Business activity and classification
Businesses combine resources to make goods and services that satisfy needs and wants, adding value. They are classified by sector, measured by size and grow in different ways.
📌 Key points
- Business activity combines factors of production to make goods and services that satisfy people’s needs (essential for survival) and wants.
- Because resources are scarce, choices must be made and every choice has an opportunity cost (the next best alternative given up).
- Specialisation means people or businesses concentrate on what they do best; it raises efficiency and output.
- Added value = selling price − cost of bought-in materials and components; it can be increased by branding, better quality, packaging and convenience.
- The primary sector extracts natural resources, the secondary sector manufactures and builds, and the tertiary sector provides services. As countries develop, the tertiary sector usually grows in importance.
- The private sector is owned by individuals and companies; the public sector is owned and controlled by the government. A mixed economy has both.
- Entrepreneurs organise resources and take risks; useful qualities include being creative, hard-working, self-confident, a risk-taker and good at communicating.
- A business plan sets out the aims, market, finance and strategy of a business; it helps to get finance and to plan. Governments may support start-ups with grants, loans, advice and cheap premises.
- Business size is measured by number of employees, value of output, value of sales (revenue) or capital employed, but not by profit.
- Businesses grow internally (new branches, products, markets) or externally by mergers and takeovers: horizontal, vertical (forward or backward) or conglomerate. Many businesses fail because of poor management, cash-flow problems or changes in the market.
📖 Key terms
- Added value
- The difference between the selling price of a product and the cost of bought-in materials and components.
- Opportunity cost
- The next best alternative given up by choosing another item.
- Primary sector
- Businesses that extract natural resources, e.g. farming, fishing and mining.
- Tertiary sector
- Businesses that provide services, e.g. banking, transport and retail.
- Entrepreneur
- A person who organises, operates and takes the risk for a new business venture.
- Business plan
- A document containing the business objectives and important details about its operations, finance and owners.
- Capital employed
- The total value of capital used in a business.
- Takeover
- When one business buys out the owners of another business, which then becomes part of the buyer.
✏️ Worked example
A bakery sells 200 cakes a week at $12 each. The ingredients and packaging for each cake cost $4. Calculate the added value per cake and per week, and suggest one way to increase it.
- Added value = selling price − cost of bought-in materials.
- Per cake: $12 − $4 = $8.
- Per week: $8 × 200 = $1,600.
- To increase it, the bakery could build a strong brand or use attractive packaging so customers pay a higher price.
- Answer: $8 per cake and $1,600 per week.
Added value is not the same as profit: it does not take away wages, rent or other overheads. Use the business in the case study when suggesting how to add value.
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