Chapter (1)
Understanding business activity
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Business activity
• 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( land , labour , capital and enterprise) to produce the goods
and services to satisfy(meet) those wants – this creates scarcity
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Business activity
• four factors of production
- land : used to cover all of the natural resources provided by
nature ( fields, forest, oil , gas etc)
-labour: this is the number of people available to make products
or services
- capital: the finance, machinery and equipment needed for the
manufacturing of goods
- enterprise: 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 ( the owner of a business and are called
entrepreneurs)
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Business activity
• Limited resources
Opportunity cost is
- the next alternative given up by choosing another item
For a business , buy Machine A or B?
The business decides to buy Machine A , so Machine B becomes
the opportunity cost
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• Purpose of business activity/ def of business
• Combines scare factors of production to produce goods and services
to satisfy the needs and wants of customers for profit
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• Division of labour
• Def: when the production process is split up into different tasks and
each worker performs one of these tasks
• Specialisation
• Def: occurs when people and businesses concentrate on what they
are best at
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• Specialisation and the division of labour
- Advantages
- Workers are trained in one task and specialise in this – this increases
efficiency and output
- Less time is wasted moving from one workbench to another
- Disadvantages
- Workers can become bored doing just one job- efficiency might fall
- If one worker is absent and no one else can do the job, production might be
stopped
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Added value
Added value is the difference between the selling price of a product
and the costs of bought in material and components (parts)
Added value = selling price – material costs
•
Added value
• Selling price of a product = material costs + other costs + profit
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Why is added value important?
• The business can pay other costs such as labour costs, management
expenses and costs such as advertising and power
• May be able to make a profit if these other costs total less than the
added value
Added value – other costs = profit
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How could a business increase added value?
• 1. Increase selling price
-keep the material cost the same
-tries to create a higher quality image for its product or service
( other costs might increase when trying to create quality image)
• For example:
10= 4+(2+4)
12= 4+(3+5)
• 2. Reduce the cost of material
- keep the selling price the same
-could use cheaper materials and components
Lower price materials might reduce the quality of the product
• Therefore, ( material cost reduced but not effect material quality ): save transportation cost of material ,
discount from bulk purchase
• For example : 10= 4+(2+4)
10= 3 +(2+5)
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