Business activity, added value and the economic sectors

What businesses do

A tailor buys cloth and thread for 400 rupees and sells the finished shirt for 900. What has the tailor done? Combined resources to make something people value more than the materials. That is what every business does, and this lesson starts the whole course.

Why businesses exist

People have needs, such as food and shelter, and wants, such as phones and holidays. Businesses exist to satisfy them. But resources are scarce, while wants are unlimited, so choices must be made about what to produce. Every choice has an opportunity cost: the next best alternative given up.

The factors of production

Land: natural resources such as soil, water and minerals. Labour: the effort of workers. Capital: man-made goods used in production, such as machines, tools and buildings. Enterprise: the skill and risk-taking of the entrepreneur who brings the other three together.

Specialisation

Specialisation is when people or businesses concentrate on what they are best at. The division of labour splits production into tasks. It raises output and efficiency, because workers become skilled at one task. But work can become boring, and the whole process stops if one stage fails.

Added value

Added value is the difference between the selling price of a product and the cost of the materials bought in to make it. The tailor sells the shirt for 900 rupees and the cloth cost 400, so the added value is 500 rupees. Added value is not profit. Wages, rent and other costs must still be paid out of it.

How to increase added value

Raise the price customers will pay: build a brand, improve quality and packaging, give better service, or a convenient location. Or cut the cost of materials: find cheaper suppliers or waste less, without lowering quality. In an answer, link the method to the business in the case, and explain how it widens the gap.

The three economic sectors

The primary sector extracts natural resources: farming, fishing, mining and forestry. The secondary sector manufactures and builds: textile mills, car factories, construction. The tertiary sector provides services: banks, shops, transport, schools and hospitals.

One product, three sectors

A cotton shirt passes through all three sectors: cotton is grown on a farm, spun and sewn in a factory, and sold in a shop. The sectors depend on each other.

Why sectors change

As countries develop, the primary sector shrinks in importance, and first the secondary, then the tertiary sector grows. Reasons include higher incomes, so people spend more on services; machines on farms needing fewer workers; and raw materials running out. Cheaper imports of food and raw materials can also shrink the primary sector.

Private and public sectors

The private sector is owned by individuals and shareholders, and usually aims for profit. The public sector is owned and run by the government, and aims to provide a service, such as hospitals, roads and water. A mixed economy, like Pakistan's, has both sectors.

Mistakes that lose marks

Mistake one: calling added value the profit. It is selling price minus the cost of bought-in materials. Mistake two: putting a bank in the secondary sector. Banks provide a service: tertiary. Mistake three: giving a way to raise added value without linking it to the business in the case. The fix: the exact formula, the right sector, and the case.

The full-marks tip

The full-marks tip: define added value as selling price minus the cost of bought-in materials. In every explain answer, use the name and details of the business in the case.

On one card

So, on one card: business activity. Keep it for revision.