Business Activity B1.1

Section 1: Understanding business activity

What is the purpose of business activity?

To provide customers with goods or services that meet their wants and needs.

Needs vs Wants

What are wants and needs?

  • Needs are things we cannot live without. They are essential for life.

    For example: food, water and shelter.

  • Wants are things that we do not need in order to survive, but are things we would like to have.

    For example: Expensive cars, jewelry, newest phone.

Wants are unlimited. They are constantly being introduced and invented. This means we are never really satisfied. However, our earth has limited resources.

Endless wants cause economic problems. This is the shortage of goods and services.

Factors of Production

There are 4 factors of production:

Land, Capital, Labour and Enterprise

Land

  • Natural resources that can be obtained from nature. This includes physical land, or resources that can be extracted from Nature, such as coal, oil and gas.

Capital

  • The money and investment but into a business. As well as finance, this includes the machinery and equipment needed for the production of a problem.

Labour

  • People who work in the business

  • Workers who contribute their skills to the production of a good or service. The reward for labour is a wage/salary

Enterprise

  • Is the process of bringing together the other 3 factors of production in order to create goods or services for the consumers.

The people who manage Enterprises are called Entrepreneurs. An Enterpreneur takes risks in order to create profit.

Scarcity

Scarcity occurs when there is not enough goods or services to meet the needs of the population.

It is the gap between limited resources and limitless wants.

  • Scarcity requires people to make the desicion on how to alocate these resources efficiently. They want to satisfy all basic needs as well as many additional wants possible.

For example, the population may want 1 million iphones, however we do not have enough resources to create 1 million iphones. This is an example of scarcity.

Opportunity cost

Opportunity cost: Loss of one alternative when another alternative is chosen.

An example of an opportunity cost is having to decide between going to the cinema, or studying for a test. You decide to stay at home at study for the test because you want good grades. Going to the cinema and watching a movie is the opportunity cost.

  • Business example: A farming business has unhealthy vegetable crops but many fields of wheat. They have to choose bewteen buying 2 new tractors to harvest the wheat more efficiently, or using the money to treat their crops. They decide to buy the tractors. Having healthy vegetable crops is the opportunity cost.

Specialisation

When a person/business focuses on an area that they are very good at. This means they are very skilled in or have a very comprehensive understanding of a specific area. This is also called an expertise.

  • This can be a product, service or a skill.

  • For example, the following jobs: Dentist, Suregon, Pediatrician. These are all doctors, however the specialise in different areas.

Division of Labour

This refers to different workers performing different tasks in the course of creating a good or service.

  • This enables workers to focus and specialise in a specific task.

  • If workers can concentrate on a specific task, there will be increased efficiency.

Divison of labour is very important in mass production, but there are good and bad sides to this.

Benefits

  • Saving time

  • Increasion productivity

  • Giving employees activities that suit each of their skills,

Disadvantage

  • Fall in motivation (it gets too boring)

  • If an employee in a specific area is absent, the production may be disrupted.

Adding Value

Adding Value: when the selling price of an item is higher than the cost of all the resources used.

Resources: Raw materials, equimpent, buildings and staff

Added value is not the same as profit. It is when business add extra features to their products before selling them.

  • For example, a business wants to sell logs of wood. These logs of wood do not seem very appealing to the population, so a carpenter transforms these logs into a chair. This product, made of the same resources, is now much more appealing.

Another example

A car is sold for a price of $10,000.

  • The sum of the cost of materials (tyres, glass, metal) needed to make the car comes up to $3000.

10,000 - 3,000 = 7,000

This is the value added.

  • It is not the profit because we still have to pay the staff wages, and pay rent for the building it was manufactured in.

  • It does not take into account rent or staff wages.