Business: Chapter 1

• Needs


  Goods or services that are essential and required for survival, such as food, clothing, shelter and healthcare
• Wants


  Goods or services that are not necessary for survival but that people desire or wish for, adding comfort to our lives but not essential
• Factors of production


  • Land
  • Labour
  • Capital
  • Enterprise
• Land


  All natural resources like farmland, water, coal, soil, sand etc.
• Labour


  The physical and mental contributions of an employee
• Capital


  Items that go into producing other things, e.g. machinery, tools
• Enterprise


  The factor responsible for bringing together land, labour and capital
• Resources are limited and wants are unlimited - this gives rise to the problem of scarcity
• Choice


  Opting for one thing among various alternatives
• Sacrifice


  Something that is given up to obtain something else
• Opportunity cost


  The most valuable alternative that is given up when making a choice
• Specialisation


  When people and businesses concentrate on what they are best at
• Division of labour


  The production process is split up into different tasks and each worker performs one of these tasks, a form of specialisation
• Advantages of specialisation


  • Increases efficiency
  • Less time is wasted moving from one bench to another
  • Quicker and cheaper to train workers as fewer skills need to be taught
• Disadvantages of specialisation


  • Workers can become bored doing just one job - efficiency might fall
  • If someone is absent, production might be stopped
• Business activity


  Any activity engaged in for the purpose of making a profit, including buying, selling or any activities to run an organisation
• Purpose of business activity

  Businesses combine the factors of production to make products (goods/services) which satisfy people's wants
• Added value


  The difference between the selling price of a product and the cost of all bought in materials and components
• Calculating added value


  Added Value = Selling Price - Cost of bought in materials and components
• All businesses attempt to add value, as if they do not add any value to the materials and components, other costs cannot be paid for and no profit will be made
• Example of value added


  • Selling price of a newly built house is £100,000, value of all bought in materials and components is £15,000, so the added value of the building firm is £85,000
• Why is value added important?

  It is important because sales revenue is greater than the cost of materials bought in by the business, allowing the business to pay other costs and potentially make a profit
• How can a business add value?

  • Increasing the selling price but keeping the materials the same
  • Reducing the cost of materials but keeping price the same
• Methods to add value

  • Creating a recognized brand
  • Introducing value added services
  • Holding promotions
  • Providing excellent customer service