Sample Notes: Business Activity

O Level and IGCSE Business Studies – Detailed Notes

Chapter 1.1: Business Activity

1.1.1 The Purpose and Nature of Business Activity

Concepts of Needs, Wants, Scarcity, and Opportunity Cost

Needs

• Definition: Basic human requirements necessary for survival.
• Examples: Food, water, clothing, shelter, healthcare.
• Importance: All economic systems aim to satisfy the basic needs of their population.

Wants

• Definition: Desires for goods and services that are not essential for survival but improve quality of life.
• Examples: Smartphones, branded clothes, vacations, luxury cars.
• Characteristics: Unlimited and change over time with trends, income, and preferences.

Scarcity

• Definition: The basic economic problem where resources are limited but human wants are unlimited.
• Key Concept: Scarcity forces individuals, businesses, and governments to make choices.
• Examples of Scarce Resources: Time, money, labour, raw materials.

Opportunity Cost

• Definition: The next best alternative foregone when a choice is made.
• Importance: Every decision involves giving up something else.
• Example: A government choosing to build a school instead of a hospital — the hospital is the opportunity cost.

Purpose of Business Activity

Main Purpose

• To combine scarce resources to produce goods and services that satisfy people’s needs and wants.

Role of Business

• Provides employment and income to workers.
• Produces goods (physical items) and services (intangible activities).
• Helps in economic development and growth.
• Encourages innovation and entrepreneurship.
• Improves living standards by offering better products.

Inputs and Outputs in Business Activity

• Output: Goods and services that satisfy needs and wants.

Importance of Specialisation

Specialisation Defined

• Definition: When people or businesses focus on a particular task or production process in which they are best skilled or most efficient.

Types of Specialisation

• Individual specialisation: A worker focuses on one task.
• Business specialisation: A company concentrates on producing a limited range of goods.
• Regional/national specialisation: A region or country focuses on certain industries based on resource availability or skill.

Advantages of Specialisation

• Increased productivity and efficiency.
• Higher quality due to expertise.
• Faster production due to repetition of tasks.
• Lower average costs through economies of scale.

Disadvantages of Specialisation

• Workers may become bored, reducing motivation.
• Over-dependence on one skill or industry.
• Lack of flexibility — difficult to switch roles or products.
• If demand for the specialised product falls, the business suffers.

The Concept of Adding Value

Definition

• Adding value: The process of increasing the worth of a product by modifying it or enhancing its appeal so customers are willing to pay more than the cost of inputs.

Formula

• Added Value = Selling Price – Cost of Inputs

Importance of Adding Value

• Enables businesses to make profit.
• Helps differentiate from competitors.
• Allows higher pricing without necessarily increasing costs.
• Essential for business survival and growth.

How Businesses Add Value

1. Branding
   • A strong brand name can command higher prices.
   • Example: Apple charges more due to brand loyalty.
2. Quality
   • Higher quality materials or finishes attract more customers.
   • Example: Organic food sells at a premium.
3. Customer Service
   • Excellent service increases customer satisfaction and loyalty.
   • Example: After-sales support and warranties.
4. Product Features and Design
   • Innovative or stylish features increase value.
   • Example: Sleek smartphone design or fuel-efficient car engines.
5. Convenience
   • Making products easier to access or use increases perceived value.
   • Example: Home delivery or ready-to-eat meals.

Real-World Examples

Example 1: Specialisation

• A bakery employs one person only for mixing dough, another for baking, and another for packaging. Each becomes faster and more efficient at their task.

Example 2: Opportunity Cost

• An entrepreneur chooses to invest in a clothing brand instead of a tech startup. The startup’s potential profit is the opportunity cost.

Example 3: Adding Value

• A cafe buys coffee beans for Rs. 100 and sells a cup of coffee for Rs. 400.
  • Added value = Rs. 400 – Rs. 100 = Rs. 300.

Summary Table