BUSINESS STUDIES IGCSE NOTES [2023-2024]

Section 1: UNDERSTANDING BUSINESS ACTIVITY

Outline: This section will introduce the key ideas of business activity.
1.1 Business activity
1.1.1 The purpose and nature of business activity:

➢ 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

1.2 Classification of businesses

1.2.1 Business activity in terms of primary, secondary and tertiary sectors:

➢ Basis of business classification, using examples to illustrate the classification

➢ Reasons for the changing importance of business classification, e.g. in
developed and developing economies

1.2.2 Classify business enterprises between private sector and public sector in a
mixed economy

1.3 Enterprise, business growth and size

1.3.1 Enterprise and entrepreneurship:

➢ Characteristics of successful entrepreneurs

➢ Contents of a business plan and how business plans assist entrepreneurs
➢ Why and how governments support business start-ups, e.g. grants, training
schemes

1.3.2 The methods and problems of measuring business size:

➢ Methods of measuring business size, e.g. number of people employed, value

of output, capital employed (profit is not a method of measuring business size)
➢ Limitations of methods of measuring business size

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1.3.3 Why some businesses grow, and others remain small:

➢ Why the owners of a business may want to expand the business

➢ Different ways in which businesses can grow
➢ Problems linked to business growth and how these might be overcome
➢ Why some businesses remain small

1.3.4 Why some (new or established) businesses fail:

➢ Causes of business failure, e.g. lack of management skills, changes in the

business environment, liquidity problems
➢ Why new businesses are at a greater risk of failing

1.4 Types of business organisation

1.4.1 The main features of different forms of business organisation:

➢ Sole traders, partnerships, private and public limited companies, franchises,

and joint ventures
➢ Differences between unincorporated businesses and limited companies
➢ Concepts of risk, ownership, and limited liability
➢ Recommend and justify a suitable form of business organisations to
owners/management in a given situation
➢ Business organisations in the public sector, e.g. public corporations

1.5 Business objectives and stakeholder objectives

1.5.1 Businesses can have several objectives and the importance of them can change:

➢ Need for business objectives and the importance of them

➢ Different business objectives, e.g. survival, growth, profit and market share
➢ Objectives of social enterprises

1.5.2 The role of stakeholder groups involved in business activity:

➢ Main internal and external stakeholder groups

➢ Objectives of different stakeholder groups
➢ How these objectives might conflict with each other, use examples

1.5.3 Differences in the objectives of private sector and public sector enterprises

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UNDERSTANDING BUSINESS ACTIVITY

1.1 BUSINESS ACTIVITY
What is business activity?
Business activity involves organising, combining and
using scarce resources to satisfy the needs and wants
of the consumer.

Needs: Needs are the things that are must to stay alive.
Examples warmth in winter, clean water and air, food,
shelter, and medical care. Human beings cannot survive for
long if these are not met.

Wants: Wants are the extras; they

are not for survival but they make life
more pleasant.

Examples: favourite brand of cereal, the latest videos, lunch

out with friends, a new soccer ball or concert tickets.

People’s wants are often unlimited and shaped by their stage

in life, their culture, and their personality.

To satisfy these needs and unlimited wants, money is required. There are just not
enough goods and services to meet the needs and unlimited wants of all consumers
– this is known as the economic problem.

Economic problem: Unlimited wants cannot be met because there are limited
factors of production. This creates scarcity. If this is the case, then the answer is
simple – produce more goods and services! Unfortunately, the answer is not so
simple. To understand why not, first we need to look at factors of production.

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Factors of production: the resources needed to produce goods and services –

land, labour, capital, and enterprise.

The production of goods and services requires four factors of

production:
■ Land is all-natural resources such as minerals, ores, fields, oil and forests. Land
is defined as a factor of production, it refers to the natural resources used to produce
goods and services (for example, wood for a furniture maker or aluminium for a
bicycle-manufacturer)

■ Labour is the human element and includes all mental and physical work that
people put into producing goods and services. The number of people available to
work e.g. shop floor workers, a labour in a factory.

■ Capital is the money used to start a business and to keep it running. Capital
includes the value of machinery and equipment required to produce goods and
services.

■ Enterprise is the initiative taken by the person to take the risk of setting up
business – for example, the owner of the business. He is known as entrepreneur.
The activity of people who bring together all the factors of production to start a

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business. Entrepreneurship includes having the skills and determination to start and
operate a business and to accept the calculated risks involved.

However, there are not enough of these factors of production in the world. This
means that it is not possible to make all the goods and services needed or wanted by
the world’s population. In other words, the unlimited wants of consumers cannot
be satisfied because of limited factors of production required to produce the goods
and services to meet those wants. This is the problem of scarcity. We have seen
that there are not enough resources to produce all the goods and services needed to
meet consumer’s wants. So, choices must be made.

Scarcity: there are not enough goods and

services to meet the wants of the population.
Scarcity paves way for an economic problem in a
country and the necessity to choose the needs and
wants arises. This process is known as
opportunity cost.

Opportunity cost: A benefit, profit, or value of something that must be given up

acquiring or achieve something else. Since every resource (land, money, time, etc.)
can be put to alternative uses, every action,
choice, or decision has an
associated opportunity cost.

Explanation: When making the choice one

needs to make sure that the product or service
one chooses is worth more than the one given
up. The next best alternative given up is
known as the opportunity cost of one’s
decision. It is not just consumers who have to make choices about how to use scarce
resources. Businesses and governments also have limited resources and must choose
between alternative uses of those resources. For example, a business might have to
choose between using resources on an advertising campaign, or on a training
program for its workers. A government might have to choose between building a
new school or a new hospital.
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Specialisation: people and businesses concentrate on what they are best at.
It is very important that the factors
of production are not wasted on the
production of goods and services
that consumers do not need or want.
The increasing specialisation of
factors of production has meant that
businesses are far more efficient
than they once were. Specialisation
reduces the costs of production.
This benefits consumers by
providing more goods and services at lower prices than before specialisation took
place. A good example of specialisation in business is Microsoft, which develops
and produces computer software.

➢ Mc Donald’s specialises in fast food

➢ Ford manufactures cars
➢ Saudi Arabia in oil extraction
➢ South Africa in supply of gold

Division of labour: production is divided into separate tasks and each worker
does just one of those tasks. Specialisation of labour is now commonplace in the
workplace. Instead of workers producing one product from start to finish, they focus
on just one skill. The production of a product now requires several workers, each
using their skill. This is an example of the division of labour.

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Since each worker is now specialising in just one skill, they become far more
efficient and this increases the productivity of labour.

Advantages of Division of Labour

To the business
➢ Practise makes perfect: Worker specialises in a particular task and gives
in the best, thus producing goods faster and less wastage of material. (Faster)
➢ Use of machinery: Specialised machinery can be used which is
further increase the productivity.
➢ Increased Output: with improvement in efficiency and use of machinery
output is increased.
➢ Saves time: There is no time wasted in switching of jobs and thus the
momentum of production can be maintained which leads to less wastage of
time.

To the workers
➢ Higher pay for specialised work
➢ Improved skills at that job

Disadvantages of Division of Labour

To the business
➢ Boredom: Performing the same task repeatedly may lead to boredom for the
workers.
➢ Lack of variety: Though the number of goods produced increases but they
are identical or standardised.
➢ Low motivation for worker: Repeatedly performing the same task may
lead to low motivation level for the worker. The worker might not have the
sense of fulfilling a complete task as he is performing only a part of the job.
➢ Lack of mobility: Due to specialisation workers might find it difficult to
switch between tasks.

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To the workers
➢ Their quality and skills may suffer
➢ May eventually be replaced by machinery

Purpose of business activity

We have already learned that businesses take scarce resources – factors of
production – and use these to produce the goods and services demanded by
consumers. Without the activity of business there would be no products and services.

Added value: The difference between the price of the finished product/service
and the cost of the inputs involved in making it. So added value is the increase in
value that a business creates by undertaking the production process. It is quite easy
to think of some examples of how a production process can add value.

Ways of adding value:

➢ Building a brand – a reputation for quality, value etc. that customers are
prepared to pay for. Nike trainers sell for much more than Hi-Tec, even though
the production costs per pair are probably similar.
➢ Delivering excellent service – high quality, attentive personal service can
make the difference between achieving a high price or a medium one.
➢ Product features and benefits – for example, additional functionality in
different versions of software can enable a software seller to charge higher
prices; different models of motor vehicles are designed to achieve the same
effect.

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➢ Offering convenience – customers will often pay a little more for a

product that they can have straightaway, or which saves them time.
➢ Advertising as a way of creating a brand image and enhancing the product
value.
➢ Reducing the cost of natural and man-made resources it must buy or hire

A business that successfully adds value should find that it is able to operate
profitably. Why? Remember the definition of adding value: where the selling price
is greater than the costs of material used to make the product.

By definition, a business that is adding substantial value must also be operating

profitably.

Finding ways to add value is an important activity for a start-up or small business.
Quite simply, it can make the difference between survival and failure, between profit
and loss.

The key benefits to a business of adding value include:

➢ Charging a higher price, hence higher profit margin
➢ Creating a point of difference from the competition
➢ Protection from competitors trying to steal customers by charging lower
prices
➢ Focusing a business more closely on its target market segment

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KEY POINTS
➢ Business involves Organising and combining resources into firms with the
purpose of producing goods and services to satisfy needs and wants of
consumers
➢ Resources, or factors of production, are used to make goods and services
➢ Resources are scarce. There are not enough to produce everything we need
and want. We must choose between alternative resources.
➢ Resources include land (natural resources), labour (human efforts), capital
(man-made resources) and enterprise (the knowledge and skills people need
to own and run business organisations).
➢ Resources are inputs to productive activity and products (goods and
services) are outputs from productive activity.
➢ Specialisation involves individuals and business organisations focusing
resources on the limited range of productive activities they perform best.
Without specialisation, far fewer goods and services would be produced.
There would be lar fewer business and employment opportunities and
incomes and living standards would be much lower.
➢ Business activity adds value to resources by using them to produce goods
and services that are more desirable to consumers.
➢ Firms owned by private individuals are private enterprises. Most firms aim
to make a profit but same, like charities, engage in non-profit-making
activities.

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WORK SHEET
Farha opened her business, Farah’s Salon (FS) just after leaving school. She offers
hairdressing and beauty services for women. She employs three workers who have
quite different skills. One is a hair stylist, one is a beauty specialist and the other is
a receptionist. this means that Farah is able to offer a very wide range of beauty and
hairdressing services very efficiently. Shampoos, hair sprays and many other beauty
products are bought in from several suppliers. Farah’s business is now very busy.
Farah is planning to use some of FS’s capital to buy a computer to keep customer
records of treatments they have received and to allow an accurate record of
appointment to be kept. However, she is worried about the opportunity cost of this.

Farah is keen to increase the added value of her business. She has not yet decided on
how to achieve this but she thinks that buying cheaper shampoos and other beauty
products is probably the best way.

Farah needs to recruit another employee. She has to choose between one applicant
who is an experienced and specialist hair stylist but who has no other beauty
experience and the other applicant who has some experience of both hair and beauty
but is not a specialist in either.

1. (a) Identify two different factors of production used by Farah.

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(b) Define ‘Opportunity Cost’.

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(c) Outline two ways in which specialisation of its employees could benefit FS.
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(d) Explain two examples of how the business activities undertaken by FS benefit
the local economy.
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(e) Do you think that buying in cheaper shampoos and other beauty products is the
best way to increase added value by FS? Justify your answer.
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2. (a) Define ‘capital’.

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(b) Identify two pieces of equipment or furniture that Farah could purchase if she
did not buy the computer.
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(c) Outline two ways in which the economic problem affects FS.
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(d) Do you think that Farah should employ the experienced and specialist hair stylist
or the other applicant? Justify your answer.
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