The Purpose of Business Activity

Chapter 1

  • The purpose of business activity is to satisfy customers using the scarce factors of production.
  • A need is a good or service essential for living
  • A want is a good or service that people desire, but is not essential for living
  • The economic problem results from there being unlimited wants but limited resources to produce the goods and services to satisfy those wants. This creates scarcity.
  • Scarcity is the lack of sufficient products to fulfill the total wants of the population

Factors of Production

  • Factors of Production are those resources needed to produce goods and services. They are in limited supply.
  • Land: covers all the natural resources provided by nature
  • Labor: human resource
  • Capital: investment in goods that are used to produce other goods in the future e.g. finance, machinery, equipment
  • Enterprise: the skill and risk-taking ability of the person who brings all the other factors together to produce a good or service. These people are called entrepreneurs.
  • Opportunity cost is the next best alternative given up by choosing another option


  • Division of Labor/Specialization is when production is split up into different tasks and each worker performs one of these tasks.
  • Advantages:
    Increases efficiency and output
    Less time is wasted between tasks
  • Disadvantages:
    If workers get bored, efficiency falls
    If one worker is absent, production may be stopped

Business Objectives

  • Profit
  • Value added:
    the difference between the selling price of a product or a service and the cost of materials and components bought
    by adding features or attractive displays
  • Growth:
    Job security
    Increase salaries and status
    Risk taking
    Higher market share
    Economies of scale
  • Survival
  • Provide a service

Possible Conflicts in Business Objectives

  • More profit but more pollution
  • Expansion but more dirt and noise
  • Profit through capital intensive but unemployment
  • Expansion but less profit
  • Therefore, managers must compromise during decision making
  • Objectives may change overtime

Stakeholders involved in Business Activity

  • Stakeholders are the people with a direct interest in the performance and activities of a business
OwnersRisk takersInvest capital

Take a share of profit

Growth: for more profit shareProfit
WorkersEmployeesFollow instructionsRegular payJob security

Good contract of employment

Satisfaction and motivation

ManagersEmployeesDecision makersHigh salariesJob security

Growth: status and power

CustomersBuy the productsInvolved in market researchSafe and reliable products/servicesValue for money

Quality and quantity

GovernmentMake lawsProtect well-being of economyHigh tax collectionHigh GDP

Positive multiplier effect

Follow the law

CommunityEffected by the quality and type of goodJobs


Employment opportunitiesNo pollution

Socially responsible products and services


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