Chapter 1 The Purpose Of Business Activity 574x5j

Source: Cambridge IGCSE Business Studies, 4th edition, Karen Borrington & Peter Stimpson

Notes Chapter 1: Business Activity

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The Purpose of Business Activity

 People have unlimited wants.  The four factors of production are in limited supply.  Scarcity results from limited resources and unlimited wants.  Choice is necessary - opportunity cost.  Specialisation improves the efficient use of resources.  Businesses – They combine factors of production to make products ( goods and services) which satisfy people’s wants.

 Business activities…… a) combines factors of productions to produce goods and services. b) produces goods and services which are needed to satisfy the population’s needs and wants. c) employes people as workers and pays them wages to allow them to consume products made by others.  Need – It is a good or service essential for living. Example: water, food, shelter, clothes and money.


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 Want – It is a good or services which people would like to have but which is not essential for living. People’s wants are unlimited.

The Economic Problem  There are unlimited wants but limited resources to produce the goods and services to satisfy those wants.  It is the real cause of the scarcity of goods and services because there are not enough factors of production to make all of the goods and services that the populuations needs and wants.  Scarcity – It is the lack of sufficient products to fulfil the total wants of the population.  Factors of production – The resources needed to produce goods and services. There are four in total and limited supply. Factors of Production  Land - It covers all the natural resources. It includes fields, forests, oil, gas and other mineral resources.  Labour – It is the people who make the product.


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 Capital – It is the finance needed to purchase machinery equipment for the manufacture of goods.  Enterprise – It is the skill of the people who bring the other resources to produce goods and services. Limited resources. The Need to Choose  In any one country, factors of production are limited in supply. Therefore, there is an economic problem of scarcity.  Because resources are limited, we have to make choices. We have to decide which wants we will satisfy and those which we will not. All choices involve giving something up (opportunity cost).  Opportunity cost – It is the next best alternative given up to acquire or achieve something else. Specialiasation. The Best Use of Limited Resources  Specialisation- It occurs when people and businesses concentrate on what they are best at.  It is important to use resources in the most efficient ways possible.  Machinery and technology are now widely used.  Larger firms often employ workers that specialise in one skill and most businesses specialise on one product. Division of Labour


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 It 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. Advantages: a) Workers are trained in one task and specialise in this which increases

efficiency and output. b) Less time is wasted moving from one workbench to another. Disadvantages: a) Workers can become bored doing just one job and efficiency might fall. b) If one worker is absent and no one else can do the job, production might be stopped.

Added Value  It is the difference between the selling price of a product and the cost of bought in materials and components.  It is the increased worth that a business creates for a product.  If value is not added to the materials and components that a business buys, other costs cannot be paid for and no profit will be made.  Added value is important because…….. a) Sales revenue is greater than the cost of materials bought in by the business. More resources can get from www.MyBusinessStudies.com

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b) It can pay other costs such as labour costs, management expenses and costs such as advertising and power. c) It may be able to make profit if these other costs total less than the added value.

 We can increase added value by ……. a) Improving the quality b) Convenience and speed c) Packaging d) Brand name e) Good design f) Unique selling point/ proposition (something that makes the product worth paying extra for) g) Increaseing selling price but keeping the cost of materials the same h) Reducing the cost of materials but keeping the price the same


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