SECTION 1: UNDERSTANDING BUSINESS ACTIVITY

This section introduces the underlying ideas and concepts of business and
includes the purpose and nature of business activity and how businesses
can be classified. Enterprise and entrepreneurs, and why some businesses
grow while others remain small are further important issues. How business
size can be measured, types of business organisation, business objectives
and stakeholder objectives are the concluding topics.

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IAK/IGCSE 2022/2023
Business Studies – 0450/0986
Ms.Mayada Fahmy
Assistant Examiner
 Chapter 1: Business Activity

1. The economic problem: needs, wants, scarcity and opportunity cost

Need: a good or service which is essential for living. e.g. food and clothing.
Want: a good or service which people would like to have but which is not essential for
living. e.g. mobile phones

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 include fields and forests, oil, gas, metals and other minerals resources.
 Labor: 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 Mayada the Risk Taker as she started up her business.

Unlimited wants + limited factors of production = Scarcity

Scarcity: “The lack of sufficient products to fulfill the total went of the population.”
Scarcity will lead us to make choices as we have to decide which wants we will satisfy
and those which we will not, which is opportunity cost.

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Opportunity cost: The next best alternative that was given up due to choosing another
item.”

The economic problem: unlimited wants cannot be met because there are limited
factors of production 'resources’. This creates scarcity.

IAK/IGCSE 2022/2023
Business Studies – 0450/0986
Ms.Mayada Fahmy
Assistant Examiner
2. The importance of specialization: the best use of limited resources

Specialization occurs when people and businesses concentrate on what they are best at.

Specialization is now very common because:

1. Specialized machinery and technology are now widely available.

2. Increasing competition means that businesses have to keep costs low.
3. Most people recognize that higher living standards can result from being specialized.

Specialization and division of labour.

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 specialization.

Advantages:

1. Workers are trained & specialized in one task, this increase efficiency & output.
2. Less time is wasted moving from one place to another.
3. Quicker and cheaper to train workers as fewer skills need to be taught.

Disadvantages:

1. Workers can be bored doing just one job. Efficiency might fall.
2. If one worker is absent and no one else can do the job, production might be stopped.

3. The purpose of business activity

- People have unlimited wants

- There are 4 factors of production and they are limited

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- Scarcity results from limited resources and unlimited wants
- Choice is necessary which leads to opportunity cost
- Specialisation improves the efficient use of resources

4. Added Value

Added Value is the difference between the selling price of a product and the cost of bought
in materials and components. It is one of the most important objectives of business.
All businesses want to add value because 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
IAK/IGCSE 2022/2023
Business Studies – 0450/0986
Ms.Mayada Fahmy
Assistant Examiner
How could a business increase added value?

1. Increase the selling price by:

 Branding: this will increase added value because people want or feel they should
buy this item from this company because of its high quality.
 Excellent service quality: providing high quality and/or personalized service can
be a reason to charge higher price. Example: price of a made-to-measure suit will
be higher than the price of a ready-made suit though, the cost of materials used
will be similar but the personalized service increases the added value.
 Product features: products that have more features and functions than similar
products will gain a 'novelty' factor which enables producers to charge a much
higher price. Example: the market for mobile phones.
 Convenience: goods and services that are available immediately is very
appealing to consumers nowadays as it saves their time. Example: ready –made
meals

2. Reduce the cost of materials but keep the price the same. This can be done by
using cheaper raw materials however this might reduce the quality of the product.

Important…
Added value is not the same as profit. Value is added to the component of the car &
these are many other costs & expenses that have to be taken into account.

TIP FOR SUCCESS:

1. You should take every chance to apply answers to the business in the question.
A jewellery shop is likely to increase added value in different ways to a soft drink
manufacturer.

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2. 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 profits.

IAK/IGCSE 2022/2023
Business Studies – 0450/0986
Ms.Mayada Fahmy
Assistant Examiner