Key definitions
- Needs — goods or services necessary for life.
- Wants — goods or services that are not necessary for life but are still sought after.
- Scarcity — the basic economic problem; unlimited wants but limited resources.
- Opportunity cost — the next best alternative forgone.
- Specialisation — when a business focuses on producing a specific type of good or service that they are good at.
Factors of production
Factors of production are the factors that must be available for the production of goods and services.
- Capital — man-made machinery and equipment.
- Enterprise — the entrepreneur ready to take the risk.
- Land — all natural resources involved.
- Labour — the people available to work.
Importance of specialisation
- Builds brand reputation.
- Increased product quality from focused production.
- Increased productivity as production processes are broken down.
- Increased profit as a result.
Specialisation of workers — division of labour
Division of labour is when workers are assigned specific tasks or jobs.
| Advantages | Disadvantages |
|---|---|
| Employee skills are developed | If one worker is absent, the whole production is disrupted |
| Quality of products increases as employees become skilled at one task | The job can get repetitive |
| Production is more efficient | Bored workers are more likely to quit (increased labour turnover) |
| Quicker training | In turn, the quality of products could also decrease |
Purpose of business activity
To use the factors of production to create goods and services that meet consumer wants and needs.
Added value
Added value = Selling price − Cost of materials
To increase added value, you:
- Increase the selling price of the product, or
- Reduce the cost of production.
Methods of adding value
- Branding — creating a unique brand image that makes the business identifiable to consumers. Essentially, brand reputation. E.g., people like buying branded bags.
- Excellent service — providing unique services that make the customer want to return. E.g., having a 2-year warranty.
- Product features — having unique product features that make it stand out from competitors, resulting in customer return.
- Convenience — the location in which the good or service is being sold. A customer would prefer purchasing bread at their nearest grocery store over driving 20 km for a similar variety.