1.1.1 The purpose and nature of business activity: Flashcards
• 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 (16 cards)
A need
A good or service essential for living
A want
A good or service that people would like to have, but which is not essential for living
Economic problem
Unlimited wants but limited resources - this creates scarcity
Opportunity costs
The next best item is given up by choosing another
Factors of production
Resources needed to produce goods and services - land, labour, capital, and enterprise
Business
An organisation that combines factors of production to make goods and services to satisfy people’s wants and needs
Specialisation
People and businesses concentrate on what they are best at
Division of labour
Production is split into separate tasks, and each worker specialises in one task
Added value
The difference between a product’s selling price and the cost of bought-in materials
Why is added value important?
Added value is important because sales revenue is greater than the cost of
materials bought in by the business. This means the business:
- can pay other costs such as labour costs, management expenses and costs
including advertising and power - may be able to make a profit if these other costs come to a total that is less
than the added value.
Adding value is not easy for
many businesses –
For example, just increasing the
price of the product can lead
to lower sales and, perhaps,
lower profit.
What is meant by opportunity cost? Can you give an example?
Opportunity cost is the next best alternative that is given up when a choice is made.
Example: If a business spends money on new machinery instead of advertising, the opportunity cost is the benefits that advertising could have brought.
How does scarcity lead to the economic problem?
Scarcity means resources are limited, but human wants are unlimited. This creates the economic problem of having to make choices about how to allocate resources efficiently.
What are the 4 factors of production? Give one example of each.
Land – natural resources (e.g., oil, farmland)
Labour – human effort (e.g., factory workers)
Capital – man-made resources (e.g., machinery)
Enterprise – risk-taking and decision-making (e.g., an entrepreneur starting a company)
How can a business add value to a product?
By increasing the difference between the cost of materials and the selling price. Methods include branding, quality, design, or convenience.
What is the difference between needs and wants?
Needs are essential for survival (e.g., food, water, shelter), while wants are not essential but improve quality of life (e.g., smartphones, designer clothes).
