O Level Commerce (7100)
Chapter 1: The Purpose and Nature of Business Activity
Business activity exists to satisfy human wants and needs by producing goods and services.
Resources are limited, which creates the need for choices and trade-offs.
1. Needs and Wants
- Needs: Essential for survival (e.g., food, water, shelter, clothing).
- Wants: Non-essential but desirable (e.g., smartphones, cars, luxury goods).
2. The Economic Problem
Resources (land, labor, capital, enterprise) are scarce, while human wants are unlimited. This
creates scarcity, which forces individuals and businesses to make choices.
3. Factors of Production
- Land: Natural resources (e.g., oil, water, forests).
- Labor: Human effort in production (e.g., factory workers, teachers).
- Capital: Man-made resources used in production (e.g., machinery, tools).
- Enterprise: Entrepreneurs who take risks to combine resources and create businesses.
4. Specialization and Division of Labor
Specialization: When individuals, firms, or countries focus on producing specific goods and services
to increase efficiency.
Division of Labor: Splitting production into tasks, increasing productivity (e.g., assembly line
production in a car factory).
5. Types of Business Activity
- Primary Sector: Extracting raw materials (e.g., farming, mining).
- Secondary Sector: Manufacturing products (e.g., car production, textile factories).
- Tertiary Sector: Providing services (e.g., banking, retail, transport).
6. Adding Value
Businesses add value by increasing the worth of a product through branding, convenience, design,
and quality, allowing them to sell at a higher price than production costs.
7. Business Objectives
Common business objectives include:
- Profit Maximization: Aim to make the highest possible profit.
- Growth: Expand operations and market share.
- Survival: Ensuring business continues operating, especially in difficult times.
- Social Responsibility: Ethical practices and environmental concerns.
Past Paper Practice Questions
1. Define the term 'opportunity cost' and explain how it affects business decisions.
2. Explain how division of labor can improve productivity in a factory.
3. Discuss the benefits and drawbacks of specialization for an economy.