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Business Activity

Unit 1. Introduction to business activity

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Learning outcomes

■ Develop an understanding of needs, wants and scarcity

■ Understand the purpose of business activity

■ Develop knowledge of the objectives of non-profit making activity, private

enterprise and public enterprise

■ Appreciate the concept of adding value

Definition of ‘scarcity’

The basic economic problem that arises because people have unlimited wants
but resources are limited. Because of scarcity, various economic decisions must
be made to allocate resources efficiently
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What is enterprise?

■ The term “enterprise” has two common meanings.

■ Firstly, an enterprise is simply another name for a business.  You will often
come across the use of the word when reading about start-ups and other
businesses…“Simon Cowell’s enterprise” or “Michelle set up her successful
enterprise after leaving teaching”.

■ Secondly, and perhaps more importantly, the word enterprise describes the
actions of someone who shows some initiative by taking a risk by setting up,
investing in and running a business. 
 
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Business Activity

■ Businesses produce goods and services. These are the products of the
business.

Which are goods and which are services?

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Business Activity
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Business Activity

■ Goods are things you can touch

■ Services are things that other people do for you

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Needs and wants

■ What we need and what we want can sometimes be confusing.

■ Often you say you need a new iPod/mobile device when in fact you
want it rather than need it.

■ Which items do you think people need and which items do you think
people want?
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Business in context
Kuwait Petroleum Corporation (KPC) is one of the world’s largest oil companies. The
company makes products such as petrol and diesel from crude oil. Crude oil is oil in
it’s raw or natural state. It occurs naturally in deposits within the earth. To produce the
petrol that people buy from garages, KPC must first extract the crude oil from the
earth. The company does this by drilling oil wells, many of which are under the sea.
KPC then transports the crude oil to oil refineries where it is turned into petrol or
other oil products customers want.

Individually answer the following questions:

1. What does KPC produce?

2. Does KPC produce goods or services?

3. Where can you buy KPC’s product?

4. What is KPC’s product made from?

5. Why do you think KPC produces petrol and diesel?

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Business in context
1. KPC produces oil products such as petrol and diesel.

2. KPC produces goods (products).

3. KPC’s product can be purchased at garages and gas or petrol stations.

4. KPC’s product is made from raw or crude oil.

5. Student’s own answer. Points to consider could include:

■ KPC has the necessary raw materials in its country.

■ KPC has developed the skills to extract and produce petrol and diesel. This
means it could seek new locations to find oil.

■ There is a market for the product.

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1.1 Activity
Think carefully about the following products and answer the questions.

(a) A loaf of bread (b) An oak coffee table (c) a book

1. What are the raw materials that each product is made of?

2. Where do these raw materials come from?

3. If society keeps using these raw materials, will they run out? Explain your
answer.

Definition ‘raw materials’

A material or substance used in the primary production or manufacturing of a good.

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1.1 Answers

1. Bread is made from flour; an oak coffee table is made of wood; the
book is made of paper.

2. Flour is made from wheat that is grown on farms; wood comes

from trees that grow on the land; paper is made from wood and
other fibres.

3. Wheat and trees are both renewable. This means that as they are
used to make products, new wheat and trees can be grown.
However, while a new crop of wheat can be grown every year, it
takes many years for trees to grow. If these resources are used to
make products faster than they can be replaced, supplies will run
out.
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Demand and effective demand

■ Our wants influence the way we satisfy our needs. For instance, if
you need food which would you choose to satisfy your need?

■ You may choose to satisfy your need by eating a burger because that
is what you want.
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Demand and effective demand

■ When you want something, you create a demand for it.

You have decided that you want the new iPhone 4S. What do you
require to satisfy your want?
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Demand and effective demand

■ To satisfy your want you will need money to pay for it as well as the
willingness to spend the money on it. You may wish to spend the
money on something else
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Demand and effective demand

■ Your demand for an iPhone 4s will not be successful unless

other people want the same phone too and have the money and
are willing to pay for it.

■ Apple would not make these products if you are the only person
who wants them. The same response applies to businesses.

■ This is called effective demand. People create effective

demand when enough people want something and are able to
and willing to pay for it.
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Needs and wants

• Needs
• Clothing

• Shelter

• Food
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Needs and wants

• Wants
• Clothing
• Jeans

• Party Dress

• Shelter
• House

• Apartment

• Food
• Burger

• Pizza
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The purpose of business activity

■ Businesses have been set up to produce goods and services. These

goods and services are supplied to individuals and other business
organisations that want them.

■ There are many types of business organisation. Some are major

international businesses and others are smaller local businesses.

Activity: Come up with 3 major international businesses and 3 smaller

businesses that operate in their own country.
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International
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National
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Regional
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Local
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Business Activity

■ Activity 1:

In pairs, list 3 major international businesses and 3 smaller businesses

that operate in their own country and 3 local businesses.
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Activity 1.2

1. What is the main difference between needs and wants?

2. Make two lists: the first showing the things that you need; the
second listing things that you want.

3. Identify 3 kinds of businesses or organisations that supply each

item on your lists.

4. Select two businesses that you have identified and explain why you
think that they supply the item.
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Activity 1.2 answers

1. Needs are items that we must have in order to live, whereas wants are
items that we would like to have but which are not essential for us to
live.

2. Student’s own answer. Needs include items such as food, water, shelter
and clothing. Wants might include a certain style of clothing, a holiday, a
mobile phone and so on.

3. Student’s own answer based on items identified in question 2.

4. Students own answer based on businesses identified in question 3.

Reasons why the business supplies an item could be:
■ it wants to provide a service

■ it has spotted a market for the product to make money.

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Private sector: private businesses and
enterprises
Private Sector: Business activity owned financed and controlled by private
individuals
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Private sector

■ Self-employed traders

■ Professional firms

■ Small and large businesses

■ International companies
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Public sector: businesses owned and
run by the government are public
enterprises
Public Sector: Business Activity owned, financed and controlled by the state
through government or local authorities
■ Government – key departments set policy and monitor implementation
■ Local Authorities – County Councils, District Councils
■ Schools
■ Hospitals
■ Libraries
■ Public Corporations – BBC
■ Transport
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Non-profit-making: a third type of
enterprise
Non-profit-making organisations include charities and voluntary
organisations.

These organisations are set up to fulfil a perceived social need or to

provide help to a specific section of the community.
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Similarities and differences

■ Non-profit-making and public sector organisations have profit as a

high priority

■ The difference between these two is that public sector organisations is

run by or on behalf of the government whilst non-profit-organisations
could easily be set up by private individuals who want to support a
specific cause.

■ The government focus on enriching society and ensuring a basic

standard of living
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Similarities and differences

■ Non-profit-making and public sector organisations have profit as a high

priority

■ The difference between these two is that public sector organisations is run
by or on behalf of the government whilst non-profit-organisations could
easily be set up by private individuals who want to support a specific cause.

■ The government focus on enriching society and ensuring a basic standard

of living

■ All organisations in the public and private sector are involved in some form
of business activity and it is only their objectives that differ. For example:
what, whom and why they produce goods and services.
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Activity 1.3

1. Investigate the different types of business in your local area. You

should find examples of private enterprise, public enterprise, and
non-profit-making activity.

2. Identify the objectives of each.

3. Draw up a table

Type Organisation Objective

Private sector
Public sector
Non-profit-makng
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Deciding on what to produce

■ Resources found on earth are finite or in limited supply such as:

Crude oil Gold Aluminum

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Scarcity

■ Some resources such as air satisfy everybody’s needs but most

resources are not plentiful enough for this.

■ Although trees are renewable you have to be careful of the amount of

trees cut down taking into consideration of the time it takes for the
replacement tree to grow.
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Scarcity
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Managing scarce resources

■ Since resources to produce goods and services are scarce a choice

must be made to decide what to produce from them.

■ For example, furniture and houses can be made from timber so a

decision needs to be made whether to cultivate trees for furniture or
houses.

■ Similarly, if a government spends too much money on building skills

then it will not be able to spend much on training extra doctors
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Cost and opportunity cost
■ If you want an iPod and a pair of shoes but only have enough money to buy one of them, you will
have to choose which one to buy. Both products cost money and that is their financial cost.

■ There is also an opportunity cost – the possibility of buying and enjoying the use of the other
item.

■ If you buy the iPod, the opportunity cost of the iPod is the shoes

■ If you buy the shoes, the opportunity cost of the shoes is the iPod

■ Here's another example: if a gardener decides to grow carrots, his or her opportunity cost is the
alternative crop that might have been grown instead (potatoes, tomatoes, pumpkins, etc.)
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Business activity and the factors of
production
Business activity involves the use of resources known as factors of
production. These are:

■ Land

■ Labour

■ Capital

■ Enterprise
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Factors of production: land

Land includes all resources that occur naturally.

Can you think of any?

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Factors of production: labour
Labour is the effort of work provided by people.

Labour-intensive production can often be found in many developing

countries. Labour-intensive production means labour is plentiful and
relatively cheap compared with the technology available to do the job.

In more industrialised countries such as the UK labour-intensive

production can be more expensive in terms of wages than the cost of
running machinery.
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Factors of production: capital

Capital includes items used in the production of goods and services made by
people. These include:

■ Buildings

■ Machinery

■ Equipment

■ Finance required to purchase these items

Production that uses a high proportion of capital compared to labour is called

capital-intensive. Capital-intensive production can be seen as a cheaper and
more efficient production using the latest technology than by hand (labour-
intensive)
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Factors of production: enterprise
Enterprise is the ability, skill and enthusiasm to take risks involved in developing a
business idea and gathering appropriate resources.

All businesses combine factors of production to produce goods and services that
people want to buy.

A large company like Kuwait Petroleum Corporation will use all four elements to
produce the final product (petrol or diesel).

1. Land- oil wells and refineries

2. Labour- staff

3. Capital- drilling equipment, pipelines, office buildings

4. Enterprise- the skill of senior management

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Village fisherman

Land:

Labour:

Capital:

Enterprise:
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Adding Value

Added value = the difference between the price of the finished product/service and the cost of the
inputs involved in making it.

This is because of the work carried out increases the value of the parts and raw materials used. When
the product is complete its value and the price it is sold at is more than the value of the factors of
production used to make the product.

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.
Consider the examples of new cars rolling down the production line being assembled by robots.  The
final, completed and shiny new car that comes off the production line has a value (price) that is more
than the cost of the sum of the parts.  Value has been added.  Exactly how much added value is
determined by the price that a customer pays.

Alternatively, imagine a celebrity chef preparing a meal at his luxury restaurant.  Once the cooking is
complete, the meal is being served and sold for a high price, substantially more than the cost of buying
the ingredients.  Value has been added.
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Activity 1.4

1. Consider one of the following businesses:

■ a farm

■ a furniture maker

■ a shop

■ a cosmetics manufacturer

■ a paper producer

■ a producer of music CDs

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Activity 1.4

Construct a table like the one shown below. Complete your table with
examples of the types of resources or factors of production used by
your selected business. The first line of the table has been completed as
an illustration.
Factors of production
Business Land Labour Capital Enterprise
Farm Land for Farm Tractors Skills and
grazing workers efforts of the
animals or farmer in
growing setting up and
crops running the
farm
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Activity 1.4

■ Design a poster of diagram showing how, by combining these

resources and transforming them into a finished product, the business
adds value to the resources.
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Adding value
You don’t have to use robots or have the culinary skills of Gordon Ramsay to “add value”.  For
example, businesses can add value by:

■ 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
pretty 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.

■ Offering convenience  – customers will often pay a little more for a product that they can have
straightaway, or which saves them time.

■ 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
making the product.

Do not confuse added value with profit as they are not the same (we will come to profit later)
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Adding value Why would people pay a bit more
money for a loaf of bread than make it
at home?
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Summary
Supplying
Effective
needs and Demand demand
wants

Opportunity
Scarcity cost
Goods and
services

What is Land
business? Resources

Adding value Labour

Factors of
production

Selling price
minus cost Capital

Enterprise
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Summary
1. We all have needs and wants.

2. The main purpose of business activity is to supply the goods and services
people want.

3. The objective of most private sector businesses is making a profit.

4. The main objective of public enterprise is to provide services to the local and
national community.

5. The main objective of non-profit-making organisations is to meet a perceived

social need or to provide help to a specific section of the community that is not
met by private or public enterprise

6. Businesses produce goods and services using scarce resources known as factors
of production: land, labour, capital, enterprise.

7. Value is added to the resources because of the work carried out to produce the
finished product has a value that increases the value of the parts and raw
materials used.
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Key terms
Added value – the difference between the selling price of a product and the cost of raw materials used to make it

Effective demand – demand for a product that is backed up by the ability and willingness to pay for it

Factors of production – the four categories of resources that are used to produce goods and services: land, labour, capital, enterprise

Goods- tangible products that can be touched and consumed

Needs – things necessary to sustain life

Opportunity cost – the cost of something in terms of the next best thing

Private sector – the sector of business consisting of businesses owned by private individuals or groups

Profit – the profit a business makes is the amount by which its income from selling the goods and services it produces exceeds the
costs of producing those goods and services

Public sector – the sector of business consisting of businesses owned by the state

Resources – items of limited availability that can be used in human activity

Services – things other people or businesses do for you

Wants – things chosen to satisfy a need or to make life more enjoyable

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Factors of production

Match each factor of production to the correct description

and example (cards).

Exemplar question:

What is meant by the term ‘added value’? (2)