Business Studies – 1.1 Business activity | e-Consult
1.1 Business activity (1 questions)
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The availability and cost of the factors of production – land, labour, capital, and enterprise – significantly impact a business's operations and profitability. Let's consider the impact of a change in the cost of labour. An increase in the cost of labour, for example due to a minimum wage increase or a shortage of skilled workers, can have several consequences.
- Increased Production Costs: Higher wages directly increase a business's variable costs. This can reduce profit margins if prices cannot be raised.
- Reduced Profitability: If a business cannot pass on increased costs to consumers through higher prices (due to competition or price sensitivity), its profitability will decrease.
- Investment in Technology: To mitigate rising labour costs, a business might invest in automation and technology to replace manual labour. This requires significant capital investment.
- Outsourcing: A business might choose to outsource production to countries with lower labour costs. This can lead to quality control issues and ethical concerns.
- Reduced Employment: In the worst-case scenario, a business might reduce its workforce to cut costs, leading to job losses.
Example: A small manufacturing company relying on manual labour might struggle with a significant rise in the minimum wage. They may need to invest in machinery, potentially leading to temporary layoffs. Alternatively, they might consider relocating production to a country with lower labour costs, but this carries risks.