Business Activity

Every economy faces the same fundamental issue: resources are limited but human wants are unlimited.

Needs. Goods or services ESSENTIAL for survival. Without them, life is at risk:

• Food and water.
• Shelter and clothing.
• Basic healthcare.

Wants. Goods or services DESIRABLE but not essential for survival:

• Smartphones, tablets, gaming consoles.
• Holidays, restaurants, entertainment.
• Designer clothes, luxury cars, branded products.

Wants are LIMITLESS — there's no level of consumption at which people stop wanting more. Resources to satisfy them are LIMITED — finite land, finite labour hours, finite raw materials, finite capital. This mismatch is scarcity.

Why this matters for business. Businesses exist to convert resources into goods and services that satisfy customer wants. Because resources are limited, businesses must CHOOSE what to produce. Every choice has an opportunity cost — the next-best alternative given up.

Cambridge tip. Mark scheme rewards CLEAR distinctions. 'Needs are things you really want' loses marks — 'needs are essential for survival' is the precise answer.

Opportunity cost is the next-best alternative GIVEN UP when a choice is made. It's not the price paid in money — it's what else could have been done with the same resources.

Example. A business has $50,000. It can:

• Buy a new delivery van.
• Refurbish the shop floor.
• Run an advertising campaign.
• Pay off a bank loan.

If it chooses the van, the opportunity cost is the BEST of the other three (probably the refurb or the ad campaign — whichever would give the best return).

Why opportunity cost matters in business.

• Resource allocation. Every dollar spent here is a dollar not spent there. Decisions should compare alternatives, not just check 'can we afford it'.
• Time decisions. A manager spending three hours on email gives up three hours that could have gone into strategy.
• Capacity. A factory making product A can't make product B with the same machines.

Cambridge tip. When asked to apply opportunity cost to a scenario, name the SPECIFIC alternative the business gave up — don't just say 'the money'.

Every good or service is produced using a combination of FOUR resources — the factors of production. Each factor has a corresponding reward.

Land. All NATURAL RESOURCES used in production:

• Physical land for farms, factories, shops.
• Raw materials (oil, minerals, timber, fish).
• Water, sunlight, wind.

Reward: RENT.

Labour. The HUMAN EFFORT (mental and physical) put into production:

• Workers operating machinery.
• Software engineers writing code.
• Managers planning and coordinating.
• Service staff dealing with customers.

Reward: WAGES or SALARIES.

Capital. Man-made AIDS to production:

• Machinery, vehicles, computers, factories.
• Tools, office furniture, infrastructure.

(Note: 'capital' in business has TWO meanings — the man-made tools, AND the money used to start/grow the business. Cambridge usually means the first.)

Reward: INTEREST (paid to lenders) — sometimes broadened to 'return on capital'.

Enterprise. The willingness of an entrepreneur to:

• Take risks (financial, time, reputation).
• Organise the other three factors.
• Innovate and find opportunities.

Reward: PROFIT.

Cambridge tip. Memorise as PAIRS — Land/Rent, Labour/Wages, Capital/Interest, Enterprise/Profit. Mark scheme typically awards a separate mark for each pair.

Added value = Selling Price − Cost of Bought-in Materials.

It measures how much VALUE the business adds during production. If a coffee shop buys a kg of beans for $4 and sells the resulting 50 cups for$200, added value is $196 per kg.

Why added value matters.

• It's what funds wages, rent, marketing, equipment, profit.
• High added value means the business has strong margins.
• Increasing added value usually grows profits faster than just selling more.

How a business increases added value.

(a) Charge more for the same product.

• Better branding (Apple charges more than commodity electronics).
• Premium positioning (Rolex vs everyday watches).
• Better customer experience (high-end hotels).
• Targeted to high-spending customer segments.

(b) Reduce the cost of bought-in materials.

• Bulk buying / better supplier deals.
• Switch to cheaper materials without losing quality.
• Vertical integration — own the supplier.

(c) Add features the customer values.

• Personalisation, faster delivery, gift wrapping.
• After-sales service, warranties.
• Bundling related items.

Difference between added value and profit.

• Added value covers material costs only — has to pay for everything else (wages, rent, marketing, etc.).
• Profit subtracts ALL costs from revenue.

Cambridge tip. When asked HOW a business can increase added value, name TWO DISTINCT methods (e.g. branding AND lower material costs) — listing 'add more value' and 'increase value added' twice doesn't count.