Business Studies (0450) | Business activity

👋 Welcome to Business Activity! Your Essential Study Notes

Welcome to the start of your IGCSE Business Studies journey! This first chapter, Business Activity, is the foundation for everything else you will learn. Don't worry if it seems tricky at first—we're just talking about how people and businesses decide what to make and why.

Understanding this chapter helps you see why businesses exist and how they affect your everyday life, from the clothes you wear to the services you use. Let's get started!

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1.0 The Basic Economic Problem: Scarcity

1.1 Needs and Wants: Why Businesses Exist

Every business starts by trying to satisfy either a need or a want. Understanding the difference is crucial:

• Needs: These are the basic necessities required for human survival.
  Examples: Food, clean water, shelter, basic clothing.
• Wants: These are things people would like to have, but which are not essential for survival. Wants are unlimited and constantly change.
  Examples: A new smartphone, a fast car, dining in a fancy restaurant.

1.2 The Problem of Scarcity

If everyone could have everything they wanted, businesses wouldn't need to make hard choices. But this isn't the case!

The Basic Economic Problem is Scarcity.

Scarcity means that resources are limited (finite), but human needs and wants are unlimited (infinite).

Because resources are scarce, businesses and individuals must constantly make choices about how to use them most effectively.

1.3 Making Choices: Opportunity Cost

Since resources are scarce, choosing one thing means giving up another. This is where Opportunity Cost comes in.

Definition: Opportunity Cost

Opportunity Cost is the cost of the next best alternative that is given up (foregone) when a choice is made.

Analogy: You have enough time to either revise for your Business exam or watch a movie. If you choose to revise, the opportunity cost is the enjoyment of watching the movie.

Businesses face this too: If a factory owner uses their land to build a new warehouse, the opportunity cost might be the potential profit they could have earned from renting that land to a retailer.

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2.0 Factors of Production and Added Value

2.1 What is Business Activity?

A Business Activity is the process of combining limited resources to create goods and services that satisfy unlimited needs and wants.
To do this, businesses need four essential ingredients, known as the Factors of Production.

Memory Aid: CELL

Remember the four factors of production using the mnemonic C.E.L.L.

1. C (Capital): The man-made resources used in production.
   Examples: Machinery, equipment, factories, computers, delivery vans.
2. E (Enterprise): The skill and risk-taking ability of the entrepreneur (the person who starts the business) to combine the other three factors.
   This is often considered the most important factor!
3. L (Land): All natural resources provided by nature.
   Examples: Actual physical land, raw materials (oil, wood), and natural resources (fish, fertile soil).
4. L (Labour): The human effort (physical and mental) used in the production process.
   Examples: Factory workers, teachers, managers, plumbers.

2.2 The Importance of Added Value

Simply selling raw materials usually doesn't make much profit. Businesses need to transform inputs into something more desirable—this is called Adding Value.

Definition: Added Value

Added Value is the difference between the selling price of a product and the cost of the materials/components used to make it.

$$ \text{Selling Price} - \text{Cost of Materials} = \text{Added Value} $$

Example: A baker buys flour and sugar for $1 (Cost of Materials) and turns it into a cake that sells for $8 (Selling Price). The added value is $7.

How do Businesses Add Value? (Ways to increase the selling price without drastically increasing material costs)

• Branding: Creating a strong, desirable brand name (e.g., Apple products sell for more than generic electronics).
• Quality/Design: Making the product look better or function better.
• Customer Service: Offering excellent advice, repairs, or support (e.g., high-end department stores).
• Convenience: Making the product easily accessible (e.g., ready-made meals sold in supermarkets).

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3.0 Economic Sectors: Where Production Happens

Businesses around the world are grouped into three main sectors based on what type of activity they perform.

3.1 Primary Sector

This sector involves the extraction and cultivation of natural resources. These activities are usually the first stage of production.

• What they do: Take raw materials directly from the earth or sea.
• Examples: Farming, fishing, mining (coal, gold), forestry, oil extraction.

In many developing countries, the Primary sector is the largest employer.

3.2 Secondary Sector

This sector involves manufacturing (turning raw materials into finished or semi-finished goods) and construction.

• What they do: Process the raw materials supplied by the primary sector.
• Examples: Car manufacturing, building houses, food processing (turning wheat into bread), textile production (turning cotton into shirts).

The Secondary sector often grows significantly during a country's industrialisation phase.

3.3 Tertiary Sector

This sector provides services to both businesses and consumers. It does not produce a physical good.

• What they do: Help and support businesses and consumers.
• Examples: Retail shops, banking, insurance, transportation (buses, airlines), education, healthcare, tourism.

In most developed countries (like the UK, USA, or Singapore), the Tertiary sector is the largest employer and generator of wealth.

Did you know? (Sector Shifts)

As countries develop, they often experience a shift. They move from relying heavily on the Primary sector (farming) towards the Secondary (factories), and finally, to the Tertiary sector (services). This shift is called de-industrialisation.

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4.0 Specialisation and the Division of Labour

4.1 Why Specialise?

Imagine trying to build a complex piece of machinery entirely by yourself. It would take a very long time! Businesses and workers often become more productive if they focus on one thing.

Definition: Specialisation

Specialisation occurs when a business, country, or person concentrates on producing a limited range of goods or services.

Example: A car company specialises only in electric vehicles. A lawyer specialises only in family law.

4.2 Division of Labour

This is a deeper level of specialisation, usually within a factory or company.

Definition: Division of Labour

The Division of Labour is when the production process is broken down into a series of separate, specialised tasks, with each worker performing only one of those tasks.

Example: In a pizza shop, one worker prepares the dough, another adds the toppings, a third manages the oven, and a fourth handles packaging and sales.

4.3 Advantages and Disadvantages of Specialisation and Division of Labour

✅ Advantages (Why it's great for business)

• Increased Output: Workers become faster and more efficient at their single task.
• Reduced Waste: Less time is wasted moving between tasks and changing tools.
• Higher Quality: Since workers are constantly practicing the same skill, the quality of their work improves.
• Less Training Time: It takes less time to train a worker for one specific task than for the entire production process.

❌ Disadvantages (The problems)

• Boredom and Demotivation: Performing the same simple task repeatedly can lead to boredom and poor performance.
• Interdependence Risk: If one worker or one machine breaks down, the entire production line stops. The business is reliant on every single part functioning correctly.
• Lack of Flexibility: Workers may not be able to perform other tasks if needed, making it hard to cover absences.