Section 1 — Understanding Business Activity

Flashcards covering key definitions, concepts, application, and evaluation questions for Cambridge O Level Business Studies 7115 Section 1.

What is a need?

Something essential for survival and basic human wellbeing, such as food, water and shelter.

What is a want?

Something that people would like to have but is not essential for survival, such as a holiday, designer clothing or a new phone.

What is the difference between a need and a want?

A need is essential for survival or basic wellbeing, while a want is desired but not essential.

What is scarcity?

Scarcity occurs because resources are limited while human wants are unlimited.

Why does scarcity exist?

There are limited resources available to satisfy unlimited human wants.

What are examples of scarce resources?

Land, labour, capital and enterprise.

What is opportunity cost?

The next best alternative that is given up when a choice is made.

Give an example of opportunity cost.

If a business spends $50,000 on a new machine instead of advertising, the opportunity cost is the advertising it has given up.

Why is opportunity cost important to businesses?

Businesses have limited resources, so choosing one use of resources means giving up the next best alternative.

How are scarcity and opportunity cost related?

Scarcity means resources are limited, so choices have to be made. The opportunity cost is the next best alternative sacrificed as a result of the choice.

What is specialisation?

Specialisation occurs when a worker, business or country concentrates on producing a particular product or performing a particular task.

What is division of labour?

Division of labour is when production is divided into separate tasks, with different workers specialising in particular tasks.

Why can specialisation increase productivity?

Workers repeatedly perform a specific task, allowing them to become more skilled and faster at it, increasing output per worker.

How can specialisation save time?

Workers do not need to repeatedly switch between different tasks, so less time is lost moving between activities.

How can specialisation reduce training costs?

Workers only need to learn a limited number of tasks rather than the entire production process.

How can specialisation improve quality?

Repeatedly performing the same task can allow workers to become highly skilled, potentially reducing mistakes.

Give two disadvantages of specialisation to workers.

Work may become repetitive and boring, which can reduce motivation. Workers may also become less flexible because they specialise in only one task.

What could happen if a worker specialising in one task is absent?

Production could be disrupted if there is no other worker capable of performing that task.

How can specialisation make workers vulnerable to changes in demand?

A worker with highly specialised skills may find it difficult to move to another job if demand for their particular skill falls.

What is business activity?

Business activity involves producing goods and services to satisfy customer needs and wants.

What are the four factors of production?

Land, labour, capital and enterprise.

What is land as a factor of production?

All natural resources used in production, such as land, minerals, forests and water.

What is labour as a factor of production?

The physical and mental effort of people involved in producing goods and services.

What is capital as a factor of production?

Man-made resources used to produce goods and services, such as machinery, buildings and equipment.

What is enterprise as a factor of production?

The ability to organise the other factors of production, take risks and make business decisions.

Who is an entrepreneur?

A person who organises resources, takes risks and makes decisions to start or run a business.

What is the main purpose of business activity?

To use resources to produce goods and services that satisfy customer needs and wants.

Why do businesses produce goods and services?

To satisfy customer needs and wants and, in the private sector, generally to earn a profit.

Why is business activity important to an economy?

Businesses produce goods and services, create employment, generate income and contribute to economic activity.

What is added value?

Added value is the difference between the selling price of a product and the cost of the bought-in materials and components used to make it.

What is the formula for added value?

$$\text{Added value} = \text{selling price} - \text{cost of bought-in materials and components}$$

A business buys materials for $8 and sells the finished product for $20. What is the added value?

$$\$20 - \$8 = \$12$$

Why is added value important?

Higher added value can increase the amount available to cover other costs and potentially increase profit.

How can a business increase added value?

It can increase the selling price, reduce the cost of bought-in materials, improve the product's quality, strengthen its brand or add features that customers value.

How can branding increase added value?

A strong brand can make customers willing to pay a higher price because they perceive the product as more valuable.

How can better quality increase added value?

Customers may be willing to pay more for a higher-quality product, increasing the difference between selling price and input costs.

How can packaging increase added value?

Attractive or useful packaging can make a product more appealing and encourage customers to pay a higher price.

Why might a business not simply increase its selling price to increase added value?

Customers may be unwilling to pay the higher price, causing demand and sales to fall.

What is the difference between revenue and added value?

Revenue is the total income from sales, while added value is the difference between selling price and the cost of bought-in materials and components.

What is the primary sector?

The primary sector involves extracting or harvesting natural resources.

Give examples of primary-sector businesses.

Farming, fishing, forestry, mining and oil extraction.

What is the secondary sector?

The secondary sector involves manufacturing or processing raw materials into finished or semi-finished goods.

Give examples of secondary-sector businesses.

Car manufacturing, food processing, construction and electronics manufacturing.

What is the tertiary sector?

The tertiary sector provides services to consumers and other businesses.

Give examples of tertiary-sector businesses.

Banks, shops, hotels, restaurants, schools, hospitals and transport companies.

What is the difference between the three economic sectors?

The primary sector extracts natural resources, the secondary sector manufactures or processes goods, and the tertiary sector provides services.

Give an example of how the three sectors can be connected.

A farmer grows wheat in the primary sector, a food manufacturer turns it into bread in the secondary sector, and a supermarket sells it to consumers in the tertiary sector.

Why is the primary sector often more important in developing economies?

Developing economies may rely heavily on agriculture and the extraction of natural resources for employment, income and exports.

Why does the secondary sector often become more important as an economy develops?

Economic development can increase investment, infrastructure and demand for manufactured goods, leading to industrialisation.

Why does the tertiary sector often become more important as an economy develops?

Rising incomes increase demand for services such as banking, entertainment, education, healthcare, tourism and professional services.

Why might the importance of manufacturing decline in a developed economy?

Manufacturing may become more automated, production may move to countries with lower costs, and consumers may spend more on services.

Why can technological change affect the importance of economic sectors?

Technology can increase productivity and automation, reducing the number of workers needed in some sectors while creating new jobs in others.

Why can outsourcing affect the importance of economic sectors?

Businesses may move certain activities to specialist external businesses or other countries, changing the size and importance of different sectors.

Why might the tertiary sector be particularly important in developed economies?

Higher incomes often increase demand for services, while technology and productivity improvements can reduce employment needed in agriculture and manufacturing.

What is the private sector?

The part of the economy made up of businesses owned and controlled by individuals or private organisations.

What is the public sector?

The part of the economy owned and controlled by the government.

What is a mixed economy?

An economy where both private-sector and public-sector organisations operate.

Give examples of private-sector organisations.

Sole traders, partnerships and private or public limited companies owned by private shareholders.

Give examples of public-sector organisations.

Government departments and public corporations providing services such as public transport or utilities.

What is a key difference between private and public sector businesses?

Private-sector businesses are owned by private individuals or organisations, while public-sector organisations are owned by the government.

What is usually the main objective of private-sector businesses?

To make a profit, although they may also have objectives such as growth, survival and increasing market share.

What is usually the main objective of public-sector organisations?

To provide goods or services that meet public needs and achieve government objectives.

What is entrepreneurship?

The process of identifying a business opportunity, organising resources, taking risks and starting or running a business.

What are characteristics of a successful entrepreneur?

Risk-taking, creativity, innovation, determination, confidence, leadership, decision-making ability and willingness to work hard.

Why is risk-taking important for entrepreneurs?

Starting a business involves uncertainty, so entrepreneurs must be willing to risk their money and resources in the hope of achieving a return.

Why is creativity important to entrepreneurs?

Creativity can help entrepreneurs develop new products, services or ways of operating that meet customer needs.

Why is determination important to entrepreneurs?

New businesses often face difficulties, so entrepreneurs need determination to continue and solve problems.

Why is decision-making important to entrepreneurs?

Entrepreneurs must decide how to use limited resources, what products to sell, how to price them and how to respond to changes.

Why is innovation important to entrepreneurs?

Innovation can help a business differentiate itself from competitors and satisfy changing customer needs.

What is a business plan?

A document setting out a business's objectives and explaining how it intends to achieve them.

What information is included in a business plan?

Business objectives, details of the product or service, market research, marketing plans, production plans, human-resource requirements and financial forecasts.

What is a business objective?

A target that a business aims to achieve.

Why is market research included in a business plan?

It provides information about customers, competitors and market demand, helping the entrepreneur make decisions.

Why are financial forecasts included in a business plan?

They estimate expected revenue, costs, cash flow and finance requirements.

How can a business plan help an entrepreneur?

It provides a clear plan for operating the business and helps identify potential problems before they occur.

How can a business plan help obtain finance?

It can provide banks and investors with evidence that the entrepreneur has considered the business's objectives, market and financial requirements.

Why might a bank want to see a business plan before lending money?

The bank can use it to assess the viability of the business and the entrepreneur's ability to repay the loan.

What is one limitation of a business plan?

Forecasts may be inaccurate because future sales, costs and market conditions are uncertain.

Why might governments support business start-ups?

Start-ups can create jobs, increase economic activity, encourage innovation and increase competition.

How can governments support business start-ups through grants?

Governments can provide money that eligible businesses can use to help cover start-up or development costs.

What is a government training scheme?

A programme that provides entrepreneurs or employees with skills and knowledge needed to start or operate a business.

How can training help a new business?

It can improve the entrepreneur's management, financial, marketing or technical skills.

Why might governments provide financial support to new businesses?

New businesses may struggle to obtain finance, and supporting them can encourage employment and economic growth.

Why might governments want to encourage entrepreneurship?

Successful new businesses can create employment, increase tax revenue, encourage innovation and contribute to economic growth.

What are the main methods of measuring business size?

Number of employees, value of output and capital employed.

Is profit a method of measuring business size?

No. The Cambridge syllabus specifically states that profit is not a method of measuring business size.

How can number of employees be used to measure business size?

A business with more employees can generally be considered larger than one with fewer employees.

What is value of output?

The monetary value of the goods and services produced by a business over a particular period.

How can value of output measure business size?

A business producing a greater value of goods or services can generally be considered larger.

What is capital employed?

The total amount of capital invested in a business and used in its operations.

Why might number of employees be a useful measure of business size?

It is relatively easy to identify and compare between businesses.

What is a limitation of using number of employees to measure business size?

Businesses use different levels of automation, so one business may have fewer employees but produce more output than another.

What is a limitation of using value of output to measure business size?

Businesses producing different types of products may not be directly comparable because their products have different prices.

What is a limitation of using capital employed to measure business size?

Capital-intensive businesses may have large amounts of capital invested even if they have relatively few employees or low output.

Why is it useful to use more than one method to measure business size?

Each method has limitations, so using several measures gives a more complete picture of the size of a business.

Why might business owners want their business to grow?

To increase profit, increase market share, achieve economies of scale, increase the owners' wealth and reduce the threat from competitors.

How can growth increase profit?

Higher sales can increase revenue, while larger-scale production may reduce average costs through economies of scale.

How can growth increase market share?

Expanding sales allows the business to account for a larger proportion of total market sales.

What are the two main types of business growth?

Internal growth and external growth.

What is internal growth?

Growth achieved by expanding the business's own existing operations.