Booklet 2: Central Purpose of Business Activity

Question 1

Definition of ‘Adding Value.’

Answer 1

1. The value of the finished product is greater than the cost of inputs.
2. The product/service is more desirable to consumers.

Question 2

Advantages of added value.

Answer 2

1. Being able to charge a higher price.
2. Consumers feel and appreciate the convenience
   3, USP/ image for the business.

Question 3

What are the two types of competitive advantage?

Answer 3

Cost advantage & Differentiation.

Question 4

What is a cost advantage?

Answer 4

Cost advantage refers to a business’s ability to produce goods and services at a lower cost than its competitors without reducing its quality standards.

Question 5

Disadvantages of added value.

Answer 5

1. Lower profit margins
2. Customers are expecting more and more.
3. In times of recession consumers want cheaper products.

Question 6

Advantages of cost advantage.

Answer 6

1. Can gain from economies of scale- buy in bulk
2. Popular with consumers on low wages.
3. The cost savings can be passed onto consumers in the form of cheaper prices.

Question 7

Disadvantages of cost advantage.

Answer 7

1. Customers will expect lower prices all the time.
2. The lower prices may be an indication of low quality.
3. Prices may need to be reduced, lowering profits.

Question 8

How does a business achieve a differentiation advantage?

Answer 8

A business creates the perception in consumers’ minds that its product or service is better than its rivals. This is achieved by creating a unique selling point (USP) and a strong brand.

Question 9

Advantages of differentiation advantage?

Answer 9

1. Increased sales
2. Creates a USP
3. Opportunity to charge a higher selling price.

Question 10

Disadvantages of differentiation advantage?

Answer 10

1. Need to continually spend money on promotion.

2. Extra costs in achieving differentiation may outweigh the higher prices charged.