BUSINESS ACTIVITY

The purpose and nature of business activity

Needs – Goods and services (goods and services) that are essential for living. E.g., food, shelter,
and clothing.

Wants – Goods and services that people would like to have but are not essential for living. E.g.,
branded clothing like Polo shirts and Paul Smith, expensive food, and luxury cars.

Scarcity (the economic problem) – Resources are limited in relation to our unlimited wants. This
necessitates choices and thus incurs opportunity costs.

Opportunity Cost – A benefit/value that must be given up to achieve something else. It is the
benefit of the next best alternative given up when consuming or producing another product. E.g.,
if a bakery spends money on a new oven, the opportunity cost of the oven would be the next best
item the money could have been be used to buy, such as a new refrigerator to store cakes.

Purpose of business activity:

o Combine factors of production to produce Goods and services, which are used to satisfy needs
and wants

o Pay for factors of production and thus providing income and employment, which allows people
to consume goods and services produced by other people or businesses.

Business activity:

End purpose: usually to make a profit. However, some businesses have non-profit objectives
(e.g., charities, government organisations, local sports clubs), funded by donations, membership
fees, tax revenues, etc.

o Businesses also add value to resources by specialisation and also determine what, how, for
whom to produce.

Profit/Loss = Revenue – Cost

Note: “Products” means goods and/or services

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Factors of production – productive resources used to make goods and services.

1. Land – Natural resources such as farmland, trees, forests, oil

2. Labour – Human resources i.e., number of workers available to make products

3. Capital – Man-made resources, such as finance, technology, buildings, and machinery, used to
manufacture or supply other products

4. Enterprise – The skill and risk-taking of entrepreneurs, who organise factors of production and
take risks to produce goods and services.

IMPORTANCE OF SPECIALISATION

Specialisation is:

o Concentration by workers on a particular task in a production process

o Concentration by workers or businesses in the production of particular good or service.

o E.g., in a car factory, some workers specialise in cutting metal parts, another worker assembles
the product, and others paint the car

o E.g., a bakery only specialises in baking cheesecakes, a teacher only specialises in teaching A-
level economics, a doctor specialises in treating children (paediatrician)

Specialisation helps:

o increase amount of goods and services that can be produced with scarce resources

o: Increase speed of production

o Increase quality of products

o reduce/cut costs

Specialisation is now very common compared to the past (where people were self-sufficient, i.e.
they produced everything they needed on their own).

• Specialisation allows the best use of limited resources and skills! This increases the efficiency
in the allocation and use of resources, which leads to an increased standard of living.

Due to repetition (in specialisation):

Increase experience = improve skill = increase efficiency, productivity = increase output, quality
and reduce waste, cost

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Division of labour

When the entire production process is divided into different tasks, and each worker is assigned a
specific task to work on

o It is a form of specialisation.

Keywords:

o Repetition

o Efficiency

o Productivity

o Waste, Cost, Output, Quality

o Best use of limited resources and skill

Advantages of specialisation to workers

1. Specialised workers are more efficient and productive, and thus can command higher
wages.

Disadvantages of specialisation to workers

1. There is the risk of reduced employment opportunities and job security for low-skilled
workers as robots can take over their repetitive tasks.

Advantages of specialisation (General)

Specialised workers, through repetition tends to have:

1. Improved skills and experience

2. Increased efficiency, increased productivity
3. Reduction in wastes,
4. Reduced cost
5. Increase in product quality
6. Increase in output
7. Less time wasted as worker does not need to move from one task to another.

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Disadvantages of specialisation (General)

1. Repetition could lead to boredom and reduction in job satisfaction. This may lead to: -
reduction in efficiency, reduction in productivity, reduction in quality.
2. Must rely on other businesses / workers to supply what they don’t have or cannot
produce. Thus, production is disrupted when: -

i) Specialised workers go on leave/stop working

ii) Businesses of specialised components stop supplying the business / workers

ADDED VALUE

Value Added = Selling Price – Material Costs

• Value added – is the difference between selling price of a product and material costs
• Selling price –is market price paid by consumer (includes all costs and profit)
• Cost – refers to natural and man-made materials and components
• Note: Value added is NOT profit. It includes labour wages (paid for effort and work put
in to convert or process materials), but NOT material costs.

Ways to increase added value

1. Increase selling price by creating a high-quality image for the good/service so people
are willing to pay higher prices, such as through:

• Advertising
• High quality packaging
• Creating a recognised brand
• Employing experienced/knowledgeable sales staff
• Decorating the store in an upmarket way (appeal to wealthy customers)
• NOTE: creating a high-quality image may incur higher costs
2. Reducing cost of materials such as by:
• Specialisation (more efficient in using resources, reducing waste)
• Lowering quality (e.g. using cheaper materials)
• NOTE: lowering quality may make customers unwilling to pay the same price

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 CLASSIFICATION OF BUSINESSES

Economic Sectors

Primary Sector

• Industries that specialise in the extraction of natural resources to produce raw materials
used by other businesses

Examples:

• Fishing
• Agriculture
• Mining
• Oil and gas extraction

Secondary Sector

• Industries that specialise in processing and/or using natural resources and raw materials,
including manufacturing, construction, refining, and assembly

Examples:

• fast food, cheese, biscuits, tea, chocolate, etc.)

• Food processing (e.g. bakeries, manufacturers of
• Construction
• Textile industry (clothes production)
• Oil and gas refining
• Manufacturing cars and aircrafts

Tertiary Sector

• Industries that specialise in the provision of services to consumers and other sectors of
the industry

Examples

• Healthcare (e.g. nurses)

• Legal services (e.g. lawyers)
• Entertainment (e.g. singers, dancers)
• Education (e.g. teachers)
• Financial services (e.g. banking, accountancy)
• Repairs (e.g. plumbers, tailors)

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 • Insurance
• Tourism
• Hairdressing
• Wholesaling and retailing

Developed Newly industrialised Developing

economies economies (rapidly economies (Less
developing) developed)

Primary sector Small Large but shrinking Large

(esp. agriculture) (major employer)

Manufacturing sector Declining Expanding rapidly Small

(secondary)

Service sector Significantly Growing Small, growing

slowly
(tertiary) expanded

Standard of living

Income and standard Generally good Improving generally poor

of living (which (Large proportion of
affects demand for income spent on
goods and services) services)

Amount and variety great amount Growing quickly Few

of goods and services
Wide variety

Examples of countries Australia, France, Brazil, China, India, Brazil, China, India,
Singapore, USA, UK Malaysia, Thailand Malaysia, Thailand

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Changes in sector importance

De-industrialisation – the decline in the manufacturing sector in a country (accompanied by the

growth of the service sector)

Relative importance of each sector (compared to each other) is determined by:

o Output (compared to national output)

o Employment (percentage of total workforce)

Changes in the relative importance of the 3 sectors:

o Initially, the primary sector is of greatest relative importance (highest output and employment).

o Then, the relative importance of the manufacturing / secondary sector increases, compared to
the primary sector.

o Then, many tertiary sector industries begin to expand more rapidly than those in the primary
and secondary sectors.

Reasons for changes in the relative importance of the 3 sectors:

[Link] of natural resources (primary sector resources):

▪ Natural resources, e.g. timber, oil, gas, and precious metals

▪ Due to: overfishing, excessive deforestation and mining, etc.

[Link] of international competitiveness (in manufacturing):

Developed economies are less competitive in manufacturing than newly industrialised countries
like China / India, where wages (labour costs) are low.

3. Higher proportion of incomes spent on services:

▪ Occurs when: Total wealth of a country, standard of living, people become wealthier

▪ Consumers tend to spend a higher proportion of their incomes on services, like travel,
entertainment, and restaurants, instead of just spending on basic needs and manufactured and
primary products

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