earnings
fall. Imports increase if customers switch from local to overseas supplies.

Companies are likely to be successful if they promote good relations with their
stakeholders

Owners – Who earn a profit and are more likely to increase their investment.

Employees - are more likely to work hard and creatively

Customers – Bring repeat business

Bankers – Are willing to lend. They may charge a lower rate of interest.

Suppliers – Give priority to customers who give regular orders and pay bills on time.

The Community – Is more likely to give support to a business which creates employment and
supports local organizations.

The Government – Is more likely to respond to the needs of a business which is a good
corporate citizens and pays taxes. With money from taxes, the government can keep roads in
good repairs and educate the next generation of employees.

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Objective 7 – Discuss the role of stakeholders in business activities

Roles and responsibilities

Owners

- To provide capital for the business (reward is profit)

- In sole trader and partnerships owners are likely to have a role which includes
i) Strategic management, that is making important decisions about the
future of the business
ii) And operational management, that is decisions about what happens on a
day to day basis
- In private limited companies the owners are likely to maintain full control, as most
private limited companies are family concerns. In public limited companies, owners/
shareholders have the right to attend Annual General Meeting. Shareholders are
allowed to vote on any decisions taken at this meeting.

36
Objective 8: Outline the functions of a business

A Business or business unit consists of a person or group of persons engaged in trade or some
other commercial activity, with a view of making a profit.

Not all organizations can be regarded as businesses. A Non-profit organization is not a

business. For Example, a church bazaar may be engaged in selling goods, but it is not a
business, because the money made will be given to the church or a charity. They did not sell
with the aim of making a profit. A Private school, run for profit by its owners, is a business, but
a government school, provided as a service to the community is not.

Functions of a business

The functions carried out by a business depend on its aims, goals and objectives. However, for
most businesses there are several main functions:

1.) The Production of goods, services to meet customers’ needs and wants
Goods are made through the use of raw materials and other products
2.) Create jobs by hiring and training employees
3.) Businesses buy goods and services for their own use and resale
4.) Raise money by borrowing
They borrow for short-term cash needs from local banks

37
Section 2: Internal Organizational Environment

SPECIFIC OBJECTIVES

Student should be able to:

Objective 1: Describe the functional areas of a business

Functional areas refer to specialized departments within a business. These departments carry
out specific functions that assists the business overall.

Businesses can vary greatly in size. When a business is small, there are no definite functional
areas evident. This is so because the owner usually produces and markets his own products,
does his own accounting and personnel work.

As the business expands, however, specialized (functional areas) departments become

necessary. Most large businesses have FOUR functional areas: PRODUCTION, FINANCE,
MARKETING and PERSONNEL.

In very large businesses, there are TWO additional functional areas: RESEARCH and
DEVELOPMENT, and SOCIAL

Functional areas of a business

1. Production
2. Finance
3. Marketing
4. Personnel

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THE PRODUCTION FUNCTION

The Production Department is run by the Production manager. In this department, raw
materials are combined to produce goods and services. Designers make specifications which
are fully developed and tested. Sample products are also made. There will be no production
department if the business is only engaged in retailing or wholesaling, since they are buying
and selling already manufactured goods or they are in the service industry.

Functions

- Purchasing the raw materials

- Scheduling the production process
- Making of the Product
- Warehousing the scheduling goods
- Establishing quality control procedures
- Maintaining an adequate inventory system

Production should be geared toward:

(i) Offering the highest quality and standards required;

(ii) Producing the quantity required in a timely manner;
(iii) Making the goods and services available at an affordable price to customers.

A method of production adopted by some firms or industries is ‘mass production’, which means
producing goods in very large quantities (usually by using automated methods). Mass
production often leads to reduced cost (for the producer) and cheaper prices (for the
customer).

Apart from the main functions of the Production Department, the manager and staff may also
be responsible for:

- Controlling progress and standard of the work;

- Keeping production records;
- Keeping abreast of production costs;
- Estimating the cost of jobs;
- Preparing the budget for the production department;
- Liaising with the various departments and sections; and
- Providing overall, excellent service to the organizing and eventually to customers.

THE FINANCE FUNCTION

The Accounting and Finance Department, which is usually run by the Financial Comptroller of
the business, is responsible for the accounting procedures and processes of the business. The
department deals with the money management and money resources of the organization and

39
usually has overall control of income and expenditure within the organization. The finance
function of the business mainly involves:

(i) Producing the business’ annual, final accounts. This includes the preparation of the
Trading and Profit and Loss Account and the Balance Sheet, to be presented to the
shareholders and to be filed with the Registrar of Companies.
(ii) Advising management on the availability of capital for expansion and the
investment of funds in plant building and machinery. The department will offer
advice on how funds may be raised; the ability to pay higher wages and so forth.
(iii) Ensuring that dividends are paid to shareholders (if shareholders are paid
dividends).
(iv) Maintaining a satisfactory cash-flow position

Other Functions include:

- Making out payments on behalf of the business and

- Receiving all the monies due to the company
- The payment of wages and salaries
- Purchases and Sales, whether for cash or credit
- Budgeting and forecasting
- Establishing hire purchase and credit control measure as well as a collection
system

THE MARKETING FUNCTION

The Marketing function of the firm involves identifying and/or anticipate customers’ wants and
needs and to satisfy them in an efficient and profitable manner. The Marketing and Sales
Department is controlled by the Marketing (and Sales) Manager who has direct responsibility
for:

(i) Assessing market possibilities through market research and sales forecasting;
(ii) Advertising and sales promotions; and
(iii) Distribution of products.

Other Functions include:

- Liaise with Production Department regarding product design

- Pricing
- After-sales service, repairs and refund
- Storage of products (if not done by Production Department)
- Dispatch and control
- Transportation of products

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 - The preparation of: (i) Sales invoices; (ii) Cost of Sales reports, Sales statistics, etc.

THE ADMINISTRATIVE FUNCTION

The Administration Department is also referred to as the Personnel Department or the Human
Resources Department. It is often managed by the Administrative Officer or the Chief
Personnel Officer or the Human Resource Manager. The functions and duties of this
department concern mainly the employees of the business.

Functions

- Planning and forecasting man-power requirements

- Recruiting and selection of employees of the business
- Job analysis and job descriptions
- Job specifications and employee training

Having looked at the FOUR main areas, let us now spend a few minutes on the additional
functional areas that may exist if the business is large.

Additional functional areas that may exist if the business is large:

THE RESEARCH AND DEVELOPMENT FUNCTION

This department includes many types of research such as consumer, product and motivation

The work of this department includes many types of research, e.g., consumer research,
product research and motivation research. Feasibility studies and pilot projects are carried out
and communication with research institutes, such as the department of statistics, takes place.

THE SOCIAL FUNCTION

This may include: trade union negotiations, efforts to reduce pollution and dumping of waste
products, provision of health facilities and the provision of clean working environments, and
the initiation of social groups in the business e.g., clubs and credit unions.

Many persons decide to own and operate their own businesses. Some decide to invest in the
business ventures of others. Still, others end up working in the business. Whatever the case,
one needs to understand the fundamentals of management.

Functions

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 - Trade Union Negotiations
- Efforts to reduce pollution
- Dumping of waste products
- Provision of health facilities
- Provision of clean working environment
- The imitation of social groups in the business. E.g. Clubs and Credit Unions

Objective 2: Outline the functions of management

The functions of management

1. Planning – Is the developing for the future activities and opportunities of the business.
2. Organizing – Involves ensuring that everything is I place for the work of the business –
that materials, equipment personnel and financial resources are available at the right
time.
3. Directing – Involves ensuring that the middle or junior management and other
employees have what is required of them
4. Controlling – Involves setting up systems which monitor performance so that problems
can be detected and dealt with
5. Co-coordinating –Ensuring that different departments work together and provide
support for each other
6. Delegating – Involves giving responsibility for specific areas to middle and junior
managers. Senior managers retain final responsibility
7. Motivating – Inspiring staff so that they are keen to do their jobs to the best of their
ability. This includes providing the right pay and incentive structure and creating a
prospectful working environment.
8. Communicating – Ensuring that staff and stakeholders are aware of what is expected of
them, of what is happening in the organization and of what is planned for the future.

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Objective 3: Outline the responsibilities of management

Management is the act of combining the resources of an organization towards the

achievement of goals of the organization.

Management responsibilities to:

a.) Owners and Shareholders – By maximizing efficiency and creating surpluses

b.) Employees – For e.g. providing adequate working conditions, training, maintaining
good communication and human relations
c.) Society –

d.) Customers –

e.) Government –

Responsibilities of management

Owners and Shareholders

- Achieving the highest profit level

- Protecting and maintaining the asset
- Ensuring the firm grows and develops
- Providing information
- Maintaining the value of the firm

Employees

- Paying fair wages

- Protection against unfair discrimination
- Safe working conditions and equipment
- Providing opportunities for trade and education
- Providing compensation for job related injuries
- Medical assistance if working with dangerous chemicals
- Non- Discrimination – especially against union members, a race or sex

Customers

- Provide good quality goods and services at reasonable prices

- Provide good after sale services
- Carry out fair trading practices

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 - Provide compensation to customers for injuries on the business compound
- Deliver orders on time
- Provide information on products and services
- Guard against misleading advertisements

Society

- Avoid pollution of environment

- Conserve (scarce) more resources
- Preserve local culture and tradition

Government

- Payment of taxes
- To adhere to and observe laws of the country
- To observe international and domestic regulations regarding trade
- To honor all state contracts professionally

Objective 4: Construct an organizational Chart

Organizational Chart

An organizational chart is a diagrammatical representation of the formal structure of

organizational. It shows the different management and employee positions in a business.

Organizational Structure

Organizational Structure refers to how the business is setup and the relationship between its
employees and its departments

Types of organizational Structures

There are four (4) basic types of organizational structure (See text for examples of charts)

i.) Line
ii.) Staff
iii.) Functional
iv.) Committee

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Line structure

 Shows very clear and direct lines of authority flowing from top to bottom.
 There is no doubt as to the person in charge and there is no overlapping of authority.
 Authority that flows directly from a manager or supervisor to his subordinate only is
called line authority.

Staff Structure

 This is similar to line (and is sometimes referred to as Line and Staff) but departments
are added, making the business much larger in operation.
 Staff means that specialists are part of the organization and these specialists may have
authority over the subordinates of other managers.
 There may be overlapping of authority; staff authority is shown by a broken line in the
organization chart.

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Functional Structure

 The business is structured according to the basic functions.

 In addition to department or line managers, there are a number of specialists. These
specialist areas are controlled by various managers and so workers can find themselves
reporting to various officers.
 Authority flows from top to bottom

Committee

 This is based on the principle of grouping specialists in a committee to assist in the

development of policies. Some committee are ad hoc (temporary) while others are
permanent.

Committees can:

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 - Make Recommendations
- Undertake Management Functions
- Investigate and solve specific problems or conduct research

Objective 5: Interpreting Simple organizational charts

How can we compare and interpret different organizational charts for different businesses? For
this, it is important to know the key part of a chart.

Each level in the hierarchy represents a grade or rank of staff. Lower ranks are subordinate to
superiors of a higher rank. The more ‘levels’ there are, the greater the number of levels of
hierarchy, which creates three (3) main problems

- Communication through the organization can become slow, with messages becoming
distorted or filtered in some way
- Spans of control are likely to be narrow
- There is likely to be a greater sense of remoteness, amongst those on lower levels,
from the decision-making power at the top.

In contrast, a flat or wide organizational structure, will have few levels of hierarchy, but will
tend to have wider spans of control.

Key Terms

Line of Communication – Refers to the standard and protocols associated with the way in
which the information moves about in the organization.

Chain of Command – The direction in which authority flows within a business.

Span Control – Number of Subordinates reporting directly to a manager.

Lines of Hierarchy – the number of layers of authority

Chain of Command

Typically, instructions and delegation are passed down the hierarchy, while information – for
example, about sales or output levels – is sent upwards. The taller the organizational structure,
the longer will be the chain of command, thus slowing down communications. An organization
with many levels of hierarchy and narrow spans of control will have a long chain of command.

Span of Control

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Span of control can be either be wide (With a manager directly responsible for many
subordinates) or narrow, where a manager has direct responsibility for a few subordinates.
This difference can be illustrated on an organizational chart.

Several Factors determine the span of control:

i.) The difficulty of the work – the more complex it is the smaller the span of
control is likely to be so that the manager can supervise more closely
ii.) The training and motivation of the workforce – a well trained and
motivated workforce will require less control from senior managers so a wider
span of control is possible
iii.) Leadership style of the manager – If the manager is authorization and
wants to control workers closely than narrow span will be used. If the manager
is more democratic or ‘laissez-faire’ then a wider span of control is likely.

Types of Organizational Structure

i.) Line Organization

ii.) Staff Organization
iii.) Functional Organization
iv.) Committee Organization

Line Organization

- Authority flows in descending order

- Traditional Form of organization
- The owner or Chief Executive will instruct those below him/her such as department
managers
- They in turn will instruct the less senior employees, who will comply with the
instructions

Advantages

- The firm benefits from specialist expertise

- There can be quick decision making
- It is easy to hire specialist help

Disadvantages

- There is the possibility of conflict between line workers and staff managers unless line
of authority are very clear

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 - Specialist sometimes become very technical which may make difficult for a line
manager to understand what is being discussed

Staff Organization

- Staff manager contributes indirectly to the provision of goods and services by

supporting line managers
- The position is seen as “authority with responsibility”
- The staff manager is personal assistant to a senior manager and offers advice on
particular aspects of the business

Advantages

- The firm benefits from specialists expertise

- There can be quick decision – making
- It is easy to hire specialist help

Disadvantages

- There is the possibility of conflict between line managers and staff managers unless line
of authority are very clear
- Specialist sometimes become very technical which may make it difficult for a line
manager to understand what is being discussed

Line and Staff Organisation

The examples used so far have shown either ‘line organizations’ where a direct flow of
authority is dispersed and delegated from top to bottom – or ‘functional organizations’ in which
the flow of authority is also from the top to the bottom, but for each specialized department or
function. ‘Staff’ organizations are different. It is common for some activities, people in an
organization cut across a linear functional structure.

These people would be specialists offering services to more than one department. They might
include legal executives, research engineers, IT specialists and so on. These staff advisors
would have no authority over “line workers” in a department but would provide valuable
support services – perhaps to more than one department.

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Functional Organization

- Specialist manager is responsible for a specific function within a number of

departments
- The specialist has direct authority over others in respect of the specialist function only
- Tells but only as obliged by their specialist function

Advantages

- Firm benefits from specialist expertise

- Benefits of specialization are enjoyed
- There is a reduced managerial work load

Disadvantages

- Workers have more than a boss

- Conflict in/of authority may develop due to overlap

Committee Organization

- A group of persons delegated by a higher authority to achieve an objective

- They are usually a group of specialists who are empowered to investigate, study,
propose, recommend solutions or to achieve a specific objective

Types of Committee

1.) Ad Hoc – Appointed to achieve one task and is disbanded when the task is completed
2.) Standing Committee – Enjoys a more permanent role in an organization

Advantages

- Specialist help is a benefit

- Group actions simulates creative ideas
- Representative views are aired
- Operates like a participating democracy which raises morale

Disadvantages

- Debate may be prolonged and decision making is slow

- Decision is generally reached by compromise and the best decision and is not
necessarily obtained
- No single person tends to accept responsibility for the mistakes of the committee

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Formal and Informal Relationships in an Organisation

The formal relationships that exist in a business are those shown by the organizational chart.
The formal relationship is derived from the organisation’s structure. They include authority,
responsibility and channels of communication.

Authority – The right to make decisions as part of the executive function of planning, and
represents the power to direct subordinates to perform certain duties

Responsibility – the individual’s obligation to carry out duties assigned to him or her

Accountability – The obligation of an individual or organization to account for its activities,

accept responsibility for them, and to disclose the results in a transparent manner

Delegation – the investment of one person with the power to act for another; it is the
assignment of responsibility or authority to another person (normally from a manager to a
subordinate) to carry out specific activities

Within each business there exist informal relationships which operate together with those that
are formal. The make the latter more or less efficient.

An informal relationship is a voluntary group of people within an organisation, whose members

have social needs that can be satisfied only by association with each other.

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52
Objective 7: Differentiate among different leadership styles

Leadership – Leadership refers to the style of management and is the manner in which an
organized group is influenced or managed so that success can be achieved.

Characteristics of Good Leadership

- Knowledge/ “know-how” of the enterprise and of business in general

- Dedication and the ability to work hard and long hours
- Efficiency
- The ability to get the co-operation of subordinates and employees
- A sense of humor
- Unquestionable integrity
- The ability to select the right persons for the right jobs
- The ability to work with people and to influence people to get tasks performed

Types of Leadership Styles

1. Democratic Leadership (Participative)

 Involves participation of subordinates in the decision making that affects them
 “Leader” leads but does not dominate
 He makes sure that everyone is fairly treated and is encouraged to take part
and remains capable of making decisions

2. Autocratic Leadership (Authoritarian)

 This is boss-centered; the leader makes decisions without consulting others. He
leads by the books.
 He gives commands and orders to others. Hardly gives authority
 He demands respect
 The leader instills fear and issues threats to employees/subordinates in order to
get the work done
 Employees are seldom motivated to work; (but works out of fear)

3. Laissez Faire Leadership (Leave-to-do)

 The leader leaves many of the decisions to his subordinates
 Allows staff to work with little or no supervision and much depends on the
initiative of each worker to make his own decision and how to achieve his
objectives

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  Workers are made aware of the task that they must perform and what is
expected of them

4. Charismatic Leader
 His has a dominant, persuasive personality – He inspires and motivates others
because of his skills and personality
 He inspires people by his mere presence
 He is easy-going

NB:

- There is no style of leadership that will work in all situations

- Leadership must be flexible and adapt to changing circumstances

Objective 8: Identify different sources of conflict within an organization

Conflict – This is a disagreement between two (2) or more organizational members or teams

Internal Sources of Conflict

- Competition between employees regarding performance or promotion

- Competition between employees or departments regarding allocation resources
- Different groups of workers may share different interests and needs
- Differences in the objectives of the employee and of the organisation (this could also
include differences in values and attitudes)
- Breakdown in communication, leading to misunderstandings and false information
being passed on
- Management leadership style not suitable for the employees and the task
- Industrial relations issues – Industrial relations means the relationship between
managers and employees and the process by which the two groups negotiate on pay,
improved working conditions and so on.

Industrial relations issues may arise from:

 A breach in a labour or industry law;

 Breaking a work code or a work-related regulation;
 Breaching negotiated agreement between employees and management, or a policy of
the organisation;
 Unfair treatment of an employee;
 Unfair management practices;
 Unfair dismissal;
 Any threats to the health and safety of employees.

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Objective 9: Outline strategies used by employers and employees to gain the
upper-hand during periods of conflict

Industrial Action by Employers and Employees

Industrial action is usually a last resort when attempting to resolve a conflict between
employers and employees. It is used when there is little hope of resolving the conflict in a
peaceful manner that benefits everyone.

Employer Strategies or Actions to get Employee Strategies or Actions to get

solution to a conflict solution to a conflict

Lock- out: Employees are told to stay home Picketing: Employees gathering at the
or are barred from the premises entrance of the business and trying to
influence other employees to stay away

Dismissing all workers who are taking
industrial action (this is legal under some
conditions)
Strike Action: Trade union may permit the
employees who are union members to stop
working; they are paid from the union funds.
If employees strike without union permission
this is called ‘wildcat’ (illegal) strike.

Using Scab Labour: Some employees will
replace the employees who are taking
action; they may use their own managers or
temporary employees; those employees who
choose to work instead of taking industrial
action offer ‘scab’ labour.
Work-to-rule: Doing only exactly what is
officially required in the job description or
employment contract; this slows down
production

Go-slow: to work at a slow pace without

breaching company regulations

Sick-out: workers falsely report sick on the

same day

Overtime Ban: Workers limit their time on

the job site to the hours specified in their
employment contracts, hence refusing to
work any overtime

55
Trade Unions

A trade union is an organization of persons employed in an industry following a particular trade

who have joined together in order to negotiate with employers as a group of employees rather
than doing so individually.

Therefore, a trade union is an association of workers who join together to represent their
interest and to regulate the relations between employers and employees.

Motto of Trade Unions: ‘In unity is strength’.

Trade unions negotiate with employers for wage increases, better working conditions and
other benefits for their members, and also settle disputes. This process is called collective
bargaining.

Types of Trade Unions

There are many types of trade unions, a trade Union may be:

i.) A craft Union in which all the members practice a particular trade
ii.) Industrial Union – Is a union in which all the members are employed in the same
industry
iii.) Staff union – a Union in which all members are all ‘While collar’ (Clerks, Office staff)
iv.) General Unions – Is a union where the members are in different trades and
employed in different industries
v.) General workers union
vi.) Government Workers Unions
vii.) Professional Union
viii.) Performing Arts Union

Purpose of Trade Unions

- To negotiate improved wages and conditions of services for the workers

- To protect workers from unfair dismissal
- To improve the physical working conditions of the workers
- To educate the workers in job related activities
- To present the workers’ point of view to management and government agencies
- To provide unemployment and sickness benefit scheme where government sponsored.

56
Objective 10: Identify the strategies for the resolution of conflict within an
organization

Terms and Concepts related to Conflict Resolution

Arbitration – Is the process by which parties to dispute submit their differences for judgment
by an impartial third party or group.

Collective Bargaining – This is the process by which members of the labour force, operating
through authorized union representatives, negotiate, with their employers concerning wages,
hours, working conditions and benefits.

Collective Agreement – This is a written contract between the employer and a union that
outlines many of the terms and conditions of employment for employees in a bargaining unit.

Negotiation – Implies that two (2) or more parties discuss and settle an agreement or
contract based on “mutually of assent”, consensus and iden of terms and conditions.

Negotiation can be carried out:

- Voluntarily
- Through joint industrial councils
- By wages council

Discussion – This involves investigating or examining a topic and using points for/against.
Discussions have two (2) parts, an analyst in which the problem is examined, and a solution
part in which conclusions are drawn.

Grievance – Is a written complaint by either labour or management. This is an issue or

dispute that workers take to their employer.

Conciliation / Mediation – use of a third party, usually a government official to resolve an

industrial dispute between labour and management. The conciliator makes no suggestion but
the mediator does. However, the mediator has no power to force acceptance of suggestions.

Trade Union Activities

Collective Bargaining

This is the process by which members of the labour force, operating through authorized union
representatives, negotiate, with their employees concerning wages, hours, working conditions
and benefits

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In order for collective bargaining to take place smoothly these conditions should be met:

- Bargaining must be pursued with good sense by both parties

- Both sides must consist of strong organizations
- There must be an accepted procedure between the parties

Negotiation

This refers to a bargaining process between management and labour representatives, seeking
to discover areas of commonality, so as to reach an agreement that is mutual benefit to the
partners in a conflict.

Negotiation can be carried out:

- Voluntarily
- Through joint industrial councils
- By wages council

Grievance Procedure (Settlement Dispute)

Step 1 – Shop steward is notified of a dispute by workers

Step 2 – Shop steward takes up the matter with the supervisor/manager involved.

Step 3 – If unresolved, shop steward speaks to Human Resources Manager or Industrial

Relations Manager

Step 4 – If there is still no agreement, he reports to the union officials (at the trade union)

Step 5 – The district office representative holds talks with top-level management

Step 6 – If this fails, the union officials will then try each of the following stages. If the first
one does not work, they will try the next and so on.

 Conciliation – A third party, (e.g. representative from the Ministry of Labour) will be
present during discussions to ensure that communication takes place and to encourage
the two groups to reach an agreement. The conciliator will not suggest any particular
solution or compromise.

 Mediation – This process involves the third party proposing solutions to the problems,
which are then considered. The third party cannot force acceptance of any suggestion.

 Arbitration – The two groups agree to ask the third party (usually a judge) to give the
solution, which they will both accept. This means that the agreement by the arbitrator
is legally binding and must be accepted by both parties.

58
Objective 11: Establish guidelines for the conduct of good management and self-
relations in the workplace

Guidelines for Establishing Good Relations between Managers and Employees

- Maintain good communication skills with workers

Managers should encourage two-way communication to ensure employees’ views are
heard and to avoid any misunderstandings.

- To Establish Clear grievance procedures

This helps to eliminate possible industrial actions since there are opportunities for
mediation and dialogue to help resolve conflict.

- Practice Good Leadership

Good leadership means that the employer should guide the employees to desired
action. It is important that the leadership gives constant feedback and uses non-
monetary rewards such as praise for good performance.

- Motivate Employees
Appropriate compensation is critical to good management–staff relations, as it builds
trust, loyalty, and self-worth.

- Job Enrichment and Job Enlargement

Where possible, jobs should be interesting and challenging. The job should allow the
worker to use a variety of skills.

- Improve Working Conditions

The work environment should not only be clean but visually pleasing. This helps to lift
the spirit of the workers and improve their performance.

Good Management - Staff Relations are important and will:

- Improve work environment

- Encourage good communication
- Foster team work
- Improve the equality of the employees work
- Increase Production

59
Objective 12: Evaluate the role of teamwork in the success of an organization;

Teamwork

Teamwork is the combined action of a group. It is the process of working collaboratively with a
group of people in order to achieve a common goal.

A team is a group of two or more persons interacting regularly and coordinating their work to
accomplish a common objective.

Importance of Teamwork

Work efficiency is boosted; teamwork helps workers to develop better relationships. Teamwork
increases accountability of every member and it also leads to learning opportunities.

Elements of Effective Teamwork

- Shared vision
- Trust among members
- Established expectations and guidelines
- Good communication skills and conflict resolution strategies
- Personal Leadership
- Appreciation of differences

Advantages

- Team members benefit from sharing ideas, and the pooling of expertise teaches new
skills; the quality of decision-making is improved.
- Group interaction and participation will motivate each member.
- Quantity of output and quality of work will improve as a result of many employees
working together effectively.
- Ensures continuity, that is, in the absence of one member the others will complete the
task.

Disadvantages

- More time is needed to make decisions and solve problems because more persons are
participating in the process.
- The cost of training the team members to work as a team might be high.
- Some persons who are not team-players may not contribute to the team; they may
become free-riders.

60
Objective 13: Outline strategies for effective communication within an
organization;

Communication

Communication is the means by which we create, transmit and interpret ideas, facts, feelings
and opinions.

Elements of Communication

- Sender
- The message
- Receiver
- The Channel/ Medium
- Feed Back

Effective Communication Entails:

- Correct timing
- Rational thinking
- Clear and vivid expressions in a way that the recipient will understand
- Understanding of environmental circumstances, so that most appropriately media, tone
and style can be clone
- Attention to reading and listening on the part of the recipient so that the message may
be correctly understood (decoding)
- Obtaining Feedback confirming that the message was received and understood

Methods Of Communication

Oral Communication

- Face to face conversations or meetings

- Interviews
- Telephone calls
- Training sessions

Advantages

- Direct Control
- Benefits from sight, sound

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 - Physical proximity
- Allows for instant feedback
- More persuasive, convincing in person

Disadvantages

- More difficult to control

- May not provide adequate time to think things through
- There might not be any written record

Written Communication

- Letters, memoranda, emails

- Reports, manuals, business plan
- Minutes of meetings
- Press Releases, bulletins and notices

Advantages

- Provides written documentation

- Can be dispatched to persons who are far away
- Can be used for complex and detailed messages

Disadvantages

- Can be time consuming to create

- Can be expensive
- Getting instant feedback may not be possible

Visual Communication

- Photographs
- Film
- Model
- Diagrams, charts

Advantages

- Illustrates or demonstrates a message through visual stimulus

- Simplifies written and oral communication

Disadvantages

- May be difficult to interpret by itself

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- Requires additional skills of comprehension and interpretation
- May require time to interpret
- May be expensive

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Objective 14: Explain the concept of a Management Information System (MIS);

Management Information Systems (MIS)

This is the use of information technology or any computer-based system, including the use of
telecommunications technology, to improve significantly every aspect of a business enterprise,
so that it may be managed with ease, convenience, efficiency, reliability, and most importantly
to lower the cost of production and increase profit margins.

To appreciate the role of MIS in a business enterprise properly, consider the role the brain
plays in the human body. Many body functions take place all at once and in harmony as long
as the person is healthy. The brain is the command center for the storage, retrieval,
distribution and communication of information, and indeed for decision-making.

To organize information effectively, many organizations have therefore developed Management

Information Systems (MIS). A management information system is an integrated system of
information flows designed to enhance decision-making effectiveness. It allows for the
management of information which is accurate, timely, complete, relevant in form of content
and available when needed.

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Objective 15: Outline the benefits and challenges of a Management Information
System in business;

The very basic activities of management information systems include:

- Accepting Instructions;
- Receiving Information/ Data;
- Processing Information/ Data;
- Sending information to devices that display it on a screen or other instruments which in
turn control other equipment, e.g. a printer;
- Storing Information
- MIS is very cost effective as it reduces the need for labour to compile and analyze
data. Once information enters a company’s database, MIS will compile and analyze the
data to give managers meaningful information to make decisions. Data e.g. items sold
or stock entering the stock room will be inputted by the various department staff. MIS
will have required reports available in a much shorter time than manual preparation of
reports.
- MIS is a decision support system used to analyze business activities. MIS at anytime
can provide information required for decision making. This can be used to assess
present performance and therefore assist managers to improve the company’s
performance so that the firm is more competitive.

Challenges
- Although very beneficial and is therefore desirable for businesses MIS is an expensive
venture and small firms will be challenged to set up this system.
- In addition to the set up cost for MIS business will have to consider the continuous
maintenance costs.
- The cost of training present employees to interact with the new system must also be
factored in to the total cost.

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Objective 16: Discuss the personal needs that are satisfied through employment.

Personal Needs Satisfied Through Employment

Managers must be aware of the various needs of workers. If these needs are adequately
satisfied through work, then workers will be motivated to improve performance.
Basic Needs
Employment is very important for the economic survival of individuals. If employees receive
adequate pay then these needs will be satisfied. Some employees may also receive allowances
and fringe benefits. Once the basic needs of survival (food, clothing and shelter) are met,
employees will be aware of higher level needs.
Security Needs
A job should not only provide adequate pay to satisfy basic needs but it should also give
workers security. This need can be satisfied through the provision of health benefits,insurance
and pensions.
Social Needs
The employee spends on average eight hours each day at work. We are social beings and
therefore need human interaction. This need can be satisfied by the establishment of after
work activities and through a teamwork approach to accomplishing tasks.
Self-Esteem Needs
Managers can satisfy this need through promotion and ways of recognizing those who have
performed well.
Self-actualizing Needs
This need is satisfied by giving subordinates opportunities to create and pursue innovative
ideas so that they can realize their capacities to the fullest.

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Section 3 – Establishing a Business
Objective 1: Define the term Entrepreneur

The entrepreneur is a human factor of production whose main functions are to organise the
other factors of production and bear risks.

The entrepreneur consciously moves resources from an area of lower productivity and lower
yield to an area of higher productivity and higher yields.

The entrepreneur may also be seen as one who creates a new business in the face of risk and
uncertainty, for the purpose of achieving profits, by identifying opportunities and assembling
the necessary resources to capitalise on them.

Entrepreneurship is the process or the act of organising resources and acceptance of risk and
uncertainty for the purpose of capitalising on opportunities with the aim of achieving profit.

Objective 2: Explain the role of an entrepreneur

The roles of the entrepreneur are as follows:

1. Conceptualising: The entrepreneur must formulate ideas regarding the type of business
and the type of product that can be put on the market. He must also think of the size of the
production in order to make a profit.

2. Planning: This means that the entrepreneur will consider the future and what is to be done
in the future with regard to what has been conceptualised. The entrepreneur will make short-
term as well as long-term plans. Overall, policies and organisational structure will have to be
worked out. Planning also includes outlining the duties of managers and setting targets to be
met, for example, production and sales targets.3. Accessing funds: The entrepreneur is
responsible for raising funds or finances before production begins and whenever the business
needs additional capital for expansion. This does not mean that the funds must come from the
entrepreneur’s own pocket. Apart from savings, the entrepreneur can use other sources of
finance, including:

 Borrowing from friends and relatives

 Attracting foreign investors
 Acquiring partners
 Financial institutions.

4. Organising: This involves bringing together the other factors of production in order to
ensure efficiency, maximum output and maximum profits.

5. Operating: Once the entrepreneur has chosen the right form of ownership, made short-
term and long-term plans and organised resources, including time and money, he may begin
to operate or run the business. Operating the business will involve the functional areas of

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production, marketing, finance and personnel. Operation of the business results in the
production and sale of a good or service with the view to making a profit.

6. Evaluating the performance of a business: One of the functions of managers is

evaluating. This is done at the end of the production process to see if the entire process has
been successful and to see if the goals of the organisation have been met. Problems and
failures are reviewed and suggestions are made and put in place to avoid these in the future.

7. Bearing risks: A risk is a chance. There are two types of risks: a) insurable and b) non-
insurable risks. It is the responsibility of the entrepreneur to take out policies against those
risks which can be insured, for example, the threat of theft, fire, flooding, etc. Those risks
which cannot be insured against must be borne on the shoulders of the entrepreneur. Such
risks are referred to as uncertainties, for example, a sudden change in the demand for the
product. Entrepreneurs must be willing to take risks or chances in order to make profits.

8. Reaping profits or the bearing of losses: The entrepreneur’s reward for organising the
factors of production and bearing risks is profit. To gain profit, the entrepreneur must sell the
good or service for more than it costs him to produce. That is, average revenue must be
greater than average cost. If he sells for less than it costs him to produce, he will make losses.
In the long run, he will leave the industry and go into one where he can, at least, make normal
profit.

In some forms of operations by entrepreneurs, profits and losses are shared, for example,
partnerships. In other forms, for example, the sole trader, profits and losses belong to the
owner of the business.

Objective 3: Identify the characteristics of the typical entrepreneur

An entrepreneur should be:

1. Creative. This means being able to use the imagination to invent something different or
original.

2. Innovative. In other words, be able to find new methods or ways of doing things and to
make changes where necessary. It also involves bringing in new ideas.

3. Flexible. This means to be easily adaptable. In this rapidly changing world, the
entrepreneur must adapt to changes in technology and changes in demand. Rigidity often
results in failure.

4. Goal-oriented. Whatever the entrepreneur does should be towards achieving the goals or
objectives of the business. He or she should not be sidetracked into doing things that have no
bearing on the aims and objectives of the business.

5. Persistent. The entrepreneur should be able to continue firmly in a certain course of action
despite difficulties. This does not mean, however, that there should not be changes where

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necessary. Remember, we have already said that the entrepreneur should be flexible.
However, being persistent means not giving up on an idea or project at the first sight of
problems. Efforts should be made to ‘iron out’ the problems and continue the projects,
resulting in the achievement of the goals and objectives of the business.

6. Highly committed. If the entrepreneur has a high degree of commitment, then hard work
and perseverance should pay off.

7. Able to take calculated risks. This means that the entrepreneur should be someone who
has a sense of searching for opportunities and is willing to take chances based on the fact that
the person has studied what is involved and feels that there can be success and achievement
of the well-defined goals of the business. Thus, the entrepreneur will spot and capitalise on
opportunities.

8. Able to handle uncertainties. The risks that cannot be insured against are referred to as
uncertainties. These risks must be dealt with by the entrepreneur.

Objective 4: Outline reasons why persons would want to start their own business

Entrepreneurs often have the desire to start up a business. What are some of the reasons that
he will want to do so? This question brings us to our next subheading: Reasons for wanting to
start a business. Let us begin by defining a business.

A business refers to an individual or a group of individuals involved in some commercial

activity, such as producing or selling goods and services, with the aim of making a profit.
Where persons are engaged in such activities but not with the aim of making a profit, then
they cannot be regarded as a business.

There are two main reasons for wanting to set up or start a business:

(i) Desire for financial independence - Some people set up businesses in order to gain
money so that they will not have to rely on others for money for food, clothing and shelter.
Financial independence, in this case, is realised through making a profit. Where an
entrepreneur sees that a product can be sold for more than what it costs to produce, there will
be motivation to set up business, so as to not have to depend on others.

(ii) Self-actualisation/self-fulfilment - Often, businesses are set up because of the need

to realise one’s potential because of the need to express creativity, because of the need to
achieve and to be able to recognise one’s limitations or shortcomings and to be able to make
improvements.

Business owners are able to achieve what is important to them. Entrepreneurs want to be their
‘own bosses’, and they set up businesses to bring their desires to life. Businesses allow for self-
expression, an opportunity to do what you enjoy.

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(iii) Being your own boss
You are able to make decisions about the direction and operation of the business.
(iv)To use your skills and knowledge for yourself
The skills, knowledge and experience that you have acquired can be put to work for you.
(V) To create employment for relatives, friends and community members
Business can assist in providing jobs for persons in communities with high levels of
unemployment.

Some persons see businesses as an opportunity to contribute to society and be recognised for
their efforts. They gain trust and recognition from customers who have served them faithfully
over the years.

Objective 5: Outline the essential steps that should be taken in establishing a

business

- Conceptualization – The entrepreneur develops ideas regarding

i.) Product
ii.) Type of Business
iii.) Size of Business
- Market Research
Market research is a systematic approach to collecting information, recording and
analyzing the information collected and adopted to fit the marketing plan of the
business
The aims of Market research are:
i.) To find out what the public wants
ii.) To assess the likely volume of demand
iii.) To discuss what will influence consumers, for example product name, style
and color of packaging, price, etc.
- Identification of resources
Resources refer to the factors that will be utilized in producing the good or service. A
decision must be taken as to the type of resources and where they will come from
These resources include:
i.) Financial resources
ii.) Man Made resources (Capital)
iii.) Human resources (Labour and Enterprise)
iv.) The natural resource (Land)
v.) Time must also be considered
- Creation of business plan
A business plan is a written summary of an entrepreneur’s proposed business venture.
It includes its operational and financial details, its marketing strategies, its management
skills and abilities

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 The plan serves as:
i.) It describes the direction the business is taking
ii.) What its goals are, where it works to be and how its going to get there
iii.) Used to attract lenders and investors
iv.) Serves as a sales tool

- Acquisition of funds
Having already decided how much funds will be required from the business, the future
business owner must decide:
i.) How the funds will be obtained
ii.) Will it be by public means or from a financial institution
iii.) The financial requirements and the terms of repayment for the loan must be
taken into consideration
- Operation of the business
For this to happen, an organizational structure must be in place and each department
of the business must realize its role in the successful operation of the business
In establishing your business, you must ensure that you have required functional areas
of the business. These refer to specialized departments within a business

Objective 6: Describe the role of key functional areas in the operation of the
different types of businesses

*~*~*||See Section 2 Objective 1||*~*~*

Businesses can vary greatly in size. When a business is small, there are no definite functional
areas evident. This is so because the owner usually produces and markets his own products
and does his own accounting and personnel work. As the business expands, however,
specialised (functional areas) departments become necessary. Most large businesses have four
functional areas: production, finance, marketing and personnel. In very large businesses, there
are two additional functional areas: research and development and social.

The production function

In this department, raw materials are combined to produce goods, and services are also
provided. Designers make specifications which are fully developed and tested. Sample products
are also made. There will be no production department, however, if the business is only
engaged in retailing or wholesaling, since they are buying and selling already-manufactured
goods or they are in the service industry.

The finance function

This department is responsible for the accounting procedures and processes of the business.
Its staff are also involved in the investment of funds in plant and machinery, as well as in the

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purchasing of the needs of other departments of the business. Where shareholders are paid
dividends, this department will make it a reality for them.

The marketing function

The marketing function includes market research, publicity, distribution, selling, merchandising
and after-sales services, advertising and sales promotion.

The personnel function

This department is sometimes referred to as the human resource department. The functions
and duties of this department concern mainly the employees of the business. Primary concerns
are: planning and forecasting manpower requirements; recruitment and selection of
employees; job analysis and job description; job specifications and employee training, etc.

Having looked at the four main areas, let us spend a few minutes on the additional functional
areas that may exist if the business is large.

The research and development function

The work of this department includes many types of research, for example consumer research,
product research and motivation research. Feasibility studies and pilot projects are carried out
and communication with research institutes, such as the Department of Statistics, takes place.

The social function

This may include trade union negotiations, efforts to reduce pollution and dumping of waste
products, provision of health facilities and provision of clean working environments and the
initiation of social groups in the business, for example clubs and credit unions.

Objective 7: Identify Sources of information for conducting research into the

establishment of the business

Sources of information

The research plan can call for the gathering of primary data, secondary data or both.

Primary Data

Primary data, also known as field research, is research that collects original or new data using
various techniques. These techniques include:

 Questionnaires. The questionnaire is the most common survey method. It may be

written or orally administered. It is designed specifically for the task and is normally
completed face to face, by telephone or through the post or email.

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  Test marketing. A potential new product is marketed on a small scale regionally to
gauge people’s reaction to it, before committing the firm to production and national
launch.
 Consumer panels. A panel consisting of a small number of consumers is set up. They
receive the product and comment on it.
 Interviews. These may be formal or casual. They may be conducted on an individual
or a group basis.
 Observation. People’s reactions are quietly watched or noticed while they shop. This
provides information from the marketplace.

Sampling in primary or field research

If primary research is to provide relevant information, it must use a representative sample,

that is, consumers forming the sample must represent the market as a whole. The researcher
must also decide how the respondent will be chosen and how large the sample will be.

Sampling methods

(a) Random - This is where everyone in the population has an equal chance of selection,
since no special criteria for selection are used.

(b) Stratified - A subgroup of the population is selected, for example using age, sex,
occupation, etc. Only those in the subgroup will be in the sample.

(c) Where a quota is set. Data is collected until the target quota is met.

The larger the sample size, the more expensive and time consuming it is to collect the data.

Desk or secondary research

This type of research uses existing information, such as information in the firm’s own records.
This may include:

- sales records
- official publications
- statistical and newspaper reports
- government publications
- trade association studies
- university journals
- websites
- Textbooks, etc.

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 The major advantage of this type of research is that the information is readily available
and can be stored for the future. Among the disadvantages is the fact that it is
sometimes out of date and the research is more time consuming than the primary type of
research.

Objective 8: Explain the relationship between planning and the operation of a

business

Planning: Prepare staff. Short term, medium and long term

Process Between Planning And The Operation Of A Business

Managers must continue to plan in order to ensure that its operations meet all long – term,
medium- term and short- term goals.
Long- term plans are made for 3 to 5 year periods. Long-term plans determine the direction
of the company. These plans set out the firm’s overall strategy to move from its present
position to where it intends to be. Long-term plans include expansion plans and plans to create
new products and services. Long-term plans are made by the directors or persons in senior
management positions of a company.
Medium-term plans range from 1 to 2 years. They are made by department managers or
persons in middle management positions. Medium term plans include increasing the efficiency
of a department in order to increase the quality and quantity of output. This would involve
implementing training programmes for staff and identifying equipment that would increase
efficiency.
Short-term plans are made daily, weekly and monthly by supervisors or persons in lower
level management positions. These plans are centred on meeting daily, weekly and monthly
production targets.

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Objective 9: Identify the regulatory practices instituted by government for the
establishment for different types of business

The regulatory practices governing the establishment of businesses refer to the rules and
regulations by which people who wish to establish a business should be guided. The
regulations differ according to the type of business.

Regulatory practices

- National Level
- Regional Level
- Global Issue

National Level

Tax Requirement:

- Company Tax
- Property Tax
- Value Added Tax (VAT)
- Income Tax and National Insurance contributions for employees
- Occupational safety and health regulations
- Every business must maintain a safe environment for customers and employees
- Health department makes visits to business premises to ensure they are up to the
standards

Practices:

- Register the Business

- Companies and most other business must register with a government agency, such as
a Registrar of Companies
- Building and town Planning Regulations
- In most countries business cannot be established in a residential area without special
permission from the town and planning authorities

Regional Level

Tax Requirement:

- Businesses must pay the Caricom Common external tariff on most ports
- A document called a Caricom invoice must be prepared for all imports

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Practices:

- Copyright and intellectual property

- Control of money laundering
- International Transport of hazardous waste
- Imports of chemicals which damage the ozone layer are restricted under an
international treaty, The Montreal Protocol

As far as the sole-trader type business is concerned, there are very few regulations in the
setting up of the business. In fact, many sole- trader type businesses do not have any
requirements to satisfy at all. A few might be required to have permits or licences in order to
operate businesses. For example, those involved in handling food, say at a restaurant, are
required to have a food-handlers permit. They are also required to take a medical examination
to satisfy the authorities that they are in good health as, otherwise, they could spread
diseases.

Visit the premises

Public-health inspectors will also visit the premises to ensure that sanitary conditions apply. For
those who are selling alcohol or spirits, a licence authorising them to do so is required. Taxi
operators are considered to be illegal operators if they do not have the correct transport
documents, including a licence to carry passengers.

They are also given regulations regarding the number of passengers they should carry in their
passenger vehicles. Hairdressers and barbers will be licensed to operate once it is proven that
they are qualified and that they have hygienic places to operate in. Sand miners also need a
licence to remove sand from riverbeds.

The partnership should have a minimum of two partners and a maximum of 20. In setting up a
partnership, a partnership deed or deed of partnership should be drawn up. This document
includes the name of the business, name and other occupation of partners and statements as
to how profits and losses will be shared. The document may be drawn up by a lawyer, but it is
not mandatory. The deed of partnership should be taken to the Registrar of Companies who
will give permission for them to operate the partnership, if everything is in order.

If a partnership is set up and there is no partnership deed, then the partners will make
reference to the British Partnership Act 1890 which indicates that all profits and losses should
be shared equally.

Required to register

Private and public limited companies are required to register with the Registrar of Companies
and to present the documents required. Included is the very important document, articles of

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incorporation, which has replaced the memorandum of association and the articles of
association. A private company may be formed with one person, or may have up to 50.

For the public company, the minimum number of shareholders is seven and there is no
maximum. Public companies are required to publish their accounts and may sell shares to the
general public, via the stock exchange. The private company is not allowed to sell shares to
the general public and, therefore, is not allowed to use the stock exchange.

In the case of professionals, for example, doctors, lawyers, accountants and so on, the
requirement is that they register with their professional association. Their associations are
permitted by the Government to play a major role in overseeing the professional conduct of
their members.

Licences

Persons who are engaged in trades, such as electricians and plumbers, must be licensed. Some
are required to sit and pass examinations which qualify them to receive their licences and
practise unsupervised.

Cooperative societies should register with the Registrar of Cooperative Societies. They are
required to pay a small fee. They should operate the cooperative based on the five cooperative
principles.

Regulatory Practices Instituted By Governments

A business is not considered a legal entity if it is not registered as business in the country
where it operates. All persons desirous of starting a business must first be registered with the
government agency authorized to carry out registration of business in their country.
A sole trader only needs to register his business by meeting the requirements outlined for sole
traders by the registering office and filling out the required documents.
Partnerships are also registered by the completion of a registration document. The names of
all the partners must be listed on the document. Partners in a business are advised to draft a
Deed of Partnership. This document sets out all the rules that govern the partnership and will
thus help to prevent conflict among partners.
The formation of public and private limited liability companies involves the preparation of a
number of documents.
The Companies Act contains the laws relating to companies. To comply with certain
requirements which were laid down by the Companies Act, the promoters of the company
must present the following documents:

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1. The Memorandum of Association – this document governs the company’s relationship
with the outside world. It contains:
(a) The name of the company
(b) The address of the registered office
(c) The objectives of the A statement of limited liability to members
(d) The amount of capital to be raised by the selling of shares and the types of shares to be
issued
(e) The number of shares to be taken by the directors
(f) Statement of intent to form a limited liability

2. Articles of Association – this document contain the internal rules and regulations which
govern the company. It contains:
(a) The rights and obligations of the directors
(b) The procedures for calling an annual general meeting
(c) Procedures for electing directors
(d) The borrowing powers of the company
In order to effect the registration of a company, the Memorandum and Articles of Association
must be prepared by a lawyer or any person named in the articles as a director or company
secretary and sent to the companies registering office.

3. Statutory Declaration – this document states that the promoters of the company have
compiled with the Companies Act. It is a signed statement from each director certifying their
willingness to serve.
4. Certificate of Incorporation
Once all three documents above have been submitted and the Registrar of Companies is
satisfied that all is in order, it will enter the name of the company on the register, and issue a
certificate of incorporation. The certificate of incorporation is proof that all requirements of
the Companies Act have been complied with. The certificate of incorporation establishes the
firm as a legal body.

5. The Incorporated Company

A company always means an incorporated company. If a company is not incorporated, it is
really a large partnership. Every business that has more than twenty shareholders must be

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registered as an incorporated company. The advantage of incorporation is that each member’s
liability is limited. At this stage it is only the private limited company that may begin trading.

6. The Prospectus
The public limited liability company must first publish its prospects inviting the public to
subscribe for shares. This may be a publication in the newspaper or in another public media.
The prospectus will contain information on the assets, liabilities and profit levels of the
company.

7. Certificate of Trading
Once the public limited liability company has collected the total amount of share capital stated
in the memorandum, the company will then be issued with a Certificate of Trading. This will
allow the company to start trading.

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Objective 10: Outline the advantages and disadvantages of different types of
business organizations

Sole Trader

Advantages

- It can be easily and quickly formed

- The sole trader accounts only to himself or herself
- The sole trader makes decisions quickly because he/she has no one to account to
consult
- All profits belong to the sole trader
- The sole trader can enjoy a personal relationship with his/her customers
- He/she has access to a government small-business loan
- A sole trader is usually flexible and can enter or exit the firm easily according to
changes in the market
- A sole trader can progress or grow into a large company

Disadvantages

- Sole trader assumes all risks and losses himself/herself

- It is not easy to obtain loans from a bank because of high risks, as in e.g. coconut or
street vending
- In assuming all responsibilities the sole trader has long working hours
- A sole trader has unlimited liability
- If the sole trader’s business is disrupted, his/her market may turn to another
competitor
- Usually a sole trader’s business dies with the owner

Partnerships

Advantages

- As with a sole trader, a partnership is easy to form without legal formalities

- More capital can be raised by the combined resources of a number of partners
- Specialization in management is possible as each partner may participate in the field in
which he has experience and training
- In a partnership the work load can be shared among the partners. This makes it
possible for a partner to take a vacation and, on death of a partner, the remaining
partners can continue to run the business on their own, or they may find a new
partner.
- There is still the incentive to succeed and there is also close contact with employees
and customers

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 - A partnership is usually flexible and partners can enter or exit the firm easily according
to changes in their market. NB: When one partner Leaves a partnership the entire
partnership comes to a legal end and may be restarted.
- A partnership can progress or grow into a large company

Co-operatives

Advantages

- There is guaranteed market for members

- Little or no advertising costs are incurred
- There is no profiteering
- There is democratic form of management
- Economies of bulk buying are available to all members
- Employment is created within the organization
- They can be useful as government agencies

Disadvantages

- Management may be poor and inexperienced

- Conflict may arise when members are both employees and employers
- Lack of capital may cause problems
- Co-operatives may be unable to attract skilled professionals
- Capital base is limited

Private Companies

Advantages

- Privacy is retained
- There is limited liability
- Continuity is ensured – the death of a shareholder does not affect the company
- It enjoys benefits, E.g. specialized help, flexibility

Disadvantages

- Shares are not freely transferable without the director’s consent

- The amount of capital is limited, growth is slow

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- It is vulnerable to changes in demand
- The entrepreneurial pool is restricted to family members and close friends
- Such companies are not known as innovators or for research and development

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Public Limited Companies

Advantages

- There is easy access to capital for expansion

- They have limited Liability
- They enjoy Economies of Scale
- Specialist help is hired to run the company
- The PLC is independent of its owners
- Risk is spread over many shareholders

Disadvantages

- The objectives of the managers may be different from the shareholders (owners)
- Small powerful groups E.g Insurance companies, may dominate the company
- Over –Expansion can lead to diseconomies of Scale
- Workers Feel Left out in the decision-making
- Accounts must be submitted annually to the Department OF Trade for Inspection

Conglomerates

Advantages

- There is strength and security in numbers, hence the risk of failure is spread
- Companies can draw on each other’s resources leading to economies of scale
- Security is provided against the take-over bids via a holding company
- There is much interaction between members in terms of secondment, staffing,
promotions, job openings, etc.
- Successful companies help to make up for the companies that perform below par.

Disadvantages

- Because of the diversity of interests, analysis of the group’s companies is difficult

- Some managers may resent control outside of their own company
- There may be friction between lines of authority

Multinationals

Advantages

- Multinationals provide much-needed investment in Caribbean Economies

- They provide foreign expertise and train local labour
- They allow access to already- existing markets
- They are valuable source of taxation, revenue and foreign exchange.

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 - They create employment
- They encourage positive work ethics.

Disadvantages

- Multinationals extract raw materials but do not add value locally

- The welfare of the economy is not a concern of a multinational
- They transfer profits to home countries
- They may harm the environment
- They may change the culture of a country
- They bargain for tax holidays and “sweetheart” deals in exchange for investment

State Corporations/ Nationalized Companies

Advantages

- State corporations provide vital services at reasonable prices, E.g. water, electricity,
postal services
- They enjoy economies of scale resulting in low cost of production
- They avoid wasteful duplication of resources, E.g. Telephone Poles, water pipes, etc.
- Key industries ought to be run by the State for Strategic Reasons
- Their profits are distributed to the population
- They safeguard jobs rather than engage in retrenchment
- They have an enhanced regard for the environment and working conditions of Workers

Disadvantages

- Losses by the companies are usually born by the taxpayer

- State corporations and nationalized industries are usually not run efficiently, often
owing to political interference.
- The lack of profit motive causes losses due to tax management
- There is often a lack of proper accountability
- Too much “red-tape” in management decisions causes unnecessary delays.
- National Issues are given preference over local ones

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Objective 11: Identify sources of capital for the setting up of a business

Capital refers to the money invested in a business. In other words the resources necessary
for the further production of goods and services

Venture Capital refers to money subscribed in the form of share capital and loan capital to
finance new firms and activities considered to be of a risky nature and therefore unable to
attract finance from more conventional sources.

Sources of Capital

- Personal Saving
- Borrowing from Friends and Families
- Forming partnerships
- Borrowing from banks, finance companies and credit unions
- Government loans or grants
- Venture Capitalist

Objective 12: Explain the significance of collateral in accessing capital to establish

a business

Collateral is anything of value that can be sold quickly and the money used to cover amounts
that a loan recipient has defaulted on.

Collateral is anything of value that is used to secure a loan. It is required by financial

institutions for the approval of loans. If the loan is not repaid then the financial institution has
the authority to seize the borrower’s collateral. Forms of collateral include: bank balances,
motor vehicle, dwelling house, land, machinery and equipment etc.

A number of items can be used as collateral, including:

 House titles
 Land titles
 Motor vehicle titles
 Titles for the businesses
 Investment documents (such as share certificates and debenture certificates)
 Antique furniture
 The cash value of insurance policies
 Gold, silver and other valuable jewellery
 Rare and valuable works of art

The value of collateral

The value of collateral lies in the fact that:

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 - In the event that the borrower is unable to repay the loan ownership of the collertal is
transferred to the lender in order to settle the debt
- It is something that can be sold so that the financial institution can recover the
outstanding money on the loan. The collateral is signed over to the financial institution.
This is done when the loan applicant signs a letter of hypothecation.
- Collateral loans are cheaper in terms of interest rates, than non-collateral loans
- Collateral or guaranteed loans are cheaper, in terms of rates of interest, since there is
less risk for the financial institution.
- A collateral loan is also easier to obtain than a non-collateral loan.

Some loans may not require collateral. A guarantor may be required to sign on behalf of the
borrower. This person signs with the intention that if the borrower defaults on the loan, he or
she will have to repay what is owing. This is another form of secured loan.

A few institutions may grant unsecured loans. In these instances, neither collateral nor a
guarantee is required.

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Objective 13: Outline the features of a business plan

A business plan is a document outlining the goals of a business and the strategies to achieve
these goals. It is mainly prepared by new businesses or by ones making major changes.
Executive Summary
The Executive Summary is a synopsis of the full business plan. It presents the salient points of
the plan. It contains information on the purpose of the business, its methods of operation and
future expectations.
History of the business
This section gives full details on previous operations of a business. For a new business it will
explain where the idea came from and the reasons for starting the business.
Mission Statement
The Mission Statement gives the overall goal of a business as well as its values. It serves as a
guide to the operation o the business. For example: providing the highest quality goods and
services.
Business goals and objectives
The firms’ short-term, medium-term and long-term goals and the time in which these are to be
achieved is outlined in this section.
Organization
The business must state the ownership structure and give details of the management team.
SWOT Analysis
Looks at the strength and weaknesses of the business
E.g. Strengths – strategic location, years of experience
Weakness – Loans at affordable interest rates,
Industry Analysis
How has the industry changed in the past few years and who are the other firms in the
industry.
Product /Service Description
Describe clearly the product or service that you will be offering.
Market Analysis
Describe your target market and your competitors.
Marketing Strategy
Explain the various promotional, pricing and distribution strategies.
Operations

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Explain how the business will function on a day-to-day basis. For example: Procurement of raw
materials, the use of technology and operating methods.
Sales Forecast
What amount of sales the business expects to make on a monthly basis.
Start –up Cost
The total amount needed to start the new business, giving a detailed description of what the
money will be used for.
Operating costs
E.g. fixed Costs (rent, insurance and salary) and variable costs (utilities and wages)
Projected Cash Flow
An estimate of how much you expect to earn periodically once you start operating.
Acquisition of Funds
Information on how funds will be obtained e.g. personal savings, borrowing from friends and
family, borrowing from financial institutions or by selling shares

Establishing a Business. This week we will discuss the business plan. For the examination, you
should be able to outline the various features of the business plan, including the executive
summary.

A business plan is a written document indicating an entrepreneur’s proposed venture. It

shows its proposed production, marketing and finance. The business plan is the entrepreneur’s
‘road map’ on the journey towards building a successful business. It describes the direction the
business intends to take, its goals, where it wants to be in the future and how it is going to get
there. Some regard the business plan as a document that tells the entrepreneur’s story by
looking at the vision, current status, expected needs, defined markets and projected results of
the business.

Functions of the business plan

- Start a New Business

- Develop Existing Products
- Expand an Existing Business
- Be a Tool for control/ checking if goals are met
- It guards the operations of the business by charting its future course and devising a
strategy to get to the end of that course. It gives managers and employees a sense of
direction.
- It is used to attract lenders and investors/ Obtain Finance
- It is used as a sales tool.

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Who are the users of the business plan?

1. Lending institutions. Commercial banks, for example, may require the business plan as part
of the processing of loan applications.

2. Strategic partners or investors. Such persons would want to assess the viability of the
business of which they will be stakeholders.

3. Landlords. They need to ensure that the activities of the business will be viable so that
tenants will be able to make their regular monthly rent payments.

Sections of the business plan

A business plan usually has four main sections:

1. The executive summary

2. The production plan

3. The marketing plan

4. The financial plan

The executive summary

This is the first part of the business plan, but it is usually done last. It summarises all the
necessary points of the proposed venture. If there is a financial request, it should explain the
purpose of the financial request, the dollar amount required, how the funds will be used and
how the money (loan) will be repaid.

The executive summary is useful in instances where individuals are too busy to read the whole
business plan, but need some vital information about the proposed business.

The executive summary includes:

1. The name of the business

2. The type of business

3. Information about the owners, for example, their names, addresses, qualifications and work
experience

4. A description of the product (detailed)

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5. A statement of the financial needs. This includes how much is needed, what the funds will
be used for and what will be the proposed means of repayment.

6. An overview of the planned strategic actions to ensure that the business is a success.

The production plan

Information that may be included in the production plan:

- The production process

- Type of production (primary, secondary, tertiary, etc)
- The level of production (subsistence, domestic or export/surplus level)
- Use of technology (state the processes that the machines will be used for (sewing,
cutting, dyeing, etc)
- Whether the fixed assets will be rented, leased or bought
- The expected life of the fixed assets if they will be bought
- Maintenance of the fixed assets (for example how much will it cost per year)
- Sources of equipment (places where they can be obtained and the costs)
- Planned capacity (how much they will be able to produce)
- Terms of purchase of assets (cash or hire purchase)
- Location and layout of machinery (time may be lost if machines are far apart)
- A list of the raw materials needed
- Labour – number needed, cost (wages), statement of availability, skills and
experiences needed
- Overheads – all expenses
- Production cost (this plus mark-up [profit] equals final price)

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The marketing plan

This plan may include:

- A description of the good or service and a statement of what makes it different

from others already on the market
- Justification of the location of the business
- Market area
- Main customers
- Total demand
- Market share
- Selling price (note current price (competitors), customers’ ability to pay and
advertising costs)
- Sales forecast over a set period of time
- Promotional activities
- Marketing strategies, including advertising, sales promotions, etc.
- Potential buyers – who they are, what their motivation to buy will be, expected
annual purchase, whether the product will be seasonal and, if so, what times of the
year the product will be purchased.

The financial plan

This part of the business plan may include:

- A statement of how much capital is required, how it will be obtained and the terms
of repayment, if any
- Security for loan if one will be sought
- How the funds obtained will be used (a budget can be created)
- Cash-flow statement
- Projection of operation costs
- Profit-and-loss statement
- Balance sheet
- Break-even point (estimate about how long it will take to reach there)
- Return on investment (percentage projected)

Objective 14: Explain the purposes of a feasibility study

The feasibility study

Let us first find out what is meant by the term feasibility study.

This is a detailed investigation to determine whether a business idea or project is technically,

financially and economically viable, and if it will be successful before committing large sums of
money to it. It is a screening exercise and is often described as a likelihood study.

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To some, the feasibility study is a way of determining if a business idea is capable of being
achieved. The question is asked: can it work and produce the level of profit necessary?

Factors relating to a feasibility study

- It is done before the business plan and usually after a series of business ideas have
been discussed.
- It includes cost-benefit analysis.
- It results in the development of a feasibility report.
- Small teams of experts from marketing, production, finance and development
produce this estimate.
- Past information is used to produce trends.

Purpose of feasibility study

A feasibility study:

- Determines if a business opportunity is possible, practical and viable.

- Enables one to take a realistic look at both the positive and negative aspects of the
business opportunity.
- Identifies the reasons not to proceed; therefore saving time, money and heartache
later on.
- Ensures that the business venture chosen will generate adequate cash flow and
profits, withstand risks, remain viable in the long run and meet the objectives of the
founders.
- Helps to frame and flesh out or shape specific business alternatives so they can be
studied in depth.
- Outlines and narrows down the business alternatives.
- Provides quality information for decision making.
- Helps to increase investment in the business.
- Provides documentation that the business venture was thoroughly investigated.
- Helps in securing funding from lending institutions and other sources.

Objective 15: Identify ethical and legal issues in the establishment and operations
of a business

Ethical issues - Ethics has to do with right and wrong, good and bad.

Legal Issues – Refer to activities that are guided by the laws of a country, these regulations
are mandatory.

The ethical issues include:

- Ensuring that if a licence, permit or registration is required for the operation of the
business, everything is taken care of. If there is no proof of the legality of the

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 business or if the business has not been given approval to proceed, the
Government can shut it down.
- Refraining from money laundering. This is when money from illegal or underground
economy is used in the legal business, for example to purchase assets. When this is
done, it distorts the national economy.
- Steering clear of cartels, example wine and drug cartels and OPEC. These restrict
quantity and increase prices.
- Reporting extortion, which is illegal.
- Making sure there is no document falsification, in terms of figures or information
- Avoiding of poor labeling
- Resisting price gouging. This is the practice of increasing prices when the supply is
low and the demand is high, for example in times of natural disaster. At such times,
the supplier has the upper hand.
- Using standard accounting procedures.
- Paying all required taxes. Tax evasion is illegal and cheats the Government of
much-needed revenue.
- Disposing of waste properly. Dumping waste in rivers and seas causes pollution and
ill-health.
- Providing quality materials. Inferior raw materials must not be used as they can
result in poor quality and, perhaps, dangerous goods that may shorten lifespan or
cause accidents.
- Adhering to business standards set by the Bureau of Standards Jamaica and the
Government
- Broadcasting misleading advertisements. They should be fair, truthful and should
not prejudice any group of persons.
- Making truthful declarations. False declarations must be avoided, for example
saying juice is 100 per cent natural, contains 100 per cent vitamin C, with no
preservatives, when this is not so.
- Avoiding double ticketing, that is, putting new, higher price tags on products
already priced.
- Falsely writing cheques for money not in the bank. These cheques will be
dishonored and the business’ credibility will be lessened.

Objective 16: Explain the consequences of unethical and illegal practices in

business

Illegal business practices will result in legal consequence for business. This may include large
fines the loss of the business. Legislation also protects consumers, competitors and society
from unethical practices of a business.

Misleading advertisements - Unfair and fraudulent practices on the population.

Withholding of tax – Cheating the Government of revenue

Unethical disposal of waste – Pollution and ill-health, even death

Money laundering – Distortions in the national economy

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Questions:

Explain how government may intervene to curtail unethical and illegal practices of business.
Answer
Government uses legislation to guide business practice thus protecting consumers. Laws
outlining accepted standard for manufactured goods and packaging and storing of goods
protect consumers. Taxes are also charged to curb activities such as pollution as a result of
production.

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Section 4: Legal Aspects of the Business

SPECIFIC OBJECTIVES

Students should be able to:

Objective 1: explain the concept of contract;

Definition and Concept of a Contract

Contract is an agreement made by two or more parties that is enforceable by law.

An agreement is reached when there is meeting of them minds between both parties. It is the
most important component of a contract but in order for a contract to be legally enforceable a
number of other important elements must exist.

The agreement must also be backed by a good or valid consideration and one that is made for
a lawful purpose in a form required by law.

Learn any one of these definitions:

I. A contract is a mutual agreement between two or more persons or parties, whereby

something is done (or promised to be done) or given (or promised to be given) by one
or more persons or parties.
II. A contract is a legally binding agreement made between two or more persons, by rights
acquired by one or more to acts or forbearances on the part of the other or others.
III. A contract is an agreement between to or more persons intended to create a legal
obligation between them and to be legally enforceable.
IV. A contract is an agreement made by two or more parties that is legally binding or
enforceable by law.

Many people use the word ‘contract’ as an alternative for ‘agreement’. It can have legal
implications in a court of law. Many true contracts, i.e., legal or valid contracts, are
agreements made in writing. That is to say, and agreement that is written down in some form
or other, signed and witnessed, becomes a contract. But a contract can be made by word of
mouth and will still be legal.

An agreement is reached when there is a meeting of the minds between both parties.
Agreement is, perhaps, the single most important component of a contract, but in order for a
contract to be legally enforceable, a number of other important elements must exist.

The agreement must also be backed by good or valid consideration and one which is made for
a lawful purpose in a form required by law.

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 N.B: The idea of ‘legal obligation’ imports the notion that the agreement is one that the law
recognizes and will enforce.

Objective 2: describe the characteristics of a simple contract;

The characteristics/features of a contract

In order for a simple contract to be legally binding it must have the following essential
elements:

i. An agreement
ii. An offer
iii. An acceptance
iv. Consideration or form
v. Capacity
vi. Legality
vii. Possibility
viii. Genuineness of the parties and good faith
ix. Some contracts must be signed, sealed and delivered (specialty contracts).

i. An agreement – is reached when there is a meeting of the minds between both parties.
There should be no doubt about what the other party means or understands and one party
must not assume what the other party means.
ii. An offer- is a proposal or bid made by a person or his/her agent to another person or
his/her agent. The person making the offer is called the offeror while the person accepting
the offer is called the offeree.

Note: In a valid contract, only the offeror can make an offer. Therefore, and offer must be
distinguished from an invitation to treat or invitation to trade.

An offer

 Can be made to a specific person or to the world at large.

 Can be oral, implied by conduct or put in writing.
 Must be communicated to the offeree.
 Can only be revoked or withdrawn before acceptance by the offeree.

NOTE: Invitation to Treat/ trade/ Bargain

Invites the public or offeree to make offers which may be either accepted or rejected. This is
NOT the same an offer. E.g. Catalogues, goods displayed in a show or store with price tag, a
notice of goods being auctioned, an advertisement inviting tenders for goods, Property
advertised for sale

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  An acceptance exists when the offeree or his/her agent agrees to all terms or
conditions laid down by the offeror or his/her agent. It must be either expressed or
implied or inferred. An acceptance must be made in a manner stated then he/she may
use the quickest means possible. An offer must be accepted within a stipulated period
of time or must be done within a reasonable period.
 Consideration or Form
 Capacity
 Legality
 Possibility
 Genuineness of parties and good faith
 Some contracts must be sealed and delivered (specialty contracts)

Note: An Invitation to treat or to trade or to bargain (through catalogues, price on goods

or window displays) invites the public or offeree to make offers which may be either accepted
or rejected. This is NOT the same as an offer.

E.g. Catalogs, goods displayed in a shop or stage price tag, a notice of goods at an auction

Some examples of invitation to trade are:

a) Goods displayed in a shop or store with price tag.

b) A notice of goods being offered for auction.
c) An advertisement inviting tenders for goods.
d) Property (e.g. real estate) advertised for sale.

iii. An acceptance – by law, exists when the offeree or his/her agent agrees to all terms or
conditions laid down by the offeror or his/her agent.

OR
Agreement to the terms and conditions of an offer.

It may be either ‘expressed’ (by word of mouth or by writing), or implied/inferred (by

conduct of the offeree, the person accepting)

An acceptance must be:

 Made in the manner stated, then he/she may use the quickest mean possible. An
offer must be accepted within a stipulated period of time or must be done with a
reasonable period.
 Made through the post office, it is effective once the letter is posted.(It does not
matter if the letter was delayed or lost in the post. It is not the same for offers
made by post). An offer must be communicated before it is considered as legal.

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  Made through the telephone fax machine or any of these modern instantaneous
means of communication is complete only when received and not when
transmitted.

iv. A consideration is a promise or action made by one party for the promise or action made
by another party.

It is important that both parties either promise to do or do something in exchange for the
other party’s promised to do so or act.

There must be the giver’s consideration and the receiver’s consideration.

A consideration may be a benefit or a detriment.

Consideration may be:

a) Executed: this refers to the price paid by in party in return for the act or
promise of the other party.
b) Executory: this is the price promised by one party for the act or promise of
another party.

Consideration must follow these rules:

 It must be real
 It must be possible
 It must move from the promise
 It need not be adequate
 It must not be past

Capacity in law means that the parties are eligible to enter into a contact.

The law sees all persons as eligible to enter into a contract. However, there is one
major exception to this:

The exception states that all parties to a contract must be able to act responsibility
and not to be exploited on the basis of knowledge, maturity or temporary lack of
consciousness. Therefore, the following groups do not have full capacity to enter into a
contract:

 Minors- those less than 18 years old

 Drunks
 Insane persons

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  Aliens( foreign-born residents in a country who have not been
naturalized) whose country is at war with yours

V. Legality- all contracts entered into must conform to the laws of the land
VI. Possibility- Parties offering consideration must be in a position to be able to carry out
their sides of the contract.
VII. Genuineness of the parties and the good faith- all parties entering a contract
must do so freely and willingly and not by force, coercion or duress.

However, there may be a mistake or misrepresentation.

A misrepresentation is a statement that is not true. If the statement is made with a

genuine belief that is true, then that is innocent misrepresentation. If a statement is made
with the knowledge that it is untrue or misleading, then that is a fraudulent misrepresentation.

Objective 3: Differentiate between a simple contract and a specialty contract

A simple contract is one which the parties have come to an agreement or deemed to have
reached an agreement whereas with the Specialty contract all the terms of the contract
should be written in a document which is then signed, sealed and delivered to all parties.

Types of Contracts

Contacts are in three main types:

I. Contract of record
II. Simple contract
III. Specialty contract (deeds)

CONTRACT OF RECORD

 A Contract of Record is imposed by a court order requesting a party to abide by

obligations laid down by the court.
 In a contract of record, the crown or state in its judicial capacity imposes an obligation
upon a person.

Examples: (i) a recognizance for good behavior and a recognizance to appear as a

witness. The individual signs a form and entry is made in the Court Records. The Court
reserves the right to levy on the individual for failure to observe the tern signed to. OR

(ii) A man may be required to pay alimony to his wife or a business man maybe told to
stop trading. A contract of record is not a true contract.

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Simple Contracts

They may be made orally, in writing, or implied. For a contract to be legally binding it must
have seven basic elements. They are:

1) Offer and acceptance of that offer

2) Form or consideration
3) Genuineness of the parties entering the contract
4) Capacity of the parties entering into the contract
5) Legality of the subject matter
6) Possibility
7) Good faith

If one of these elements is missing from the agreement then no contract exists.

The following are some kinds of simple contracts:

I. Bills of Exchange
II. Promissory Note
III. Marine Insurance

Note: the above must be in writing, otherwise they become void.

Speciality Contracts (Deed)

A specialty contract is a special kind of contract that is not valid unless it is made out in
writing and is signed, sealed and delivered.

It is also called a deed or a contract under a seal. Contract made without consideration a
valid only under seal, as is the transfer of title of land.

This is really a formal agreement that must be done in writing.

Specialty contracts, apart from being written, must be:

I. Signed
II. Sealed and
III. Delivered

Signing means that all the details that the parties have agreed on must be put in a document
which must be signed by all of them

Sealing means a seal, whether embossed, imprinted or posted, is put on the document.

Delivering means that all parties to the contract must have a copy of the document with
details they have agreed on.

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Some examples of specialty contracts are:

 Hire purchase agreement

 Mortgage contracts
 Sale of goods
 Sale of land
 Insurance contracts
 Lease of property
 All contracts that are sealed

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Objective 4: Determine the validity of various contracts

Use of case studies to determining the validity of contracts.

Validity refers to whether a contract is genuine, proper, true or worthy. A written contract
must carry a date showing when it was made, and must be witnessed by a third party, usually
a lawyer or his clerk, or a bank manager (for land deeds, bank loans, etc.

Important mistakes critical to the effectiveness of performance would render the contract
voidable, or would invalidate it completely.

All specialty contracts must be signed, sealed and delivered for them to be valid and legal.

All valid contracts should be based on common law, common understanding, and common
sense of what is right or wrong.

Condition for a valid contract

To be valid, a written contract must meet the following conditions:

 It must have a date

 It must be signed, sealed and delivered
 It must be witnessed
 There must be no factual mistakes in it
 Performance must be possible
 It must be registered
 It must be reasonable and fair

To be valid, an oral contract must meet the following conditions:

1. Contract features must be present, active, enforceable or functional.

2. Performance must be possible.
3. Time for performance must not lapse.
4. No minor, mentally ill or learning disabled person should be involved.

In addition to these features, the following should also be noted:

 Inclusion clauses (e.g. no refunds) must be made know to the buyer.

 A contract is invalid if the goods sold or bought were stolen property, whether the
buyer was aware of it or not.
 Insolvency of either party makes the contract voidable or invalidated.
 Unfair trading practices invalidate a contract.
 Failure to comply with statutory requirements invalidates or makes a contract illegal.
 Restrictive agreements invalidate a contract.
 If a seller is in breach of the contract, the buyer can reject the goods and repudiate or
avoid the contract.

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Objective 5: Distinguish between offer and invitation to treat or bargain;

Concepts of offer and an invitation to treat.

An offer, and the acceptance of that offer, is an essential part of contract.

An offer can be defined as ‘an expression of willingness to contract on certain

terms, made with intention that it will be binding on acceptance’.

An offer can be made in writing verbally, and can be made to an individual (a specific offer) or
the ‘whole world’ (a general offer). Once an offer has been accepted and the acceptance
communicated to the person or business making the offer then a legal contract has been
formed.

An important distinction needs to be between an offer and an invitation to treat. The latter is
something less than an offer and is not legally binding on the person or business ‘making the
invitation’, as it cannot be ‘accepted’ in the legal sense. Goods displayed in a shop window,
even if they have a price label on them is not an offer. In the law, when a business displays
goods in this way or on supermarket shelves, then it is only recognized as an invitation to
treat.

If a shopper then approaches and assistant and ‘offers’ to buy an item, then the seller (i.e. the
shop) is free to ‘accept’ or ‘reject’ the offer. The price on the items of sale is not an offer but
an invitation to the customer to make an offer i.e. the price being shown is an indication of an
acceptable.

An invitation to treat is not the same as an ‘offer’. With a ‘declaration of intention’

(through the advertising of sales or of an auction), a statement is used to invite the public to
make offers. Both are ‘general offers’

Both an ‘invitation to treat’ and a ‘declaration of intention’ merely invites the public to make
their own offers or acceptance of the offer price. The offeror is not obliged to sell at the price
on the item. Likewise, an advertisement does not oblige the offeror to sell to every
prospective buyer.

Objective 6: Explain the conditions under which offer and acceptance are
communicated

Concept of offer and acceptance.

Offer is a willingness to an act (as the price of a good) made by offeror to an offeree (the
person giving the ‘acceptance’).

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Condition under which Offers are communicated:

Goods and services are offered for sale in different ways, such as:

 By word of mouth (orally or verbally)

 By implication (‘it’s a bargain sale’)
 Through mass-media adverting (printed or electronic)
 In writing (on webpages or by letter; e-mail, fax, telex)

 Besides being timely, offers must be made by the seller or his agent and by no one
else. They must be directed to prospective buyers who may be known or to the
general public.
 Expressed offer must be properly or adequately communicated by word of mouth or in
writing.
 An offer must be communicated before it is considered as legal.

Acceptance is an agreement of the terms and conditions of an offer. It may be either

‘expressed’ Tby word of mouth or by writing), or ‘implied/inferred’ (by conduct of the offeree,
the person accepting).

Condition under which Acceptance are Communicated:

 through the post office, it is effective once the letter is posted. (It does not matter
if the letter was delayed or lost in the post. It is not the same for offers made by
post). made through the telephone fax machine or any of these modern
instantaneous means of communication is complete only when received and not
when transmitted
 through the telephone fax machine or any of these modern instantaneous means
of communication is complete only when received and not when transmitted.

Once an offer has been accepted and the acceptance communicated to the person or business
making the offer then a legal contract has been formed.

Objective 7: Outline ways by which Contracts may be Terminated or Discharged

There can be a thin line or distinction between the ways in which a contract can be
terminated and those that render it discharged.

Definition of Discharged.

Discharged means that all conditions have been successfully concluded and the contract is
now ended. OR

Discharged all terms and conditions must have been agreed and the contract entered into.

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The Difference between Termination and Discharge of Contract

If you have discharged your obligations, you have fulfilled all of them and you have no more to
do: your duties have ended (terminated). In this sense; then termination and discharge mean
the same thing. But it is also worth noting that discharge (meaning the carrying out of
execution of duties) can lead to a termination by mere fact that performance is now
complete.

Types of Discharged

A contract can be discharged, generally speaking, in only one way, i.e. by completing
performance or doing all that is to be done under the terms and conditions of the contract.

If any hindrance makes performance inadmissible in a law court or by any one party,
performance will be incomplete or inadequate, and the party at fault will be liable for cost or
damage to the other party. The only thing therefore, that brings discharge to it fullest
conclusion is complete performance.

Termination of Contracts

If performance is impossible, the contract can be terminated, and the part at fault will have to
compensate the other depending on the status of the contract.

A contract may be terminated in the following ways:

1. By performance. Both parties carry out their side of the agreement

2. By agreement. Both parties agree to cancel the contract before it is completed.
3. By breach. One party breaks the contract by failing to carry out its side of the
agreement.
4. By renunciation. One party carries out a portion of the contract and fails to substitute
for a higher one.
5. By merger. One contract is substituted for a higher one
6. By lapse of time. Failure of a party to carry out its side of the contract with in a
reasonable time.
7. By bankruptcy- If one of the parties to the contract becomes bankrupt.
8. By death- One party might die and cause termination. However, that party’s agent or
beneficiaries may be liable to continue the terms of the contract.
9. By impossibility of performance of either party.
10. If the contract originally made was contrary to statute or common on law.
11. If a child or legal minor was a party to the contract’

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 12. If one of the parties became mentally ill or was deemed to be so after the contract
was signed, if it was know that a mentally ill person was a party to the contract before
it was signed, the contract would be null and void.
13. If bribery or corrupt practice was involved
14. If there was fraudulent misrepresentation
15. If there were factual mistakes.

Breach of Contract:

This when a party to a contract fails or refuses to perform his/her terms and conditions of the
contract.

A ‘repudiation’ or ‘anticipatory breach’ is when a contract is expected to be breached in

the future, either by words or by conduct. A ‘fundamental breach’ (actual breach) refers to the
breach of terms and conditions of the contract.

Remedies:

Damages – Where a party has breached a contract, the usual remedy is to award damages;
that is, monetary payment for the loss that has been suffered.

Liquidated Damages – Sometimes the parties agree from the outset and stipulate in the
contract a sum that will be received if there is a breach. It is known as liquidated damages.

It is important to bear in mind that the loss which is claimed by the injured party must have
arisen naturally from the breach.

Other remedies are available, provided that specific circumstances exist to justify them. For
example:

Quantum merit claim – If one party prevents another from performing his side of the
bargain, then the affected party may claim a quantum merit. This is usually awarded where
a party has done some work but has not earned the agreed fee. Consequently, he/she is paid
the amount for the work that has been done.

Injunction - This is an order that is obtained on application to the court. It prevents the part
at fault from proceeding on any act that would be in breach of the contract.

Specific performance – An order for specific performance is also obtained from the court. It
compels a defaulting part to carry out obligations und the contract

Orders for injunction and specific performances are only granted at the court’s discretion and
are not available in respect of certain types of contract.

Rescission – an action to undo or cancel a contract to return non-breaching parties to the

positions they were before the transaction.

Restitution – money, property or goods previously conveyed are returned

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Waiver of Breach – where a non-breaching party accepts substandard performance from the
other party. A waiver keeps the contract alive.

Limitation of Liability – A limitation of liability clause provides that the only remedy for
breach is replacement, repair or refund of purchase price (or some other limit).

Specific Performance – An order of the court which requires a party to perform a specific
act, usually what is stated in a contract. This is done when damages are not an adequate
remedy.

Some Terms to Remember:

A misrepresentation is a statement that is not true.

Innocent misrepresentation is if a statement is made with a genuine belief that it is true.

Fraudulent misrepresentation is a statement made with the knowledge that it is untrue or

misleading.

Negligent Misrepresentation -

Rights and Obligations – Parties to a binding contract have created rights and obligations.

Revocation – withdrawal of an offer. This must be done before acceptance.

Valid contract – these are contract that enforceable by law. This means that all the element
of a contract exist in this agreement.

Void contracts- these are contracts that cannot be enforced by law. This means that this
type of agreement is lacking in one or more of the basic elements.

Voidable contracts – A contract that is still legally binding and remains in force until it is
declared void by one of the contracting parties; (or by the court). A contract may become
voidable if it is:

 A contract entered into by a minor for non-necessities

 A contract signed by a person under the influence of substances such as illegal drugs…
 A contract involving fraud or misrepresentation;
 A contract entered into by a person with limited mental capacity.

Objective 8: Explain why documentation is necessary in business transactions

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Business documents provide information needed for the business to function efficiently.
Information is required for accounting purposes to ascertain whether profits or losses are
being made. Documents are also needed as evidence for example orders placed for goods and
payments made. Documents also provide information on commodities in stock and prices

Documentation is necessary in business transactions as it:

 Records Transactions
 Provide information for the accounting records
 Keep track of activities within the firm and between the firm and other business

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Objective 9: Prepare business documents for various purposes

Business Documents For Various Purposes

The following three (3) documents (items d, e & f) accompany goods delivered.
1. Delivery Note must be signed by the person receiving the items ordered. This is proof
that goods were delivered. A copy of the delivery note is given to the buyer.
2. Consignment noteis sent when the firm does not have its own transportation. A
transport company is paid to deliver the goods. A consignment note will be prepared
by the consignor (the sender) and given to the transport company. It contains
information about the destination of goods and the name of the consignee (the
receiver).
3. Invoice is a bill sent with goods delivered. Invoices may also be sent after goods have
been delivered.
Terms 5% 30 days – A Discount of 5% will be given if the customer pays within 30 days.
E & OE – means errors and omissions, i.e. if any mistakes were made on the invoice the
company will make the correction.
(j) Statement of Account is a document from a supplier to a customer outlining all the
transactions carried out over a particular period. A statement is usually sent monthly.
(k) A receipt is given for cash payment.
(l) Stock cards are used to keep a record of all stocks entering and leaving the stockroom.
This procedure ensures that stock level do not fall below a minimum resulting in the depletion
of stocks.

The company may resend either a quotation or a catalogue

A catalogue is a booklet with a brief description and pictures of articles for sale. Since a
catalogue is costly, some companies opt to send a quotation instead. A quotation lists all the
goods in stock along with their prices.If there is an interest to purchase an item in the
catalogue then an order letter is sent requesting goods to be supplied.

Letter of Enquiry – A business person ordering goods for the first time from a wholesaler,
distributor or a manufacturer would write a letter of enquiry, requesting information about the
type and class of goods required, and asking for a catalogue or price list.

Quotation – This provides all the necessary information about the cost, discount and delivery
to the customer

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Order – Sent by the customer to the supplier. The order gives a full description of the goods
ordered and also the degree of urgency

Invoice – Is a Bill sent by the supplier to the purchases immediately after goods have been
dispatched. It contains all details about the order.

Advice Note – Simply informs the customer that the order is being processed and indicates
where the goods will arrive

Delivery Note – This will accompany the goods when they are being delivered. It allows the
customer to check that he receives what the firm should have dispatched

Credit Note – is issued to a customer when there has been an overcharge on an invoice due
to faulty arithmetic, when goods have been returned because of damage or refunds requested
for goods not received. A credit note is printed in red. Is used to reduce the amount of the
original invoice. The credit note is to adjust accounts between the buyer and the seller for:

 Goods not supplied for which the bill is presented

 Over pricing of goods
 Goods damaged in transit for which the seller is liable
 Goods supplied and billed correctly but different from what was ordered

Debit Note - It is used to add amounts to the original invoice, in such cases as an
undercharge or omission

Statement – It shows the total indebtness or amounts owing by the customer

Pro Forma Invoice - This is an invoice sent to a buyer when payment is required in advance
by the seller. A pro forma invoice is usually sent if there is uncertainty about the credit
worthiness of the buyer. It is also sent to a buyer when goods are bought on consignment. Is
a temporary invoice. It is used in cases where funds are being borrowed from financial
institutions to purchase items. The institution may request a pro forma invoice as proof of
items to be purchased when the loan is disbursed. It may also be sent with goods not ordered
and in this instance is a form of advertising. If the customer is interested in the items sent, an
actual invoice is sent.

Receipts – A receipt is given for cash payment, but is not required if payment have been
made by cheque by or bank draft, as these show evidence of payments

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Objective 10: Interpret information on transport documents

Information on Transport Documents

Import License
This document gives a business permission to import goods into a county. It is used by
governments to restrict the importation or to limit the amount of certain goods imported.
Quotas are sometimes used to protect local industries as they specify the quantity of certain
goods importers are allowed to import.
Certificate of Origin
This document states the country in which the goods were manufactured. This is important for
Caribbean countries as goods from other Caribbean countries enter duty free. Goods imported
from outside the region are taxed.
Shipping Note
This document provides details about the goods to be shipped, e.g. type and number of items
and the destination of the goods.
Bill of Lading
The Bill of Lading is a contract of carriage between the seller of the goods (exporter) and the
shipping company transporting the goods. It is also a document of title as a copy must be
presented by the importer before he can claim the goods.
It includes the following information: The number of packages, the weight of each piece, the
contents, the port of departure and destination, the name of the ship, the senders name and
address and receivers name and address
Dirty Bill
If the words dirty are added to the bill of lading, then the goods delivered are damaged.
The Airway Bill
This document is used when goods are transported by air. It contains similar information as
the bill of lading. It is not a document of title and the consignee named need not have a copy
to collect the goods.
Insurance Certificate – (Marine Insurance)
This document provides protection for the goods being shipped against loss or damage at sea.
Bill of Sight
This document is completed if for any reason the documents required for importing goods are
not available. It is completed giving details of the consignment and method of transportation.

Transport Documents include:

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  Bill of lading
 Airway Bill
 Shipping Note
 Certificate of Origin
 Certificate of Inspection
 Import and Export Licenses

Bill of Lading

 Used when goods are imported by sea

 It is sent by the shipper to the importer and represents the title to ownership of goods
 It shows details of the good, their destination and the terms under which the shipping
company agrees to carry goods

Functions

 A receipt for the goods

 Summary of the shipping contract
 Transfers ownership

Airway Bill

 Used when goods are transported by air. Unlike the bill of trading this document travels
with the goods

Provides Information on:

 Shipper
 Receiver/ Consignee
 Package
 Total Weight
 Freight Charges
 Payment Details
 Times and Dated

Shipping Note

This document is submitted to the part authority that receives the goods for shipping. It tells
the port Authority, what goods are being handed into their care and the ship are to be loaded
onto.

Certificate of Origin

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This document certifies the country where the goods originated. It is sometimes required by
the importing country if it has been agreed that the goods of particular country will be allowed
to enter the country at a more favorable tariff rate.

Certificate of Inspection

It is a health certificate and applies mainly to foodstuff such as meat and fruit. It sertifies the
product is in a consumable condition and free from contamination

Import Liscense

Used when there are government controls on imports.

E.g. In Trinidad require an import license to import goods such as refrigerators and vehicles

It can also be used to enforce quota.

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Terms Used in Foreign Trade

c/pd – Carriage Paid

FOB – Free On Board – All expenses up to and including putting the goods on board the ship
are included, but expenses of shipment customs and docks dues at the destination part are
excluded.

CIF – Cost, Insurance and Freight. This includes all costs and expenses to the port of
destination

COD – Cash On Delivery

FAS – Free Alongside Ship – The quoted price only includes expenses and delivery to the
docks. Loading charges onto the ship are not charged/included.

FOR – Free On Rail – Carriage will be paid by the vendor to the nearest railway station.

Franco – All carriage charges are paid by the seller to the purchase’s address.

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Objective 11: Identify instruments of payment

The instrument used to make payments will depend on the sum of money being paid and
whether the transaction is a local or an external one.
Cheques
A cheque is an order to the bank to transfer payments from an individual’s account (the
payer’s/drawer’s account) to credit another individual’s account (the payee’s account) or to pay
the payee on presentation of that cheque.

Credit Transfer
A customer of a bank may use this system by instructing the bank to transfer money from his
account to an account at any other bank.
Standing Order/Banker’s Order
This allows regular monthly payments to be made from a customer’s bank account to a named
payee. The customer must complete and sign a standing order form instructing the bank to
make payments.

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Credit Cards/Debit Cards
This allows the card holder to make payments by simply presenting the card to the seller. A
credit card facility is actually a loan given to a customer and thus it is repaid at an interest. A
debit card is issued against a customer’s account balance and is therefore not a loan.
Postal Order
Postal orders are cheques issued in specific values by a post office. The value of each postal
order is printed on it and a price depending on its value is paid for each. The postal order will
be sent to the post office of the payee as designated by the payer.
Money Order
These can be purchased from a bank or a post office. They can be used to make payments
locally or overseas, as they are made out in the currency in which they are to be paid. The
payee will cash the money order at his bank.
Telegraphic Money Order
The sender must first pay the sum to be sent over the counter of the post office. A telegram is
sent to the payee informing him to collect money at his local post office. He must present
proof of his identity.
Bank Draft
This is a cheque that is used to make payments overseas. Bank drafts are obtained for a fee
from a bank and are made out to a named payee in foreign currency.

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Bill of Exchange
This is used to pay for goods bought overseas on credit. It is an order in writing from an
exporter to an importer requiring payments of a certain sum of money at a fixed future date.
The time period allowed is normally three months.
Letters of Credit/ Documentary Credit
This is a sent from an importer’s bank to an exporter guaranteeing payment to the exporter for
goods to be supplied. The exporter must present a clean bill of lading, certificate of origin and
a certificate of insurance to the importers bank.
Irrevocable Letter of Credit
Once an exporter receives this letter of credit the importer cannot cancel payments for goods
to be supplied without the exporter’s permission.

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Objective 12: Interpret information on various instruments of payment

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Objective 13: Explain the use of documentary credit

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Objective 14: Distinguish between Insurance and Assurance

Insurance is based on the likelihood of the risk taking place, although no one knowns when or
indeed if it will take place.

Assurance is based on a risk that is bound or known to happen, e.g. death. In this case
everyone faces each although no one can say when it will happen.

Insurable and Non-insurable Risks

Non-insurable risks are risks which cannot be assessed in value. The probability may be
incalculable, or they may be risks which are against the public interest or illegal. In business,
non-insurable risks are risks such as failure to anticipate market demand correctly and failure
to manage the firm efficiently.

Insurable risks are those risks which can be assessed in value or at which the probability can
be assessed. In business, insurable risks are the non-economic risks such as fire, hurricanes,
accidents, etc.

Benefits of insurance

- It protects manufacturers and businessmen against personal risks such as accidents at

the plant, fire, burglary, etc.
- It protects exporters and shippers against the hazards of sea, or damage or loss of
cargo
- It protects householders against such risks as loss of property due to fire, flodd,
hurricanes, etc. It also provides them with protection against a penniless old age
- It is a form of saving and investment, e.g. endowment policies
- It is a source of capital for a business and householders, e.g. mortgages or loans to
companies
- It creates an estate to be passed on to relatives at death

Types of Insurance

Doing business involves taking risks. Business men therefore make sure that they have made
arrangements for some kind of financing which will offer them protection, should a loss occur.
It is by means of insurance that this protection is made possible.

Protection that is offered through insurance is based on the practice of the pooling of
risks. No business can predict which of them may need protection; therefore, they are
prepared to join together and help the unlucky one, whoever it may be. The contribution that
is made toward the pool is known as a premium.

Probability of Loss:

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 Being able to estimate fairly accurately how likely it is that a business place will be damaged.

An actuary:

One who uses records and statistics of losses accumulated over a period of years.

The majority of insurance policies are granted on the basis that the risks can be calculated;
that is, that they are insurable risks. The simpler it is to calculate the risk, the easier it is to
insure against losses.

Risks differ in nature and maybe divided into two groups:

- Insurable
- Non-insurable

Insurance companies (insurer) safeguard you against insurable risks, not against non-
insurance risks (that is if the likelihood of the event occurring is not known then the company
cannot offer protection for that risk)

Objective 15: Evaluate the principles upon which insurance is based

Principles of Insurance

The basis of which insurance operates – the pooling of risks – would be open to abuse if
certain principles are not observed.

- Utmost good faith (uberrima fides)

The term implies that all vital facts likely to affect the attitude of the insurance
company must be disclosed by the insured.
This principle also applies to the company whose representative should reveal all
relevant facts pertaining to the policy to be insured

- Insurable interests
This means that the person insuring the item must be in the position to suffer a loss or
damage in the event of something happening.

- The legality principle of insurance

- The subrogation principle of insurance

If A’s Car is Hit By B’s Car and A’s Company tool care of the damage, then by law of
subrogation A’s Company would be entitled to any compensation A Received from B

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 - The principle of contribution
If a person has insured identical risks on the same property through a number of
companies, then the amount of the loss is shared between the insurance companies.

- The principle of arbitration

- The principle of cancellation

- The average clause

- Indemnity
This means to make good or to restore the insured to his or her former position.

- Proximate clause
The cause of damage must be originated within the insured premises

Objective 16: Explain the various types of insurance policies

Types of Insurance

There are many types of risks and these, for the purpose of insurance, are divided into four
groups:

(a) Marine
(b) Fire
(c) Life
(d) Accident

1. Marine insurance
Merchants engaged in overseas trade were faced with large losses when one of their vessels
was lost at sea. They pooled their risks so that if one of them lost a vessel, the loss was borne
by the group as a whole. It covers all the risks to which a ship is subjected.
A variety of policies available for ship owners and traders:

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(A)Hull insurance
-This policy covers the whole vessel with all fixtures and fittings.
-If it is lost at sea or damaged by adverse weather conditions or by other vessels.

Hull policies are divided into Time and Voyage policies

Time policies: covering the vessel for a set period, usually twelve months.
Voyage policies: giving coverage for a specific voyage with specific cargo.

(B)Cargo Insurance
This gives coverage for goods in case of loss or damage at sea. Unless cargo is insured, the
importer will be unwilling to accept the bill of lading.
The cargo is normally insured for its full value, but the responsibility for payment of the
premium depends upon the terms on which the goods are being sold.

Floating policy: provided for merchants who are regular exporters or importers to cover the
likely value of their cargo for the next six or twelve months.

The insurer is notified of the value of each cargo, and when the total value equals the value
insured on the floating policy, a new premium is paid to cover a further period.

©Freight Insurance
Covers claim for repayment of the freight paid for carrying the goods.
Freight is the charge levied by the ship owner for carrying the goods.
2. Fire Insurance
Cover the cost of repairing fire damage. Covers both building and content.

Policy for Consequential loss:

Covers the profits the businessman/woman would lose if his premises are badly damages by
fire. This will enable him to meet any fixed cost that may fall due to this. This allows the
business to remain in existence until the damage is repaired,

3. Life Assurance
This is taken out on one’s life. The term assurance is used when a claim will definitely be made
under the policy. Everyone dies sometime.

But there is NO certainty that a claim will be made in other branches of insurance

A sum is paid either when the policy matures or the assured dies.

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TYPES/VARIATIONS OF LIFE ASSURANCE POLICIES

-Whole life: payable on the death of the insured person

-Term policies: provide benefit only if death occurs during a specified period
-Mortgage guarantee policy: a life policy is taken out for the duration of the mortgage. The
insurance company pays off the mortgage on the family house of the deceased.
It can also be used as a collateral security to obtain a loan.
-Endowed Assurance/ Endowment policies: There is a guarantee that a fixed sum will be
paid on a specified date or at death, whichever is earlier. This specified period may be
retirement.
Endowed assurance can also be a means of paying as well as a form of insurance.
- With profits

- Some are with profits (policy holder receives a share of the profits made by insurance
company from investing his savings)
- Require a slightly higher premium than those policies without profit
A common practice is to take out a policy which matures at your retirement, then use the
proceeds to finance an annuity.

4. Accident Insurance
To insure oneself against accidents and sickness (specified diseases).

Types of policies in this group:

a. Motor Insurance: Cover different kinds of motor vehicles

b. Comprehensive: covers injuries to drivers and third parties. Compensation for loss of
motor vehicle and damage to property.
c. General third party insurance: covers all persons other than the insurer and
insured. The law makes it compulsory to have it. The policy includes claim for
passengers travelling in the insured vehicle and for any other person injured or whose
property is damaged because of the accident.
d. Fidelity Guarantee Insurance: protection to employer(s) against loss by fraud and
misappropriation of funds or embezzlement by its employees, customers or other
persons
e. Engineering Insurance: provide coverage for persons working in factories

Annuity Policy

This means that in return for lump sum payment, the insurance company undertakes to make
weekly or monthly payments to the policy holder for a specified period.

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Regular income can be arranged for the rest of the insured life after he/she has retired active
work, that is, after you become a pensioner.
Bad Debts

This insures the firm against the non-payment of money owing to it; and helps to reduce the
loss that the company may also suffer from overseas debtors defaulting in their payments.
Government gives protection by setting up Export Credit Guarantees to help local exporters
who may be affected.

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Objective 17: Explain how does insurance facilitate trade?

Entrepreneurs invest a wealth of resources into the start-up and continuous operation of a
business. If the entrepreneur suffers any form of loss such as fire or burglary etc. the
business may take a long time to recover. Insurance is therefore very important to the
business community. The principle of indemnity ensures that an entrepreneur receives enough
compensation to continue the business with minimum effects.

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 SECTION 5: PRODUCTION

SPECIFIC OBJECTIVES

Student should be able to:

Objective 1: Identify in the production of goods and services;

Factors of Production

 Production is the creation of goods and services to satisfy human needs and wants
 Labour – the Human demand, mental and physical
 Land – Natural resource. Gift of nature
 Capital – Real, Physical assets, used to assist in the production of goods
 Enterprise – labour, land and capital

Objective 2: Identify industries developed from the natural resources of Caribbean

territories;

Caribbean industries developed form agricultural produce and mining.

Natural Resource Use of Resource Countries with Resource

Asphalt Construction, Road building Trinidad
Bauxite Used to make Aluminum Guyana, Jamaica
Crude Oil Petroleum Trinidad
Diamond Guyana
Gold Guyana
Gypsum Makes Cement which is used in construction Guyana, Jamaica
Limestone Construction Barbados, Jamaica
Manganese Guyana
Natural Gas Trinidad, Barbados
Silicon Sand Construction
Solar Energy Used in Electricity power plants Jamaica
Water Used in Electricity power plants (Hydroelectricity)

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Industries Developed From Natural Resources In The Caribbean
Caribbean countries have been blessed with a plethora of natural resources. The industries
developed from these natural resources have created employment as well as foreign exchange
earnings from exports.
Examples:
Crude oil is a natural resource of Trinidad. The petroleum industry employs nationals and
earns foreign exchange for the country.
Clay is found in abundance in Barbados. Pottery making is a large industry in Barbados.
Bauxite is found in abundance in both Jamaica and Guyana. The Alumina industry is an
important foreign exchange earner. Alumina is exported to be further processed to make
aluminium products.
Guyana also has very large forest areas and has developed a very vibrant lumber and timber
industry. Lumber is used in the construction industry.
Lime stone is processed to make cement in Jamaica.

Objective 3: Differentiate between Production and Productivity;

The effects of efficiency in the production of goods and services.

Production refers to the total level of output produced in a certain time period, whereas
productivity is defined as the level of output produced for each unit of out.

Production is the process of combining units of inputs (natural, man-made and human
resources) to create output (goods and services) capable of satisfying human needs and
wants.

Productivity is the increase of output from each unit in the production process. There are
several ways of achieving productivity. These include the training of workers and the
introduction of machinery and equipment into the production process.

The most common way to measure productivity is labour productivity. The following formula is
used:

Total output in a time period

Labour productivity = Number of workers employed in that time period

An increase in labour productivity lowers the cost of production and increases the standard of
living of the society.

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Benefits of Increased Efficiency

Increasing efficiency e.g. labour productivity can bring the following benefits to a business:

1. Output can increase without increasing the input of resources.

2. Average costs of production can be reduced and this increases the organization’
competitiveness.

Efficiency can be increased via the following methods:

1. Employ skilled workers and train to become more efficient.

2. Reduce time and resources used in production.
3. Use the latest capital equipment to increase output per worker.
4. Motivate staff to work to the best of their ability producing high quality output.

Objective 4: Explain the importance of productivity;

Mainly:

Productivity increases output. High productivity results in lower cost per unit of output
resulting in higher levels of profit for a business. For example, a factory worker can produce 10
items in an hour and he subsequently produces 20 units in the same hour after some training.
His productivity has doubled and the business will benefit from a fall in unit cost as more units
are being produces at the same costs of production.
Higher profits for the firm will mean more funds available for its expansion, new business
ventures and community support. It may also wish to pass on the benefits of lower costs to
consumers in the form of lower prices.

Productivity as it relates to the efficiency of labour, including its value and importance; the
factors affecting its supply; human resource development (including education, health
and working conditions);

Productivity and the Efficiency of Human Resources

Human Resource Development

The term human resource refers to the total physical and mental capacities of all people in a
country. It includes their knowledge, experience, training, and so on - in fact, every human
faculty used to produce goods and services.

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Idle human resources refer to unemployed people who are of working age, that is to say,
unproductive people as far as being economically active is concerned.
The productivity of labour depends on the following:

 Training and Retraining

Retraining is training for a new job or for a different job in one’s work place. It assists in work
performance, i.e. Productivity, and is undertaken by someone who has got promotion or a
different job.

Retraining is very important for workers who have been in their jobs for many years and need
refresher courses in order to enable them to be efficient producers at work.

 Education

Education is not the same as training, which focuses on the gaining of specific skills that can
be directly, applies to a business situation. Education offers employees the opportunity for
develop new personal qualities and interests. Gaining additional qualifications through
education may not lead to a direct input into the work of factory or office. However, it can
lead to greater self-confidence and self-esteem and there are important qualities for business
leaders and managers.

 Working Condition

Labour efficiency can also be influence by the working conditions within the workplace.
Dangerous place of work can lead to accident and delay production. Safe and clean
workplaces make staff feel they are being cared for and that they are important to the
business. Thus, employees will be more inclined to attend work regularly and work hard once
at work.

 Health

A healthy well-fed worker is more productive than an unhealthy one.

 Work ethic

Conscientious workers are more productive than idle one. Workers with a strong work ethic
are likely to have higher productivity.

 Motivation

Motivation of worker plays and important part in productivity. One of the role of management
is to motivate the workers

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Productivity and the Efficiency of Labour

Productivity refers to how much output can be achieved by employing the factor of production.
Labour productivity can be measured by the amount of output produced by a given number of
workers in a given time. Capital productivity can be measured by the amount of output
produced by a given amount of capital input.

Technical efficiency can be measured in the amount of output produced by the use of an
automated process.

Productivity can also be measured or stated as the amount of output produced by

every dollar spent, i.e. the dollars’ worth of every unit of output.

Efficiency usually refers to the relative cost of production; this is cost-efficiency more specially
the least-cost method of production.

Efficiency can also be measured in term of least wastage of factor of production: a firm can be
said to be highly efficient if its processes do not waste raw material, fuel, energy or the time
and effort of workers.

Objective 5: Outline the effects of Migration;

Migration it’s positive and negative effects on the labour force.

Migration is the permanent movement of workers from one location to the next in search of
better opportunities.
Internal Migration
Migration within a country e.g rural –urban migration. This is migration of persons from rural
communities to the city areas.
External Migration
Migration of persons from one country to another – For example, the migration of Caribbean
people to developed countries such as the United States and England.
Effects of Migration
Internal (Rural –Urban migration)
-The loss of persons from rural areas impacts on the level of output and development of these
areas.
-It also impacts negatively on the level of commodities available for export form these regions.

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-The influx of workers in urban areas increases competition for jobs, houses, health facilities,
schools etc.
External Migration (Caribbean to developed countries)
-Professional and skilled workers who migrate reduce the level of skills available in their
countries resulting in a brain drain effect. This will impact on growth and development.
-They increase competition for jobs, houses, health facilities and schools in their new territory.
-Money earned by Caribbean nations in foreign countries is sent home to support their families
reducing poverty and making foreign exchange available for their respective countries.
-Caribbean professional and skilled workers contribute to the growth of developed countries

Objective 6: Describe the role of the entrepreneur in the decision making process;

State the importance of entrepreneur organizational skills and the decision making role of the
entrepreneur

The entrepreneur undertakes the risk of production by coming land, labour, and capital

The entrepreneur is usually an innovator bringing news products and services to the market

He/she takes risk by entering the market to supply good and services.

He/she raises finance before production begins.

He/she makes decisions about what to produce, how to produce, and for whom

Objective 7: Explain the role of capital in production;

a) Fixed,
b) Working
c) and venture capital

Define capital and discuss its role in production

Capital – is refunded for as real physical assets, i.e. resources that are used in the further
production of good and services such as machines inventory, factor

Capital goods- are not wanted for immediate consumption on for their own use or satisfaction

Physical capital – can be divided into

(I) Fixed capital, such as machinery, white is long lasting and which does not
change its form during the course of production and

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 (II) Working capital – such as raw materials seeds leather and the like, which
changes during production .

Government expenditure on roads factories, airports etc., is called social capital.

Circulating capital includes raw materials, finished and semi-finished, goods, bank and cash
balances. These assets can easily be converted into cash.
Tools and machinery are necessary for products to be fashioned from raw material e.g.
mineral mining, oil drilling and lumbering. These assets also increase productivity for example
sewing with a machine as opposed to sewing by hand. Venture capital is needed for business
start-up. The business owner will need equipment, funds for promotion etc. to start the
business. Working capital is the cash available for the daily operation of the business. It is
used to pay workers, utilities and purchase raw materials.

Factors affecting capital are:

 the rate of interest

 the rate of depreciation
 the cost of labour to capital
 business expectation and government action, e.g. tax rate

Venture capital (venture capitalist) are private individuals (‘angels ‘) or small groups of
investors with excess cash who invest it in small business, this is a form of private equality and
it’s a negotiable arrangement between an investors and the business enterprise, the investor
owns a part of the company and in return provides the finance that is required.

These investors are not interested in long-term membership. They are seeking quick, high,
returns on their investment. Normally in the negotiated settlement there is an equality buy
back option for the financial .this will allow the entrepreneur to regain control of the finances
and the venture capitalist to cash in his shares.

Venture capital is designed to help start–up businesses or rescue a business, which is in

trouble. The capital may come from private sector sources, from a special government fund or
from international agencies. It combines some features of loan and equity finance. The
lender (inventors) can sell out after a number of years – the period is usually agreed in
advance. That is when the investors can make a large return. Earnings from venture capital
are high if the business is successful – but there is a strong element of risk. If the business
fails, the investor may lose the entire investment.

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Objective 8: Differentiate among the various production levels;

List the various production levels and assess their contribution to the economy

Production levels:

a) Substance/traditional
b) domestic consumption,
c) surplus and export
d) Subsistence

Subsistence: This is the lowest level of production. Subsistence productions refers to output
from the production process that is just enough for the survival. This amount of production is
therefore not adequate to meet all needs and wants of a family, community or a country. For
example, subsistence farming involves the production of crops to feed the family and for
survival. Wealth is not created as whatever is produced is consumed.
Production level: substance, domestic consumption and surplus and export

Substance production – refers to direct production of goods to satisfy primary needs. Those
who practice this type of production hunt, fine, gather and plant enough to provide for their
basic needs.

Domestic production or local production refers to production which takes place within the
boundaries of a country using local inputs only. This allows a country to reply on its own
resources rather that important foreign goods.

Surplus or export refers to production over and above what is needed for domestic
production the surplus being exported in exchange for foreign goods.

Objective 9: Classify the different types of production;

Classify the different types of production activity

Types of production: the main divisions of labour are:

Types of Production:

a) Extractive (agricultural, mining, fishing);

b) Construction (building)
c) manufacturing (assembling, refining)
d) Service (transport, communication, tourisms, banking)

The main types of industries bases on the above productive activities are:

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 (a) Extractive – (agricultural, mining, fishing); the gathering or extracting of raw
materials from the land or sea, egg. Drilling for oil. Harvesting cotton, growing, sugar
cane, and extracting bauxite, etc.
(b) Secondary – deals with the conversation of the gathered raw materials unto goods by
changing their form. This gives us the manufacturing and construction industries, egg.
Refining of oil, building of factories or roads or bridges, manufacturing of sugar,
aluminum, making gold jewelry.
(c) Tertiary production deals with the service sector indirect services. provide the means
by which goods and services charge ownership , e.g. banking , transportation ,
communication and finance
Direct service is demanded for their own sake and contribute to the qualities of life
e.g. health
services, education, tourism and auto repairs.

Objective 10. Describe the characteristics of cottage industry;

A cotton industry is an industry carried out in the home using basic raw materials and skill, e.g.
shell and coconut craft, smoking and baking.

E.g. Handicraft such as making souvenirs, shells and coconut craft, knitting, smocking and
other art forms.

Characteristics of Cottage Industries:

a) Home-based;
b) Mainly manual
c) Small scale;
d) Use of local raw material;
e) Use of family members as labour.

Advantages are:

- A source of employment and income

- Family members can assist
- Marks use of local raw materials
- No need for large space
- Equipment is Not costly
- Serves as supplementary income
- Encourage recycling of used products
- Cater to creative abilities
- Provide Important linkages to industries like Tourism

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 - Government sometimes provides financial support

Disadvantages are:

 Long hours are required, as with small businesses

 Self-marketing is necessary as sometimes there isn’t a ready market for the product
 A market may not be available
 Price may be low, therefore not very encouraging to persons unless there are large and
advanced orders from buyers.
 Raw materials may be hard to obtain as raw materials may be scarce or become
endangered

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Objective 11: Outline the opportunities for and benefits of developing linkage
industries;

Linkage industries:

a) backward
b) forward

Linkage Industries

Is an industry that depends on another industry for its output in order to provide goods and
services. Industries are linked to each other in a chain of production. Some linkages stretched
forward along the chain while some linkages stretched backward within the chain.

Forward Linkage – A business produces something, which is used as an input by another

industry. Forward linkage takes you further along the chair of production.

Backward Linkage – A business buys product from another industry, which is its supplier.
Backward linkage moves towards the start f the production chain.

The production chain may be local or international.

Benefits of forward and backward linkage

Forward Linkage:

- Provide materials that can be used to develop industries, for example in

second stage- manufacturing or service.

Backward Linkage:

- Provides stimulus to other local industries such as agriculture, mining or first stage
manufacturing. The backward linkage from the dairy provides a market for dairy
farms. They could not operate without a market.

- Where there are good backward linkages, there is the no need to import raw
materials. This saves valuable foreign exchange.
- The industries that benefit from forward linkage and backward linkages provide
additional employment.

Sometimes, the “first round” linkages stimulate a further round of linkage to

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 Objective 12: Outline the factors that determine the location of a business;

Factors affecting location:

a) Geographical;
b) Availability of raw materials and supplies;
c) Infrastructures;
d) Power;
e) Water;
f) Transport;
g) Health facilities;
h) Labour supply;
i) Labour supply;
j) governmental regulations;

The location identified for the operation of a business will impact on its success or failure. An
unsuitable location can result in high operational costs or low sales volume. Business owners
must therefore consider the following factors when choosing a location.
The proximity to customers
It is important that business owners give customers easy access to goods and services.
Shopping plazas in very central locations are very popular locations for businesses. Many
companies now opt for selling online and therefore do not need to be centrally located.
The proximity to raw materials
It is more cost effective for a business that uses raw materials that are heavy and or bulky to
locate close to the source of raw material. For example, bauxite processing plants are located
close to mining areas and sugar factories are located close to sugar fields.
Availability to suitable labour supply
A business will need adequate number of workers who posses the skills suitable for the
creation of its goods and services.
Adequate Infrastructure
Firms will locate where there are adequate supplies of water, lighting, airports, seaports, good
roads, transportation, and communication facilities.

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Objective 13: Function of a Small Firm

Mainly:

Supplying goods and services that satisfy demand

Identifying a particular need in a market and developing a product that will supply that market
need improves standard of living and increases the overall revenue (GNP) earned in a country.
Small businesses have the advantage over large businesses to identify changing market trends
as they are closer to the customers. They are also able to produce unique products to suit the
needs of each customer.
Creating employment
Small businesses account for a large percentage of total employment in Caribbean economies.
Making profits
The main purpose of starting and operating a business is to make profits. Profit makes it
worthwhile for the entrepreneur to continue business. Profit earned may be reinvested to
expand the business.

Although we have seen that many firms expand and go into large-scale production, there are
some that do not increase their size; they remain small. In the Caribbean, there tends to be
more small firms than large. These small firms exist alongside large firms.

Definitions and examples of small firms

It is not an easy task to find one appropriate definition for the small firm; therefore, many
persons use various criteria to identify such firms. According to B.M.C. Abiraj, in his book,
Principles of Business for CXC, several definitions of small firms are used in Trinidad and
Tobago as outlined by the Management Development Centre in Port-of-Spain. These
definitions include:

(a) A firm whose total assets excluding land and buildings do not exceed TT$500,000.

(b) A definition from the Central Statistical Office. This definition states that for a firm to be
considered small, it should have fewer than 10 employees.

(c) A third definition states that a small firm should employ ONE top manager who should
manage the business and perform other functional duties as well.

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 Examples of small firms include direct services such as hair-dressing, small shops, restaurants,
small private schools, private nursing homes and so on. You may wish to do some research
and add to this list of examples.

Characteristics of Small Firms

 These are firms that cannot easily be divided into departments since they lack the space
and personnel.
 Workers in small firms do not specialize much, if at all.
 Many small businesses are family oriented.
 Small firms do not normally have middle-management personnel. The top manager
performs all the important duties himself.
 Small firms are often characterized by a wide variety of tasks and skills.

These firms exhibit many of the characteristics of the sole trader.

The role of small firms in Caribbean communities

 Small firms provide employment for many, especially in rural areas.

 They provide services that are either not provided by larger firms or are not adequately
or properly provided.
 Small firms provide competition to larger firms, forcing them to be efficient and keep
their prices low.
 These firms serve as a means for persons to supplement regular income, for example,
as farmers, fishermen and so on, especially where the nature of work is seasonal.
 Many small firms assist larger ones in ‘breaking bulk’ and in the distribution process.
For example, small-scale retailers.
 Small firms often try out new ideas and expand to become larger firms to the benefit of
the community.
 Small firms can manage the demand small communities, whereas larger firms may see
their demand as insignificant and a waste of time.
 These firms are flexible and, therefore, easily adjust to changes, including changes in
the community demand.
 Some businesses are difficult to control on a large scale. Therefore, if it were not for
the small firm, these businesses would not exist in some communities, for example, taxi
services.
 Small firms are often linkages to larger firms in the community, obtaining materials
from them or supplying them.

Caribbean governments recognise the importance of small firms and try to

encourage their existence by charging them less tax or exempting from certain

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taxes. In some instances, loans are made available to small firms at special rates of
interest. In Jamaica, there is the Small Businesses Association of Jamaica (SBAJ)
that assists small businesses in the country, including lending them money at low
rates of interest. But, why do firms remain small?

Reasons for Remaining Small

 To keep the business in the family. Expansion may require hiring persons outside of the
family.
 Market for the good or service is small. Unless the market grows, the firm will remain
small.
 Some firms are linkages to small- and medium-size businesses. Unless they expand,
these firms will remain small.
 Some firms remain small because they have missed the opportunities to expand.
 Many firms have not gone into large-scale production because they do not have the
necessary collateral to access loans for expansion.
 The owners of some small firms do not have the necessary management and/or
technical skills needed for a larger business.
 For many firms, the most efficient size is the small firm.

Advantages of Small Firms

1. These businesses are often strategically placed; that is, they are located in places that
are convenient for customers.
2. They provide goods and services that are not provided by larger firms.
3. They normally sell a variety of goods and services and the items sold are usually unique
and customers prefer this to the standardisation of larger firms.
4. People support small firms because operators of these firms know their customers well
and often offer them credit.
5. The small firm is more efficient where personal services are to be carried out.
6. The top manager is the sole decision-maker. He/she can, therefore, make decisions
quickly and knows exactly what is going on.
7. Small firms have a small number of staff, therefore, staff problems can be more easily
detected and dealt with than in larger firms.
8. There is clear communication among employees and it is easier for management to
have a good relationship with employees since the business is small.
9. Because small firms offer certain services, large firms are prevented from becoming too
large.

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 10. Small firms stay open for longer hours than larger firms, to their advantage.
11. They are easy to start up and often receive government assistance.
12. These firms benefit from assistance from small business associations, for example the
SBAJ.

The disadvantages of Small Firms

1. Owners have to put in long hours, sometimes without holidays in order to make the
business a success.
2. Many of these businesses have limited liability; that is, they may loose more than they
have invested in the business if it should fail.
3. The manager is often bogged down by other tasks which, in larger businesses, are
delegated to assistant managers and supervisors.
4. They suffer because of competition from larger firms. This is so since the simple, cheap
machinery used in small firms may not allow them to compete equally with larger firms.
5. Prices tend to be higher than those of larger firms.
6. Small firms are vulnerable to changes in the economy; they are easily affected by the
‘ups’ and ‘downs’ in the economy.
7. They have difficulty in arranging loan financing since financial institutions are often
reluctant to lend them money. When they do lend them money, the rate of interest is
often higher and the loan amount is smaller than that of larger firms.

Objective 14: Explain the effects of growth on a business

Growth of a business and effect on:

a) Organizational structure;
b) Capital;
c) Labour;
d) Scale of production (economies of scale);
e) Use of technology
f) Potential for export;

Small businesses that are efficient, creative and are cognizant of changing market trends are
poised for growth.

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Growth impacts on the business organizational structure and the business
operations.
The creation of new posts and departments as a result of specialization and expansion will
change the organization’s structure. More workers will also be employed resulting in greater
specialization or division of labour (more workers will mean that tasks can be subdivided into
smaller tasks).
There will also be an increase in the internal communication systems (telephone, mail etc.) to
accommodate this expansion. More factory and office space, equipment and furniture will be
required to facilitate expansion.
As the business expands it can take advantage of economies of scale. Economies of scale
refers to the benefits that firms are able to enjoy because of expansion.
Internal Economies of Scale
This refers to the benefits enjoyed by a firm because of it’s own expansion. These include:
-Technical Economies of Scale - Expanding businesses will need to purchase machinery
and equipment to supply the level of output required. With the use of machines productivity
will rise and the firm will experience technical savings as unit cost of production will decline.
-Marketing Economies – Expanding businesses can take advantage of bulk buying and
receive discounts on raw materials.
-Financial Economies -Larger firms will access loans more easily and at a cheaper interest
rate than small firms since they already have established reputations and adequate collateral.
-Managerial Economies -The employment of experts who will specialize in various
management functions such as marketing, personnel, accounting and production will increase
efficiency and thus output.
External Economies of Scale
External economies refers to the benefits enjoyed by a business because it is part of a well-
organized industry and not because of its own expansion. Thus any businesses whether large
or small can reap these benefits as long as it is part of an industry enjoying these benefits.
Benefits include; government subsidies offered to particular industries, tax holidays and
reduced duties on items imported.
Diseconomies of Scale
A diseconomy of scale refers to the disadvantages arising from the expansion, such as:
1. High Advertising Cost: This becomes a diseconomy when the percentage increase in a firm’s
advertising cost is much greater than the percentage increase in its revenue.
2. High maintenance cost for machinery and equipment.

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3. Increased difficulty in controlling the organization.

Objective 15: Describe the economic and social implication of technological

development.

 Capital-intensive versus labour-intensive production in developing

countries,
 mechanization and automation,
 Comuter Aided Design (CAD) and Computer Aided Instruction (CAI)

Technological development increases the quality and quantity of output. This results in the
lowering of unit cost of production which may be passed on to consumers in the form of lower
prices. When goods and services become more affordable the standard of living of citizens will
rise.
Developing countries employ both labour and capital intensive methods of production. Labour
intensive industries include banana and craft and capital intensive industries include petroleum
and bauxite.
There are three methods of production:
1. Labour Intensive Production
This method of production utilizes mainly manual labour along with a limited amount of
machinery
2. Capital Intensive Production
This method of production utilizes mainly machinery along with a limited number of workers.
3. Automation
Automation is the further stage of mechanization. This production process is carried out
automatically with little or no human involvement. For example, the automated teller machine
(ATM).

Computer Aided Design (CAD)

Computer aided design is a computer software used in the product design process to produce
designs with greater accuracy, speed and flexibility. Its powerful computer graphics allow

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product designers to produce 3-dimensional objects, which can be fully examined and tested
before they are implemented.
Advantages include:
- Accuracy
- Speed
– It is easier to make adjustments since changes are made on the computer
-reduces cost of the design process

Mechanization and automation results in increased output but reduces the amount of labour
required in the production process. This creates unemployment in Caribbean countries.
Workers must be retrained for new developing industries such as information technology. New
industries will absorb the fall out of workers from other industries.

Economies and Diseconomies of Scale

Economies of Scale

Is the cost saving benefits or reduction in the unit cost of production because of the increased
scale of operation of the firm. In other words, it refers to the benefits of being a large firm.

International economies of scale part 1

A firm is defined as an independently administered business unit while an industry is made up

of a number of firms producing broadly similar items or items that are connected to each
other.

Firms and industries may be small-scale (small size) or large-scale (large size).
As firms or industries expand and go into large-scale production, they are able to secure
certain benefits that are not available to small firms or industries.

These benefits or advantages are referred to as ECONOMIES OF SCALE and they result in
reduced average costs of production as output increases.

Economies of scale are of two (2) types: INTERNAL economies of scale and EXTERNAL
economies of scale.

 Internal Economies of scale refers to the benefits or advantages to one

particular firm as it goes into large-scale production

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 External Economies of scale refers to the benefits accruing to an entire
industry that has been localised or concentrated in a particular area.

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The Types/Kinds of Internal Economies of Scale

1. Technical economies of scale: These are often called economies in the use
of factors of production. As the scale of production increases, the firm does not
have to increase the use of the factor of production to the same percentage or
degree as they increase in production. Thus, there is a saving or benefit. For
example, output can be increased using the same amount of labour. This is
possible through division of labour, which leads to increased output. In the case
of capital, machinery which before was being under-utilized can now be used to
its full capacity with very little or no increase in cost.
o Use equipment to full capacity
o Division of labour increase
o Double in capital size does not necessarily mean double in maintenance
cost.

2. Managerial economies of scale: Many refer to those as administrative

economies. As the firm expands its operations it will not need to expand its
administrative staff to the same degree or percentage as the expansion in its
operations. In fact, the firm may find that for certain levels of expansion, it may
not need to increase the amount of administrative staff at all. This is possible
through division of labour and specialization amongst the managerial staff. The
result is increased output of the managerial staff. Managers may specialize in
sales, accounting, production or research for instance, eliminating ‘red tape’ and
loss of time.
3. Marketing Economies: This can be broken down into
(a) Buying economies - Larger firms are able to purchase their raw materials
in bulk and thereby benefit from cheaper prices through discounts.
(b) Selling economies - Larger firms are better able to handle and pay for
extensive advertising campaigns. The successful result of such campaigns will
be increased demand and greater brand loyalty both of which will benefit the
firm and more than cover the cost of advertising.
o Bulk buying reduces cost
o Specialize can be employed, increasing efficiency and the lowering cost
o Handling and packaging cost do not double if the company doubles its size

4. Financial economies: Larger firms have greater capital assets, therefore, it is

cheaper and easier to access loans from financial institutions that see them as
safer borrowers. They are seen as less likely to become bankrupt and unable to
repay their loans thus, banks may actually compete for their accounts.

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 o Large firms are able to borrow more at lower interest rates simply because
of their size and popularity.
o They also have access to more sources of finance

5. Research and Development Economies: As the firm expands, it becomes

better able to afford the highly technical and extensive equipment needed for
in-depth experiments. They are also able to afford to employ the services of
highly skilled and qualified persons who can develop new methods of production
and save on the costs of production. For example, they may develop a new
production technique which uses simpler or cheaper raw materials. They may
also develop new products which may allow them to compete more effectively
with their competitors.

6. Social Economies of Scale: Large firms usually have good customer relations.
They are able to develop such because, as they expand, they are able to afford
activities that create a good impression of them in the eyes of the public.
Ultimately, they will benefit from increased sales. Expansion may allow them to
be able to afford to sponsor sporting events, and to give prizes for competitions.
They may even be able to afford housing facilities for their employees.

7. Risk-bearing Economies: As the firm expands, it will be better able to spread

its risks by diversifying i.e. selling more than one type of good. The benefit or
advantage is that if one product sells slowly or fails, the other products which
are successful will more than cover the shortfall.

o A large firm can spread risk by selling more than one type of good so that if
one product sells slowly than the other can pick up the slack

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The Types/Kinds of Internal Economies of Scale

i.) Specialists Workers

A supply of skilled labour may locate near to the firm causing the firm to save cost
in labour and training
ii.) Supporting Firms
They help to save cost, such as repair and maintenance firms near to an oil
refinery.
iii.) Specialized Services
When large firms become established, service industries such as banks, insurance,
catering and cleaning services locate near to them, thus saving costs.

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Diseconomies of Scale

This refers to the factors leading to the increase in costs due to over expansion.

For most firms there is an ideal size at which cost of production is at its minimum. This is when
firms attempts to expand beyond its ideal size they begin to suffer certain disadvantages,
which cause production costs to increase.

There are TWO (2) types of Diseconomies of Scale:

- Internal Diseconomies of Scale

- External Diseconomies of Scale

The Types/Kinds of Internal Diseconomies of Scale

i.) Standardization of a Product

The large firm may use mass production to produce a standardized product,
however it reduces customer choice and inhibits the firms ability to adapt to
changes in taste, fashion or trends.
ii.) Industrial Relations
Easier to unioniese a large firm than a small firm, this can move cost implications
for wages and possible strike action.

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Section 6 – Marketing

SPECIFIC OBJECTIVES

Student should be able to:

Important Concepts

Sales-Related – This is where a good or service is produced first then people are persuaded to
buy it. This marketing approach is called Sales-Related

Customer-Related – Research in a market reveals a want or need to be satisfied and the firm
proceeds to achieve this goal. This marketing approach is called Customer- Related.

Market Segmentation – Identifying different groups in a market and subdividing the market
into those groups which can be attacked by specially designed marketing strategies explains
the concept of segmentation

Market Saturation – When all the consumers who wish to buy a product have bought it, or
many competing goods have flooded the market, the demand for a product falls steeply. The
market for the product is said to be saturated, i.e. Supply has outstripped demand by a large
margin. No amount of advertising or promotion will raise demand until the market recovers.

Objective 1: Distinguish between the terms market and marketing

What is a Market?

A market exists under any conditions where buyers and sellers are in contact directly or
indirectly for the purpose of exchanging goods and services. The four (4) elements of the
market are buyers, sellers, goods and services, and price. If any of the elements is removed,
then the market will not exist.

The term market is also used to describe the extent of the demand for a commodity. Hence, a
large market means that there is a large demand for the good or service.

What is marketing?

Marketing refers to the set of human activities and efforts which is interrelated and focused on
bringing the goods and services to the consumer. It has to do with getting the right goods to
the right people at the right time in the most profitable and efficient manner.

Marketing may be defined as all the business activity geared towards correctly identifying and
anticipating people’s wants and needs, including the group of people associated with these
needs. The business should then concentrate on satisfying them in the most efficient and

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profitable manner possible. In other words the correct good or service must be anticipated,
identified, produced, packaged, promoted and distributed to the targeted customers in the
shortest time possible, at competitive prices and in a profitable manner as well.

Objective 2: Identify marketing activities

Marketing Activities

This refers to everything a firm can do to influence the demand for the product. It is a
collective term that is used to refer to the whole range of marketing activities, techniques and
strategies that a firm uses to reach its target market.

Market research – the process of gathering information about potential customers.

Packaging – creating a suitable package for product usage and for advertising
Branding - differentiating the product of a company from other brands and establishing loyal
customers.
Pricing - identifying the right price that will encourage sales
Advertising – methods used such as the media to inform and encourage the purchase of goods
and services
Sales promotion – short-term methods used to encourage consumers to buy during a specified
period
Distribution - methods used to make the product available to consumers. For example
wholesale, retail or internet.

Objective 3: Describe the “Marketing Mix”

What is marketing mix?

In our definition of marketing we mentioned correctly identifying a group of people associated

with certain needs (For example teenagers with brand-named footwear). For this particular
product, teenagers are referred to as the Target Market. As long as the target market has
been identified for a product, the marketing department would formulate a marketing strategy
to market the product successfully.

This marketing strategy involves the use of a marketing mix which, in essence, is the blend of
different activities undertaken by the marketing department to market a good or service
successfully.

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The variables/strategies of the marketing mix can be easily remembered by referring to the
four Ps:

 Product – The good or service that the consumers wants

 Price – Profit is usually incorporated in the price
 Place – Product must reach the place where the good or service is required for
distribution.
 Promotion – This refers to the ways in which consumers are made aware of the
availability of the product or service and the qualities it has. Advertising is the most
dynamic aspect of product promotion.

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Objective 4: Explain the concept of Market and Market Research

Market Research Concept

Market research may be defined as the systematic gathering, recording and analyzing of data
about problems relating to a specific marketing situation facing the firm, and adopting the
information to the marketing plan of the business.

The main objective of market research is to reduce decision risk by providing management
with relevant, timely and accurate information. To understand its customers, competitors,
dealers, etc.

The marketing concept requires that a firm be aware of customers’ needs to try to meet those
needs and to attempt to make a profit in the process.

Market research assists the firm to meet the goal of the marketing concept by the helping the
process of finding out what the consumer wants.

Market research investigates what consumers are buying or are likely to buy in the future. It is
normally done before the advertising campaign. Sometimes, it is carried out after the product
is well established in order to assess and improve advertising and evaluate product
performance.

Objective 5: Outline the reasons for conducting market research

Reasons for Conducting market research

Market research will help in making decisions about:

 Where to sell a good or service

 How to sell it
 Consumer tastes – That is which customers need the product and exactly what they
want and what they dislike
 How to price a product
 Competition – who are the competitors in the market place and what they are doing
 What the size of the market is
 Consumer Behavior – How consumers will react to certain conditions or when faced
with certain factors\

In other words, market research helps us see what influences the consumer.

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Types of Market Research

Market research includes the following types of research:

 Advertising or media research

This is research to see the best means of advertising at the lowest cost. It can also be
done after the advertising campaign to test how successful the campaign was in terms
of increasing market share.
 Business and Economic Research
This is done to study the trends in the business, prices and locations of plants and
distribution centers. It also studies the changing economic conditions which affect the
business
 Product Research
This tests how consumers will accept new products or changes in existing products
 Distribution Research
This is used to look at the effectiveness of the channels of distribution of the product
 Packaging Research
Used to assess people’s reaction to the design, color and other physical features of the
package
 Sales Research
This tests the potential size and make-up of the target market in terms of age, sex,
income, etc.
 Consumer Research
Used to find out why consumers prefer some goods and services to others and to
research the size of the market. It also involves research to see if there are any
changes in people’s incomes, tastes or brand loyalty.

Objective 6: Describe the factors that influence Consumer Behaviour

Factors that Influence Consumer Behavior

 Price
Consumers will adjust their demand for particular goods and services as the prices of
them change. Generally speaking, the lower the price, the greater the quantity
demanded.
 Price of Substitutes
If the price of substitutes is lower, then customers will switch from the relatively dearer
goods and services to the relatively cheaper goods and services.
 Quality

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 Consumers will gravitate towards the better quality products and may even be willing
to pay more for them
 Taste
People differ in their preferences for goods and services, so the market has to identify
these preferences
 Tradition
Long-standing traditions and customs may influence demand. For example, some
households purchase Grace Products because their mothers and grandmothers
purchased this brand and they see no reason to stop.
 Income/Affordability
The amount of money earned affects one’s ability to purchase goods and services,
therefore, some highly priced goods and services will only be purchased by the higher-
paid wage earners.
 Spending Patterns
Some consumers are accustomed to spending a certain amount of money. If prices fall
they may not spend any on these goods and services, because they have already
established a pattern of spending which they are not willing to change.
 Brand Loyalty
Marketers often try to create loyalty for their products among consumers. The hope is
that the customers will stay with their existing product because it has satisfied them for
some time.

Customers who are loyal to certain brands cannot be easily wooed or enticed away from these
products since they are satisfied with them

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Objective 7: Identify the main types of Market structures

Market Structures

Definition

This refers to market classification according to the number of firms in the industry, types of
product, the existence or non-existence of barriers to entry and the level or degree of
competition.

There are four (4) main market Structures

i.) Perfect Competition

ii.) Monopoly
iii.) Monopolistic Competition
iv.) Oligopoly

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Perfect Competition

Definition

Perfect competition refers to a market structure in which there are numerous firms in the
industry each selling a homogenous product. There are no real examples of perfect
competition in real life. However, some markets approach near to perfection. These include
agricultural markets, stock markets and markets for foreign exchange.

Characteristics

 Numerous buyers and firms in the industry: This means that neither one firm nor
one buyer can affect the price in the market. Each is a Price Taker
 The product being sold is homogenous: This means that there are no differences
in what each firm is selling, whether real or imagined. Thus, if a firm increases its price,
its scales will fall to zero as the buyers will buy from the other sellers who have the
exactly same product.
 Perfect knowledge of the market: Both buyers and sellers know exactly what is
happening in the market. For example, if prices change they are immediately aware of
it.
 Perfectly elastic Demand curve: This indicates that the firms cannot control price,
but can sell any amount at the ruling price.
 Firms are independent: This means that they do not take into consideration what
the other firms in the industry do
 Very high levels of competition: Competition among firms is due to the fact that
there are numerous firms selling exactly the same product, each competing for the
same consumer demand
 No Advertising: Advertising is not necessary since every firm sells the same thing. In
the space of competitive and persuasive advertising there may be a small amount of
informative advertising

Advantages of Perfect Competition

 All buyers and sellers are treated equally

 There is only one price ruling in the market at a time and this price is not determined
by any single buyer or seller but by the market forces of demand and supply
 Competition keeps prices lower than under other market structures
 Since the product is homogenous, sellers do not have to spend money on advertising
 Competition between firms also forces them to be efficient
 Firms under perfect competition respond to changes in consumer demand, therefore,
the consumer is said to be sovereign or king.

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Disadvantages of Perfect Competition

 Lack of variety because an undifferentiated good is produced

 They may not be able to afford the technology that allows them to be efficient
 The number of firms in the industry makes it impossible for them to benefit from
collusion
 There may be frequent changes in price as the market forces of demand and supply
change

Short- Run Equilibrium

In the short run, some of the firms will earn normal profit, some will earn supernormal
profit and some will earn subnormal profit.

Normal profit is that level of profit which is just enough to keep a firm in the industry. Once
they are earning this level of profit, they will not leave the industry. In this situation, average
revenue (AR) is equal to Average Cost (AC). This level of profit is often referred to as zero-
economic profit.

If supernormal profits are being earned, this so because AR is greater than AC. When AC is
above AR or AR below AC, the firm is earning subnormal profit

Long – run equilibrium

In the long run, all the firms are under perfect competition will be in the situation where they
are earning just normal profit AR=AC

Just how did this come about?

In the long run, all the firms that had been earning subnormal profit in the short-run AR<AC
will leave the industry and will go into industries where they can at least earn normal profit

When these firms leave, supply will fall and prices and profits will rise.

The firms that are earning supernormal profits AR>AC will attract other firms into the industry
by their attractive level of profits.

As firms enter, supply will increase and prices and profits will fall. This rise and fall in profits
will continue until all firms in the industry will be earning normal profits, AR=AC.

When this occurs, there will be no more incentives for firms to either enter or leave the
industry. Thus the industry will be in the long-run equilibrium. Again, the graphical
representation/ illustration of this situation can be found in most economics texts.

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Monopoly

Definition and examples of monopoly

A pure monopoly is a market structure where there is only one firm in the industry, therefore ,
the firm is the sole supplier of that good or service. However, in the case where a firm controls
approximately 20 per cent (20%) of a large market, it is considered a virtual monopoly.

Examples of Monopolies

 The Jamaica Public Service Company

 The National Water Commission

Characteristics/ Features of monopoly

1. As Indicated in the definition, there is only one firm in the industry. The importance of
this is that the demand curve for the firm’s goods or services will be relatively inelastic,
allowing the monopolist to exercise his monopolistic power and restrict quantity,
causing prices to rise substantially. Consumers will either have to pay the higher price
or go without the goods or services altogether.
2. There are strong barriers to entry. A barrier to entry is anything that prevents a firm
from entering an industry in the long run. Barriers to entry in this case would include
things such as legal protection and government restrictions. The importance of strong
barriers to entry is that in the long run, new firms will be kept out of the industry.
3. Monopolies are price – makers or fixers. Since they face downward sloping demand
curves, they can choose what price to charge. However, they are still constrained by
the demand curve in that, having decided on price, they must allow the demand curve
to determine the quantity. A rise in price will lower the quantity demanded.
4. The product of the monopolist is unique, therefore, no close substitute for it is being
produced by any other firm.
5. The monopolist may price discriminate, that is, charge people different prices for the
same good and/or charge different unit prices for successive units brought by a given
buyer. Those who price discrimination do so in order to earn increased profits

Short-run Equilibrium

It is likely that the monopolist will earn super-normal profits in the short run. Monopoly does
not necessarily mean super – normal profits; some monopolies at their profit-maximizing
output, face a situation where average cost is everywhere above average revenue. Thus, they
are earning sub-normal (less than normal) profits.

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Long-run Equilibrium

Since there are strong barriers to entry; it is likely that if the firm was earning super-normal
profits in the short run, it would maintain or continue to earn super-normal profits in the long
run.

If the firm had been earning sub-normal profits in the short run, it would leave the industry in
the long run and go into an industry where it can earn at least normal profits.

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Monopolistic Competition

Definition

This describes an imperfect market structure in which there are relatively large number of
producers offering slightly differentiated products.

Characteristics/features of monopolistic

1. A relatively large number of sellers. This marks the market highly competitive. In
addition, each firm’s market share is small and collusion (coming together to act as a
monopoly in order to gain more profits) is difficult
2. Independence. Each firm acts independently of the others. That is, no firm takes into
account the reaction of its rival firms
3. Freedom of entry into the market and exit out of the market. In the long run, firms will
enter and leave the industry due to the lack of significant barriers to entry.
4. The product is differentiated. Each individual seller has a product which is slightly
different from the product of other producers. This product differentiation is mainly
through brand names, but can also be through physical and chemical differences.
5. Advertising takes place. Each seller seeks to increase brand loyalty for his/her product
and thereby increase profits
6. Firms are price makers/ fixers. Therefore, their demand curve is downward sloping. It
is also fairly elastic because of the relatively large number of firms in the industry.

Examples of monopolistic competition in the Caribbean; Hairdressers, restaurants, taxi drivers

and gas stations

Short- Run Profits

The short- run profits situation is similar to that of the perfect competition. It is possible to
earn supernormal profits. Subnormal and normal profits are also possible.

Long – run Profits

In the long-run, similarity between perfect competition and monopolistic competition becomes
more obvious. Through entry of new firms and exit of some existing firms, profit will tend
towards normal in the long run for all the firms in the industry.

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Oligopoly

Definition

Oligopoly refers to a market structure in which a few frims dominate the industry in the sense
that between them they share a large proportion of the industry’s output. Some oligopoly firms
produce virtually identical products (for example metals, chemical, sugar) and are known as
perfect oligopolies and some produce differentiated products (for example cars, soap powder,
cigarettes, and electrical appliances) and are known as imperfect oligopolies.

Duopoly is a special form of an oligopoly in which there are only two firms in the industry

Characteristics/ Features of Oligopoly

1. There are only a few firms in the industry. With only a few firms in the industry, each is
big enough to influence price. Firms are, therefore, price makers/ price fixers.
2. Interdependence of firms. Since there are only a few firms in the industry, each firm
will have to take into account the actions of rival firms in the industry, for example, if
one airline announces discount fares, generally, all the other airlines will try to match
the lower prices.
3. The product is either identical or differentiated. Where the product is identical, there is
no need for advertising or non-price competition. However, if the product is
differentiated, advertising and non-price competition will take place in order to make
consumers believe that one brand is better than the other.
4. There are barriers to entry. These barriers may not be strong as the barriers for the
monopolist; however, the effect is still the same. Barriers will make it virtually
impossible for others to enter in the long run
5. Prices tend to be stable. This is because firms realize that decreased in price can lead
to ‘price wars’ and they can end up losing so much profit that they are eventually
impossible for the others to enter in the long run.
6. Firms may be collusive or non-collusive. When they are collusive, they may, for
example, formulate an agreement to set prices for everyone at a certain level.
7. Oligopolies may price discriminate in order to earn more profit.

Profits in the Short-run

Like the monopolist, many oligopolistic firms will earn super normal profits in the short run.

Profits in the Long-Run

If the barriers to entry are strong, supernormal profits will be maintained. Where a firm is
earning less-than-normal profits in the short run, it will leave the industry in the long run.

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Objective 8: Explain how price is determined

The price of a good tells us the value of that product in terms of money. A rational consumer
will try to get the greatest value for money spent on goods and services. He will therefore
weigh and compare the prices of commodities before making a decision to purchase.
Prices in a market economy are determined by the level of demand and the level of supply
(Market Forces) for each particular product.
The demand for a particular product is the amount that consumers are willing and able to
buy at a given price. The law of demand states that when prices are high demand will fall and
when prices are low demand rises ceteris paribus (meaning all other things remaining
unchanged.).
The supply of a particular commodity is the amount that firms are willing and able to supply
at a given price. When prices are high supply will rise and when prices are low supply fall.
Suppliers are willing to sell more at higher prices as profits will be high, and unwilling to sell
large quantities when prices fall because of low profit margins.
The equilibrium price in a particular market is the price at which consumers and suppliers are
willing to trade a certain quantity of a commodity. For example, consumers are willing to buy
55 litres of milk at $3 and suppliers are willing to supply 55 litres at that price. If the price
increases to $4 there will be a fall in demand to 30 litres as some consumers are not willing to
buy milk at this price.
Illustrating Price Equilibrium

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The demand and supply curves are drawn from the demand and supply schedules. Price is
measured on the vertical axis and quantity on the horizontal axis. The demand curve slopes
downwards from left to right and the supply curve slopes upwards from left to right. The
intersection of the two curves indicates the equilibrium price and quantity.

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Ways of Setting Prices

1. Cost Based Pricing

Cost Based Pricing or Cost-Plus Pricing is based on the cost of producing a product. This would
involve:

a. Fixed Cost – Fixed costs of production are the costs a company incurs whether there is
production or not. E.g. Rent, Interest on Bank Loans. They are also called Overhead
Costs.
b. Variable Costs – Are those costs associated with production itself. E.g Raw Materials,
Salaries for Employees, etc.

Fixed Cost (FC) + Variable (VC) = Total Cost (TC)

Total Cost (TC)

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑠𝑡 =
Quantity Produced

2. Break-Even Analysis

Here the firm tries to determine the price that will produce the profit it is seeking. Target
pricing uses the concept of a break-even chart that shows the total cost and total revenue
expected at different sales-volume levels.

3. Penetration Pricing

This is a popular pricing method for a new product. The intial introductory price is lower than
competing products, in the hope that consumers respond to the low price. Eventually when the
price is gradually raised, not all consumers may switch away to other competing products

4. Psychological Pricing

Some products are highly priced in the hope that they may gain snob value, e.g. perfumes and
works of art. The objective is to get the consumers to think that ‘good things are not cheap’
while ‘cheap things are not good’. Another example is pricing the product in an unusual
manner such as $7.99 instead of $8.00

5. Predatory Pricing

This pricing technique is designed to get rid of unwanted competition. Prices are lowered by
one company (A) who can afford to make a temporary loss. A competitor (B) trying to match
this low price may not be able to afford the loss and may have to leave the market. Company
(A) now has the total market and quickly recovers lost profit by raising prices.

6. Limit Pricing

This pricing technique sets prices only low enough to discourage the entry of competitors into
the market.

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Pricing Objectives

For every product the company has to decide what the objectives are for the particular
product. The following are some common objectives:

1. Survival

Some companies set survival as their main objective if the market has too many producers,
intense competition and changing consumer wants. To keep their plants going and their
products selling, companies must set a low price hoping that consumers will react to it.

2. Current-Profit Maximization

The aim here is to set a price that will maximize current profits. Companies estimate the
demand and costs associated with alternative prices and choose the price will produce the
maximum current profit, cash flow or rate of return on investment.

3. Market Share Leadership

Some companies want to be the leaders in the market share. The belief is that the company
with the largest market share will enjoy the lowest costs and greatest long-run profits. To
achieve market share leadership they set prices as low as possible.

4. Product Quality Leadership

The aim of some companies is to have the highest-quality product on the market. The
company will charge a high price to cover the high product quality and high cost of research
and development.

Objective 9: Identify Forms of packaging and presentation of goods

Packaging And Presentation Of Goods

Packaging refers to designing and producing the container that holds the product. A good
package must identify, protect and advertise the product. It must also make the product
convenient to use. Therefore products such as toothpaste are best packaged in a tube as it has
to be squeezed out. Milk must be pored from its container. Egg containers are so shaped to
hold them securely.
A package must also sell the product. It must first attract customer to buy. It must provide
information about the product i.e. ingredients, amount of contents, price, the name and
address of the manufacturer and instructions for usage. The brand name is also displayed on
the package.

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Branding
A brand is any identifiable feature of a product which makes it different from its competitor. A
brand may be a name, term, symbol, design or combination of these. Examples of brand
names include: Avon and Colgate.
A brand mark like represents the Nike brand. A
branded product will increase the value of the product in the
eye of the consumer.

Objective 10: Explain the concept of Copyright

Copyright is a form of intellectual property right that legally protects the creators and
innovators of original works. Copyright protects creators’ expressions such as music, painting,
movie, photograph, writings etc. Individuals who wish to use works that are copyrighted must
request permission from its creator. Copyright law allows creators of original work to be paid
for them. Other forms of intellectual property rights are patents and trademark.

Objective 11: Explain the term ‘patent’

Patent protects innovation. It excludes others from making and selling that invention for a
number of years.

Trademark legally protects brand names. It gives the seller exclusive rights to use a particular
brand name

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Objective 12: Describe Methods of promoting sales

Promotion includes all forms of advertising, public relations and sales promotion.
Advertising is the paid presentation of goods or services through the media for the purpose of
encouraging consumer patronage. The media refers to television, radio, magazines,
newspapers, billboards, websites etc.
The Purpose of Advertising
-to attract attention
-to inform customers
-to increase sales
Sales Promotion
Sales promotion is a marketing strategy that is used to induce customers to buy immediately.
Examples of sales promotion methods are:
a. A sale on items.
b. Bargain packs, e.g. ‘two for price of one’.
c. Coupons. These are printed in the daily newspaper or magazines. The holders of coupons
are allowed a discount on the items bought.
d. Games, e.g. guessing riddles
e. Contest. Purchasers may receive a prize if they are the winners of a contest.
f. Trading Stamps. These are given to purchases with each item bought. Booklets filled with
these stamps may be returned by customers for goods, services or money in exchange.
g. Loss–Leader. A loss-leader is a product that is in high demand and is therefore used to
attract consumers to a business location by cutting its price very low. The business uses a loss
leader to attract large number of persons to its location so that other items will be sold. The
profits lost on this product will be made up on the high sales turnover of the other products
that will be bought along with the loss-leader.
Public Relations
Public relations activities are aimed at creating a favourable impression of a business in the
eyes of the public. Public includes its customers, its suppliers, the government and the
surrounding community. Public Relations activities include sponsorship of local sporting events,
press conferences, and donations to charity.

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Objective 13: Identify the techniques of selling

These are methods used to sell products more effectively by focusing on each customer’s
personal needs. Selling techniques include:
1. Personal Selling
2. After-sale services such as warranty and installation
3. Merchandising
4. Good Customer Relations
Personal Selling
This is the use of sales persons to present and sell goods and services of a firm. Sales persons
promote a firm’s goods directly to a specific consumer. They locate new customers, provide
display services, demonstrate the use of products, deliver goods, collect payments and provide
the firm with feedback
After Sales Services
Customers are entitled to these services once they have made a purchase. They include
delivery, installation and warranty. These services are free and therefore usually encourage
consumers to buy.
Merchandizing
Merchandizing refers to self service methods of sale. This is used in supermarkets and
department stores. It allows for a better display of goods and creates a more comfortable
shopping environment.
Good Customer Relations
Building good relationships with customers ensures customer satisfaction, repeat customers
and recommendation to new customers. The sales staff must be trained in the principles of
good customer relations. This entails, listening to customers being helpful and polite.

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Objective 14: Explain the various terms of sales

A business establishment may offer its customers various terms to settle accounts.
Cash
This is preferable by most businesses and therefore customers are encouraged to make cash
payments. They are usually offered a lower payment amount for goods bought for cash.
Credit
Customers are allowed to pay at intervals over a short- term, usually one to three months to
settle outstanding balances.
Hire Purchase
Hire-purchase is a long term payment plan e.g. 24 – 36 months. Interest is charged to the
customer increasing the amount owed.
Cash Discount
A cash discount is a reduction in the price of a good that is paid for immediately or over a
short period of time by a customer. For example, if a an appliance store offers 5% discount on
items bought for cash then 5% of the sale price would be deducted from the actual bill
Trade Discount
A trade discount is the reduction in the price of a good given by a manufacturer or a
wholesaler to a retailer to allow the retailer to make a profit or to encourage bulk buying. Thus
if an appliance manufacturer offers 10% trade discount to retailers then 10% of the catalogue
price or the quoted price would be deducted from the retailers’ actual bill.

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Objective 15: List the functions of consumer organizations

Consumerism is defined as the education and the protection of consumers to prevent their
exploitation.
Consumer exploitation includes:
-overcharging
-offering poor quality goods and services
-short measurements and weights
Consumerism is practised by various groups in the economy: the government, private
nstitutions, and private firms.
Consumerism practiced by the government
This is done through various government agencies. These include:
1. The Consumer Affairs Commission – This institution was set up to disseminate
information about consumer rights and responsibilities as well as provide consumers with an
avenue for redress if they are exploited.
Consumer Rights
-The right to safety
-The right to be informed
-The right to choose
-The right to be heard
-The right to redress
-The right to consumer education
-The right to a healthy environment
Consumer Responsibility
-The responsibility to beware
-The responsibility to be aware
-The responsibility to think independently
-The responsibility to speak out
-The responsibility to complain
-The responsibility to be an ethical consumer
-The responsibility to respect the environment and avoid waste, littering and contributing to
pollution.

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2. The Fair Trading Commission – This agency was set up to administer the fair trading
act. It is concerned with matters such as; Tied selling (marrying of goods), misleading
advertising (untruths about goods and services presented for sale), untrue sale (an announced
sale for which the price of items remain the same).and the use of market dominance to
squeeze firms out of the industry (For example, large firms may drop the price of their goods
so low that small firms are unable to compete with them.)
3. The Bureau of standards -The bureau carries out regular checks on business enterprises
to ensure that goods and services offered for sale meet the standards stipulated by this
institution.
4. The Ombudsman
The Ombudsman is a government official who protects the rights of citizens who may suffer
any kind of injustice from dealing with a government agency or a government official. For
example, the Ombudsman will investigate the death of a loved one due to the negligence of a
public hospital.
Consumerism practiced by private Institution
-Local consumer groups
-Radio talk show hosts listens to consumers’ complaints
Consumerisms practiced by private firms
-Offering warranty/guarantees on items sold
-Labels carry information on ingredients, nutritional content and health risks that may be
associated with the product.

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Objective 16: Identify the links in the chain of distribution

Manufacturers must find the most efficient ways of getting the goods manufactured into the
hands of consumers.

The channels/chains of Distribution

Channels of distribution refer to the means by which commodities reach the hands of
consumers from the plant of manufacturers. This may be done directly from the manufacturer
to the consumer or indirectly through middlemen such as wholesalers and retailers.
Types of Channels
1. Direct Channel – Manufacturer – Consumer
Goods are bought directly from the producer e.g. purchasing furniture from a manufacturer.
2. Indirect channels (a) Manufacturer – Retailer – Consumer
Goods are bought from a middle man e.g. a retailer. Retailers display goods, sell in small
convenient quantities and offer credit. They therefore aid manufacturers in moving goods
quickly.

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3. Indirect channel (b) Manufacturer –Wholesaler – Retailer – Consumer
The wholesaler is a second muddle man/link on the chain. The wholesaler purchases in bulk
from the manufacturer and stores them in large warehouses. They therefore assists
manufacturers by moving large amounts of items from plant Retailers purchase goods from
wholesalers and sell them in smaller quantities to consumers.
The links in the chain of distribution areas are as follows:

 Downward flow of goods from producer to consumers

 Upward flow of cash payments for goods from consumers to producer
 Flow in marketing information in both demand and upward direction, i.e. Flow of
information on new products, new uses of existing products, etc; from producers to
consumers. And flow of Information in the form of feedback on the wants, suggestions,
complaints, etc from consumers to producers
 Producer to Consumer – This is the simplest and shortest channel in which no
middlemen is involved and producers directly sell their products to the consumer,
 Producer to Retailer Customer
 Producer Wholesaler to Producer Retailer Customer
 Producer Agent Wholesaler to Retailer Customer

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Objective 17: Identify the Methods of Retailing

Methods of Retailing are:

- Community Shops and Communication

These locations thend to serve a particular community. These locations tend to serve a
particular community. Opening hours include all weekend days, holidays and very late
in the evenings. Costs for some commodities that are not government controlled tend
to be higher than other types of retail outlets. Community shops in particular cut and
shape products to suit customers and offer credit.
- Department Stores
Carry a several lines of goods under one roof. A department store may feature a
clothing department, household items, stationery, hardware etc. It provides
convenience to customers who can pick up several items in one place, and allows the
businessman the cost effectiveness of operating several business entities in one
location.
- Mail Order
Companies that retail through mail order benefit from reduced operational cost of
location and staff. Companies that retail through mail order benefit from reduced
operational cost of location and staff. Since display areas are not required only an office
and storage facility are necessary for the operation of this business. Orders are made
from catalogues and goods are delivered by courier or mailed to customers. This saves
time and effort of consumers to visit shopping locations.
- E-Commerce
Orders are made by customers over the internet from the celebrities of business.
Orders are made by customers over the internet from the websites of businesses.
Payments are also made over the internet. Packages are delivered by mail or courier.
- Tele- Marketing
Introduces the company’s goods and try to obtain orders via the telephone
- Vending Machines
These self-service machines are placed at various locations by their owners. Customers
are required to place the required funds inside these machines and are then instructed
on how to make their choice. The machine then dispenses the product. This type of
business is very cost effective as owners may only pay a fee for locating the vending
machine.

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Objective 18: List the various forms of transport

Transportation is an integral part of the daily commercial and industrial activities of a country.
Transportation moves raw materials from source to manufacturers and finished goods to
consumers. It also makes possible overseas trade and thus foreign exchange earnings for an
economy.
There are various modes/forms of transportation that can be used to transport goods.
Commodities may be transported by land, air, sea and pipeline. The mode of transportation
will depend on weight and size of the commodities being transported, as well as the urgency
for delivery and the transportation costs.
Modes/Forms of Transportation
-Land
->Road
->Rail
-Air
-Sea
-Pipeline
Land-Road
Types of transportation include trucks, vans, cars etc. It is the most popular mode of transport
as all types of goods can be transported by road. Road transport is affected by bad roads,
traffic congestion and challenging terrain. Lengthy delays can affect perishable goods such as
farm produce being transported from rural areas to cities.
Land-Rail
This is a cheap form of transportation over long distances. Trains are suitable for heavy and
bulky things such as bauxite. Trains are a very slow mode of transportation.
Air
Types of transportation include cargo planes and helicopters. Because of the high cost involved
with air transportation it is suitable for important documents and expensive items e.g.
jewellery.
Sea
Cargo ships and barges are some of the types of transportation used for transporting goods by
sea. Goods such as oil, bauxite and cars are transported by sea.

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Pipeline
Pipelines are used to transport commodities such as water and gas. High costs are involved in
laying pipes initially. However overtime it becomes very economical.

Objective 19: Explain the importance of transport in marketing

Objective 20: Distinguish among the methods used for transporting specific goods

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Section 7 – Finance

SPECIFIC OBJECTIVES

Student should be able to:

Objective 1: Describe the Role of Commercial Banks

A commercial bank is an institution that deals with money matters

Role of the Commercial Bank

- Acceptance of deposits
- Granting of loans and allowing overdraft to customers
- Arranging for transfers of money

Objective 2: Outline the services offered by commercial Banks

Services offered by commercial banks are as follows:

- Acting as agents on the behalf of customers in buying stocks, shares and security
- Providing safety deposit
- Issuing Letters of Credit, Travelers cheques and currency
- Providing night safe facilities for the convenience of customers
- Acting as executor or trustee for customers

Objective 3: List the functions of the central bank

Features of the Central Bank

- Is a government Bank and is responsible for advising government on money matters

- Representing and negotiating on behalf of the government and supervising the
commercial banks

Functions of the central Bank

- Issuing and controlling Currency Circulation

- Having responsibility for all government accounts
- Acting as a Clearing house for banks, as it is the banker’s bank
- Conducting government monetary policies
- Managing the national Debt
- Acting as agent for the sale and distribution of government securities

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 - Acting as lender of last resort to the commercial bank – This means that when a
commercial bank faces a short fall in its cash needs

Other Functions Include:

Monetary policies
These are policies used to affect the level of the money supply to bring about high
employment, price stability and sustainable economic growth. The money supply is
composed of notes and coins in circulation plus deposits in commercial banks. If this supply
is too high then inflation will occur. If the supply is too low the economy may experience
an economic depression.
Decreasing the money supply
When the money supply is too high monetary policies such as high interest rates, selling
certificates of deposits and treasury bills and increasing the cash reserve ratio are used to
discourage borrowing and spending.
Increasing the money supply
To increase the money supply the opposite must be done. Monetary policies such as low
interest rates, buying securities from other financial institutions and decreasing the cash
reserve ratio are used to encourage borrowing and spending. When interest rates are
lowered citizens will borrow funds and reduce savings to purchase assets and consumption
items. This will increase the money supply in the economy. The government may wish to
increase the money supply to boost an economy when there is an economic decline. As the
money supply rises demand for goods and services will rise resulting in the expansion of
the business sector and the level of employment.

Objective 4: Describe the relationship between the Central Bank and the
Commercial Banks

- Cash Reserve Ratio

This is the ratio of required cash reserves (cash based) held against deposit liabilities
(Eligible liabilities). The cash Reserves consists of notes and coins held by the general
public and cash held by commercial banks at the central bank
- Open Market Operations
The bank regulates the cash reserve held by commercial banks

The Central Bank is the head of the financial system. All financial institutions including
commercial banks are regulated and monitored by the Central Bank.

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All commercial banks must keep an account with the Central Bank. These balances are used
for cheque clearing purposes between banks. Payments for cheques between banks are set
off at the Central Bank’s clearing house. The Central Bank can also demand commercial banks
to deposit a certain percentage of their total deposits with the central bank in order to control
the money supply.
The Central Bank is a lender of last resort and will aid commercial banks when needed. The
Central Bank dictates the interest rate that commercial banks can offer by setting the bank
rate. This is the interest rate set by the Central Bank and the rate at which commercial banks
and the Central Bank do business, e.g. loans offered by the Central Bank to commercial bank.

Objective 5: Outline ways used by individuals to manage personal income;

Subsequent to the deduction of taxes and other statutory payments the income earner must
manage his money to maximize its use. He must exercise and develop habits of careful
spending and saving techniques.
A good money manager will budget.
A budget outlines how much of an individual’s income is to be spent on his various expenses; it
disciples an individual to live within the constraints of his personal income. The process of
preparing a budget involves the record keeping of past expenditures, and making decision
based on these about future expenditures. Priorities must be set to meet basic needs and a
systematic plan for savings to achieve future goals.

Objective 6: Identify sources of short-term and long-term financing;

Short Term Financing

Bank Overdraft – Allows the business to withdraw more than their bank account contains
Leasing – The agreement for one business to use an asset owned by another business with
payment without buying the asset
Trade Credit – Credit lent to a business for the purchasing of asset from another business
with the understanding they will repay within 28 days
Bank Loans – Money loaned by a banking institution to be repaid with interest.

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Long Term Financing

- Government Grants – Given to a business to fund a specific project. Requirements

must be met to receive the grant.
- Bank Loan - Money loaned by a banking institution to be repaid with interest
- Leasing - The agreement for one business to use an asset owned by another business
with payment without buying the asset
- Venture Capital – The raising of capital contributed by a group of investors expecting
a return on their investment or shares in the company
- Shares – The purchase of a part of
- Retained Earnings – Money earned by a business through trading after expenses.

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Objective 7: Differentiate between saving and investment;

What is Investment?
Investment is defined as methods of increasing wealth. It differs from savings as it involves
risks. Earning from capital invested is usually amuch higher than interest earned on savings.
Forms of investments include: unit trust companies, the stock exchange and starting a
business.

What is Savings?
Savings is defined as money set aside or not spent from ones personal income. Money saved is
most effective in an interest bearing facility such as a commercial bank to keep up with
inflation which reduces the value of money over time. Other forms of savings include, the
credit union and partner (meeting turn, sou sou, box hand).
Savings is where a portion of money is started, whether in a bank or at home, so that it can
be used at a later date while investment is where someone puts money into a business,
expecting returns with the reward of interest

Forms of savings

1. Saving at the Bank

In the case of personal savings, the investor will save to receive interest as a
reward
Businesses will save at a bank in order to acquire financial and physical assets
such as shares on machinery
2. Sou Sou (Saving in turn)
A group of people agree to contribute a fixed sum to a common savings pool
each week or month
3. The credit Union
Members pool their savings into a loan fund from which loans are made to
members at a low interest rate
4. Insurance

Forms of Investments

1. Stock Markets
2. The use of Personal funds to create or participate in a business
3. Credit Unions
4. Property

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Objective 8: Explain the role of the stock market.

The stock market (stock exchange) is the market (whether physical or electronic) in which
shares are issued by public companies for sale. Therefore, the major role of the Stock
Market is to facilitate the buying and selling of shares either through exchanges or
over the counter.

Stock Market is a market where buyers and sellers for securities meet through their agents and
complete transactions. It is a market for second-hand securities.

Terms and Concepts of the Stock Market

Bears – These are speculators who sell securities because they expect the price to fall soon. A
bear market is a stock market that is slow moving i.e. investors are not keen on buying stocks.

Bulls –These are speculators who buy securities because they think the price will rise soon. A
bull market that is very active with high interest in the buying and selling shares.

Stags – Stags are short term speculators. They are also known as day traders. They carefully
watch the movement of stock prices and buy stocks with the intention of quick resale for
profits.

Cross Listing – Cross listing occurs a company lists shares on more than one stock exchange.
It not only lists stocks for sale on the exchange in the country which it operates but also on
other exchanges.

Cross Market – This is a market in which either a newly entered bid is higher than existing
asked price or a newly entered asked price is less than an existing bid price.

Stock Broker –This is someone who is authorized to buy and sell shares. Persons wishing to
buy or sell shares must contact a stock broker who will buy or sell shares on their behalf.

Jobber – This is a dealer or wholesaler who buys and sells shares on the stock exchange.

Contango – A fee charged when a stock exchange deal is not completed within the account
settlement period of two weeks

Day Trader – A stock trader who holds positions for a very short time and makes numerous
trades each day

New Issue – A new issue is a reference to a security that has been registered,
issued and is being sold on a market to the public for the first time. New issues
are sometimes referred to as primary shares or new offerings.

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The primary market: where new securities or financial instruments such as stocks, bonds,
etc. are first offered for sale

Investors purchase securities directly from issuers in the primary market

The secondary market: also called the aftermarket; it is where second hand shares/stocks
are sold

After the initial issuance in the primary market, investors purchase securities from other
investors in the secondary

Major Functions of the Stock Market

1. Raising capital for businesses – The stock market enables companies to raise
capital for expansion through selling shares to the public or private firms or individuals.
2. Transferring savings to investments – Funds which could have been consumed or
kept in idle deposits are invested thus resulting in a stronger economic growth and
higher productivity levels.
3. Facilitating company growth – Through the stock market, many companies are
merged with or taken over by other companies.
4. Creating investments opportunities for investors – Some businesses require
huge capital outlays. However, investing in shares is open to both large and small
stock investors because persons buy the number of shares they can afford. Therefore,
the stock market offers the opportunity for small investors to own shares of the same
companies as large investors.
5. Raising capital for government’s development projects – Government may decide to
borrow money in order to finance infrastructure projects such as housing
developments. Hence, they may sell/issue securities (e.g. bonds). These bonds can be
raised through the stock market whereby members of the public buy them, thus
loaning money to the government.
6. Barometer of the economy – In the stock market, share prices rise and fall depending,
to a large extent, on market forces (i.e. demand and supply). For instance, an
economic recession or depression or a financial crisis can lead to a decrease in stock
prices. These may act as signals to investors and government, that they must take
certain actions.

Other Functions of a Stock Exchange are:

1. It provides a ready market for securities

2. It provides a good indication of the value of shares
3. It provides an outlet for new capital
4. It aids the development of the industry

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 5. It provides a market for government stock already issued
6. It allows securities on the stock exchange to be easily transferable

Risks and Benefits of the Stock Market

Risk – In the stock market a risk is seen as investing without knowing what to expect; i.e.
there is a possibility of losing.

Benefit – This is a gain or profit made from investing in shares.

Some Benefits

1. Long-term investments result in relatively high returns.

2. Stocks can be used as a sort of retirement plan.
3. Stocks/shares allow you to own part of a company.
4. In addition to owning part of a company, you have the potential to receive monetary
benefits (e.g. dividends, interests, etc.).

Some Risks

1. The most risky aspect of investing in the stock market is the uncertainty of returns;
returns are not guaranteed.
2. Even when there are returns, they may be lower than expected.
3. In times of financial crises, one may lose his/her entire investment.
4. Stock prices continually adjust to new information entering the market; (this is referred
to idiosyncratic risk).
5. The behavior of some stock prices affects other stocks.
6. The risk tolerance of some individuals or firms may be too low to withstand losses in
the stock market and may lead to detrimental outcomes for either party.
 Firms may lose profit, close down, etc.
Person can suffer heart attack due to heavy losses, etc

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SECTION 8: ROLE OF GOVERNMENT IN AN ECONOMY

SPECIFIC OBJECTIVES

Student should be able to:

Objective 1: Outline the responsibilities of government in an economy;

Responsibilities of Government In An Economy

The government of a country is that group of officials that manage the affairs of the state on
behalf of its citizens. As such, the government carries out a number of functions to cater to
the needs of the people. These include:
-Ensuring the security of a state- Government must maintain law and order internally. This
is realized through legislation, the court of justice and the police force. Externally the armed
forces protect citizens against external threats.
-Protection and general welfare of citizens – Government is responsible for the general
health and education of citizens. Welfare programmes must be provided for those who are
very poor and vulnerable.
-Management of the economy – Governments are appointed by citizens to efficiently
manage the economy to bring about growth and development. This includes: encouraging
local and foreign investment, controlling inflation, maintaining the foreign reserve (NIR),
curbing balance of payments deficits and achieving high levels of employment.
-Protecting the environment – Sustaining the environment is important to the well-being
of citizens. Ways of protecting the environment include: legislation to prevent further
degradation, zoning to protect wildlife areas from disruption by development of factories,
shopping and residential areas and taxation to reduce the level of pollution by firms.

Objective 2: Identify ways by which businesses could protect the environment;

1. Business owners must adhere to the various legislations set out by government; e.g.
 Tax laws – pay their fair share of taxes
 Labour laws – pay fair wages; no discrimination against workers…
 Environmental laws – dispose of industrial waste properly to avoid pollution
in rivers, seas and the atmosphere.

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 2. Establish business in the zones legally allocated to reduce the impact of noise and air
pollution in residential areas.
3. Being part of or initiating environmental projects such as beach cleanup and planting
trees.
4. Replace the use of fossil fuels in factories / industries by using solar energy,
hydroelectric power, wind power, agricultural waste, etc.

The Importance of Environmental Protection in the Caribbean

Caribbean countries must protect their environment for the following reasons:
1. To preserve and conserve limited resources – Caribbean islands are small with very
little natural resource endowments. Therefore, they can’t afford to waste, mistreat or destroy
them.
2. For Sustainable Development – The wise use (or the conservation) of resources can
ensure that future generations benefit from these resources.
3. To help reduce Global Warming – Global warming has contributed to the increasing
severity of and frequency of hurricanes in recent times. Climate change in the Caribbean can
lead to rising sea levels, which may result in destructive tidal waves and tsunamis.

Objective 3: Describe measures used by governments to protect consumers

Consumers must be protected from business owners who are eager to sell without taking into
consideration the well-being of customers. Consumers must be protected from overcharging,
poor quality goods and services and short measurements and weights.
Consumers are protected by legislation delegated to various government agencies. These
agencies include:
1. The Consumer Affairs Commission- aids consumers with redress
2. The Fair Trading Commission- investigates cases of tied selling and misleading advertising.
3. The Bureau of standards – set standards for goods and services to be sold on the market.
4. The Ombudsman- investigates injustices suffered by citizens from dealing with a
government agency or official.

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Consumer Protection Laws
-The Food and drugs Act
-The Standards Act
-The public Health Act
-The weights and measures Act
-The processed food Act
-The hire purchase Act
Hire Purchase Law
Buyers and sellers must sign the hire purchase contract. The seller must state the cash price,
down payment and monthly instalments and total to be paid. Goods cannot be repossessed by
the seller once the buyer pays up to three quarters of the hire purchase price.
Price controls
Price controls are levied on certain goods and services to prevent suppliers from increasing
prices. For example basic food items such as corn meal, flour, rice and sugar.
Zoning Laws
These laws protect the environment by identifying certain wildlife areas that should not be
disrupted by development. Therefore, areas are designated for factories, shopping centres and
residential, away from protected wildlife.
Taxation
Firms that pollute the atmosphere, rivers and seas are charged a tax for the harm caused to
the environment. This forces firms to find methods to reduce pollution to avoid this penalty.

Objective 4: Identify ways by which government regulates business activity;

Governments influence business activities in order to stimulate or slow down the economy,
depending on the current state of the economy. They can do this through:

1. Minimum Wage Legislation – All workers must be paid a wage that will allow them to
pay for goods and services that satisfy physiological needs (for survival).

2. Taxation – This directly impacts on the profit margins of businesses. Government can
stimulate / encourage businesses by reducing corporation tax so that these businesses can
have more profits to reinvest into their organizations and create employment.

3. The Establishment of Industrial Zones – Government sometimes identifies specific

areas for industrial activities. Businesses that wish to manufacture certain products will

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therefore have to establish their operations in the specific areas; e.g. the industrial site at
Campden Park.

4. Subsidies – This refers to financial assistance that government gives to businesses to help
reduce production costs. In that way the businesses do not bear all the production costs.
(Consumers benefit since the businesses are able to offer competitively priced goods.)

5. Price Controls – Governments can stipulate the prices at which commodities are sold.
They normally set the prices for essential items to ensure that the poor can buy basic food
items.

Notice that there is some overlapping in objectives 3 and 4 above.

Objective 5: State the purposes of taxation

Taxes are mainly used to finance the expenses incurred by government to manage an
economy. These expenses include: health care, education, garbage collection and operating
government business entities.
Taxation is also used by government for several other purposes, such as:
 To reduce pollution by taxing offending firms
 To discourage unhealthy lifestyle e.g. a tax on cigarettes
 To protect local and infant industries by taxing imports
 To achieve greater equality of wealth and income. Revenue from taxation is used to
help the very poor e.g. providing food stamps.
 To improve the balance of payments (BOP) by increasing the duties charged on
imported goods.
 To control spending in an economy thus reduce inflation

Objective 6: Distinguish between direct and indirect taxes;

Direct taxes are paid by individuals directly from income earned or on the value assets
owned to the income tax department.

Types of Direct Taxes

Income Tax – This is a tax on earned income- individuals pay a percentage of their income.
Corporate Tax
This is a tax on the profits of companies

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Capital Gains Tax
This is a tax on the proceeds resulting from the sale of assets, e.g. houses, land etc.
Capital Transfer and Estate Duties
This is a tax on the transfer of property (gifts) and on legacies (death duties)
Other Direct Taxes
These include: stamp duties, motor vehicle duties land taxes, etc.

Indirect taxes are paid to the income tax department through the suppliers of goods and
services. These taxes are levied on consumption and therefore are paid by individuals when
purchasing commodities.
Value Added Tax (Ad Valorem Tax)
This is the tax levied on goods as each stage of production. This tax generally is known as a
General Consumption Tax (G.C.T.).
Purchase Tax
This tax is placed on specific goods at retail outlets. Theses include gasoline, tobacco, rum etc.
Excise Duties
A tax placed on goods manufactured within a country. This tax is paid by the manufacturer of
the product.
Customs Duties
This is a tax on imports i.e. goods entering the country.

Objective 7: Distinguish between progressive, regressive and proportional taxation;

Progressive Taxation
A progressive tax system levies a higher percentage of tax on high income earners compared
to lower income earners. This ensures that higher income earners pay a larger proportion of
their income than lower income earners.
Regressive Taxes
A regressive tax system levies a smaller percentage of tax on higher income earners compared
to lower income earners. This results in higher income earners paying a smaller proportion of
their income in taxes than lower income earners. For example, a purchase tax of 10% charged
on a commodity which values $100 is bought by a high income earner who receives $10,000
weekly and also by low income earner who receives $1000 weekly. Both income earners will

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pay $10.00 in taxes. This $10 represents a much higher percentage of the lower income
earner’s pay which is .01% than the higher income earner which is only .001% of his income
Proportional Taxation
Under this system all taxpayers pays the same proportion of their income in taxes. The same
percentage tax is levied on both high and low income earners. Therefore if the percentage tax
charged is 10% of income then each person will pay that proportion of their income.

(Refer to Economics Notes for Graphs and Further

Explanations)

Objective 8: Outline forms of assistance offered by government to businesses;

The survival and growth of the business sector will reduce unemployment, increase GDP and
foreign exchange earnings. This sector must therefore be supported and encouraged by
government. Apart from offering subsidies and grants, governments help to create a sound
business environment for businesses in various ways, including:

Financing – Government assists local businesses by providing loans at low interest rates.
Protecting local industries –Customs duties or tariffs are charged on imported goods to
protect local producers
Duty Free Concessions –Some sectors / businesses may be allowed to import specific items
duty free; this may help to boost and expand these sectors. Note: The imported item must be
used exclusively for the purpose intended.
Promotion – Local and international trade shows as well as general advertisements
promoting business locally and overseas, for example, advertisements encouraging tourist to
visit the region.
Research and Training – Government agencies may be set up to provide technical and
managerial training for businesses or conduct market research on behalf of these businesses.
Fiscal Incentives – This refers to the use of certain measures by government to encourage
businesses development; e.g. offering tax holidays or tax breaks to investors. For a specific
time the business pays little or no corporation tax; this leaves them with more profits which
can be used to expand the business and employ more persons.

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Infrastructural Development – Governments often construct roads and bridges, install
street lights and upgrade their countries’ telecommunications and water systems, in order to
give businesses the proper infrastructure needed to operate.

Objective 9: Evaluate the impact on the country with respect to social services
provided by government.

Social Services Provided By Governments

These services are provided by government to ensure the well-being of all citizens.
Education
An effective national education plan will ensure that the innate skills, talents and abilities of
individuals are harnessed and developed to their fullest potential. High levels of literacy and
numeracy will increase productivity.
Health
The economic development of any nation is dependent upon its population being physically
and mentally healthy. For someone to be productive he or she must be in good health.
Roads and Transportation
Proper Infrastructure such as roads, railways, sea and airports coupled with an efficient
transportation system are important to a country’s economic activities. Roads and
transportation facilitate trade of goods and services.
National Insurance Scheme
National Insurance Schemes protect the elderly and other categories of vulnerable persons
within a society. The elderly have contributed to the development of a nation and must be
adequately provided for when they no longer a part of the labour force.

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SECTION 9: SOCIAL ACCOUNTING AND GLOBAL TRADE

SPECIFIC OBJECTIVES

Student should be able to:

Objective 1: Outline the factors that determine a country’s standard of living;

Standard of living

Standard of living refers to the level of living which a person, family or whole nation maintains,
in terms of the various amounts of and kinds of goods and services consumed.

Standard of living varies from person to person, family to family and nation to nation. It also
varies over time. The national standard of living means the average standard of living of all the
persons living in that country.

Quality of life looks at the extent to which a person, family or nation enjoys the benefits of its
wealth.

A country may have a high standard of living in terms of being able to provide many goods
and services for its people, but the quality of life may be low if the people are not able to
access the wealth provided.

Factors indicating standard of living of a country (wealth of a country)

 The level of consumption of goods and services.

Generally speaking, the greater the amount of goods and services consumed, the
higher will be the standard of living. The counter argument to this is that the quality of
the goods and services may have deteriorated while the level of consumption
increased. The question, therefore, would be, did the standard of living really increase?

 Average disposable income of the population

Disposable income refers to net income, the amount of money that is available to be
used as one would like to. In economics, disposable income is either spent on
consumption goods and services or saved. As far as standard of living is concerned, the
higher the average disposable income of the population, the higher will be the standard
of living. The counter argument here is that the disposable income may be high, but if
it is unequally distributed, many people may have a low standard of living.

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  The level of national ownership of capital equipment.

As a country increases its ownership of capital equipment, it is able to produce more

goods and services and, thereby, increase its standard of living. However, this means
that they will first have to save or reduce consumption in order to accumulate this
capital. During this time, the standard of living may actually fall.

 Access to modern technology.

Modern technology enables a country to produce more and to produce more

efficiently, thereby, increasing standard of living. However, for developing countries like
Jamaica, the cost and maintenance of modern technology is high which often results in
loss of jobs. This, in turn, means a lower standard of living.

 The level of investment in research and technology.

The more a country spends money in research and technology, the greater will be its
improvements in the level and quality of goods and services and then the greater will
be the standard of living. Again however, cost becomes a dominant factor as research
and technology can be very costly.

Objective 2: Distinguish between a country’s standard of living and its quality of

life;

Indicators of a country’s quality of life

Quality of life refers to the extent to which the country enjoys the benefits of its wealth. The
factors that affect this include:

 The extent of security enjoyed

The greater the level of security enjoyed by the citizens, the greater will be the quality of
life. High levels of crime can prevent citizens from accessing the wealth that will increase
their quality of life.

 The availability of health, educational and recreational facilities

Greater access to these will surely increase the quality of life. Access, however, may be
dependent on ability to pay. Governments can increase a nation’s access to these areas
by subsidizing the cost, or by providing them free of cost.

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  Diet and nutrition
The amount of food and drink is not the important thing as far as quality of life is
concerned. If people are not having balanced meals, then their diet and nutrition will be
poor and the quality of life will fall even if they are consuming more.

 Life expectancy
This refers to the average number of years a person is expected to live. If people are
expected to live longer than before, it will mean that the quality of life has, in fact,
increased.

 The rate of infant mortality

Infant mortality refers to death among infants. If a country is experiencing reduced death
rates among infants, then their quality of life would be said to have increased. This could
be because of improved research in health and improved health or greater access to
health care.

 Access to public utilities

The greater the access to public utilities such as electricity and portable water, the greater
will be the quality of life. If only a few persons in a country have access to these utilities
then, generally speaking, the quality of life will be very low.

Objective 3: Explain the concept of national income and its variants;

National Income Accounting

National Income Accounting refers to the accounting records that measure the national
economy’s performance. National Income looks at a country’s total income. There are a
number of variants/forms of national income. I will now look at these variants of a country’s
Total Income (National Income).

Gross Domestic Product (GDP)

GDP is the total money value of the final goods and services produced in a country during a
one-year period. It is important to note that the GDP figure does not include goods and
services produced by firms abroad that are owned by local individuals or the government. GDP
therefore takes into consideration what is produced in the country itself with the resources of
the country.

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Gross National Product (GNP)

This is the broadest measure of the economy’s ‘health’. It refers to the total money value of all
final goods and services produced by a country during a one-year period. GNP takes into
account not only what is produced locally, but also what is produced by firms abroad that are
owned by local individuals and the government.

Net National Product (NNP)

This refers to the total money value of all goods and services produced by a country during a
one-year period after depreciation is deducted. Depreciation refers to the loss of value because
of wear and tear to consumer durables and producer goods. GNP and GDP do not take
depreciation into account. Therefore, the difference between GNP and NNP (NI) is
depreciation.

National Income (NI)

This is a measure of the total income earned by everyone in the economy. It includes those
who use their own labour to earn an income as well as those who make money through the
ownership of the other factors of production. National Income is equal to NNP minus indirect
business taxes such as excise duties and custom duties etc.

Disposal Income (DI)

Although this is the smallest measure of income it is an important indicator of the economy’s
‘health’, because it measures the actual amount of money people have to spend. DI is also
known as personal disposable income. It is the amount of money that individuals have
available for spending after personal taxes are paid. These taxes are subtracted from personal
income. DI may also be regarded as the income available to an individual for immediate
purchase of goods and services and for savings. For the most part, DI is equal to the amount
of money received from an employer after taxes and other deductions such as social security.
Individuals have a choice as to how to allocate their disposal income. Most of disposal income
is spent for personal consumption, and that portion not spent for consumption is called
personal savings.

Personal Income (PI)

This is the total amount of income going to households/individuals before taxes are subtracted.
PI can be derived from NI through a two-step process. Firstly, corporate income taxes, profits
that businesses put back into their businesses to expand and social security contributions
made by employers are all subtracted from NI. These are subtracted because they represent

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money that is not available for businesses to spend. Secondly, transfer payments (i.e. welfare
and other supplementary payments such as unemployment compensation) are added to NI.
These transfer payments add to an individual’s income. However, they are not in exchange for
any current productive activity that has been done by an individual. The resulting total is the
final measure of personal income.

Per Capita Income

In order to get a general idea of the standard of living of a country, the national income is
divided by the population and the resulting figure is call the per capital income. One fault with
this method is that it does not show how income is distributed or the facilities available.

Try answering this question:

(1) The term National Income Accounting

(2) Three of the six forms of a country’s National Income
(3) (i) the difference between GNP and NNP
(ii) the difference between personal income and disposal income.

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Objective 4: Explain the approaches used to measure national income;

The methods/appr0aches used to measure national income and the uses and limitations of
national income statistics.

The Measurements Of National Income

In order to assess how fast an economy has grown, we must have a means of measuring the
value of the nation’s output. The measure of national income that we use to do this is known
as Gross Domestic Product (GDP). Last week, GDP was defined as the total money value of the
final goods and services produced in a country during a one-year period. Remember that this
figure does not include goods and services produced by firms abroad that are owned by local
individuals or the government. It takes into consideration therefore only what is produced in
the country with the resources of the country.

There are THREE methods of measuring GDP. All the three methods should result in the
same GDP figure:

1. The first method of measuring GDP is to add up the value of all goods and services
produced in the country. This is known as the Product/Output Method.
2. The second method of measuring GDP is to add up all the incomes in the form of
wages and salaries, profit, rent, and interest. This is known as the Income Method.
3. The third method focuses on the expenditure necessary to purchase the nations
production. This is called the Expenditure Method.

Since the value of what is sold is also the value of what is produced and these must be equal
to the value of the expenditure, all the three methods must yield the same result, i.e.,

National Product/Output = National Income = National Expenditure.

In reality, however, the figures may differ slightly and the difference is made up by use of an
accounting procedure known as the margins of error or statistical discrepancy.

The factors that influence national income.

The major factor affecting national income of a country is the degree of economic growth. This
in turn is influenced by the following:

1. The availability of natural resources and how effectively these natural resources are
used by the country The greater the availability of natural resources, and the more
effectively they are used, the greater will be the country’s economic growth and

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 therefore the greater will be its national income. In Jamaica, our natural resources
include bauxite, limestone and sand.
2. The quality of the country’s labour force also affects economic growth and ultimately its
national income In considering the quality of labour, factors such as size, its health and
the skills it has are of utmost importance.
3. The degree of industrial development of the country’s industries The more equipped
and technically advanced they are, the greater will be the country’s economic growth
and by virtue of its economic growth, its national income.
4. Economic activity should be spread over a wide range of industries in order to achieve
high levels of national income.
5. Political stability is important to economic growth If there is political unrest, investment
will be adversely affected and economic objectives will not be achieved.

Uses of National Income Statistics

The Uses And Limitations Of National Income Statistics

1. The statistics allow us to compare output of one country with another.

2. The figures can be used to compare economic growth of countries at a particular time
and over a period of time.
3. The statistics serve as a tool or instrument of economic planning, i.e., the statistics help
government to determine how to plan for a country and these plans are included in
their budget.
4. One of the most important uses of these statistics is its use in comparing the standard
of living of one country with another, i.e., an increase in the National Income statistics
usually an increase in standard of living.

However there are a number of limitations in using these statistics as an indicator of standard
of living because of:

(a) Problems of measuring national output where there are instances of unrecorded items. This
occurs where:

I. There are non-marketed items e.g. babysitting

II. Where underground economies exist.

(b) Total GDP/GNP figures ignore the distribution of income.

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(c) Problems in using National Income statistics to measure welfare since:

I. Production does not equal consumption

II. There may be high human costs of production
III. Externalities are ignored. There are costs and benefits to parties external to
the production or consumption of a good or service.

(d) National income statistics is recorded in money terms. The value of money is constantly
changing and therefore inflation can cause it incorrectly to appear as if a country’s national
income is increasing. Deflation would have the opposite effect. What is important therefore is
the REAL increase in the national income and to arrive at this, allowances must be made for
changes in the value of money.

Objective 5: Distinguish between economic growth and development;

The distinction between economic growth and development

Economic growth is a quantitative concept; that is, it deals with numbers or figures or
amounts. It refers to the real growth or expansion in national output, and is most often
measured in terms of real Gross Domestic Product (GDP).

The concept of economic growth is positive. This means it always refers to an increase in
output. Negative growth, while quantitative, as is economic growth, refers to a decrease in the
national output.

The production possibilities frontier can be used to illustrate economic growth. A production
possibilities curve is a curve showing all the possible combinations of two goods that can be
produced using up all the resources and at a given state of technology. When economic
growth takes place, the production possibilities curve shifts to the right. The curve may shift to
the right and economic growth results if the productivity of labour or other factors of
production improve; if there is an improvement in technology; or if there is an increase in
resources.

Try to find a diagram of a production possibilities curve. Copy it into your notebooks then shift the
curve to the right. The first curve represents production possibilities for the country NOW, and the
second one will represent the production possibilities at a future date, for example, five years later.

Economic development is qualitative and refers to the process by which the standard of
living and the well-being of the entire nation are improved by raising real per capita income.
Economic well-being is concerned with the quality of housing, clothing, education, food, health,

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peace of mind, security, eradication of poverty and eradication of inequalities in income and
wealth, and so on. If any of these factors increases or improves, there will be economic
development.

Human resource development looks at improving the human. Objective 6 -”resources of labour
and entrepreneurship”. Improvement of labour and the entrepreneur means that the
productivity of both will increase. In turn, there will likely be an increase in economic growth
and development.

The human resource can be improved through education, training or retraining, improved
health facilities, improved working conditions and an improvement in the factors of production
that they have to work with.

Objective 6: Describe the role of education in economic growth and development

The role of education in economic growth and development

Improved education and training means that

2. Labour and entrepreneurship will now have greater capacity to increase the national
output and improve the well-being of the nation.
3. Through education and training, labourers may learn new and more efficient methods
of production and, thereby, increase the overall output.
4. The entrepreneur might learn how to better organise and bear risks, thereby, causing
improved output and improved economic well-being.
5. Education helps individuals to improve their standard of living and thus, the standard
of living of the country on a whole.

Education, thus, improves the productivity and efficiency of both of the human factors (i.e.
physical and mental).

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Now for your homework:

(a) Distinguish between economic growth and economic development. (6 marks)

(b) Why is economic growth regarded as a quantitative concept while economic development
is regarded as a qualitative concept? (4 marks)

(c) Discuss TWO factors that might result in economic growth and TWO factors that might
result in economic development (8 marks)

(d) Explain ONE way in which education can cause economic growth and development (2
marks)

Total marks: 20

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Objective 7: Outline the reasons for international trade;
International trade and balance of payments

International trade

When countries buy goods and services from each other and/or sell goods and services to
each other, this is referred to as international trade. International trade is thus trade among
countries.

International trade is the largest scale in the development of division of labour and
specialisation, wherein countries specialise in the goods and services that they can produce
best and at the lowest cost, and then trade with other countries to get the goods and services
that they do not specialise in.

Reasons For International Trade

1. Climate and soil type differences. Not all countries have the same climate and soil
conditions. Different crops will grow where the climate and soil types differ.
2. Natural resources. These can only be mined where they are found, for example,
bauxite. Some countries are rich in mineral resources; others have little or none at all.
3. Special skills of the labour force. The type of labour determines what is produced. For
example, France produces fashions (clothes), cologne and various types of cheese
because the labour force has special skills and aptitude in these areas.
4. Lack of quantity and quality of local goods. Very often, countries import goods and
services because what they produce locally is not enough for local needs and/or
because the quality falls short of what is desirable.
5. Increased transportation and communication. These have made trading on a worldwide
scale much easier.
6. Access to a wider variety of goods and services. Wider variety pleases consumers and
results in an increase in their standard of living. The same is true for countries.
7. Foreign exchange. This is gained from exports and is used to pay for imports.
8. World output increases. This allows the problem of scarcity to be reduced
9. Cheaper goods and services. Countries may import goods and services because they
are cheaper han goods and services sold locally.

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Objective 8: Differentiate between balance of trade and balance of
payments;

Differentiate between the balance of trade and the balance of payments

The balance of trade is the difference between earnings from exports of goods and payments
for imports of goods. The balance of payments is a summation of the balance of trade, net
invisible earnings and capital flows.

Balance of payments

International trade refers to trade among different countries of the world. When countries
trade with each other, a record is kept of the financial transactions between them. This record
is known as the balance of payments. It is a statement of the trade which takes place between
a country’s residents (individuals, businesses and the government) and the residents of all
foreign countries. Therefore, St. Vincent’s balance of payments shows all the payments we
receive from other countries and all payments which we make to them.

There are three components of the balance of payments account, the current account, the
capital account and the official financing account.

Please note that in all parts of the balance of payments account, exports and income are given
a plus (+) sign and imports and payments are given a minus (-) sign.

Formulas:

Balance of Trade/Visible balance = Export ($) – Imports ($)

Invisible balance = Net transportation +net interest & profits + net government
Current Balance = visible balance + invisible balance

The Current Account

This section of the balance of payments is divided into TWO parts: Part (a) the visible trade
account and part (b) the invisible trade account.

The visible trade account records the tangible items – the imports and exports of goods only.
The difference between the money value of goods imported and goods exported is known as
the visible trade balance or the balance of trade. This balance may be a plus (+) surplus or a
minus (-) deficit. If exports exceed imports, the result will be a surplus or a favourable

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balance of trade. On the other hand, if imports exceed exports, there will be a deficit or
unfavourable balance of trade.

The invisible trade account records the intangible items – the imports and exports of services,
tourist expenditure and income, income from investments abroad and paid to investments
abroad. The services include shipping, aviation and financial services. The balance on this
account is known as the invisible balance and it will be a plus (+) favourable if exports
(income) of the intangible items exceed the imports. Now you can work out for yourselves
what will result in a minus (-) on this account.

The overall current account balance is the difference between our exports of goods and
services and the imports of goods and services. As with the visible and invisible balances, the
overall current balance may be favourable or unfavourable.

The Capital Account

This account records capital flows – loans and grants to and from other countries and
investments bought and sold. (Note that the income from investments is recorded in the
invisibles of the current account). As with the current account balance, the capital account
balance may be favourable or unfavourable.

Now we need to consider the overall balance of payments figure. This takes into account the
current account balance and the capital account balance. If, overall, the exports exceed the
imports, the overall balance of payments will be a surplus (+) and if, overall, the imports
exceed the exports, the overall balance will be a deficit (-). This means that the country spent
more than it earned.

Credit items are- Inflows /receipts

Debit items are- outflows /payments

The Balance Of Payments Must Balance

Ultimately, the balance of payments must balance since every export becomes an import and
every import an export. Balancing the balance of payments means that there must neither be
a surplus nor a deficit in the end. A way must be found to finance the surplus or deficit
through external strategies which are shown in the official financing account.

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Home - Work

(a) Define the term balance of payments.

(a) What is meant by a country’s balance of trade?

(b) Calculate the BALANCE OF TRADE for the country

shown below:

Visible trade US ($ M)

Exports 26,000

Imports 29,000

Invisible (net)

Exports 20,000

Imports 15,000

(d) Name TWO items that are regarded as invisibles.

(e) Calculate the current account balance.

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The Official Financing Account

This account shows how the balance of payments is financed; that is, it shows what is done
with the surplus or the deficit on the balance of payments.

(Correcting) Financing A Balance Of Payments Deficit

 borrowing from international financial institutions like the International Monetary Fund
and the World Bank
 borrowing locally
 drawing down on the official reserves of foreign exchange
 selling an asset locally or overseas
 borrowing from other countries
 receiving gifts and grants
 rescheduling of the debt
 Importing on credit. Permission must be granted from the exporting country.

Explained Ways of Correcting A Balance of payments Defecits

1. Tariffs (taxes on imports)

Taxes increase the cost of items imported and therefore will discourage imports. This may
encourage the purchase of cheaper local imports.
2. Import licences
Only holders of this licence can import particular goods and services. Government can restrict
the importation of certain goods and services e.g. those that compete with local goods.
3. Quotas
Restrictions on the quantity of a type of commodity to be imported.
4. Total ban of certain commodities.
5. Exchange Control
This is various forms of control by government on the purchase and sale of foreign currencies
by citizens and foreigners. Example: limiting the amount of foreign exchange that residents
can leave the country with, banning the use of foreign currencies locally and having a fixed
exchange rate.
6. Encouraging export
Incentives given to exporters.
7. Devaluation
The price of foreign currency is increased against the local currency thus discouraging its
purchase.
8. Special Drawing Rights
Drawing on the resources of the International monetary fund
9. Importing on credit

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 Purchasing on credit delays payments in the short term
10. Accepting gifts from other countries
This reduces the need to spend foreign exchange.
11. Borrowing from other countries
This represents inflows into the Balance of payments accounts

What if the balance of payments showed a surplus? This surplus could be financed or used in
the following ways.

(Correcting) Financing A Balance Of Payments Surplus

 lend money, for example to other countries

 purchase an asset locally or overseas
 increase the official reserves of foreign exchange
 pay outstanding debts
 invest the surplus
 give gifts and grants to other countries

Below is an example of the official financing account. Assume that the balance of payments
figure is US$1,500m.

THE OFFICIAL FINANCING ACCOUNT

US $M

Foreign currency borrowing +800

Official reserves +700

Total +1500

Now we have balanced the balance of payments by eliminating the deficit of US $1,500m.

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Objective 9: Outline the measures which a country may adopt to address balance of
payments problems.

What if a country continues to have an adverse balance of payments, year after year? Well,
that country must find ways of correcting that adverse balance of payments.

The country has a balance of payments problem and must, therefore, earn more by: increasing
exports through:

 offering incentives and subsidies to local manufacturers

 encouraging foreign investment
 extending credit facilities
 reducing spending
 improving marketing skills and sponsoring exhibitions
 devaluing the local currency, which makes exports cheaper

Reducing imports by:

 increasing tariffs (duties) on imported goods and services

 setting quotas to limit the physical amount imported
 requiring special licences to import
 devaluation, which makes imports dearer
 foreign-exchange controls, which limit the amount of foreign currency available to
individuals
 import on credit

Others:

 Drawing on the resources of the International Monetary Fund or other international

financial institutions;
 Accepting gifts from other countries;
 Borrowing from another country;

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Home - Work

The questions below will test how much you have grasped of this lesson.

(a) What is the official financing account? (2 marks)

(b)(i) List TWO ways of financing a balance of payments surplus (2 marks)

(ii List TWO ways of financing a balance of payments deficit (2 marks)

(c) A country has a balance of payments of US$ + 300m, draw up the official financing
account to show how this may be financed (2 marks)

(d) Explain TWO ways of correcting an adverse balance of payments. (2 marks)

Total: 10 marks

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SECTION 10: REGIONAL AND GLOBAL BUSINESS
ENVIRONMENT

SPECIFIC OBJECTIVES

Student should be able to:

Objective 1: Explain the functions of major economic institutions and systems;

Major Economic Institutions and Systems:

Caribbean countries play an active role in international and regional organizations because they
need to:

o Remove some of the barriers to unity, particularly at a regional level

o Make their voices heard internationally
o Seek assistance from outside, for example by borrowing to fund developments
projects.

Caribbean businesses need to:

 Sell good and service in the America, Europe and elsewhere

 Competed on equal terms with larger businesses from outside the region.

The following are major Caribbean economic institutions.

Caricom- Caribbean Community and Common Market, the most important organization
from a regional perspective, with its Secretariat in Guyana.

A common market is an association of countries that have joined together to bring about the
harmonious development, continuous economic expansion and increased stability of the
countries involved. CARICOM was formed in July 1973 when Barbados, Trinidad and Tobago,
Jamaica and Guyana signed the treaty of Chaguaramas. Since then the following Caribbean
countries have joined: Antigua and Barbuda, Belize, Dominica, Barbados, Suriname, Grenada,
Montserrat, St. Kitts & Nevis, St. Lucia, St. Vincent and the Grenadines and Bahamas and Haiti.
Associate members of CARICOM are Anguilla, Bermuda, British Virgin Island and Turk and
Caicos.

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Purpose:

 To develop links between the nations of the Caribbean and presents a common view
 To encourage regional trade and remove trade barriers
 To promote economic development
 To develop functional co-operation on important issues and areas of activity

Objectives of CARICOM
 Improved standard of living.
 Expansion of trade.
 Joint negotiations internationally.
 Co-ordination on foreign and economic policies.
 Full employment of labour and other factors of production.
 Economic integration.

ACS - Association of Caribbean States – with it Headquarters or Secretariat currently in

Port of Spain, Trinidad. The ACS was established in 1994 to promote cooperation among
Caribbean countries.

Purpose:

To promote the interest of Caribbean and remove international barriers. The ACS has special
committees on trade transport, tourism and natural disasters.

Its objectives include:

 The strengthening of regional cooperation and integration
 Preserving the environmental integrity of the Caribbean Sea
 Promoting the sustainable development of the Caribbean

IMF – International Monetary Fund

The IMF was established in 1944 at ‘a monetary conference’ in Bretton Woods in the United
States of America. Its major purpose is to provide short-term loans/ lending to countries that
are experiencing balance of payment problems (Includes Defecit BOPs) by providing foreign
currency needed to pay for goods and services. This loan may be able to increase technology
in the productive sector and hence boost output of a product so that Exports will increase to
such a level to remedy the negative balance of payment.

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Member countries contribute to this fund. Amounts contributed are set aside to be drawn upon
in time of need. In this way, members have special Drawing rights. Drawn down from the IMF
funds are based upon how much a country has contributed.

Purpose:

 To promote international monetary cooperation and exchange rate stability

 To facilitate growth and international trade
 To use funds from member countries to provide financial assistance to countries in
financial or economic difficulties
 To keep track of the economic health of its member counties, alerting them to risks on
the horizon and providing policy advice
 To provide technical assistance for economic management.

IBRD – International Bank for Reconstruction and Development (World Bank),

which grants loans to less developed countries

The aim of the World Bank is to reduce poverty worldwide. It therefore assists developing
countries by providing loans for projects such as housing, infrastructure and industry. The
World Bank provides long term loans for developmental purposes. It is used interchangeably
with the International Bank for Reconstruction and Development (IBRD).

Purpose:

To provide low interest loans and grants to developing countries for education, health, public
administration infrastructural, financial and private sector development, agriculture and
environmental and natural resource management. The World Bank sees five key factors and
essential for economic growth:

 building capacity of government and public service

 creating infrastructure
 developing strong financial systems
 combating corruption
 research consultancy and training

CDB – Caribbean Development Bank

The CDB is a regional financial institution. It finances regional projects that contribute to the
economic growth and development of the region. Sectors financed by the CDB includes:

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infrastructure, tourism, mining and refining, agriculture, agriculture, manufacturing, heath and
education.

The objectives of the Caribbean Development Bank are:

 Supporting regional and local financial institutions
 Assisting borrowing member countries to optimize the use of their resources
 To mobilize financial resources regionally and internationally
 To support capital markets
 Stimulating growth
 Supporting business activities

Purpose:

This is a development bank which finances social and economic project and public spending

OECS - Organization of Eastern Caribbean States

OECS was formed in 1981 for the purpose of promoting cooperation among member states.
These countries include Montserrat, Anguilla, Antigua, Dominica, Grenada, St. Kitts and Nevis,
St. Lucia and St. Vincent, Anguilla and the British Virgin Islands are associate members.

Purpose:

 To promote cooperation and unity among the eastern Caribbean countries.

 To reach common positions where possible
 To promote economic integration

CSME – Caribbean Single Market and Economy

The CSME was established in 2006. It seeks to transform the common market into a single
market and economy. It was established to deepen the integration among Caribbean states
and to respond effectively to the challenges and opportunities globally.

Objectives of CSME:
 Deepening economic integration.
 Free trade of services.
 Free movement of capital, labour and the freedom to establish business enterprises
anywhere within CARICOM states.
 Widening of membership.
 A common currency/single currency.

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Purpose:

The Revised Treaty of Chaguaramas goes further in promoting regional unity that the
original treaty.

 To ensure a single market with no barriers to regional trade and harmonized

standards for most products
 To ensure right of establishment t Caribbean businesses can establish operations
anywhere in the community
 To establish the movement of labour, initially for specific skill classes and including
graduates of the University of the West Indies.
 To ensure free movement of capital

Further ahead declared objectives for single economy include:

 Harmonization of laws on company formation intellectual property and other areas

 Co-coordinating economic policy
 Harmonizing policy on foreign investment
 Co-coordinating policy on indirect taxes and local deficits

IADB – Inter-American Development Bank

The IADB was established in 1959 for the purpose of assisting Latin American and Caribbean
countries. It offers loans, lines of credit and technical assistance to member governments for
social and economic development. Areas of assistance include: agriculture, industry, mining
health, tourism and infrastructure.

Purpose:

 To support economic and social development in Latin America and the Caribbean
 To provide multilateral financing for regional government and public sector
organizations’

OAS – Organization of American States, mainly a poetical institution, e.g. for settling
boundary disputes and supervision elections.

The OAS was established for the main purpose of increasing interdependence and solidarity,
and promoting regional co-operation and the peaceful settlement of disputes among the

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member countries. These countries include: North and South America, Canada and the
Caribbean.

Purpose:

The OAS promotes peace, democracy, international understanding human rights, as well as
cooperation for economic, social and cultural development. It works on:

 Country narcotic through he Inter-American Drug Abuse Control Commission

 Sustainable development through the Inter-American Council for Integral
Development

ECLAC – Economic Commission for Latin America and the Caribbean

The ELAC was established in 1948 for the main purpose of integrating Latin American countries
for their development. Caribbean countries were later included in the ELAC.

Their objectives include:

 Guaranteeing equal rights and opportunities
 Economic integration of Latin American and Caribbean countries.
 Reinforcing economic ties among countries of Latin America and other nations of the
world
 Economic development of Latin America
Purpose:

 To encourage economic cooperation

The following are major international organization involved in trade with the
Caribbean:

EU – European Union (formerly the EEC or European Community founded in 1957). The
European Union is an economic and political partnership between its 27 member countries. It
is a single market economy with the euro as its common currency.
These countries include: Spain, Luxemburg, Britain, France Portugal, Italy, Greece, Belgium,
Germany, Denmark, Finland, Sweden and Switzerland.

Their objectives include:

 Free movement of people services and capital
 Removal of customs duties and quotas among members

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  Establishment of common policies for agriculture and transport
 Establishment of a common tariff and common policies towards other countries
 Economic cooperation
 Promoting equal rights
 Fighting climate change

Purpose:

 To ensure economic integration with a single market

 To promote cooperation many other issues, including trade and development
assistance environmental protection and energy

OPEC – Organization of Petroleum Exporting Countries

OPEC is an organization of 12 oil –exporting countries. This organization was established in

1960 for the purpose of unifying the petroleum policies of member countries.

Objectives include:
-Regular supply of petroleum products on the world market
-A steady income for producers

In 1976 OPEC established a special fund to provide financial assistance to developing

countries.
OPEC countries: Kuwait, Venezuela, Iran, Iraq, Angola, Saudi Arabia, Algeria, Ecuador, Libya,
Nigeria, Qatar, United Arab Emirates

Purpose:

 OPEC members produce around one third of the world’s annual output of oil and hold
close to 80% of world oil reserves. They have attempted with vary in success to
influence prices by holding back production.

WTO – World Trade Organization, a world trade regulator, succeeding the GATT

The WTO is an international organization that monitors and regulates trade among the nations
of the world based on trade agreements by member states. The WTO replaces the General
Agreement of Tariffs and Trade (GATT).
Their main aim is to encourage the free flow of trade among nations.
Their objectives include:

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  discouraging unfair trading practices e.g. export subsidies and selling products below
cost to gain market share
 settling disputes among members
 environmental protection
 monitoring and reviewing the trade policies
 reducing trade

Purpose:

 To provide a framework for negotiation on international trade

 To attempt to reduce trade barriers
 To supervise trade agreements, with rules on trade in goods, service and intellectual
property

CBI – Caribbean Basin Initiative, originally a 12-year agreement from 1984

CBI allows certain Caribbean and Central American products duty free entry into the United
States. Products exported include chemicals, manufactured goods, fresh fruits and vegetables.

Purpose:

To protect duty-free access to US market for many goods manufactured in the Caribbean and
Central America.

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ECCM – Eastern Caribbean Common Market - was a fore-runner of the OECS.

Purpose:

The OECS heads of government in 2001 proposed an economic union intended to romote
closer integration. A second Treaty of Basseterre was signed in December 2009, to deepen
the integration process.

Institutions:

 The Eastern Caribbean Supreme Court runs a common judicial system

 The Eastern Caribbean Telecommunications Authority (EXTEL) regulates
telecommunications
 The Easton Caribbean Central Bank in St. Kitts is responsible for a common
currency the Eastern Caribbean Dollar’ and other central bank functions.

NAFTA – North American Free Trade Agreement, including the USA, Canada and Mexico

Purpose:

NAFTA eliminates most barriers to trade and investment between the USA,, Canada and
Mexico implementation phased over 15 years.

CARIBCAN – Caribbean-Canadian Agreement

The agreement allows preferential duty free access to the Canadian market for almost all
imports from Commonwealth Caribbean Countries.

Its main objectives are:

 to enhance the Commonwealth Caribbean’s existing trade
 improve economic development prospects of the region
 promote new investment opportunities
 encourage economic integration and cooperation within the region
 to encourage long term investments through development projects.

Purpose:

Promotes trade investment and industrial cooperation through duty free access of Caricom
goods to Canada. It does not allow duty free access for Canadian good to the Caribbean.

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FTAA – Free Trade Areas of the Americas

The FTAA is an expansion of NAFTA. It is an organization of 34 countries of the Americas

including North and South America, Canada and the Caribbean except for Cuba.

It’s objectives include economic prosperity, free market of goods and services and democracy.

Purpose:

The FTAA was proposed by the USA to remove trade barriers in the Americas. Several rounds
of talks ended inconclusively in 2005.

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Objective 2: Identify major economic problems in the Caribbean;

Major economic problems in the Caribbean:

Unemployment: because of difficulty of finding work; low earnings- hence difficulty in

covering the essentials of modest household budget;
Globalization has contributed significantly to unemployment in the Caribbean. With the removal
trade barriers, some industries have not been able to compete globally. The lack adequate
skills that are required for the new industrial paradigm for example, information technology
skills have also contributed to the problem of unemployment.
A high level of unemployment among the young people of the Caribbean may results in
various social problems, as survival may depend on illegal activities.
Reasons for unemployment
-firms e.g. multinationals closing down
-lack of investment to create new businesses
-lack of skills training

Population density: this is the average number of people per square kilometer of land.
Problems such as poverty and poor infrastructures may be made worse by population density:

Population density Refers to the average number of people living on every square kilo meter in
a country. The formula used for calculating population density is:
Density of population
= Total population
Area (sq. km.)

Very high population densities can indicate overpopulation. This occurs when the facilities in a
location, are not able to serve the number of persons in that location. This will cause heavy
competition for jobs, schools, health facilities etc.

Migration: high unemployment and low earnings may cause people to migrate. This can
create problems – but it also has positive effects, for the migrant, for the former home country
and of the new host country; especially if the people are well qualified, young and
healthy.

Caribbean people migrate to first world countries in search of opportunities such as

employment and education. When skilled and professional workers migrate, Caribbean
countries may experience shortages in critical areas such as health care. Loss of skilled
workers from industry will also retard growth and development. Social problems may arise
when children are left in the care of grandparents and other relatives who have challenges to
discipline them.

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Debt burden: Many Caribbean countries have high level of debt; particularly when there has
been commercial borrowing at high interest rate; high debt level create serious problems.
Governments have to spend much of their tax revenue on debt interest. Public services,
such as health, education and infrastructural investment, are squeezed’

Many Caribbean countries have high debt- to-GDP ratios. This ratio is the amount of national
debt of a country as a percentage of its Gross Domestic Product. High debt-to-GDP can stifle
an economy as a large portion of its GDP is consumed in debt payment and very little is left for
investment in the economy. A very low debt- to- GDP ratio is desirable for economic growth
and development.

Sourcing Capital & Raw Material

Sourcing capital: Interest rates can be high. Possible source of capital include banks;
development banks and for small businesses, soft loans from special lending agencies
Foreign investment is another possible source of capital.

Raw material: many countries have to import their raw materials

While the Caribbean might be rich in certain natural resources such as bauxite, oil and gold the
region lacks other very important resources such as capital and entrepreneurial skills. Capital is
important as it increases production through the use of machinery, equipment and money
invested. The spirit of entrepreneurship is necessary for the creation of new business ideas and
entrepreneurship skills are important for the successful running of the businesses.

Economic dualism in the region: Dual economy is an economy in which modern

industries, mines, or plantation agriculture exist side by sad with backward sectors, with little
interaction between them. This situation may occur in less developed countries due to
the effect of foreign direct investment with the use of expatriates for skilled work.

Economic dualism occurs in countries where there exist two opposite economic sectors. One
sector is characterized by development, capital intensive industries, large scale farming and
technological advancement, and the other sector is characterized by subsistence farming,
labour intensive industries, handicraft industries and simple trading means of survival.

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Objective 3: Outline possible solutions to economic problems in the Caribbean;

Access to Foreign Direct Investment (FDI)

Foreign Direct Investments refers to capital investments into factories, machinery and
equipment by a foreign company or an individual. FDI is important for the development of
Caribbean economies as they are challenged by their high debt- to-GDP ratios and increased
global competition for export earnings. Attracting foreign direct investment is a way for
Caribbean countries to obtain capital for growth and development.
Benefits of FDI include:
 Employment for nationals
 Increased access to global markets
 Introduction of advanced technologies and processes
 Improvement in human resource skills

Development of human resource

Investment in human resources is imperative for Caribbean economies to compete globally.
Improving the value of human resources through education and training will increase the
productive capacity of Caribbean countries.

Development of manufacturing sector

The manufacturing sector creates value added products which increases export earnings for
Caribbean economies. Developing the manufacturing sector therefore will impact on the
potential economic growth of a country.
Methods of developing the manufacturing sector:
 Encouraging Foreign Direct Investment
 Retooling
 Research and development
 Technological advancement

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QUIZ AREA

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Section 1

Question 1
Explain two ways in which the barter system limited trade in early economies.
Answer
A common measure of value did not exist. It was difficult to ascertain the value of goods exchanged.
It therefore would hinder trade as sometimes persons would not want to feel cheated.
A double coincidence of wants must exist for trade to take place. An individual who wishes to trade
must have what other persons want to trade his goods. If this does not exist then trade cannot take
place.
Question 2
State one advantage and one disadvantage of specialization.
Answer
An advantage of specialization is that it increases output.
A disadvantage of specialization is that it discourages quality work because of monotony.
Question 3
Show how two functions of money facilitate trade.
Answer
Money is a common measure of value. Persons can therefore determine the value of commodities
and know how much to accept in exchange for goods and services.
Money is a medium of exchange and therefore accepted by everyone. Persons will not have
difficulties to buy or sell goods and services.
Question 4
Starting a business is a lot of hard work and very costly. Why would an individual want to start a
business?
Answer
An individual may wish to gain financial independence. A successful business can earn high levels of
profits.
Using the skills and knowledge acquired to operate a profitable business.
Question 5
State the form of business organization that you believe is most advantageous to form. Give two
reasons why.
Answer
Choose one of the following:
Sole trader – Decisions are made quickly and there is little legal requirement to start the business.
Partnership – more capital can be raised, specialization of functions is more efficient
Limited liability Company – shareholders are not liable for the company’s debts beyond their level
of investment, continuity of existence is assured.
Question 6
State two differences between the Free Market and the Planned economic systems.
Answer
In the free market economy the consumer is king i.e. the consumer determines what goods and
services are to be produced based on their demand. In a planned economy the government makes
decision concerning the distribution of goods and service.
Competition in a free market economy leads to efficiency and innovation.

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However, in a planned economy, the lack of competition reduces innovation and the motivation to
produce quality output.
Question 7
Explain the roles of two stakeholders in business activities.
Answer
The role of the government is to monitor and regulate business activity to ensure that the consumer
is treated fairly.
Employees must work efficiently to create quality goods and services.
Employees must adhere to the rules and relations of the company.
Question 8
Identify a business activity within your community and discuss two contributions of this business to
your community.
Answer
Sally’s bakery produces good quality bread in various sizes to meet the requirements of customers.
The prices are also very affordable. The bakery makes it convenient for community members as they
do not have to travel a far distance to obtain this product.
Sally’s bakery also employs persons from the community. The bakery is very popular, and so
workers are paid an adequate salary to support their family.

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Section 2

Question 1
Explain two important activities carried out by one functional area of a business.
Answer
The marketing department promotes the firms products to encourage sales. Consumers must be
made aware of what is being offered and encouraged to buy. They also conduct market research to
identify the needs and wants of consumers. Companies depend on consumers support for their
success, and so ascertaining consumers taste is very important.
Question 2
Outline two functions of management and say how each is important to the efficient operation of a
business.
Answer
Controlling involves the continuous assessment of the work done by subordinates. Poor quality
work is a reflection of the company and so managers must ensure that quality work is done.
Planning involves outlining all future activities that are required to achieve the organizations
objectives. Planning activities involve all the programmes and policies that will guide the firm’s path
to success.
Question 3
Give two examples to show how managers can fulfill their responsibilities to one group of business
stakeholders.
Answer
Managers can full their responsibility to customers by proving quality goods and services. A system
that ensures standards should be implemented. Prices must also be affordable. All measures must
be taken to operate as efficiently as possible so that production cost are kept low resulting in
affordable selling prices.
Question 4
(a) Draw an organizational chart of your school or business organization.
(b) Identify the type of organizational chart drawn
(c) Identify the span of control of one person in authority on the chart
(d) Identify two persons at the same level of authority.
Answer

(a)
(b) Line organizational chart
(c) The span of control of Vice principal is the head of departments for arts and science.
(d) Two persons at the same level of authority are the heads of department for arts and science.
Question 5
Show how two important characteristics of a good leader can improve the efficiency of a group.

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Answer
Good communication skills will foster good working relationships between workers and managers.
Workers are more effective in a comfortable environment. This also encourages feedback from
workers.
A devoted and committed manager will lead by example. His commitment to the tasks that are
required to achieve the organizations objectives will inspire subordinates to work hard.
Question 6
Give two differences between the autocratic and the democratic leadership styles.
Answer
An autocratic manager makes all decisions concerning the tasks to be performed by subordinates.
All directives handed down by him must be closely followed. He makes frequent checks on output of
workers. The democratic leader allows the participation of others in decision making. He allows
workers some latitude to work on their own initiative and periodically checks output from workers.
Question 7
Outline the steps for handling grievances in the organization.
Answer
The worker lodges a complaint with his or her immediate supervisor. If worker feels that the
complaint was not adequately dealt with then he may discuss the matter with the head of
department. If the worker is still not satisfied with how the matter is being dealt with, he along with
the union representative may discuss the matter with management. It may need to go a further
stage where there is mediation from Ministry of Labour or any independent body. The final stage is
when the matter has to be taken to court.
Question 8
Explain the purpose of the collective bargaining process.
Answer
The purpose of collective bargaining is a means to reach an amicable agreement between
management and workers. Workers bargain collectively through their union representative with
management until an agreement is reached.
Question 9
Discuss two ways in which teamwork can improve the efficiency of an organization.
Answer
Teamwork gives workers the opportunity to make collaborative decisions and support each other to
accomplish tasks more effectively.
Teamwork allows for specialization in various parts of a task based on the skill of each team
member. Specialization increases output.
Question 10
Discuss two benefits that a business will derive from using Management Information Systems.
Answer
It reduces labour costs as the computer compiles and analyses all the data. This increases the
efficiency of employees and reduces production costs. It provides timely information that helps the
business. This allows for better decision making as information is available when needed.

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Section 3

Question 1
Explain the importance of encouraging entrepreneurial skills and abilities in Caribbean schools.
Answer
Entrepreneurship is important to Caribbean economies. Businesses create jobs, add to GDP and
foreign exchange earnings. They also provide revenue for government in the form of taxes.
Therefore, entrepreneurship skills must be taught in schools. Our students should be prepared to
enter the workplace and to also start businesses. An investment in a programme that prepares
students for entrepreneurship will have long–term impact on a country’s economic growth and
development.
Question 2
Outline and explain the importance of two characteristics required for a successful entrepreneur.
Answer
Creativity is an important characteristic of an entrepreneur. Creativity helps entrepreneurs to
innovate new products and ideas for the success of the business. Entrepreneurs must have the drive
and determination to be successful. Operating a business requires a lot of effort and will to succeed.
Question 3
Three of your past high school friends request your assistance in starting a small business. Advise
them on three important steps that they must take.
Answer
Do a feasibility study to ascertain the viability/feasibility of a business idea. It assesses the
operational costs, expected revenue flows, level of competition etc. Its main purpose is to find out if
the business idea is practical. The business must be registered. This is a legal requirement.
Decisions must be taken on the type of business that you wish to form i.e. either a partnership or a
private limited liability company. Identify sources of capital to purchase machinery, equipment,
fixtures and raw materials.
Question 4
‘James & Sons’ has been operating as a partnership for five years. They have decided to expand
through offering shares to the public. Outline the steps that must be taken by the owners of ‘James
& Sons’ to establish a public limited liability company.
Answer
Documents that must be submitted to the registrar of companies are the memorandum and articles
of association and statutory declaration. A prospectus must then be published inviting the public to
subscribe for shares. Collecting the capital required as outlined in the memorandum of association,
to be issued with a certificate of trading allowing the company to start trading as a public limited
liability company.
Question 5
Compare two advantages and two disadvantages of a sole trading business and a public liability
company.
Answer
One advantage of a sole trading business is that the owner receives all the profits made. However,
profits are shared among members of a public limited liability company.

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The sole trader can also implement new ideas quickly as he does not have to consult anyone else
concerning business decisions. However, new ideas must be ratified by the board of public limited
entities and therefore may take much longer to implement.
One disadvantage is that the sole trader must find all the capital to invest into a business.
A public limited liability company raises capital from shareholders. The sole trader will lose all his
personal assets if the business goes bankrupt. Shareholders in a public limited liability company
have limited liability and therefore will not lose their personal assets if the company goes bankrupt.
Question 6
Outline three features of a business plan.
Answer
The executive summary is a synopsis of the full business plan. It outlines information on the
purpose of the business, its methods of operation and future expectations.
The mission statement conveys the overall goals and value of a business. It speaks to how a
company operates. For example: providing the highest quality goods and services.
A SWOT Analysis outlines the strengths and weaknesses of the business. For example,
Strengths –low overhead costs and large market share
Weakness – difficulty in sourcing raw materials and sourcing skilled workers.
Question 7
Differentiate between primary and secondary data and give two examples of each.
Answer
Primary data is originally collected data. This data will be obtained by interviewing, observing or
distributing questionnaires to the sample population.
Secondary data is information that has already been collected by someone else originally. This data
will be therefore obtained from books, newspapers, magazines, libraries and publications of various
institutions.
Question 8
Explain how government may intervene to curtail unethical and illegal practices of business.
Answer
Government uses legislation to guide business practice thus protecting consumers. Laws outlining
accepted standard for manufactured goods and packaging and storing of goods protect consumers.
Taxes are also charged to curb activities such as pollution as a result of production.
Question 9
Explain the importance of a feasibility study to the start up of a business.
Answer
A feasibility study helps individuals to ascertain whether or not a business will be profitable, it also
assesses the possibilities of future income earnings and overall operational costs.
Question 10
List two forms of collateral and explain their importance to the acquisition of funds for a business.
Answer
Collateral is anything of value that is used to secure a loan. It is required by financial institutions for
the approval of loans. If the loan is not repaid then the financial institution has the authority to seize
the borrower’s collateral. Forms of collateral include: bank balances, motor vehicle, dwelling house,
land, machinery and equipment etc.

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Section 4

Martha offered to sell her prized orchid for $1000. Joseph telephoned her and expressed his great
interest in that variety of orchid. He however could not pay the $1000 she asked but could manage
to pay $800. Joseph then promised that he will visit her later to pay for and collect the orchid.
Later that day Joseph visited Martha with the money to pay for the orchid. Martha informed him
that she had already sold the orchid for $1000. Joseph was furious and told Martha that it was not
only unethical for her to sell the orchid to someone else but it was also illegal.
Question 1
Did a valid contract exist between Martha and Joseph? Explain the reason for your answer.
Answer
A valid contract did not exist between Martha and Joseph.
An offer was initially made by Martha. Joseph wished to obtain the orchid but could not pay the
amount asked by Martha. He therefore made a counter offer of $800.
Martha did not clearly accept his offer and therefore a contract did not exist. Since a contract did
not exist, Martha is allowed to sell the orchid to whomever she chooses.
Question 2
Differentiate between a simple and a specialty contract.
Answer
A simple contract is legally binding if there are an offer, acceptance and consideration. A specialty
contract must have all these in addition to it being documented, signed sealed and delivered.
Question 3
Outline three reasons for the discharge of a contract.
Answer
If the time for which the contract must be executed is passed, then the contract can be brought to an
end because of lapse of time.
If there is a mutual agreement between the parties of a contract to bring the contract to an end.
A contract may also be discharged if one of the parties to the contract dies.
Question 4
You purchased an item from a variety store and were not given a receipt. The owner explained that
he never usually gives a receipt. Explain to him the importance of not only a receipt but two other
business documents to the operation of his business.
Answer
A receipt is proof of payment for goods or services bought. It not only provides protection for the
purchaser but also is a record of money received by the business. Two other important business
documents are an invoice and a statement of account.
An invoice is a bill outlining the total amount owed by customers for goods or services. It also
informs the customer of deadline dates for payments and any discounts offered. A statement of
account informs customers of all payments made within a specific time period and outstanding
balances at the end of that period.
Question 5
Outline two ways of making payments overseas.
Answer
A bank draft is a cheque which guarantees payment to the receiver from the issuing bank. Bank
drafts can be made out to a payee in foreign currency and thus used for making overseas payments.

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Letters of credit are used in international trade to make payments for imports. Payments to
exporters are guaranteed through the bank.
Question 6
Explain the importance of the following documents in international trade:
– Certificate of origin
– Import license
– Bill of lading
– Certificate of insurance
Answer
Certificate of Origin
A certificate of origin states the country in which goods imported were manufactured. It informs
importing countries if goods are to be accepted in the case of a ban and if tariffs to be charged.
Import license
Ensures that approved goods and quantities are imported
Bill of lading
Ensures the safety of goods in transit and delivery to receiver
Certificate of insurance
This ensures that there is financial protection for goods during transit
Question 7
You are a business owner in a Caribbean country and wish to export. Explain how you would ensure
that payments are received for items exported.
Answer
Request from the importer an irrevocable letter of credit. This ensures receipt of payments once an
order is filled.
Question 8
Explain the purpose of insurance and identify four fundamental principles.
Answer
The purpose of insurance is to indemnify the insured who suffers loss. It ensures that the insured is
returned to the exact position he was financially before the loss occurred.
Four principles of insurance are:
– Utmost Good Faith
– Proximate Cause
– Contribution
– Average Cause
Question 9
Differentiate between Insurance and assurance and give four types of Insurance.
Answer
Insurance refers to the coverage of events that may occur e.g. an accident. Assurance on the other
hand covers events that are inevitable such as death.
Four types of insurance are Bad debt, Plate glass, marine, and employers’ liability.
Question 10
Show how three types of insurance is beneficial to businesses.
Answer
Bad debt insurance covers any loss that a business might incur if customers do not make payments
on outstanding balances.

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Plate glass insurance covers any damage to customers or anyone else due to the accidental breakage
of a shop window. The cost of the window is also covered by the insurance company.
Employers’ Liability covers injury to staff or visitors on a business location due to the negligence of
the company.

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Section 5

Question 1
Discuss the importance of one natural resource to the survival, economic growth and development
of your Caribbean country.
Answer
Bauxite is a natural resource found in Guyana and Jamaica. The bauxite industry provides
employment for thousands of workers. It is also a main export product and foreign exchange earner.
The growth of this industry will impact on the growth and development of these countries.
Question 2
Explain the importance of productivity to a business organization and state two ways by which
productivity can be achieved.
Answer
Productivity is measured by the output of each worker. If workers are very productive, output will
rise and unit cost of production will decline. This will result in higher profit margins for a business.
Workers can be made more productive by training to improve skill and by the introduction of
machinery and equipment to increase output.
Question 3
State one positive and one negative effect of external migration.
Answer
External migration deprives Caribbean countries of nationals who are professionals and those who
posses a high level of skill. However, an advantage of external migration is that foreign exchange is
remitted to Caribbean countries.
Question 4
Discuss the importance of two factors of production to the production process.
Answer
Capital is very important to the production process. Machinery, tools and equipment are needed for
production as they increase the efficiency of workers.
Labour as a factor of production is also important. Labour combines raw materials and machinery
to create goods and services. Methods applied to increase the productivity of labour will increase
output.
Question 5
Differentiate between subsistence and surplus levels of production and explain the importance of
surplus level production to an economy.
Answer
Subsistence level of production refers to a level of output that is just enough to ensure survival.
However, surplus production refers to a production level that is greater than what is demanded
locally.
Surplus production is important as it allows countries to export and earn foreign exchange.
Foreign exchange earned can be used to import goods and services that are not produced locally.
Question 6
Give two examples of items made by cottage industries in your country and explain how these
activities contribute to your economy’s growth.
Answer

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Handcraft jewellery and T-shirt are popular cottage industry products in my country. Both these
items are sold locally in many popular boutiques and therefore provide income for producers and
retailers. They are also sold to visiting tourists and thus contribute to foreign exchange earnings.
Output from cottage industries contributes to the GDP of the economy and thus economic growth as
these industries expand to meet rising demand.
Question 7
State three factors to be considered when identifying a suitable location to set up a new business
and give a reason for each.
Answer
Proximity to ones customers – A new business should be located where it will be seen by its most
likely customers.
Available supply of labour- A new business will require the best quality workers to ensure that it
makes a positive impact on the market.
Adequate infrastructure- A new business will need to be located in an area that is supported by
infrastructure such as good roads, communication and transportation services so that customers
and suppliers will have easy access.
Question 8
Differentiate between a forward and a backward linkage and give one example of each in your
country.
Answer
A forward linkage refers to the industries that are linked in such a way so that the finished product
of one becomes the raw material of another. For example, lumber from saw mills are used in the
construction of houses and furniture.
A backward linkage refers to industries that are established to meet the needs of other already
established industries. For example, hotels will backward link to the entertainment and
transportation industries.
Question 9
Explain the importance of mechanization for the growth of small businesses in the Caribbean.
Answer
Mechanization is the use of mainly machinery in a production process. Machinery increases output.
This will mean lower cost of production and therefore higher profits. Small businesses owners
should endeavour to mechanize in order to increase output and be more competitive with large and
medium sized business.
Question 10
What are the social and economic implications of mechanization and automation on Caribbean
countries?
Answer
Mechanization increases the productivity of workers. High productivity as a result of machinery
may cause job losses as fewer workers will be needed to produce the levels of output required.
Automation also results in job losses as this process involves little human intervention.

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238
Section 6

Question 1
Outline three marketing activities.
Answer
Advertising
Advertising is used to make customers aware of goods and services being offered by suppliers. It
usually involves messages that persuade consumers to buy.
Branding
Brands are created to differentiate a product from its competitors. Branded products are created to
develop a loyal following.
Distribution
Distribution channels move goods from producers to consumers. A business can either sell directly
to consumers or sell goods and services through middlemen such as retailers and wholesalers.
Question 2
Explain what is meant by the ‘marketing mix.’
Answer
The marketing mix refers to four categories of marketing activities. These categories are:
-product which includes the product design, package and brand
-place which refers to the distribution channels
-promotion which includes advertising and sales promotional method
-pricing includes various methods used to suit the target market e.g. penetration pricing.
Question 3
Outline two factors that influence consumer behaviour.
Answer
Consumers purchase products to a large extent based on their prices. Consumers seek value for
money and therefore will purchase a substitute for a product if its price increases.
Consumers taste and preferences will also determine what products they buy. Taste and preferences
will depend on culture, religion and changes in fashion.
Question 4
Differentiate between monopoly and monopolistic competition.
Answer
A market that is controlled by one supplier is a monopoly. The monopolist produces a unique
product for which there are no close substitutes. Monopolistic competition differs from monopoly
as it involves several suppliers in a market of a similar product, but each supplier sells a particular
brand. Therefore, although competition exists each supplier has a monopoly over his own brand.
Question 5
(a) Define the term ‘demand.’
(b) Define the term ‘supply.’
(c) Explain the role these play in determining price.
Answer
(a) The demand for a particular product is the amount that consumers are willing and able to buy at
a given price.
(b) The supply of a particular commodity is the amount that firms are willing and able to supply at a
given price.

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(c) In a market economy the demand and supply of particular commodities determine their
prices. Consumer will demand increasing amounts at lower prices and decreasing amounts at
higher prices. However, producers are willing to sell more at higher prices and less at lower market
prices. The market price at which both buyers and sellers wish to trade at is the market equilibrium
price.
Question 6
Differentiate between copyright, patent and trade mark.
Answer
Copyright is a one form of intellectual property right that protects creators’ expressions such as
music, painting, movie, photograph, writings etc.
Patent protects innovation by excluding others from making and selling an invention for a number
of years.
Trademark legally protects brand names by giving the seller exclusive rights to this name.
Question 7
Outline three methods of sale promotion.
Answer
Loss –Leader: This form of sale promotion is used to attract customer to a location that offers a
product for sale at an extremely low cost. The business will lose profits on this loss-leader but it is
expected that this will be made up on the high sales from other products
Bargain packs offer consumers free products or discounted products if a particular item is
purchased.
Coupons allow discounts to customers on particular items when presented at a particular business
location.
Question 8
Show how two selling techniques can be used to increase sales.
Answer
Good customer relations will encourage customers to purchase a company’s goods and services and
also make recommendations to other customers. This involves being very helpful, efficient and
polite when dealing with customers.
Offering after sales services will encourage customers to buy and they will not incur this extra cost
after buying the product. These services include: delivery, installation and warranty.
Question 9
(a) Outline two ways in which consumers may be exploited.
(b) Discuss how consumers might seek redress for each way mentioned above.
Answer
(a)Consumers are exploited when they are sold poor quality goods and services. They are also
exploited when they are not given the correct weight or measure for products as stipulated on the
package or what was asked for.
(b)To seek redress consumers may contact the offending firm concerning the complaint and require
compensation. The Fair Trading Commission may be contacted if the offending firm does not
compensate the consumer. Radio talk shows have also been very effective to obtain redress from
offending firms for consumers.
Question 10
Discuss the importance of transportation to the distribution of goods from manufacturer through
middle men to consumers.

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Answer
Transportation is integral to distribution. Transportation must efficiently move goods from
manufacturers through middlemen to consumers. Goods may be transported by road rail, sea or air.
The choice of transportation is determined by the type of product, for example heavy and bulky
products are transported by rail or sea. Perishable products are transported by sea or by road in a
speedy manner.

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Section 7

Question 1
Explain the importance of two functions of the commercial bank to business.
Answer
The commercial banks offer loans and overdrafts to the business sector. Loans are required for
start-up capital and for business expansion. Overdrafts assist business to bridge finance so that
liquidity may be maintained to continue operation.
Commercial banks also provide a safe place for business to keep money. A business only needs to
keep enough cash on location that is required for its daily operations.
Question 2
Explain the benefits of two services of commercial banks to customers.
Answer
It sells travelers cheques to customers who are travelling overseas. Traveler’s cheques are a safe way
of traveling with funds overseas. They give financial advice to customers. This advice will help
customers to make informed decisions concerning investment.
Question 3
Outline two functions of the central bank.
Answer
The Central Bank is a banker to other banks. All commercial banks must keep an account with the
Central Bank. These balances are used for cheque clearing purposes between banks. The Central
Bank can also demand commercial banks to deposit a certain percentage of their total deposits with
the central bank in order to control the money supply.
The Central Bank is responsible for designing printing and issuing the country’s currency. It has the
sole authority to issue notes and coins. Any other forms of printing money is counterfeit money and
illegal.
Question 4
Explain how government is able to control inflation through the Central Bank.
Answer
The government can control inflation through the Central Bank. When the money supply is too high
monetary policies such as high interest rates, selling certificates of deposits and treasury bills and
increasing the cash reserve ratio are used to discourage borrowing and spending.
Question 5
Explain the term ‘money management.’
Answer
Money management refers to methods used to efficiently manage ones income. Preparing a budget
will ensure that an individual lives within his means and save to achieve future goals.
Question 6
Give two reasons for drafting a budget.
Answer
A budget is outlines how much of an individuals personal income is to be allotted to various living
expenditures. It provides a record of past expenditures so that the individual can analyze his
expenditures and make more efficient spending decisions. It ensures that priorities are taken care of
and that a system for savings can be developed to meet future goals.

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Question 7
Distinguish between long and short-term financing.
Answer
Short-term financing involves loans that require repayment up to five years. Short-term loans can
be accessed through commercial and merchant banks and credit unions. Long-term financing
involves loans that allow a longer payment period. Building societies and development banks
require repayment of to 20 years.
Question 8
Distinguish between savings and investment.
Answer
Savings is defined as money set aside or not spent from ones personal income. However, investment
is defined as methods of increasing wealth. It differs from savings as it involves risks. Examples of
investments include, starting a business and purchasing shares.
Question 9
Discuss the importance of the stock market to an economy.
Answer
The stock market provides a means of financing for firms. Firms that need capital to expand may
offer shares for sale. The stock market also provides an opportunity for investment. Individuals who
buy shares may resell them when the stock prices rise.
Question 10
Differentiate between two type of investors on the stock market.
Answer
Bears are speculators who sell securities because they expect the price to fall soon. Bears wish to
prevent losses by selling their shares before prices fall. However, bulls are speculators who buy
securities because they think the price will rise soon. They purchase shares as they expect to make
profits as soon as stock prices increase.

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Section 8

Question 1
(a) Identify two responsibilities of government to an economy.
(b) Show how the government of your country carries out these two responsibilities.
Answer
(a) Protection and general welfare of citizens, and protecting the environment.
(b) The government of my country protects vulnerable citizens through welfare programms. These
include food stamps and cash grants.
The government of my country protects the environment by legislation to prevent degradation of
wetlands and the extinction of certain species.
Question 2
Give two reasons why government should be the chief guardians of the environment.
Answer
For the well-being of citizens; health issues can be a consequence of pollution. This is very costly for
the economy.
Eco-tourism is a market niche that can earn foreign exchange for an economy.
Question 3
Discuss two consequences of unregulated business activity in an economy.
Answer
If businesses are not regulated by government agencies then consumers may receive poor quality
goods and services. Acceptable standards are outlined by government agencies which business
must abide by.
Businesses may also overcharge for goods such as basic food items. If basic food items are
unaffordable to the very poor and vulnerable, the consequence might be malnutrition.
Question 4
List two consumer protection laws.
Answer
The Standards Act and The weights and measures Act.
Question 5
Identify two purposes of taxation and discuss the importance of each.
Answer
Taxation may be used to discourage behaviour. Taxing firms that pollute the atmosphere, rivers and
seas will reduce pollution. Also taxing the consumption of harmful goods such as cigarettes will
reduce its consumption.
Taxation can also redistribute income by providing welfare programs and cash grants to the very
poor and vulnerable in the society.
Question 6
Differentiate between direct and indirect taxes and give two examples of each.
Answer
Direct taxes are paid by individuals directly from income earned or on the value of assets owned to
the income tax department. Examples of direct taxes are: income tax, corporate tax and capital
gains tax. Indirect taxes differ from direct taxes as they are paid to the income tax department
through the suppliers of goods and services. These taxes are levied on consumption and therefore

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are paid by individuals when purchasing commodities. Examples of indirect taxes include: value
added tax, purchase tax and excise and custom duties tax.
Question 7
Distinguish between progressive and regressive taxation.
Answer
A progressive tax system levies a higher percentage of tax on high income earners compared to
lower income earners. This ensures that higher income earners pay a larger proportion of their
income in taxes than lower income earners. However, a regressive tax system allows higher income
earners to pay a smaller proportion of their income compared to low income earners who pay a
higher proportion of their income in taxes.
Question 8
The regressive tax system is unfair and places a greater burden on the lower income earners.
Discuss.
Answer
An examples of a regressive tax is a value added tax where each persons pays a fixed percentage on
the cost of a good or service. Therefore, if $10 is the tax amount to be paid for a particular item
charged, a high income earner who receives $1000 will pay 1% of his income in taxes while another
income earner who receives $100 will pay 10% of his income in taxes. The regressive tax system is
unfair as low income earners will pay a higher proportion of their income in taxes than a high
income earner.
Question 9
Outline two ways in which governments provide assistance for businesses.
Answer
Governments assist small businesses with soft loans. They provide loans at low interest rates
through financial institutions and government agencies.
Governments also provide information, training and advice through various agencies for small
business.
Question 10
Discuss the importance of the provision of one social service by a government.
Answer
Education is a very important social service. High levels of literacy, numeracy, and skills will
increase productivity. A highly skilled workforce is also attractive to international investors who
seek new locations to expand their businesses.

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Section 9

Question1
Explain the difference between a country’s ‘Gross National Product’ and ‘National Income’
statistics.
Answer
GDP is the total money value of all output produced within a country over a year. National Income
figures includes (GDP + income from nationals abroad) – Depreciation. Therefore net National
product/NI adds overseas earnings to earnings from local production. Depreciation is subtracted to
give final National Income figures.
Question 2
What is the standard of living?
Answer
The standard of living a country is determined by level of goods and services available, ownership of
capital equipment and access to modern technology.
Question 3
Outline two methods that can be used to achieve economic growth.
Answer
Economic growth is the expansion of national income. Two methods to increase the productivity of
industrial and commercial activities include: a training of human resources and the introduction of
technology.
Question 4

Differentiate between the balance of trade and the balance of payments

Answer
The balance of trade is the difference between earnings from exports and payments for imports. The
balance of payments is a summation of the balance of trade, net invisible earnings and capital flows.
Question 5
The balance of payments always balances. Explain this statement.
Answer
The balance of payments account is governed by accounting principles. For every debit entry there
is a corresponding credit entry. Outflows are matched by inflows. The summation of the current and
capital account is zero.
Question 6
State three measures used to correct balance of payments problems.
Answer
Balance of payment problems may be corrected by tariffs, quotas and export incentives to
encourage local production for export.
Question 7
Explain the term ‘per capita GNP.’
Answer
Per Capita GNP is the value of a country’s output from local production divided by its population.
Per capita GNP figures give an idea of the average income enjoyed by each individual in a country.
Question 8
Distinguish between visible and invisible trade.

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Answer
Visible trade is the export and import of physical goods and services for example, sugar, coffee and
bauxite. Invisible trade refers to the trade of services for example, tourism and shipping.
Question 9
Explain two reasons why countries engage in international trade.
Answer
Countries engage in international trade to obtain goods that they lack the necessary raw materials to
produce.
Countries also engage in trade to obtain goods for which they do not have a comparative advantage.
Question 10
Differentiate between ‘economic growth’ and ‘economic development.’
Answer
Economic growth refers to an increase in national income and economic development is sustained
growth that is accompanied by policies established to ensure continuous growth. These include an
increase in exportation, decrease in importation, lesser dependence on foreign aid and important
infrastructural development.

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Section 10

Question 1
List three objectives of CARICOM.
Answer
Three objectives of CARICOM are:
-joint negotiations internationally
-economic integration of the region
-improved standard of living for the region
Question 2
Explain how the CSME differs from CARICOM.
Answer
This transforms the common market into a single market and economy. It establishes a single
currency for the region and the free movement of human and capital resources throughout the
region.
Question 3
Outline the main objective of the World Bank.
Answer
The World Bank provides long-term loan for developmental projects. Its main aim is the reduction
of poverty in worldwide. Loans are provided for purposes such as infrastructure and industry.
Question 4
(a) Identify two economic problems that affect Caribbean countries.
(b) Discuss one method that can be used to solve one of these problems.
Answer
(a) Two economic problems that affect Caribbean countries are unemployment and high debt
burdens.
(b) High debt burdens can be reduced by methods that increase foreign exchange earnings and
reduce dependency on imports. Support for local industries in the form of tax holidays, duty free
imports and low interest loans will reduce cost of production and thus encourage output. Lower
market prices will encourage local consumption and increase the competitiveness of products on the
international market.
Question 5
Explain the role of the Caribbean Development bank.
Answer
The Caribbean Development bank was set up to finances regional projects that contribute to the
economic growth and development of the region. For example: providing funds for roads, education
and business development.
Question 6
Give two methods that can be used to increase FDI.
Answer
Caribbean government can encourage FDI incentives with methods such as tax holidays, affordable
operating costs (labour and utility) and availability of human and natural resources.
Question 7
What is the role of the WTO?
Answer

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The WTO was set up to monitor and regulate trade among nations of the world based on their
collective agreements.
Question 8
List three international trade agreements.
Answer
Three international trade agreements are:
-The Caribbean Basin Initiative (CBI)
-CARIBCAN
-North American Free Trade agreement (NAFTA)
Question 9
Outline one trade agreement that involve Caribbean countries and explain the long term benefits of
these agreements to the Caribbean.
Answer
CARIBCAN gives Caribbean countries duty free access to markets in Canada. It ensures a steady
market for Caribbean products and thus long-term development of local industries. Other benefits
include: employment and linkage industries.
Question 10
Write brief notes on ECLAC.
Answer
The ELAC is an organization of Latin American and Caribbean countries. They aim to reinforce
economic ties among the countries of Latin America and the Caribbean.

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