vt

Aims(1 .1.1)
By the end of this section, you should :
• Underst and t he conce pts of need s, wants, sca rcit y and opportunity cos t
• Understand the importa nce of specialisation
• Understand t he purpose of busin ess activity
• Understand the concept of adding value a nd how added value can be increased.

a11d s arc1 -v
A successful business will need to create a product or service that
people actually want or need. There is a difference here. A need
is for a product you could not live without, for example, heating,
food or drink. In contrast, a games console is a want: you don't
have to have it, nor do you really need it, but you would like it
ali the same. Usually, essential items (items you must have) are
needs, whereas non-essential items are often wants.

Did you know?

Only 450 Bugatti Veyrons

have been made. Each one
takes six weeks to complet,e
(compare this with the
production time of one day
for a normal car) and costs
nearly $1 million, so they
are truly scarce.

6 A Bugatti Veyron is a very desirable want for sorne, but notan essential need .

A Bugatti Veyron? Latest mobile phone? Concert tickets?

Whatever it is you really want, there will often be a limited
amount of it. This is because there is only a limited supply
of the resources needed to make it. This could be a limited
number of:

• seats in the arena for a concert

• diamonds to make rings
• parts and components that are needed to make a product
• employees with the skills that are needed to make a product.

8 l l.:Jt1dí-'l~L
Scarcity is the shortage of a resource, such as oil, wheat or
land. The scarcity of resources can often makc products more Kf' Y 1'c1m
expensive, as the demand is greater than the supp ly. Fa ctors of produ ction :
Scarcity of a product is often caused by a limited supp ly of th c reso ur ces need ed
land, labour, capital or enterprise. These are called the factors to p ro cl ucc a p ro du ct o r
of production. They are the key inputs that businesses need to ser v1c c - th cse 1nc lu d c
produce goods and services. lab o u r, lond, cnte r prne
and ca p ,tul .

The price of land is often more expensive the

closer a business is to large cities. This is because
land is scarce (in short supply). As businesses
often wish to be close to city centres, the
land that is available is very expensive. Sorne
businesses also need large amounts of land (for
warehouses), which reduces the options available.
t=~====
Sorne parts of the labour force are scarce. For
example, pilots are highly skilled employees who
have undergone years of training . They are paid
high salaries because their skills and expertise are
scarce.

Capital refers to cash or goods that a business

uses to generate income. This could be property
or money used to purchase materials.
F;~~~~~~~~~~ ------
Karachi-born Gulu Lalvani set up Binatone, one
of the world's largest manufacturers of cordless
phones. His innovative (creative) mind and hard
work allowed the product sales to grow. Without
his enterprising attitude, it would not have
succeeded. This set of skills is rare, and many
businesses struggle to find employees who can

------ help improve their performan~

-----
______ _

gº •·ihU♦
Focus on your own needs and wants.
• ldentify and then write down your top three wants and your
top three needs.
• In pairs, discuss how your wants and needs might differ
from those of people in other countries .

What do you notice about wants and needs around the world?
 . noney to help them buy
Every day people go to work, earning~ ill be sorne essential
a range of goods and serv1ces. There ut the will also
items that they need to buy, such as food, b y and
choose to buy other items such as mobile phones,_ cars on
.d h t t pend the1r money ·
jewellery. They have to dec1 e w a o s
. lso need to make
With so many wants and needs, businesses a .
choices about what they spend their money on. This may_ be Key Term
simply deciding to order a different product from a suppller
Opportu nity co s l a
ora decision about where to spend excess (extra) cash. The
benefit, profi t CJr \, alue
decision may be to stop spending money on one part of
that a firm has t ~.. Ji ve u
the business and focus it on another. Every decision has an
opportun ity cost .
in order to ach i'.· ·: or h:ve
somethin g el se.
Every day businesses experience opportun ity costs. For
example, a business may invest in a new machine rather than
spend that money on a new TV advert. The opportun ity cost
here is the extra customers that might have resulted from the
TV advert. With sorne resources so scarce, governm ents have to
make the same sort of decisions.
Each year the governm ents in many different countries have
to decide what they are going to spend the money on that
they raise from tax or trade. For example, sorne people may
feel that a new hospital is needed in a certain area, whereas
the local businesses may feel that a new road system is
more importan t. Whichev er decision the governm ent makes
will mean an opportun ity is missed, therefore creating an
opportun ity cost.

6 The Dubai _government chose to build the palm islands, creating new investment
an dd tounsm in the country. The opportunity cost was investment in the country's
roa s. sewage system and other upgrades . Every decision has an opportunity cost.
K e y T e rm
.••••••••• ,... ... ... ... ... ... ... ... ... ... ... ... ... . .. . ~=- -;· ·~·· ··

Opportu nit y cost: a

b e n e fi t, p ro fi t o r valu e
th a t a fi rm has to give up
in o rd e r to ac h ieve o r have
something else.
Nokia h as seen many ch .1nqC''> 1lnd dP( 1,1('n, m,,~, l \ \
150-year h istorv. Havin g \ tMtPct O\.lt ,\ t. ,l pul 1, mdl ,, l,, .}nu•
Z¼
known for produ u n g rubb~, 111 oduct °' \lJ(h d'l ,ho<> •.c•lt'~ ~nr
time , 1t has chang<..>d t o become onC' o f t hc o f thp lt1 rO<'\t
commurncdt ton busmesses 1n th e world In 2013 , ,t dec•ded to •-el
its mobile phone business to M i crosoft in ordc, to f0<m on
netvvorks and ne w technology. The opportun it\ co<.t hc,c \\ ~·
losing its place in the mobde phone ma rket HO\\;evcr. despitc-
these major changes. ít seem s Nok 1a 1s ret.urnmg to th ,s mJr\.l't
with a new vers.ion of 1t s famous 3310 phone . This co u ld be t"w
start o f Nokia's retum, so changing 1t s long -t erm prionttes

oof:--iiii a____ ____ ____ __ _ _

Us,i ng your research ·skills, identify three different bus inesses or ,nd rntri••~ th 1t i
funded . Try to find out the exact amounts of funding and h ow the 1,,...,., 1 ()f tun .
over time .

Try usi-ng the following key words to help in your research : publi l '>t'C HH , q,wl'rr
business, governmen t funding and government -run .

• Now analyse them . Discuss whether they are successful . Are t h cy u-,1riq l ht t Id
the funding achieve its purpose?
• Now try to describe each business or industry to your class, but only q 1vt' t tw111 t

S ec ahsa o,
Specialisation is when a person, business, region o r country fo o 1\C' '.\ on
producing a limited range (small number) of goo ds or serv1ce'\.
People all have ditferent skills., so different people are oe-s t su ,t~d t o do
different jobs. A good busines.s will understand th is and wdl c."nsuu~ th:,t lh<· u
employees work on the tasks tha t be.st suit t hetr sk 1Hs Th1\ d tv1 ston of l.abou,
(d ivi ding up the employees into g r o u ps} aUows the employe~ to f0<u, on
1
pedorming a few tasks . For exam pl e, ,f you went tn t o Thí.> Pen mu <1 To~ ,,o
Hotei, t here would be a range of emptoyees . Sorne \'"', ork on re<.c-pt on. o th ... r\
in the kitchen . fmpfoyees are d ivided u p based on thelf sk1H\ a nd wnecr, l (.J\~
they speciafise in . Th is is a ve n; important aspen of busine~s act1v1l~ . o~ ,t
alJows employees , businesses, regions and coun tr ies to f0<us on t,k ptO(tuí t"l
or ser vices they are b est at .
lt is not on1y busi nesses th at f ocus on one o r t wo t ~1\~, (vw1t1h.·\ lk) too
Many count ries only produ ce one o r t wo p, o d u( t ~ bN ~luh· tth y ~1 '-' .e, 1
good at making that spec1f1c product .
 Sorne examples of speci alisation, a t th e d1·t··f eren t Ie veis, ar e shown in
the t able .

Employee
· h . h -q ualit y vi o li ns
• A skilled carp enter who foc uses on pro d uc1ng 19
• A pastry chef wh o only makes t he desserts and ca kes for
the rest aurant
1
• A mortgage adviser fo r a bank
Business

• Audi specialises in making cars

• The local accountants who focus on doing other people's

tax calculations

• Nestlé specialises in chocolate production

, Region

1 • The Champagne region in France specialises in making ...

champagne!

• The Santos region in Brazil specialises in coffee production

• Nuwara Eliya in Sri Lanka produces sorne of the world's best tea
i- - - ----f-- -----

1 Country
1

• Saudi Arabia specialises in extracting oil

• The lvory Coast specialises in the production of cocoa

• Japan specialises in technology and computing

j Benefits of specialisation -~Il•lb❖J•fl4:D~{ijfa461ii11il•W

For ✓ By specialising, an improvement
businesses in quality and efficiency can lead
to larger profits.
' ✓ Businesses may develop a
positive reputation for a
particular productor service. For
example, a wedding dress shop
may become well known because
of its specialist products.
¡
i ✓ A business may be able to charge
higher prices if it is one of the
only businesses to offer the
productor service.
1
K Training of employees will oft en
be more varied and expens ive .
K The employees may become
bored with the tasks they do
each day, as they tend to be the
same. This may cause them t o
leave the business.
K The productor service in which
the business specialises can
become out of date or no longe r
required, causing it to close .

i ✓ The employees become faster at

__ ~r~d~c~~~-~~~~oo~s~ _______ ____ ! ______ __ ____ _ __ _

.,..,-
----- -- - -- - - ------- -- ----- - ------
12 l Underst a n d i n g b u si
nes s act ivi t y
 For ✓ Employees may be paid more if
employees their skill is in short supply.
✓ The skills they have may mean
they can choose the job they
want and the benefits that
come with it (for example, a car,
1
flexible working hours).
l - - - -
,e Machines that can do the
same tasks more quickly and
cheaply may replace employees .
,e The employee may become
bored with only focusing on one
or two skills.

For the world 1 ✓ Scarce resources are used more
j effectively.
✓ A country that specialises can
trade (exchange) with other
countries for goods and services
that they do n't o r can't prod uce.
✓ People bene-f it fron, the j obs
and inco m es th ,::.t coi"'ne frorn
pro d uci ng -: pe :i::ih,2 d nroducts or
0
¡-K-Sorne countries struggle to
produce a productor service that
is required globally.
,e Countries can suddenly become
beaten on price, meaning that
1
their entire workforce is no
longer in demand.

servi ces.

Top Tip

Specialisation ta kes place at \' 0 ,,<:,.:u;. 1,.-: ~r 1 tGn, ~:ha t of a

person up to a country. Re mern bE, :/, '.1: 'r~ -::.Ya:nples from ali
appropriate levels .

.~-~f?.'!'!.I.f:.~.g!:. ~~~~J~.......................................................... ........................... .

Audi now has a global reputation for comfort and quality. lts range of cars can cost up to
$500 000 and is only targeted at the richest customers. lts products include the Audi R8 and
Audi RS, two very exclusive cars with only a few thousand of each being made.

o Define the term scarcity. (2)

•
o
o
Explain the opportunity costs to Audi of producing the R8 and RS cars.

Explain how specialisation benefits an employee of Audi.

Do you believe that specialisation will benefit Audi when making their cars?
(4)

(4)

Justify your answer. (6)

Total 16 marks
 Purnns e of busine ss activity
~ . d want of a customer.
AII businesses exist to fulfil a nee or d . this with
· t
Many businesses a1m o ma ke a profit from oing '
businesses that
.
the money going to t he ow ners · There I
. are .a.so. ro·ects
invest any profits they make into social ac~vl1t1~~ a~:i;s pJeople
that try to help society. Far example, Unlt n ,a
set up and run businesses.
However, a business cannot exist unless it has customers who
want to buy what it sells, whatever this may be.
Sorne of the purposes a business may have are to:
• create new products
• generate large amounts of sales .
• educate the local and global commun ity to reduce pollut,on
and damage to the environm ent
• create large brands across the world
• listen to the different stakeholders
• support commun ity projects and social activities.
Different business structures have a direct impad on the aím s
and objectives set by a business (see 1.4 Types of busin ess
organisation). Far example, a sole trader will decide on hí s or
her own business aims and objectives, while in a pubfü: nm¡ted
company, each business owner, shareholder and di rector ,!,r)1
have her or his own ideas and aims far the business . HO\N ·'. !·'::
business is organised therefore shapes th e purpose arnJ ~~,.. , .,:
of the business.
Consider the following examples:
• Walmart (USA). Walmart is one of the vvor!d 's largest
businesses, with an estimated revenue of $485 biiiion. lt
meets the needs and wants of its customers by selling a wide 70% D ARK CHO COL AE
,uit/, GING ER •; O RAN GE
range of goods in its stores. lts purpose is to provide these
goods and make large profits.
• Divine Chocolate (UK and Ghana). lts purpose is to sell
its chocolate worldwid e, but also to boost the Fairtrade
productio n of cocoa and the commun ities that it works with.
• UNICEF (global). UNICEF aims to support children worldwid e
through donation s and business activities that focus on '
promotin g its cause, rather than generatin g large profits.
• Chao Chung (China). This local family-ru n restaura nt in China 6 Fairtrade Divine ginger and orang,
dark chocolate .
aims to support the local commun ity by providing affordab l
me_als. The business makes a profit but not at the expense ;
losing customers. 0
·
• Tannura (Japan). Brian Tannura set up a vending h'
. .
b usiness in Japan and runs itas asole trader H' mac me
. 1s purpose ·1s
to generate enough revenue to do this full-time He I t
b · · · • p ans o
~inbg 1~ a vanety of different vending machines and expand
h 1s usiness.
 Businesses sell on a pro duc tor service in orde
r to add valu e.
The key here is to create a prod uct that is
wor th mor e th an th e
cost of mak ing it. lf the business can enc oura
ge customers to
pay mor e than the tota l costs, then it will
be able to make a
prof it.

lf the prod ucti on of a new Mazda car cost

s $6000 and each car
is sold for $12 000 , then Mazda is add ing $60
00 value . Once
Mazda has paid off all its overheads, mar keti
ng, insurance and
othe r costs, the com pan y will make a prof
it.

50 ·i&+i:-
ln small groups or pairs, discuss the benefits
for a business of adding value . You shou ld ai,-
come up with four diffe rent benefits. Writ e ,·
each ben efit on a separate shee t of pa per.
• Now arrange the benefits in order of impo
rtance. Be ready to just ify w hat you thi nk is
biggest ben efit. t hc-
• How could a business achieve sorne of thes
e benefits?
_______ _ _ _ __ __ __ __ ____ __ ____ ___ __
Extension: Using you r research skills, find
out which business has the high est added valu
e. _/

.f i Sa ms un g vs Apple
Samsung released the new Galaxy 58 in 2017
in an atte mpt to rival the
iPhone 7. Using its bran d image and new feat
ures to add value to its
products, Samsung hopes to con tinu e its grow
th in this mar ket with a new
range of phones tha t offe r solutions to cust
omer demands such as batt ery
life and screen size.

1-f ow to add val ue

Businesses can add valu e to thei r prod ucts
in num erou s ways:
by design, qua lity and effic ienc y, mar keti
ng and convenience.

Design
This can mak e you r pro duc t uniq ue and diffe
ren t to the
com peti tion . For exa mpl e, Dyson uses 'cyc
lone' tech nolo gy to
mai ntai n mar ket lead ersh ip due to thei r inno
vati ve and effe ctiv e
prod uct design, whi ch customers will pay
a high er price for.

Quality and efóciency

'The bet ter the qua lity, the high er the pric
e.' Pro duc ts tha t are
of a high qua lity can ofte n sell for mor e.
In China, Om nial uo is
seen as a luxu ry clot hing rang e. In con tras
t, Prim ark in the UK
add s valu e thro ugh effic ienc y rath er than
qua lity. The low er
the costs of mak ing the prod uct, the high
er the valu e add ed.
 Marketing
lf you think of a produc t that you want to buy, it wi ll b e
due partly to the marketing of t he product . This ha s mad e
you more willing t o buy the product and pe rhaps even pay
more f or that brand . A brand is crea t ed through intense (a
lot of ) marketing, which allows the cust omer t o recognise a
product, logo or packaging and associate this with a busines s.
For example, the Van Cleef & Arpels luxury retailer lago is
recognised all over the Middle East . This adds value to the
product .
Top Tip
Convenience
Ad ding va lue th r
lf you go to a concert or sporting event, such as the Formula
their b rand is ea
One Chinese Grand Prix, the food, drink and merchand ise
larger busíne sse
will always be more expensive than elsewhere outside the
estab li shed a nd
venue. This is because it is conveniently located for customers
product s, bu t ;,_ e
to purchase it. This means that those companies can add value
difficult for srra E rt-t!p
because of their location . Customers will be forced to pay
businesses.
higher prices dueto the lack of alternative products .

Knowled~e check
·o··;~~;~~ t~~ ~~~~- ~-~~~~
• ;~;~~-- · · · · · · · · · -· · · · · · · · · · · · · · · · ·;~;
✓ 1 can exp lain t he o
nature of b u siness ~ -
se anc
,)

O Explain two ways in which a business can

✓ 1 can outl i n e th e cor E.::> •~ ~·
needs, wan ts. SGHC;' J _;:r ~
opport uni t y cost.
add value. (4)

• Explain why businesses can have different

purposes.

Total 10 marks
(4)
✓

✓
1 u n de rst and t he 1rnpcr :3n .

o f spe cial isatio n

1 und e rst a n d t he ccn-::e::-t e·

a d di n g va lu e a nd ca-, e,o d
h o w bu sine ss es cari dCé \d _e
 ..... .

Addrn g vaf.ue thro ug f1

their brand: is easie r f o-
iarger busin-e sses t hat r\ ,._; 1e
establi,shed and po pu la:·
prod:ucts, but it can be
di1fficult for smaller st a:-t-up
businesses.

y r

✓ 1 can explain the purpose and

nature of business activit y.
✓
I can outline the concepts of
needs, wants, scarcity an d
opportunity cost .
✓
1understand the impo rt ance
of specia lisation .

✓ 1
underst an d t he concept of
adding value and can explain
how businesses ca n a dd value.