1 Business activity

This chapter will explain:

• the concepts of needs, wants, scarcity and opportunity cost
• the importance of specialisation
• the purpose of business activity
• the concept of adding value and how added value can be
increased.
The economic problem: needs,
wants, scarcity and opportunity
cost
Activity 1.1
Make lists of:
a your needs – those things you think are necessary for living
b your wants – things you would like to be able to buy and own.
For example, on your needs list you will probably include clean
water, and on your wants list you may include a luxury house.

What do you notice about your two lists? Probably the really important
items are on the needs list – water, clothing for warmth and
protection, food and some form of housing or shelter. And on your
wants list? That will be up to you and your interests and tastes, but
you could probably have written a very long list indeed.
Do you already own all of the items on your wants list? If you do,
then you must be very lucky and very rich! Most people in the world
cannot afford to buy everything they want because our wants are
unlimited. In many countries, some people cannot afford to buy the
things they need and they are likely to be very poor.
Why are there so many wants and needs that we cannot satisfy?
Why are millions of people living in poverty in many countries around
the world? Most people will answer these questions by saying,
‘Because there is not enough money.’
Is the real economic problem caused by a shortage of money? An
example may help to show you why more money is not the answer to
the problem of many people’s wants and needs not being satisfied.
Case study
The government of a small country is worried about large numbers of
people who cannot afford the basic needs of life. Even those citizens
with more money are always complaining that the country is not
producing enough of the luxuries that they want to buy. The
government decides to try to ‘solve’ these problems by printing more
bank notes, doubling everyone’s incomes.
Has the government solved the economic problem of the country?
Are there now more goods for the people to buy? More houses?
More schools? More cars? Improved standard of living of the
population?
The answer to all of these questions is ‘No’. Printing more money
does not produce more goods and services. It will just lead to prices
rising so more goods cannot be afforded – you just pay more for the
same amount of goods.
The economic problem – the real
cause
The real cause of the shortage or scarcity of goods and services is
that there are not enough factors of production to make all of the
goods and services that the population needs and wants.
There are four factors of production:
• Land – this term is used to cover all of the natural resources
provided by nature and includes fields and forests, oil, gas, metals
and other mineral resources.
• Labour – this is the number of people available to make products.
• Capital – this is the finance, machinery and equipment needed for
the manufacture of goods.
• Enterprise – this is the skill and risk-taking ability of the person who
brings the other resources or factors of production together to
produce a good or service, for example, the owner of a business.
These people are called entrepreneurs.
In any one country, and in the world as a whole, these factors of
production are limited in supply. As there is never enough land, labour,
capital or enterprise to produce all of the needs and unlimited wants of
a whole population, there is an economic problem of scarcity.

The real cause of the economic problem

Limited resources: the need to
choose
We make choices every day. We have to, as we have limited
resources but so many wants. We therefore have to decide which
wants we will satisfy and which we will not. All choices involve giving
something up – this leads to opportunity cost. Should I take a bus to
school or use the money for a new pen to write clear Business Studies
notes? Do I buy a new pair of trainers or spend the money on a new
smartphone?
We do not have the resources to satisfy all our wants, so the next
best alternative that we give up becomes our opportunity cost. This
problem of ‘what to give up’ exists not only for consumers like us but
for governments and businesses too. In making choices we need to
consider carefully the opportunity cost to make sure it is not worth
more to us than the item we are buying.
Examples of opportunity cost
REVISION SUMMARY
The economic problem
The importance of
specialisation: the best use of
limited resources
In all societies the factors of production are in limited supply. It is
therefore important to use these resources in the most efficient ways
possible. The ways in which these resources are used have changed
greatly in the last 250 years. Very few products are now made just by
the efforts and skills of one worker. Nearly all workers specialise in
particular skills and many businesses specialise in one type of
product. Specialisation is now very common because:
• specialised machinery and technologies are now widely available
• increasing competition means that businesses have to keep costs
low
• most people recognise that higher living standards can result from
being specialised.
Case study
This is how Joe Sharma, a carpenter, went about making a table 250
years ago:

What do you notice about these methods of production?

• Joe did everything himself – including the cutting of the timber and
the sale and delivery of the finished table.
• Production was very low – only one table per week.
• Compare this with typical modern production methods. Two
hundred and fifty years later, Jack Sharma owns the family
business. This is how production is organised:
Specialisation and the division of
labour
Jack Sharma is using the principles of specialisation and division of
labour. He is dividing up the making of tables into different jobs and
making each worker a specialist at just one task. Division of labour
has advantages and disadvantages:
Advantages Disadvantages
• Workers are trained in one task • Workers can become bored
and specialise in this – this doing just one job – efficiency
increases efficiency and output might fall
• Less time is wasted moving • If one worker is absent and no
from one workbench to another one else can do the job,
• Quicker and cheaper to train production might be stopped
workers as fewer skills need to
be taught

Activity 1.2
a Using another product, for example, bread or clay pots, explain,
with simple illustrations, how division of labour or specialisation
could be used to make the product.
b Explain the possible advantages/disadvantages of using division
of labour (or specialisation of labour) to the business you chose.
The purpose of business activity
We have identified the following issues:
• People have unlimited wants.
• The four factors of production – the resources needed to make
goods – are in limited supply.
• Scarcity results from limited resources and unlimited wants.
• Choice is necessary when resources are scarce. This leads to
opportunity cost.
• Specialisation improves the efficient use of resources.
So far, we have hardly mentioned businesses and yet this is the
purpose of this book!
Where does business activity fit into the ideas we have already
looked at?
The purpose of all businesses is to combine the factors of
production to make products which will satisfy people’s wants. These
products can either be goods – physical items such as cars and shoes
which we can touch and see – or they can be services, such as
insurance, tourism or banking.
Businesses can be small – just one person, for example – or large.
Some businesses employ thousands of people with operations in
many different countries. Businesses can be privately owned or
owned by the state/government. They can be owned by one person or
by thousands of shareholders.
Whatever their size and whoever owns them, all businesses have
one thing in common – they combine factors of production to make
products which satisfy people’s wants.
Businesses in all sectors of industry produce goods and services by
combining factors of production

What would life be like without business activity? In simple,

undeveloped economies, businesses do not exist. Everyone attempts
to do everything for themselves – they are self-sufficient. With their
own plot of land and by their own efforts, such as hunting, they
attempt to survive and produce enough for their own needs. This is a
very basic existence and living standards are low.

Study tips
Definitions of the key terms in this book can be found in the left-hand
margins.
These definitions will be very useful to you as you study the course
so it is important that you learn these by heart.

By a slow process of specialisation, people began to concentrate on

what they were best at. They then traded those goods for others made
by people who had different skills. In this way, businesses began to be
formed, and trade and exchange of goods expanded. In today’s world,
most people specialise by working in one job for a weekly wage. With
this money, they are able to purchase a wide range of goods and
services produced by many different businesses – specialising in
different products.
Business activity therefore:
• combines scarce factors of production to produce goods and
services
• produces goods and services which are needed to satisfy the
needs and wants of the population
• employs people as workers and pays them wages to allow them to
consume products made by other people.
Added value
This is a very important idea. All businesses attempt to add value. If
value is not added to the materials and components that a business
buys in, then:
• other costs cannot be paid for
• no profit will be made.

Diagram showing value added

Example:
• The selling price of a newly built house is $100 000.
• The value of the bought-in bricks, cement, wood and other materials
was $15 000.
• The added value of the building firm was $85 000. This is not all
profit – out of this the builder must pay wages and other costs too.
Key info
Children around the world are playing with more mini LEGO people
than there are human beings on the planet. The LEGO Group add
value by putting LEGO bricks into themed building sets, such as
spaceships or pirate ships. Some sets are also linked to successful
movies such as Harry Potter and Star Wars. When The LEGO Movie
was released it further strengthened the brand and encouraged
consumers to pay a high price for the building sets.
Why is added value important?
Added value is important because sales revenue is greater than the
cost of materials bought in by the business. This means the business:
• can pay other costs such as labour costs, management expenses
and costs including advertising and power
• may be able to make a profit if these other costs come to a total that
is less than the added value.
How could a business increase added
value?
There are two main ways in which a business can try to increase its
added value:
a Increase selling price but keep the cost of materials the same. This
might be possible if the business tries to create a higher quality
image for its product or service. If consumers are convinced by this
then they might be prepared to pay higher prices and buy the same
quantity as before the price rise. A jewellery shop could employ
very experienced and knowledgeable sales staff, decorate the shop
to look luxurious and use high-quality packaging. Note though:
other costs might increase when trying to create this quality image.
b Reduce the cost of materials but keep the price the same. A
building firm could use cheaper wood, bricks and other materials
when constructing a home or shop. If the price charged to
customers stays the same then a higher added value will be made.
Note though: lower priced materials might reduce the quality of the
product. Will customers be prepared to pay the same price for a
product that they believe is of lower quality?

Study tips
Adding value is not easy for many businesses – if it was, every
business would be very successful! When some businesses try to
increase added value it can lead to serious disadvantages. For
example, just increasing the price of the product can lead to lower
sales and, perhaps, lower profit.

Study tips
You should take every chance to apply your answers to the business
in the question. A jewellery shop is likely to add value in different
ways to a hotel business or a soft drinks manufacturer.
REVISION SUMMARY
Adding value

Case study: Rakesh’s bakery

Rakesh owns a small bakery selling bread, cakes and biscuits. His
business is just making enough money to survive. His wife, Neeta,
had the idea of serving customers tea and coffee at two small tables
that could be fitted into the bakery shop. ‘Customers will pay more for
each cake and biscuit if we sell them with tea or coffee – just like a
little café.’ Rakesh bought some second-hand café equipment and
furniture and tried what Neeta had suggested. She was right! Some
of his customers not only bought teas and coffees but they paid
higher prices for the cakes and biscuits they bought as they were
served them on a plate!
Rakesh had increased the value added to the flour, sugar and
butter he used to make these cakes and biscuits.
Activity 1.3
Refer to the case study above.
a If the best-selling cake in this bakery uses 30 cents’ worth of flour,
sugar and butter and Rakesh sells each one for $1, calculate the
value added.
b If customers are prepared to pay $1.50 when this cake is served
on a plate at a table within the bakery, what is the new value
added per cake?
c Does the opening of the small café mean that Rakesh must have
increased his weekly profit? Explain your answer.
International business in focus
Division of labour at McDonald’s
The cooking of food in all McDonald’s restaurants is broken down
into small, repetitive tasks. These include serving customers, pouring
drinks, cooking French fries and cooking burgers. These separate
tasks allow workers to become very efficient and skilled in them. All
workers are given much training in the tasks that they will become
skilled at.
The speed and efficiency of McDonald’s workers means that
customers are served very quickly with freshly cooked food. Costs
are kept very low and this helps to keep prices low.
McDonald’s and other fast-food restaurants often make great efforts
to reduce the high labour turnover in this industry; this means they
are trying to reduce the high number of workers that leave the
industry each year.
Discussion points
• Why do you think a large business such as McDonald’s uses
specialisation?
• Think about as many advantages as you can to McDonald’s of
using specialisation.
• If you owned a fast-food restaurant, consider two ways in which
you could increase the value added to the food bought in by the
restaurant.
Exam-style questions: Short answer and
data response
1 Gowri plans to start up her own business using her savings. She
wants to produce fashion clothes for women. She is a very good
clothes designer but she does not like stitching clothes together.
Two friends have offered to help Gowri. Abha is an experienced
material or fabric cutter – she can cut lengths of material or fabric
for clothes with very little wastage. Aditi is quick at sewing fabric
together.
a Define ‘business’.
[2]
b Identify two factors of production that Gowri will need for her
new business.
[2]
c Outline two possible opportunity costs that Gowri may have
from her decision to start her own business.
[4]
d Explain one advantage and one disadvantage to Gowri’s
business of using division of labour in making clothes.
[6]
e Do you think that Gowri’s business will be able to sell all of the
clothes that it makes? Justify your answer.
[6]
2 Mohammed owns a bakery. He makes bread and cakes. He
employs three workers who help him mix the dough for the bread
and cakes, put the dough into tins, bake the bread and cakes, and
serve customers. Mohammed has calculated that the ‘added value’
of his business is low. His customers complain when he tries to
increase his prices. ‘We can buy the same bread and cakes at
lower prices,’ they tell him.
a Define ‘added value’.
 [2]
b Identify the opportunity cost to Mohammed of buying a new
oven.
[2]
c Outline two benefits to Mohammed’s business of all of his
workers being able to do all of the jobs in the bakery.
[4]
d Explain two ways in which Mohammed could increase the value
added of his bakery business.
[6]
e A friend told Mohammed, ‘Your business would be more
successful if you only served in the shop and let your workers
make the bread and cakes.’ Do you agree? Justify your answer.
[6]

Revision checklist
In this chapter you have learned:
the difference between wants and needs
why scarcity of resources results in choices and opportunity cost
why specialisation is important
the purpose and nature of business activity
how businesses can try to increase added value.

NOW – test your understanding with the revision questions in the

Student etextbook and the Workbook.
Definitions to learn
A need is a good or service essential for living.
A want is a good or service which people would like to have, but
which is not essential for living. People’s wants are unlimited.
The economic problem – there exist unlimited wants but limited
resources to produce the goods and services to satisfy those wants.
This creates scarcity.
Factors of production are those resources needed to produce
goods or services. There are four factors of production and they are
in limited supply.
Scarcity is the lack of sufficient products to fulfil the total wants of
the population.
Opportunity cost is the next best alternative given up by choosing
another item.
Specialisation occurs when people and businesses concentrate on
what they are best at.
Division of labour is when the production process is split up into
different tasks and each worker performs one of these tasks. It is a
form of specialisation.
Businesses combine factors of production to make products (goods
and services) which satisfy people’s wants.
Added value is the difference between the selling price of a product
and the cost of bought-in materials and components.
2 Classification of businesses
This chapter will explain:
• the differences between primary, secondary and tertiary production
• the reasons for the changing importance of business classification,
for example, in developed and developing economies
• the differences between public sector and private sector business
enterprises in a mixed economy.