The Nature of Business Activity (Cambridge (CIE) IGCSE Business): Revision Note

Factors of production

• Factors of production are the resources used to produce goods and services

  • They include land, labour, capital and enterprise

• The production of any good or service requires the use of a combination of all four factors of production

  • Goods are physical objects that can be touched (tangible), e.g., a mobile phone

  • Services are actions or activities that one person performs for another (intangible), e.g., a manicure or car wash

Explanation of the four factors of production

Adding value

• Adding value is the process of taking raw materials and using them in such a way that the end product created is worth more than the cost to make it

• It is therefore the difference between the price charged to the customer and the cost of inputs required to create the product or service

  • For example, customers are prepared to pay more for potatoes when they are packaged as oven chips than they would be willing to pay for a bag of potatoes

• The greater the added value, the more successful the business is likely to be and the higher their profits

• Product and marketing teams explore ways to increase added value

Examples of added value

Opportunity cost

• Opportunity cost is the loss of the next best alternative when making a decision

• Businesses thrive when they are able to meet customer needs and wants

  • Needs are essential, e.g. shelter or food

  • Wants are desires which are not essential e.g Nike trainers

• Due to the problem of scarcity, there is a basic economic problem

  • Choices have to be made by producers, consumers, workers and governments about the most efficient use of resources

• There is an opportunity cost in the allocation of resources

  • When a consumer chooses to purchase a new phone, they may be unable to purchase new jeans

    • The jeans represent the loss of the next best alternative (the opportunity cost)

  • When a producer decides to allocate all of their resources to producing electric vehicles, they may be unable to produce petrol vehicles

    • The petrol vehicles represent the loss of the next best alternative (the opportunity cost)

  • When a government decides to provide free school meals to all primary students in the country, they may be unable to fund rural libraries, which may have to close

    • The libraries represent the loss of the next best alternative (opportunity cost)