1.1 Nature of Business Activity
| In this lesson you will learn: |
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✅ Concepts of needs, wants, scarcity and opportunity cost ✅ Importance of specialisation ✅ Purpose of business activity ✅ The concept of adding value and how added value can be increased |
1.1 The Purpose and Nature of Business Activity
The purpose and nature of business activity is a straightforward introduction to the IGCSE course. However, it’s important to learn a simple definition for each new concept. You may be asked short answer definition questions like this one:
| Past Paper Question Example Paper 1 (a) Identify two examples of human needs Need 1:………………………………………………………………………………………………………….. Need 2:………………………………………………………………………………………………………….. [2] |
Concepts of needs, wants, scarcity and opportunity cost
Needs are goods or services we need to survive. Examples include food, drink and shelter.
Wants are goods and services people or consumers desire but aren’t essential for survival. This could be a holiday stay at a luxury hotel or a PlayStation 5.
Scarcity occurs as there are not enough resources, goods or services to provide for consumers’ unlimited wants.
Opportunity Cost is the potential benefit a business misses out on when choosing one alternative over another. A business may have a choice between investing in new machinery or an advertising campaign. If the business chooses the new machinery, the opportunity cost of the decision to buy machinery will be that it can’t benefit from the advertising campaign.
Importance of specialisation and the purpose of business activity
Specialisation means people in business focus on what they do best. A shoe store focuses on selling shoes only, not clothes or food. A transport company may hire a website designer to create their website, as their expertise is in driving and vehicles, not in information technology.
The purpose of business activity is to satisfy consumers’ wants. A fast-food outlet satisfies consumers desire to eat a hamburger. A social media network satisfies users who want to connect with their friends.
The concept of adding value and how added value can be increased
Added value is calculated by subtracting the cost of materials from the selling price.
Cost of materials is calculated by adding together the costs of all the different materials to make a product.
Let’s use the example of Mac’s Hamburgers to explain further.
Value Added at Mac’s Hamburgers
| Costs: Burger bun $0.50 Salad $0.50 Burger Patty $1 Selling Price – Cost of Materials = Value Added $5 – $2 = $3 |
Value Added can be increased by increasing the selling price or reducing the cost of materials.
If Mac increases the selling price of a hamburger to $7, and the cost of materials stays the same at $2, the value added increases to $5 per hamburger.
$7 – $2 = $5
If Mac decreases the cost of materials of a hamburger to $1, and the selling price stays the same at $5, the value added will be $4 per hamburger.
$5 – $2 = $3
There are a number of ways a business can use to increase value added for consumers and justify a higher selling price.
Businesses may offer additional features. Mac could add bacon or avocado to the hamburgers they sell.
They can also improve the quality of materials. Mac’s could offer organic cheddar cheese in their burgers rather than processed cheese.
Branding is crucial in increasing added value. If consumers trust a branded product they will be willing to pay more. If Mac has a positive reputation and builds brand identity he may be able to increase prices for his burgers. Apple can charge high prices for their products due to the strength of its brand image.
