Business Activity

The Basic Economic Problem: Needs, Wants, Scarcity, and Opportunity Cost

Needs are essential goods or services for survival (e.g. food, water, shelter, clothing).
Wants are unlimited and refer to non-essential desires (e.g. smartphones, designer clothes).
The economic problem arises because resources (factors of production) are limited, while wants are unlimited. This leads to scarcity – not all wants and needs can be satisfied.
Scarcity forces individuals, businesses, and governments to make choices, leading to opportunity cost – the next best alternative foregone when making a decision.

Factors of production are resources needed to produce goods or services

The four factors of production used to produce goods and services are:

Land – natural resources (e.g. oil, minerals, farmland).
Labour – human effort used in production.
Capital – man-made resources used in production (e.g. machinery, tools).
Enterprise – the risk-taking ability and organisation skills of entrepreneurs who combine the other three factors to produce goods/services.

Specialisation is when individuals, businesses, or economies focus on producing specific goods or services.

Division of labour is a form of specialisation where the production process is divided into separate tasks, each performed by different workers.

Advantages:

Increases efficiency and productivity.
Reduces production costs and training time.
Allows workers to become skilled at specific tasks.

Disadvantages:
Work can become repetitive and boring.
- Over-dependence on specific workers; if one is absent, production may stop.
- Reduced flexibility in the workforce.

Businesses combine scarce resources (factors of production) to produce goods and services that satisfy people’s needs and wants.
Business activity is essential for:
- Solving the problem of scarcity by producing useful goods/services.
- Providing employment and income.
- Improving living standards by enabling trade and consumption.
Without business activity, people would need to be self-sufficient, which limits efficiency and standard of living.

Added value is the difference between the selling price of a product and the cost of the materials and components used to make it.

Added Value = Selling Price – Cost of Inputs
It is not the same as profit, as added value must also cover other costs like wages, rent, and advertising.

Why is added value important?

Ways to increase added value:

Increase the selling price without raising input costs, e.g., by:
- Improving product quality.
- Building a strong brand.
- Enhancing packaging or customer service.
Reduce the cost of materials without reducing the price, e.g., by:
- Sourcing cheaper inputs.
- Improving operational efficiency.