Business activity exists because people have unlimited wants but only limited resources. This creates the economic problem of scarcity, forcing individuals, businesses and governments to make choices about how to allocate resources. Whenever a choice is made there is an opportunity cost – the next best alternative forgone.
Factors of production
Businesses use resources, known as factors of production, to produce goods and services:
- Land – natural resources such as land itself, minerals, water and forests.
- Labour – the human effort used in production, both physical and mental.
- Capital – man‑made resources such as machinery, factories and vehicles.
- Enterprise – the ability to combine the other factors, take risks and make business decisions. People who do this are called entrepreneurs.
Specialisation and added value
Specialisation occurs when people and businesses concentrate on what they do best. It leads to higher efficiency and productivity but also means that businesses are dependent on others for goods and services they do not produce. When a firm turns inputs into finished goods it aims to add value by increasing the difference between the cost of inputs and the final selling price. Methods of adding value include improving quality, branding, packaging and providing additional services.
Advantages of specialisation
- Higher productivity and efficiency because workers and machines focus on a narrow range of tasks.
- Better quality and expertise as skills are refined and improved through repetition.
- Time saved because workers do not switch between tasks.
- Economies of scale as production volumes increase, reducing costs per unit.
Disadvantages of specialisation
- Work can become repetitive and boring, lowering motivation and increasing absenteeism.
- Workers may become over‑dependent on one skill and find it difficult to adapt if demand changes.
- Over‑reliance on other producers for inputs can cause disruptions if they face problems.
- Structural unemployment may arise if specialised industries decline or relocate.
Advantages of adding value
- Allows businesses to charge higher prices by differentiating their products.
- Creates a competitive advantage and builds customer loyalty.
- Increases profit margins because the selling price exceeds the cost of inputs.
- Enhances brand image through quality, packaging or service improvements.
Disadvantages of adding value
- May increase costs if additional features, better materials or marketing are required.
- Customers may not be willing to pay a higher price if they do not perceive extra value.
- Requires investment in research, design and staff training.
- Value‑added strategies can be copied by competitors, reducing their effectiveness.
Goods and services
Businesses can produce:
- Consumer goods – products sold to individuals (e.g. clothing, computers).
- Capital goods – man‑made resources used to produce other goods (e.g. machinery).
- Services – intangible products (e.g. banking, healthcare, education).
| Category | Description | Examples |
|---|---|---|
| Consumer goods | Physical products purchased by individuals for personal use. | Smartphones, clothing, food, bicycles |
| Capital goods | Goods used by businesses to produce other goods and services. | Factory machinery, delivery vans, office computers |
| Services | Intangible activities performed for others. | Banking, hairdressing, medical treatment, teaching |
Purpose of business activity
The primary purpose of business activity is to satisfy customers’ needs and wants by providing goods and services. In doing so businesses create employment and income, generate wealth for owners and shareholders, and contribute to the economy by paying taxes and investing in innovation. Without business activity, resources would remain unused and consumers’ needs would go unmet.
Examples and applications
Businesses exist at all scales. A local bakery combines land (flour, water), labour (bakers), capital (ovens and a shop) and enterprise (the owner’s skills) to produce bread for the community. At the other extreme, a multinational car manufacturer sources components from around the world and assembles vehicles in automated factories using highly skilled engineers and sophisticated robots. In both cases, the aim is to satisfy customers’ wants while covering costs and earning a profit.
