Chapter 1
Business Activity
Difference Between Needs & Wants
• Needs – Water, Clothing, Food, Shelter for living – Basic
Things for life
• Wants – Luxurious Things that is based on your tastes
and interests – Expensive Cars, Phones, Houses etc. –
Luxuries of Life
• You may not have all of these- What is the reason of not
having all these luxuries and Necesities
The Economic Problem – The Real
Cause
• The Real Cause is that we do not have enough factors of
Production to make possibility of all the needs and wants
• Factors of Production
• Land: All the natural Resources Risk-Taking fields and forests, oil,
gas, metals and other mineral resources.
• Labor: Human Power available in the market Risk-Taking Number
of People
• Capital: Finances, Machinery and Equipment needed to
Manufacture Goods
• Enterprise: The Skills and Risk-Taking ability of a person to bring
the factors of Production together and Produce goods and service
Opportunity Cost
• Due to Scarcity, we always must decide between two
options
• Getting rid of one option and selecting second option.
The first option will be an Opportunity Cost for the
Second option.
• Examples???
Opportunity Cost
Specialization of Work and Division
of Labor
• In all societies the factors of production are in limited
supply
• It is therefore important to use these resources in the
most efficient ways possible.
• The workers must Specialize in one of the task of
production making the work done efficiently
Advantages and Disadvantages
The Purpose of Business Activity
• The purpose of all businesses is to combine the factors
of production to make products which will satisfy
people’s wants.
• Production of Goods – Laptops, Computers, Mobile Phones,
Furniture
• Services – Hospitals, Banks, Toursim
• Business activity therefore:
• Combines scarce factors of production to produce goods
and services
• Produces goods and services which are needed to satisfy
the needs and wants of the population
• Employs people as workers and pays them wages to allow
them to consume products made by other people.
Added Value
Added Value
• If value is not added to the materials and components
that a business buys in, then:
• Other costs cannot be paid for
• No profit will be made.
Why is added value important?
• Added value is important because sales revenue is
greater than the cost of materials bought in by the
business. This means the business:
• Can pay other costs such as labor costs, management
expenses and costs including advertising and power
• May be able to make a profit if these other costs come to a
total that is less than the added value.
How could a business increase
added value?
• There are two main ways in which a business can try to
increase its added value:
• Increase selling price but keep the cost of materials the same.
This might be possible if the business tries to create a higher
quality image for its product or service.
• Reduce the cost of materials but keep the price the same. A
building firm could use cheaper wood, bricks and other
materials when constructing a home or shop.
