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Business IGCSE 0450 class notes
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01 UNDERSTANDING BUSINESS ACTIVITIES1.1 business activity
the economic problem & opportunity cost
‘Economic Problem’ is the problem that we people have unlimited wants but have limited resources to
produce goods and services to satisfy these wants.
Limited resources are the factors of production:
-Land (natural resources such as minerals, trees, etc.)
-Labour (people available to make the product)
-Capital (man-made equipment and material to manufacture the product)
-Enterprise (the skills of entrepreneurship, taking risks to produce the goods/service - often the owner of
the business)
Opportunity cost: the next best alternative that was
given up by choosing another alternative. Only one
alternative!
Example:
The opportunity cost is the
earphones because the shorts
were chosen instead. The next
best alternative would be the
earphones with an 8 in
preference. Therefore the
opportunity cost is the
earphones.
specialisation & division of labour
Specialisation: when people and businesses concentrate on what they do best. This allows people to
focus and work on what they're good at, earn a wage and spend on other businesses.
Division of Labour: separation of tasks in different systems (a form of specialisation)
Advantages:
- Efficiency and output increases, since workers specialise in their tasks and gets better over time
- quicker and cheaper training (fewer skills needed to be taught)
Disadvantages:
- workers are dependent on others to produce: when a department is absent, production may be
stopped
,- workers may get bored and unmotivated due to repetitive tasks: quality of work may go down,
workers want to leave, bad rep and harder to keep to company going efficiently
Business Activity helps:
1. Combines scarce factors of production
2. Produces goods and services for needs and wants
3. Employs people and pays wages
added value
Added value is the difference between the cost of the materials and the selling price.
● Other costs besides materials can be: labour costs, management expenses, advertising costs, etc.
● Companies want to make profits, hence the importance of added value to make profit.
EXAMPLE: The selling price of bubble tea is $30, the cost of tea powder, bubbles, straws and cups are $10.
The added value is $20.
Ways to increase added value
- convenience: making the product more convenient for the customer
- branding: customer's pay more for famous brands
- quality: companies increase selling price when materials are of high quality
- design-aesthetic: attracts customers
- USP (unique selling point): the product is unique and different, having no competition would
attract more customers. Like eco-friendly products, their values align with customers’ value
1.2 classification of businesses
stages of economy activity
1. Primary sector - extracting raw materials and natural resources such as mining, farming and
fishing.
2. Secondary sector - turn raw materials into manufactured goods such as baking bread,
construction and car manufacturing.
3. Tertiary Sector - providing services to consumers/other sectors of the industry like hotels,
transport and retail.
All three sectors are interdependent.
sector importance
Tertiary sector is becoming more significant as a country develops because:
● as wealth increases → living standards increase → consumers spend more income on services
● better education → “better”/higher paying jobs → more tertiary sector workers
● automation of work in primary and secondary sector, loses competitiveness
● limited primary resources all used up! like overfishing
,mixed economy
private sector: business owned by individuals
- objectives: profits, source of profit to survive in competitive market (retained profits), personal
gain (reward for enterprise & risk taken), indicator of success
- initial capital: bank loans, personal money
public sector: owned by government/government departments/public services
- objectives: make essential services accessible and to provide employment
- initial capital: taxes
privatisation: selling public sector businesses to private sector
ADVANTAGES
- private sectors aim to make profits → they minimise costs and not waste taxpayers’ money
- Private sector also invest more capital to improve quality of service
DISADVANTAGES
- Might make more workers unemployed than public sector businesses
- Less likely to focus on social objectives
1.3 enterprise, business and growth
enterprise and entrepreneurship
advantages & disadvantages of being an entrepreneur
Advantage Disadvantage
- more freedom, autonomy to produce own - may not succeed → their own capital
products invested
- No limitations in terms of investment and - economic insecurity
earnings
WHY Governments often support entrepreneurship:
- reduces unemployment
- increases competition
- increases output
- benefits society with products
HOW Governments often support entrepreneurship:
- offer training and support sessions
- provide low cost premises
- low interest rate loans
- make research facilities available (STEM related projects)
, a business plan includes:
● description of business
● products & services
● the market
● business location
why new businesses fail
● lack of management skills
● change in business environment
● liquidity problems (shortage of cash to pay workers)
● over-expansion
business growth and size
Measuring the size of a business:
● the number of employees
○ limits:
Labour-intensive firms would seem bigger than capital-intensive
Employees can work part-time → how are they counted
● value of capital employed (total money/funding invested in business)
○ limits:
Capital-intensive firms would seem bigger than labour-intensive firms
● value of output (total money of goods and services produced)
○ limits:
A firm with less employees may produce items worth more money, this would give them a
higher output number than firms with more workers but cheap products.
business growth
Businesses would want to expand their business because:
● more money
● more power
● average cost lowers
What owners get from expanding their business:
● higher profits
● status and prestige
● lower average cost
● larger market shares
internal growth
when a business expands its existing operations
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