Principles of Business
THE NATURE OF BUSINESS
LESSON NOTES 2
THE NATURE OF BUSINESS
• Brief history of trading instruments from subsistence economy to
money economy,
• Trading instruments refer to the different types of markets you can
trade. Sometimes called securities, they range from commodity futures
to stocks and CFDs, to currencies,textiles, metals, and more.
THE NATURE OF BUSINESS
• Brief history of trading instruments from subsistence economy to money
economy.
• The first phase:
• One product was exchanged for another, without the use of “currency”, or a
“third product”, e.g. one bag of wheat was exchanged for one set of clothes.
This therefore was the exchange rate that became the norm:
• 1 set of clothing = 1 bag of wheat
Brief history of trading instruments from subsistence economy to money
economy.
• The second phase:
• During this phase, a “third thing” in which the value of goods could be
expressed was introduced. Such a “third thing/article” normally comprised a
product that was regarded as valuable in particular communities, e.g. a sheep,
which was significant of a person’s wealth. Barter (exchange transactions) could
therefore be entered into in relation to the value of a sheep or a number of
sheep, e.g.:
• 2 sets of clothing = 1 sheep = 2 bags of wheat
Brief history of trading instruments from subsistence economy to money
economy.
• The third phase:
• During this phase, an exchange medium that remained generally
acceptable but overcame the shortcomings mentioned above became
necessary. Metals like copper, silver and gold, which were regarded as
“precious”, proved to be particularly suitable for use in this regard and
for acceptance as medium of exchange. In terms of our example, we
would present this as follows:
• 1 set of clothing = 1 oz of silver = 1 bag of wheat
Brief history of trading instruments from subsistence economy to money
economy.
• The fourth phase:
• Because of the danger linked to carrying large amounts of “precious metals” on
long journeys undertaken to trade in distant parts, it became customary to
deposit the metals with approved goldsmiths and obtain a receipt
acknowledging the deposit (the gold certificate). It then became acceptable to
merely submit the certificates as proof in exchange transactions. The next step
had goldsmiths issuing certificates in different denominations, which also
became an acceptable medium of exchange.
Brief history of trading instruments from subsistence economy to money
economy.
• The fifth phase:
• When goldsmiths realised that the gold and silver for the certificates were not
claimed that frequently, they began issuing more gold certificates (paper money)
than could be substantiated with gold from their coffers. This was the origin of
modern paper money.
Brief history of trading instruments from subsistence economy to money
economy.
• The sixth phase:
• The most recent developments, besides printing of notes and minting of coins,
involve the use of cheques and credit facilities. An amount is paid into a current
account at a bank and the account holder can then write out a cheque to present
as payment. The recipient of the cheque can deposit the money (cheque amount)
into his or her own account or withdraw it as cash. In this way a cheque
performs all the functions of currency.
Activity 1:SUBSISTENCE ECONOMY
• Part 1
• GROUP:
• Your group has survived the accident that forced the aeroplane in which you were travelling to crash down on a remote
island. Having regained consciousness, you find that the wreck of the aeroplane was destroyed in an explosion after the
disaster. The island is small and has a relatively high rainfall.
• HOW WILL YOU GO ABOUT TO PROVIDE IN YOUR NEEDS IN ORDER TO ENSURE SURVIVAL? (Suggestion:
Begin by determining what your immediate needs are). (Submit a brief list.)
Activity 1:SUBSISTENCE ECONOMY
• Part 2
• GROUPS:
• Try to identify the characteristic features of an economic situation in which you have to be self-sufficient.
• During the next phase of economic development, which is characterised by SPECIALISATION, SURPLUSES AND
EXCHANGE, communities/families produced sufficient products to have surpluses that they could exchange for other
products that they needed.
THE NATURE OF BUSINESS
• (a) bills of exchange - A bill of exchange is a written order used primarily in
international trade that binds one party to pay a fixed sum of money to
another party on demand or at a predetermined date. Bills of exchange are
similar to checks and promissory notes—they can be drawn by individuals or
banks and are generally transferable by endorsements.
THE NATURE OF BUSINESS
• (a) bills of exchange
• Features of Bills of Exchange are as follows:
• 1. It is always in writing
• 2. It is an order to make payment
• 3. The order is unconditional
• 4. The creator of the bill needs to sign it
• 5. Date of payment is also provided
• 6. The amount given on the bill is either payable on demand or on the expiry of
the bill.
•Advantages of bills of exchange:
•The bills of exchange as instruments of credit are used frequently in business because of the
following advantages:
Framework for relationships: It is an instrument which provides the framework for enabling the
credit transaction between the seller or creditor and buyer or debtor on an agreed basis.
Certainty of terms and conditions: The creditor knows the time when he would receive the money
and the debtor is also fully aware of the date by which he has to pay the money. This is due to the
fact that terms and conditions like amount required to be paid; date of payment; interest to be paid,
if any, place of payment are clearly mentioned in the bills of exchange.
•Advantages of bills of exchange:
•The bills of exchange as instruments of credit are used frequently in business because of the following
advantages:
Convenient means of credit: A bill of exchange enables the buyer to buy the goods on credit and pay
after the period of credit. However, the seller of goods even after extension of credit can get
payment immediately either by discounting the bill with the bank or by endorsing it in favour of a
third party.
Conclusive proof: The bill of exchange is legal evidence of a credit transaction implying that during
the course of the trade, buyer has obtained credit from the seller of the goods; therefore, he is
liable to pay the seller.
Easy transferability: A debt can be settled by transferring a bill of exchange through endorsement and
delivery.
•Disadvantages of bill of exchange:
•As instruments of credit the bills of exchange also have some disadvantages. They are as follows:
The bills of exchange are mainly used for short term service. Generally bills of exchange are not considered to be
a good option for banking services.
In case the bills of exchange are not accepted by the bank, then it is an additional burden on the person who
was drawn it.
The discount allowed in the bills of exchange is also like an additional cost.
The drawee is liable to pay the bills in time as the date of payment is fixed.
THE NATURE OF BUSINESS
• (b) credit cards - A credit card is a thin rectangular piece of plastic or
metal issued by a bank or financial services company, that allows
cardholders to borrow funds with which to pay for goods and services
with merchants that accept cards for payment. Credit cards impose the
condition that cardholders pay back the borrowed money, plus any
applicable interest, as well as any additional agreed-upon charges,
either in full by the billing date or over time.
Illustration of a credit card
THE NATURE OF BUSINESS
• (c) Electronic funds transfer/Electronic money transfer - An electronic
funds transfer (EFT) is the electronic transfer of money over an online
network. Electronic funds transfers can be performed between the
same bank or a different one, and can be accomplished with several
different types of payment systems.
• An EFT can be initiated by a person or by an institution like a business
and often doesn’t require much more than a bank account in good
standing.
• An electronic funds transfer is a widely used method for moving funds
from one account to another using a computer network. Electronic
funds transfers replace paper-based transfers and human
intermediaries, but provide the customer with the convenience of
doing their own banking.
• Electronic funds transfer example
• The most popular form of electronic funds transfer is a direct deposit, in which an
employee of a company preauthorizes their employer to pay their salary directly into
their bank account. However, numerous other electronic funds transfers exist, including
the following:
• ATMs.
• Online peer-to-peer payment apps like PayPal,Cashapp and Venmo.
• Pay-by-phone systems.
• Wire transfers.
• Online or mobile banking.
• Electronic checks.
THE NATURE OF BUSINESS
• tele-banking – a facility enabling customers to make use of banking
services, such as oral payment instructions, account movements,
raising loans, etc, over the telephone rather than by personal visit.
• Ecommerce - Electronic commerce or e-commerce (sometimes written as
eCommerce) is a business model that lets firms and individuals buy and sell
things over the internet. E-commerce operates in all four of the following major
market segments:
• Business to business
• Business to consumer
• Consumer to consumer
• Consumer to business
The Advantages and Disadvantages of Electronic Commerce
• E-commerce offers consumers the following advantages:
• Convenience. E-commerce can occur 24 hours a day, seven days a week.
• Increased selection. Many stores offer a wider array of products online than
they carry in their brick-and-mortar counterparts. And many stores that solely
exist online may offer consumers exclusive inventory that is unavailable
elsewhere.
The Advantages and Disadvantages of
Electronic Commerce
• E-commerce carries the following disadvantages:
• Limited customer service. If you are shopping online for a computer, you
cannot simply ask an employee to demonstrate a particular model's features in
person. And although some websites let you chat online with a staff member,
this is not a typical practice.
• Lack of instant gratification. When you buy an item online, you must wait for
it to be shipped to your home or office. However, retailers like Amazon make
the waiting game a little bit less painful by offering same-day delivery as a
premium option for select products.
The Advantages and Disadvantages of
Electronic Commerce
• E-commerce carries the following disadvantages:
• Inability to touch products. Online images do not necessarily convey the
whole story about an item, and so e-commerce purchases can be unsatisfying
when the products received do not match consumer expectations. Case in point:
an item of clothing may be made from shoddier fabric than its online image
indicates.
Reasons for establishing a business.
• To provide goods and services
• To make a profit
• To provide income for the government
• To create employment
