🧃Needs
A need is a good or service that is essential for living.
Examples:
- Food
- Clean water
- Clothing
- Shelter
Business Activity
This chapter explains why businesses exist, how scarce resources create choices, and how firms combine land, labour, capital and enterprise to produce goods and services. It also covers opportunity cost, specialisation, division of labour and added value.
Needs and wantsEconomic problemFactors of productionOpportunity costDivision of labourAdded value
Topic 1: Core Business Concepts
Start here: students learn the basic economic ideas that explain why businesses exist and why choices must be made.
1. Needs and Wants
✨Wants
A want is a good or service that people would like to have but which is not essential for living.
Examples:
- Expensive smartphone
- Luxury car
- Designer clothes
- Holiday
Important point: human wants are unlimited, but the resources available to satisfy them are limited.
2. The Economic Problem
The economic problem exists because:
Unlimited wants + limited resources = scarcity
There are not enough resources available to produce all the goods and services that everyone wants.
Simply increasing the amount of money in an economy does not solve the economic problem because printing more money does not automatically create more goods and services.
Scarcity
Scarcity means there are insufficient products and resources to satisfy all the wants of the population.
Because resources are scarce, individuals, businesses and governments have to make choices.
3. Factors of Production
Factors of production are the resources needed to produce goods and services.
There are four factors of production:
| Factor | Meaning | Examples |
|---|---|---|
| Land | Natural resources provided by nature | Land, forests, oil, gas, minerals |
| Labour | People available to produce goods and services | Factory workers, teachers, shop workers |
| Capital | Finance, machinery and equipment used in production | Machinery, equipment, money invested |
| Enterprise | Skill and risk-taking ability used to organise the other factors of production | Entrepreneur/business owner |
The person who brings the factors of production together and takes the risks involved in starting or operating a business is an entrepreneur.
Important chain to remember
Limited factors of production→Scarcity→Choice→Opportunity cost
4. Opportunity Cost
Opportunity cost is:
The next best alternative given up when making a choice.
Because resources are limited, choosing one option normally means giving up another.
Examples
👤Individual
A person has enough money for either a holiday or a new car.
If the person chooses the holiday, the car is the opportunity cost.
🏭Business
A business can afford either Machine A or Machine B.
If it chooses Machine A, Machine B is the opportunity cost.
🏛️Government
The government can build either a new school or a new road.
If it builds the road, the school is the opportunity cost.
Exam point: Opportunity cost is not simply the money spent. It is the next best alternative that has been sacrificed.
Topic 2: Specialisation and Division of Labour
This topic explains how work can be organised to improve efficiency, and also why specialisation can create problems.
5. Specialisation
Specialisation occurs when people or businesses concentrate on the activities that they are best at.
Specialisation has become increasingly common because:
- specialised machinery and technology are widely available
- businesses need to keep costs low because of competition
- specialisation can increase efficiency and contribute to higher living standards.
6. Division of Labour
Division of labour occurs when the production process is divided into separate tasks and each worker specialises in one task.
🪑Furniture factory example
For example, in a furniture factory:
- one worker cuts the wood
- another assembles the furniture
- another polishes it
- another handles packaging or delivery
Division of labour is therefore a form of specialisation.
Advantages of Division of Labour
1. Increased efficiency
Workers repeatedly performing the same task become skilled at it.
Result: output can increase.
2. Less time wasted
Workers do not continually move between different jobs or workstations.
Result: production can become faster.
3. Lower training costs
Workers only need to be trained for a limited number of tasks.
Result: training can be quicker and cheaper.
Disadvantages of Division of Labour
1. Boredom
Repeating the same task can become monotonous.
Result: motivation and efficiency may fall.
2. Dependence on individual workers
If a specialised worker is absent and nobody else can perform the task, production may be disrupted or stopped.
Exam technique
Do not just state:
“Division of labour increases efficiency.”
Develop the answer:
Workers become highly skilled at one particular task, allowing them to complete it more quickly. This can increase the firm's output and potentially reduce production costs.
Topic 3: Purpose of Business Activity
This topic links factors of production to the goods and services businesses produce for customers.
7. The Purpose of Business Activity
Businesses exist to combine factors of production to produce goods and services that satisfy people's wants.
📦Goods
Physical products that can be seen and touched.
Examples:
- Cars
- Shoes
- Furniture
🤝Services
Activities provided to customers rather than physical products.
Examples:
- Banking
- Insurance
- Tourism
Businesses can differ considerably. They may be:
- small or large
- privately owned or government owned
- owned by one person or many shareholders
However, all businesses combine factors of production to produce goods or services.
Business activity also:
- combines scarce resources
- produces goods and services to satisfy needs and wants
- provides employment
- pays wages that allow workers to purchase goods and services.
Topic 4: Added Value
This topic explains how businesses create value, calculate added value, and understand why added value is not the same as profit.
8. Added Value
Added value is one of the most important ideas in this chapter.
Definition
Added value = Selling price − Cost of bought-in materials and components
It is the difference between what a business sells a product for and the cost of the materials/components bought from other businesses.
Example
Selling price$100
Bought-in materials cost$40
Added value$100 − $40 = $60
Important: Added value is NOT the same as profit.
The business still has to pay other costs from the added value, such as:
- wages
- advertising
- electricity
- management costs
The book illustrates this with a house sold for $100,000 where bought-in materials cost $15,000. The $85,000 difference is added value, but it is not all profit because other costs still have to be paid.
9. Why Is Added Value Important?
A business needs to add value so that it can:
💵Pay other business costs
For example:
- wages
- management expenses
- advertising
- power
📈Earn profit
If the added value is greater than the other costs of operating the business, the business may make a profit.
10. How Can a Business Increase Added Value?
There are two main methods.
Method 1: Increase the selling price while keeping material costs the same
A business may persuade customers to pay more by creating a higher-quality image.
Possible methods include:
- better customer service
- attractive presentation
- higher-quality packaging
- creating a premium image
Possible problem: Increasing prices may cause customers to buy less, especially if competitors offer similar products more cheaply.
Method 2: Reduce the cost of bought-in materials while keeping the selling price the same
A business could:
- find cheaper suppliers
- negotiate lower material prices
- use cheaper materials
Possible problem: Cheaper materials could reduce product quality, which might cause customers to stop buying the product.
The textbook stresses that attempts to increase added value can themselves create disadvantages, so students should consider the effect on customers, sales and costs.
11. Added Value: Exam Example
A bakery spends $0.30 on the flour, sugar and butter used to make a cake.
Selling price = $1.00
If customers are willing to pay $1.50 because the cake is served at a table:
The bakery has increased the value customers place on the product by improving the way it is provided. The chapter uses this type of bakery example to reinforce the concept.
Topic 5: Revision and Exam Focus
Use this final topic to memorise key definitions and check the skills needed for examination questions.
12. Key Definitions to Learn
| Term | Exam-ready meaning |
|---|---|
| Need | A good or service essential for living |
| Want | A good or service people would like to have but which is not essential |
| Economic problem | Unlimited wants but limited resources, creating scarcity |
| Factors of production | Resources required to produce goods and services |
| Scarcity | Insufficient resources/products to satisfy all wants |
| Opportunity cost | The next best alternative given up when making a choice |
| Specialisation | People or businesses concentrating on what they are best at |
| Division of labour | Dividing production into separate tasks, with workers specialising in particular tasks |
| Business | An organisation that combines factors of production to produce goods and services that satisfy wants |
| Added value | Selling price minus the cost of bought-in materials and components |
What You Must Be Able to Do in the Examination
By the end of Chapter 1, students should be able to:
- distinguish between needs and wants
- explain why scarcity creates the need for choice
- identify and explain the four factors of production
- calculate or identify opportunity cost
- explain specialisation and division of labour
- analyse advantages and disadvantages of division of labour
- explain the purpose of business activity
- distinguish between goods and services
- define and calculate added value
- explain why added value is important
- explain ways a business can increase added value
- recognise that increasing added value may also create disadvantages.
These areas correspond closely to the chapter's own revision checklist and exam-style coverage.
Chapter 1 formula to remember
Added value = Selling price − Cost of bought-in materials and components