+

Business Activity

Unit 4: National wealth and the impact of business activity

+Learning outcomes

Develop knowledge of the impact that business activity may have on the environment, including pollution and global warming.

Understand the impact that business development may have on national wealth and the depletion of natural resources and sustainable development.

+Caring for the environment

We all care about the environment and most business are conscious about preserving and protecting our environment.

Can you think of any examples where the environment has been damaged through the impact of business activity?

+Caring for the environmentTo make production friendly it could:

Add costs to the

business

Present a positive image that could

boost its reputation and lead to further

sales

Result in new business

opportunities as consumers search

for environmentally friendly products

Lead to the development of new

environmentally friendly production

techniques thus reduce wastage and

cut costs

+Caring for the environment

Environmental issues have become a global issue for individuals, businesses and governments and needs addressing.

For businesses, this is both a threat and opportunity as you have seen on the previous slide. There is a danger that current production methods, products and distribution will have a negative impact on people outside the business. People may take legal action against the business which can be costly unless they change how they operate.

+Caring for the environment

Businesses may wish to adopt more ethical policies to prevent them gaining a poor reputation with their customers.

+Business in context

See worksheet

+Ethical issues and examples

You’ll find lots of examples of business ethical decisions and dilemmas in areas such as:

+SuppliersA business cannot claim to be an ethical firm if it ignores unethical practices by its suppliers such as:

Use of child labour and forced labour

Production in sweatshops

Violation of the basic rights of workers

Ignoring health, safety and environmental standards

An ethical business has to be concerned with the behaviour of all businesses that operate in the supply chain:

Suppliers

Contractors

Distributors

Sales agents

+Primark

Read the article about Primark and their suppliers.

+Pressure for businesses to act ethically

Businesses and industries increasingly find themselves facing external pressure to improve their ethical track record.  An interesting feature of the rise of consumer activism online has been increased scrutiny of business activities.

Pressure groups are a good example of this. Pressure groups are external stakeholders they

Tend to focus on activities & ethical practice of multinationals or industries with ethical issues

Combine direct and indirect action can damage the target business or industry

+Example of a campaign

+Direct consumer action

Direct consumer action is another way in which business ethics can be challenged. Consumers may take action against:

Businesses they consider to be unethical in some ways (e.g. animal furs)

Business acting irresponsibly

Businesses that use business practices they find unacceptable

Consumer action can also be positive – supporting businesses with a strong ethical stance & record.  A good example of this is Fairtrade.

+Is ethical behaviour good or bad for business?You might think the above question is an easy one for businesses to answer? Surely acting ethically makes good business sense? As with all issues in business studies, there are two sides to every argument:

The advantages of ethical behaviour

The disadvantages of ethical behaviour

Higher revenues – demand from positive consumer support

Higher costs – e.g. sourcing from Fairtrade suppliers rather than lowest price

Improved brand and business awareness

Higher overheads – e.g. training & communication of ethical policy

Better employee motivation and recruitment

A danger of building up false expectations – promises they cant keep

New sources of finance – e.g. from ethical investors

+Externalities: the social costs and benefits of business activityBusiness activity incurs social costs and benefits that have an impact outside businesses themselves. These are called external costs, or externalities. Typical external costs of business activities include:Destruction of

the countryside

such as chemicals,

waste, buildings and

new roads

Disturbance of people living

close to the new motorway

Destruction of wildlife and its

habitatPollution from smoke, traffic, chemicals and

noise

Increase in global

warming –cutting

trees and burning

coal

Social factors such

as unemployment and loss

of amenities when a factory closes

+Externalities: the social costs and benefits of business activityExternal benefits include:

Increased employment from the expansion on business e.g. new

factories

Economic regeneration of an area if new

businesses move in

Increased training of a local

workforce, making the

workforce more adaptable

Improved amenities and

living standards

such as new schools and

roads

+Business in context

See worksheet

+Activity 4.1

Make a list of the external benefits and costs of producing and using coal. Do you think that the benefits outweigh the costs, or not? Justify your answer.

+Dealing with external costs

External costs

Private action

Government action

Pressure groups

Internationalisation

+Internationalisation

Internationalisation, where a supplier accepts responsibility for the external cost and absorbs the cost of putting it right. For example, a construction company building a new road may pay the costs of excavating, removing and restoring an archaeological site in a new location.

+Pressure groups

Pressure groups, such as Greenpeace International which operates throughout Asia, Africa, Europe, the Americas and the Pacific to protect and conserve the environment, can demand that governments and private firms take externalities into account which projects such as a nuclear generating station.

+Private action

Private action by firms or individuals is often intended to improve their own public image, but may go a long way towards paying for social costs. Such action may be, for example, a manufacturer reducing emissions of gasses harmful to the atmosphere. Or even a football club paying for the policing of the neighbourhood around its ground when there is a match.

+Government action

Government action that cover externaltities include:

Taxation and subsidies

Introducing a pricing system, such as parking meters and tolls

Direct controls, such as planning controls and licensing

Providing goods and services through the public sector, either free or subsidised

+Cost-benefit analysis: measuring social costs and benefitsThere is a procedure called cost-benefit analysis that weighs up the social costs and the benefits of their business activities. The basic procedure involves:

1. Identifying all costs and benefits connected to the acitvity including future costs and benefits

2. Putting a financial value on the costs and benefits

3. Comparing the total cost with the total benefit value

If the benefits exceeds the costs then the activity should go ahead.

+Problems with cost-benefit analysis

Some business activities provide benefits for some consumers but costs for others

Difficulty to put a value on some social costs or benefits, such as protecting endangered species

+National wealth, livings standards and economic growth

The wealth of a country lies in its natural resources or other productive assets. How efficiently the country uses its natural resources and other productive assets will determine the standard of living for those in the country.

The efficiency of a country using its natural resources is measured by the amount of goods and services that are produced using them (GNP – gross national product).

An increase in goods and services produced will lead to a higher quality of living.

+Economic growth and sustainability

To be a lasting benefit, growth must be sustainable. But despite major advances in technology and communications that have increased productivity and factors of production, the basic economic problem remain:

People have potentially unlimited wants

The resources available to satisfy them are limited

As the world population is increases, pressure on these scarce resources increase with it.

+How they are connected

Sustainability

Economic growth

National wealth

Impact of business activity

Externalities

Cost-benefit analysis

Dealing with

external costs

External benefits

External costs

+Activity 4.2Economic growth is achieved largely through increasing production of goods and services. Usually, within a country some industries are growing (increasing production) whilst others may be in decline (decreasing production).

1. Identify and research an industry that is increasing its level of production

2. Find out why this is happening. For example:

Demand for the product may be growing either in the home market or abroad.

New technology may be improving production techniques or productivity.

The raw materials from which the product is made may have become more easily or cheaply available.

3. Do you think the increase in production is sustainable? Explain your answer.

+Exemplar exam question

See worksheet

+Key terms

Cost-benefit analysis – a method of comparing the overall costs and benefits, including social costs and benefits, of a business activity or project

Economic growth – a measure of how well a country is doing: it is shown through the GNP of the country

Environmentally friendly – activities that conserve the environment or do not deplete scarce resources

External costs/externalities – the social costs and benefits of business activity borne by the wider community

National wealth- the natural resources and other productive assets

Social costs and benefits – costs and benefits to society as a whole rather than to the business

Sustainability- the likelihood of being able to maintain levels of production

+Summary

1. Some activities of business are harmful to society or the environment.

2. These are social costs external to the business.

3. External costs may be dealt with by internalisation, pressure groups, private action by firms or individuals, or government action.

4. Cost-benefit analysis is a method of comparing the total costs and benefits of a business activity or project, including social costs and benefits.

5. The wealth of a country lies in its natural resources and other productive assets.

6. How efficiently a country uses its natural resources and other productive assets will determine the general standard of living of those living in the country.

7. Economic growth through increasing GNP (gross national product) will increase the wealth and living standards of a country.

8. To be of lasting value, growth must be sustainable.