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Key Fact 1.1.1: The purpose and nature of business
activity
Section 1
Unit
1.1.0.0
1.1.1.0
1.1.1.1
1.1.1.2
1.1.1.3
1.1.1.4
Fact
1 1.1.1
Understanding business activity
You should be able to
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G
Comments
Business activity
The purpose and nature of business activity
The concepts of needs, wants, scarcity and opportunity cost
Importance of specialisation
Purpose of business activity
The concept of adding value and how added value can be increased
Questions to
ask
What is
business?
Key information
New terminology
Businesses
combine factors of
production to make
products (goods
and services)
which satisfy
people’s wants.
Any organisation
that brings
resources together
to produce a good
or service (K1) to
satisfy wants (K1)
All businesses use factors of production to make goods or provide
services, in order to satisfy people’s wants.
What are
needs,
wants?
K= Knowledge
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.
A successful business will need to create a product or service that
people actually want or need.
There is a difference here.
A need is for a product you could not live without, for example, shelter,
clothing, food or drink.
In contrast, a games console is a want: you don’t have to have it, nor do
you really need it, but you would like it all the same.
Usually, essential items (items you must have) are needs, whereas
non-essential items are often wants.
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Questions to
ask
What are
factors of
production?
Key information
New terminology
There are four factors of production that a business needs to be able
to produce their products or provide their service.
The factor of
production is
those resources
needed to produce
goods or services.
There are four
factors of
production, and
they are in limited
supply.
These factors of production can be classified into four main groups:
• Capital
• Enterprise
• Land
• Labour
Type of factor
Land
Description of factor
Includes all-natural resources provided by nature
and includes fields and forests, oil, gas, metals and
other mineral resources as well as the space used
for production.
Labour
This is the number of people available to make
products, for example employees.
Capital
The finance, machinery, equipment and
buildings used to produce/manufacture goods
and services.
Enterprise
This is the skill and risk-taking ability of the
person who brings the other resources or factors
of production together to produce good or service,
for example, the owner of a business. These people
are called entrepreneurs.
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1.01
Sample questions and answers
AO1
AO2
Assessment Objectives (AO) skills to be learned and developed:
Knowledge and understanding [K]
Application [APP]
The below case study is designed to test your knowledge and understanding (AO1) and application
(AO2) of business activity.
Case study/business context:
Peter is a qualified fitness instructor. He used to work at a luxury gym in country X. Customers of this
luxury gym pay a high monthly membership fee no matter how many times they visit. There are no
additional fees. Peter enjoys helping people get fit and lose weight and he enjoys teaching exercise
classes. Peter wanted to help more people to get fit or build up their muscles, so he decided to set
up his own gym.
Sample questions:
(a) Define ‘factor of production’. [2]
Hint: What examiners are looking for?
What is the assessment objective (AO) being tested?
an entrepreneur who has identified a need for a new gym will require:
Land - naturally occurring resources, such as land and water. A gym will need land for a physical
building.
Labour - human effort, skills and knowledge. A gym will need staff who can offer advice on health
and fitness.
Capital - equipment and money used to provide goods and services. A gym will need fitness
equipment and money to pay staff.
Enterprise - the willingness to take risks, make decisions and organise resources. All of these will
be needed to open the gym.
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Questions to
ask
What is
scarcity?
Key information
New terminology
Scarcity is the lack
of sufficient
products to fulfill
the total wants of
the population.
The economic
problem – there
exist unlimited
wants but limited
resources to
produce the goods
and services to
satisfy those
wants. This creates
scarcity.
Scarcity of resources creates a basic economic problem.
Resources are limited but people’s wants are not.
Choices must be made.
Resources used to make one thing cannot be used for another
purpose.
The value of the option not selected is known as the opportunity
cost.
Scarcity is limited availability of resources to meet the unlimited
wants of people.
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Questions to
ask
What is
opportunity
cost?
Key information
New terminology
Opportunity cost
is the next best
alternative given
up by choosing
another item.
The next best alternative foregone/given up [2K]
OR
The benefit that could have been gained from an alternative use of
the same resource [2K]
OR
A benefit, profit, or value that a firm gives up in order to achieve
something else [2K]
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Questions
to ask
What is the
economic
problem –
real cause?
Key information
New terminology
Scarcity of a product is often caused by a limited supply of land,
labour, capital or enterprise. These are called the factors of
production. They are key inputs that businesses need to produce
goods and services.
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.
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Cambridge IGCSE and O Level Business Studies Year 10
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Scarcity is the lack
of sufficient
products to fulfill
the total wants of
the population.
Factor of
production are
those resources
needed to produce
goods or services.
There are four
factors of
production and
they are in limited
supply.
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Key Fact 1.1.2: Specialisation
Section 1
Unit
1.1.0.0
1.1.1.0
1.1.1.1
1.1.1.2
1.1.1.3
1.1.1.4
Fact
1 1.1.2
Understanding business activity
You should be able to
A
G
 
R
☺
Comments
Business activity
The purpose and nature of business activity
The concepts of needs, wants, scarcity and opportunity cost
Importance of specialisation
Purpose of business activity
The concept of adding value and how added value can be increased
Questions to
ask
What is
specialisation?
Key information
New terminology
Way in which work is divided so each worker concentrates on a
specific task so become expert at it [2K]
OR
When people and businesses concentrate on what they are best
at [2K]
Specialisation
occurs when
people and
businesses
concentrate on
what they are best
at.
Partial definition e.g. workers do only one job [1K]
What is the
importance of
specialisation?
Most production involves more than one person or piece of
equipment. People and businesses specialise, to try not to waste
limited resources.
This can involve division of labour where employees are given a
specific job to do.
Businesses
combine factors of
production to make
products (goods
and services)
which satisfy
people’s wants.
This should lead to:
• Less wastage of scarce resources
• Lower production costs
• Greater output from same amount of resources.
What is meant
by ‘uses
specialisation’?
Way in which work is divided so each worker concentrates on a
specific task so become expert at it. [2K]
OR
When people or business concentrate on what they are best. [2K]
At some understanding [1K]: E.g., workers only do one job.
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Questions to
ask
Key information
What are
examples of
specialisation?
Employee
•
•
Business
Region
•
•
•
•
•
•
•
Country
•
•
•
Identify two
advantages of
specialisation.
New terminology
Examples of specialisation
A skilled carpenter who focuses on producing
high-quality violins.
A pastry chef who only makes the desserts and
cakes for the restaurant.
A mortgage adviser for a bank.
Audi specialises in making cars.
The local accountants who focus on doing other
people’s tax calculations.
Nestle specialises in chocolate production.
The champagne region in France specialises in
making champagne.
The Santos region in Brazil specialises in coffee
production.
Nuwara Eliya in Sri Lanka produces some of the
world’s best tea.
Saudi Arabia specialises in extracting oil.
The Ivory Coast specialises in the production of
cocoa.
Japan specailises in technology and computing.
[0450/12/Oct/Nov/2017, Q2(a), 2 marks
Exam tips!
Possible points might include for each relevant advantage:
No mark awarded
for the following:
• Able to charge
higher price
[Hint: This is
not necessarily
true of
specialisation
in general]
• Motivate, better
reputation,
specialised as
too vague.
• Reduced
training costs
on its own
unless
explained.
•
Increased output/quicker production/increased productivity/higher
efficiency. [K]
•
Lower unit cost/economies of scale. [K]
•
Workers become expert/more skilled/focus on what they are good
at. [K]
•
Improved accuracy/better quality/fewer mistakes/reduced waste.
[K]
•
Help improve competitiveness. [K]
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For business
For employees
For the world
Benefits of specialisation
By specialising, an improvement in
quality and efficiency can lead to larger
profits.
Drawbacks of specialisation
Training of employees will often be more
varied and expensive.
Businesses may develop a positive
reputation for a particular product or
service. For example, a wedding dress
shop may become well known because of
its specialist products.
The employees may become bored with the
tasks they do each day, as they tend to be
the same. This may cause them to leave the
business.
A business may be able to charge higher
prices if it is one of the only businesses to
offer the product or service.
The product or service in which the business
specialises can become out of date or no
longer required, causing it to close.
The employees become faster at
producing the goods.
The product or service in which the business
specialises can become out of date or no
longer required, causing it to close.
Benefits of specialisation
Employees may be paid more if their skill
is in short supply.
Drawbacks of specialisation
Machines that can do the same tasks more
quickly and cheaply may replace employees.
The skills they have may mean they can
choose the job they want and the benefits
that come with it (for example, a car,
flexible working hours).
The employee may become bored with only
focusing on one or two skills.
Scarce resources are used more
effectively.
Some countries struggle to produce a
product or service that is required globally.
A country that specialises can trade
(exchange) with other countries for goods
and services that they don’t or can’t
produce.
Countries can suddenly become beaten on
price, meaning that their entire workforce is
no longer in demand.
People benefit from the jobs and incomes
that come from producing specialised
products or services.
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Questions to
ask
Explain benefits
and drawbacks
of specialisation
within a
manufacturing
process.
Key information
New terminology
0452/21/Oct/Nov/2021, Q1(a) [8 marks]
Benefits of
specialisation
[K]
1
2
3
4
5
6
Explain benefits
and drawbacks
of specialisation
within a
manufacturing
process.
Higher quantity
produced/higher
output.
Production workers
are trained in one
task.
Quicker to produce
output/increased
efficiency.
2
3
4
5
This will
lead to…
Therefore
Performing only one
task makes worker
become a skilled
expert/employee
specialises in what
they are good at.
Easier to use
machinery to
perform tasks.
Fewer mistakes
made.
Drawbacks of
specialisation
[K]
1
Sentence
connector
Production workers
may become bored
doing the same task
repeatedly.
Workers less
motivated/less job
satisfaction.
Workers cannot
cover for absent
colleagues.
Trained/skilled in one
task.
Worker only uses
skills for one task.
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Explanation of why it
is a benefit of
specialisation within
a manufacturing
process.
[AN]
increased sales.
quicker to
train/cheaper to train
workers.
less time taken by
workers moving
between tasks in the
factory.
Exam-styled
answer sample:
The production
workers are trained
in only one task (K)
therefore, it takes
less time to train
new recruits in the
factory. (AN)
more efficient in that
task/more job
satisfaction.
speeds up production.
less wastage/fewer
customer
complaints/reduced
costs of production.
Sentence
connector
This will
lead to…
Explanation of why
it is a drawback of
specialisation
within a
manufacturing
process.
[AN]
May become less
efficient and slow
down production.
Therefore
More likely to leave
the business.
Manufacturing may
halt or slow down.
Worker may find it
difficult to find
alternative
employment.
Lose other skills.
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Questions to
ask
What is the
division of
labour?
Key information
New terminology
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.
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.
What are the
advantages and
disadvantages
of division of
labour?
Advantages
Workers are trained in one task
and specialise in this – this
increase efficiency and
output.
Disadvantages
Workers can become bored
doing just one job – efficiency
might fall.
Less time is wasted moving
from one workbench to another.
If one worker is absent and no
one else can do the job,
production might be
stopped.
Quicker and cheaper to train
workers as fewer skills need to
be taught.
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Questions to
ask
What is the
difference
between
effective and
efficient?
Key information
New terminology
The words effective and efficient both mean
"capable of producing a result," but there is an
important difference. Effective means "producing a
result that is wanted". Efficient means "capable of
producing desired results without wasting
materials, time, or energy".
The difference is that when something is effective it produces a
result even if it takes some unnecessary resources to do so. When
something is efficient, not only does it produce a result, but it does
so in a quick or simple way using as little material, time, effort, or
energy as possible. The following example sentence show how the
two words are used.
•
Walking may be an effective way to get to the office, but
driving is more efficient. Both methods will get you there but
driving takes less time and energy.
The word effective puts more attention on the actual ability to
produce a desired result. The word efficient puts more attention
on the lack of waste in producing that result.
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Key Fact 1.1.3: Purpose of business activity
Section 1
Unit
1.1.0.0
1.1.1.0
1.1.1.1
1.1.1.2
1.1.1.3
1.1.1.4
Fact
1 1.1.3
Understanding business activity
You should be able to
A
G
 
R
☺
Comments
Business activity
The purpose and nature of business activity
The concepts of needs, wants, scarcity and opportunity cost
Importance of specialisation
Purpose of business activity
The concept of adding value and how added value can be increased
Questions to
ask
What are the
purposes of
business
activity?
Key information
New terminology
All businesses exist to fulfil a need or want of a customer.
Many businesses aim to make profit from doing this, with the money
going to the owners. There are businesses that invest any profits they
make into social activities and projects that try to help society. For
example, UnLtd India helps people set up and run businesses.
Businesses
combine factors of
production to make
products (goods
and services)
which satisfy
people’s wants.
However, a business cannot exist unless it has customers who want
to buy what it sells, whatever this may be.
Some of the purpose of a business may have are to:
• Create new products
• Generate large amount of sales
• Educate the local and global community to reduce pollution
and damage to the environment.
• Create large brands across the world.
• Listen to the different stakeholders.
• Support community projects and social activities.
How does
business
activity helps?
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.
How business activity helps?
Produces goods and services
which are needed to satisfy the
needs and wants of the
population.
Combine scarce factors of
production to produce goods and
services.
Employs people as workers and
pays them wages to allow them to
consume products made by other
people.
Businesses
activity: the
process of
producing goods
and services to
satisfy consumer
demand.
Demand is the
want, willingness
and capability of
consumers to buy
goods and
services.
The amount of
goods and services
consumers are
willing and able to
buy is quantity
demand.
Choice is necessary when
resources are scarce. This
leads to opportunity cost.
Specialisation improves the
efficient use of resources.
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Key Fact 1.1.4: Adding value
Section 1
Unit
1.1.0.0
1.1.1.0
1.1.1.1
1.1.1.2
1.1.1.3
1.1.1.4
Fact
1 1.1.4
Understanding business activity
You should be able to
R
A

 ☺
G
Comments
Business activity
The purpose and nature of business activity
The concepts of needs, wants, scarcity and opportunity cost
Importance of specialisation
Purpose of business activity
The concept of adding value and how added value can be
increased
Questions to
ask
What is added
value?
Key information
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.
Value added
by the
business
Selling
price of
product
Example of
value added
New terminology
Less
Material
and
bought in
costs
Added value is the
difference
between the
selling price of a
product and the
cost of bought-in
materials and
components.
Added value: The
difference between
the value of
goods/materials
bought in by a
business (K1) and
the price the
product is sold for
(K1).
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.
Selling
price of
product
($ 100,000)
Value added by
the business
($ 85,000)
Less
Material and
bought in costs
($ 15,000)
Value added by the business = Selling price of product – Material
and bought in costs
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Questions to
ask
Why is added
value
important?
How could a
business
increase
added value?
Key information
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 profit if these other costs come to a
total that is less than the added value.
There are two main ways in which a business can try to increase its
added value:
Way to increase
added value
Increase selling
price but keep
the cost of
materials the
same
Reduce the cost
of materials but
keep the price
the same.
How can
businesses
increase their
value added?
New terminology
Business tries to create a higher quality image
for its product or service.
How to create higher quality image? Employ
very experienced and knowledgeable sales
staff, decorate the shop to look luxurious and
use high-quality packaging?
However, other costs might increase when
trying to create this quality image.
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.
However, lower price materials might reduce
the quality of the product.
A business can increase the value it adds by:
• Increased specialisation and using resources as efficiently
as possible.
•
Reducing waste.
•
Reducing the costs of the natural and man-made resources
it must buy or hire, for example by finding cheaper suppliers.
•
Making products more attractive to consumers so they are
willing to pay a higher price for them.
•
Making its products more appealing to consumers through
advertising.
•
Creating a recognised brand, such as Coca-Cola, that
consumers are willing to pay more for.
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