1.1 Business Activity | IGCSE Business

Cambridge IGCSE Business (0264) syllabus reference: 1.1.1

Success criteria - by the end of this topic you can:

name and explain the four factors of production
explain what added value is and how a business can increase it
explain opportunity cost and apply it to business decisions

What is business activity?

Businesses combine scarce resources to produce goods and services that satisfy people's needs and wants. In doing so they employ people, who earn incomes and spend them on goods and services made by other businesses.

Key terms
Factors of production - the resources needed to produce goods and services: land, labour, capital and enterprise.
Added value - the difference between the selling price of a product and the cost of the bought-in materials used to make it.
Opportunity cost - the next best alternative given up when a choice is made.

The four factors of production

Factors of production

Factor	Meaning	Example
Land	All natural resources: soil, water, forests, oil, minerals	Farmland used by a tea estate
Labour	The people available to work, and their skills	Software engineers at Infosys
Capital	Finance, machinery and equipment used in production	Robots on a car assembly line
Enterprise	The skill and risk-taking of the person who brings the other factors together	An entrepreneur starting a cafe

Added value

Added value is not the same as profit. Added value pays for wages, rent and other costs, and what is left is profit. A business wants high added value because it gives more room to cover its costs and make a profit.

Worked example: Added value

A bakery buys flour, sugar and butter for $1.20 and sells a cake for $4.00.
Added value = selling price - cost of bought-in materials = $4.00 - $1.20 = $2.80 per cake.
The $2.80 must cover wages, rent and electricity; anything left over is profit.

Ways to increase added value

Raise the selling price by making the product more desirable: a strong brand image, better design, attractive packaging, extra features or better customer service.
Reduce the cost of bought-in materials: use a cheaper supplier or buy in bulk for discounts, without lowering quality.

Real-world example A tea estate in Assam that sells loose leaves in bulk earns very little per kg. When tea is blended, packed and sold under a brand such as Tata Tea or Taj Mahal, the selling price per kg rises many times - the extra value is created by processing, packaging and branding.

Opportunity cost

Resources are scarce, so every choice involves giving something up. Businesses use opportunity cost to compare options: if a business spends $50 000 on a new machine, the opportunity cost might be the advertising campaign it can no longer afford.

Exam tip

In a 'Which option should X choose?' question, mention the opportunity cost of the option you reject - it shows evaluation and is a quick way to justify your decision.

Common mistakes

Saying added value = profit. Added value is before wages and other costs are paid.
Defining a factor of production with only an example (e.g. 'land is a field') - give the meaning first.

Analysis chains - use these to build 6 and 8-mark answers

Better design [k] - higher price customers will pay [an] - added value per unit rises [an] - more profit to reinvest [an].
Buying in bulk [k] - lower cost of materials [an] - added value rises even at the same price [an].

Check your understanding - exam-style practice

1. Define 'added value'. [2]
2. Explain two ways a furniture maker could increase added value. [6]
3. A business can either buy a new machine or open a shop. Explain how opportunity cost affects this decision. [4]
Write your answers, then check them against these notes and the Exam Technique Sheet.

📝 Practise this topic

Case Study 1 (Paper 1 style, 20 marks): Questions · Mark scheme · A* answers

Case Study 2 (Paper 2 style, 20 marks): Questions · Mark scheme · A* answers

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