Business Activities

The economic problem (needs, wants, opportunity cost):

What are needs and wants?

  • Needs: A need is a good or a service which is essential for our living, for example, food and water.
  • Wants: A want is a good or a service which people would like to have but which isn’t essential or living, talking about wants people usually have unlimited wants such as expensive clothes and accessories.

Due to these wants we may run into an economic problem…

An economic problem is normally caused due to the list of unlimited wants but only limited resources to produce goods and services to satisfy those particular wants, and this tends to create scarcity

  • Scarcity: the lack of sufficient resources to fulfil the wants of the people.

The real cause of an economic problem:

The real cause of scarcity of goods and services is due to the lack of factors of production.

There are unlimited wants and limited resources for those wants.

Factors of production are those resources needed which can help us to produce the goods and services we need and what we want.

There are four factors of production:

  1. Land: This factor helps in covering all the natural resources such as fields and forests
  2. Labour: In order for the production of goods and services, we will need a number of people to be able to produce numerous amounts of products in time. For example machine operators.
  3. Capital: This is where the finance, machinery, and equipment for the manufacture of goods, company buildings, and more.
  4. Enterprise: The risk ability of the person who brings together the factors of production together providing the goods and services, for example, a business owner. These people are also called entrepreneurs

STUDY TIP:  One way to remember the four-factor factors of production is ‘CELL’



Needing to choose and oppurtunity cost:

Due to the limited resources and unlimited wants, we, therefore, have to choose between two wants – this is also known as opportunity cost. Opportunity cost is the next best alternative given up by going with another decision or item. For example, if you had to choose between movie tickets and a new car, you decide to go in the car so the movie tickets become the opportunity cost.

  • Conclusion:

In summary, there are four factors of production: Capital, Enterprise, Labour, and Land which produce the goods and services of the population, but due to the limited amount of resources and unlimited wants, this is could lead to an economic problem which then creates scarcity. Because of the lack of proper goods and services needed to fulfill the total wants of the people, this then leads to opportunity cost where you give up one decision or item for another.

the importance of specialization:

Since there is a limited supply of the factors of production, it is important we use the resources in a very efficient way. One of the ways that societies or businesses are doing this is by specialization where a worker focuses on what they are best at – this way it is very time efficient and saves a lot of resources. This also improves the skills of the work force.

Benefits of specialization:

  • Specialization often leads to better networking opportunities, people assume you produce high-quality goods or services
  •  Specialized machinery and advanced technology are highly available, which can take away work pressure making things easier to handle.
  • Increases competition between other businesses, having to keep low costs

Another form of specialization widely used in businesses is division of labour, division of labour is when the production process is split up throughout the workers where each individual performs a specific task.

There are many pros and cons of division of labour such as:

The pros are…

  • Workers are usually specialized in doing that task, which increases the efficiency and output of production.
  • The work gets done faster as there is less movement within the worker from one place to another
  • It is very cheap and quick to train employees as they already have experience in the work that they do

The cons are…

  • After a certain amount of time, workers tend to get bored and show no interest which slows down the production
  • Since one individual handle that specific task, in case that person doesn’t come to work – there will not be anyone else to do the work stopping the production.
  • Workers have higher chances of jumping ship to better offers or may switch companies after the enterprise invests in the worker’s training.

 The purpose of business activity:

The main purpose of businesses is to combine all four factors of production to produce goods and services which satisfy the population’s wants. By the process of specialization, people began to concentrate on what they are good at and then trade those goods in exchange for others made by people with different skills. Like this, businesses slowly start growing and over time the business will expand reaching new heights and recognition.

Business activities therefore:

  • Combine the factors of production to produce goods and services
  • Produces goods and services in order to satisfy the needs and wants of the people
  • Employs people as workers

Added value:

Added value is the difference between the selling price of the product and the cost of the materials and components. If the added value is not present to the materials and components that a business buys in, then no profit will be made for the business.

In short…

Selling price of the product – material and costs = value added by the business

Why is added value important?

One of the main reasons why added value is so important in businesses is because of how much customers can attract towards buying the products.

The business can:

  • Pay for other costs such as labor costs and management expenses including advertising
  • Be able to gain a lot of profit if other costs in total are less than the added value of the product

How could a business increase added value?

There are two main ways in which a business can increase its added value:

  1. Increase the selling price of the product but keep the cost of materials the same. This tends to create a high-quality image for the customers possibly convincing them to buy the products [note that the expenses of other items may increase in the long run].
  2. Reduce the cost of materials but keep the price the same. If the price of the product is low, it can reduce the quality of the product – if the quality of the product decreases then the population wouldn’t buy the products leaving the business to go in loss.


In summary, added value is used in businesses because the business can pay for other costs such as labor and management expenses and the business may be able to make a huge profit. There are simple ways to increase the added value: 1) increase the selling price, 2) reduce the material costs, 3) selling price fewer costs of materials.

Understand why people work and what motivation means

  • Motivation is the desire an employee has to work hard and do a good job. Many factors influence this, and can give the employee job satisfaction. A satisfied employee is likely to be more productive and more committed to their job.
  • A job can be motivating because of many factors;
    • Good Wages
    • Generous Holidays
    • A safe and clean working environment
    • Working as part of a team
    • Insurance, and other perks

Understand the benefits of a well-motivated workforce

  • Increase Productivity
    • If workers are satisfied with their work and feel loyalty to the business, they are more willing to work efficiently and in the interest of the business.
      • This increases the amount of output they produce as well as increasing the quality of the work.
  • Reduced Absenteeism
    • Workers who dislike their work or don’t feel rewarded are more likely to take days off than well-motivated employees. Increasing job satisfaction can therefore lower absenteeism.
      • This decreases the time and costs to arrange other employees to take the place of the missing one and therefore results in higher profits.
  • Reduced Labour Turnover
    • Motivated employees are more likely to stay with an organisation
      • This lowers the need to recruit and therefore decreases the cost of recruitment

Understand the concept of human needs in Maslow’s hierarchy

  • In 1968, the Us psychologist Maslow proposed his hierarchy of human needs.
    • He claims that initially, the thing employees want the most are physiological needs (reasonable wages to buy food, house and clothing).
    • Once these needs are satisfied, employees tend to look towards safety and security needs (Job security and safe working conditions)
    • Then social needs (Working as a team and supporting each other)
    • Then esteem needs (positive feedback from managers)
    • Lastly, the thing employees want self-actualization (promotion, power, and development)

Understand the key motivational theories from Taylor and Herzberg

  • Taylor
    • He was an US engineer who pioneered work studies.
    • Taylor developed time and motion studies that divided up each job into simple tasks. He then calculated how many times an employee should perform each task. These were set as production targets
    • He then states that labour productivity would increase if each employee specialised in a particular task and was rewarded when reached the production target
    • This idea is no longer used because his studies were undertaking many facts, such as that repetitive tasks can motivate employees through boredom.
  • Herzberg
    • Herzberg studies engineers and accountants and argued that people have two sets of needs they need to satisfy at work
      • Hygiene Factors
        • Job Security, Wages, Working Conditions
        • These needs do not motivate people, but they make them satisfied. With no satisfaction employees may reduce labour productivity
      • Motivators
        • Sense of Achievement, Recognition at Work, Being Trusted with Responsibility
        • If these needs are satisfied, employees motivation will increase and boost productivity

Identify financial rewards

  • Wages
    • Wages are paid to employees per week or per month. Then there are two types of extra wages an employee can receive
    • TIME RATE; Based on hour worked
      • The main problem is that it does not take into account the productivity of each employee
    • PIECE RATE; Based on output produced
      • This encourages the employee to work harder, but can encourage the worker to rush and ignore quality
      • It cannot be used where it is difficult to measure output
  • Salaries
    • Usually not given to employees that are hourly wages but instead permanent workers
    • Annual salary divided into 12 equal monthly payments
    • Only way to change it is if and employee receives a pay rise
  • Performance Related Pay
    • Commission
      • The more sales an employee makes or the more revenue they earn for the organisation, the more they will earn. Usually, a % of their sales and is a good way to reward employees for increasing sales
    • Bonus Payment
      • Sums paid usually at the end of the year to reward the performance of the employee
    • Profit-Sharing
      • Giving the employee a % of the profits of the business they work for. This can motivate the employee to increase productivity

Identity non financial methods

  • Job Rotation
    • Employees can be organised into small groups trained to carry different tasks that can be swapped between employees. This makes the job more varied and refreshing
      • However, if the tasks are equally boring motivation is unlikely to improve
  • Job Enrichment
    • Increasing the degree of challenge in a job by adding tasks that require more skills and responsibility.
      • However some employees may not want to take extra tasks especially if there is no extra pay
  • Teamworking
    • Involved dividing the workforce into small teams of employees. It encourages cooperation and gives the employee more responsibility
  • Training
    • Employees with limited tasks may feel bored. Training can help employees understand how their work fits in with the aim of the business. This will make them feel better about the task they are given. They can also get better jobs for better pay
      • However not all employees are willing to take training
  • Opportunities for Promotion
    • The possibility of promotion can motivate the employees who want to progress in their careers. Employees who see the opportunity to be promoted will want to prove that they are good workers.
      •  Promotion means extra responsibilities and challenger that some employees may not want


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