Business activity

A need is something a person must have to live, such as food or shelter. A want is something a person would like but can live without. People's wants have no limit.

Resources are limited. This is scarcity: there are never enough resources to satisfy every want.

For a business, scarcity means limited money, materials and time. The business cannot do everything, so it must choose how to use what it has.

Scarcity forces a choice, and every choice gives something up. The opportunity cost of a choice is the next best alternative given up.

Opportunity cost is not the money spent. It is the benefit lost by choosing one option instead of another. Name the one alternative that was given up, not every alternative.

An owner who puts savings into the business faces it too. The opportunity cost is whatever else the savings would have paid for.

Specialisation is when workers focus on one task. They build a higher level of skill at that task. A definition needs both parts: the focus and the higher skill.

The benefits are higher output, fewer mistakes, better quality and time saved. Develop each one: skilled workers finish each item faster, so the labour cost of each unit falls. An effect on sales or reputation is not an advantage of specialisation.

The main drawback is boredom from repeating the same task. Division of labour is a different term: it is the splitting of a job into separate tasks.

A business exists to produce goods or services that satisfy customers' needs and wants. In doing this a business adds value: it sells its product for more than the bought-in materials cost.

Link the purpose to the business in the question. A salon exists to satisfy customers who want a haircut. Two purposes must be two different ideas, not one idea in different words.

Added value is the difference between the selling price and the cost of bought-in materials. A business buys inputs, changes them and sells the result for more.

It is not the same as profit. Wages, rent and machinery are costs of production, not bought-in materials, so they are not subtracted. The business pays those costs out of its added value, and what is left is profit.

A definition must explain the term. Repeating that the business "adds value", or listing ways to increase it, earns nothing.

There are two routes. A business can increase the selling price or reduce the cost of bought-in materials. Cutting wages or machinery costs is not a route: those are not bought-in materials.

A higher price needs a reason, such as better quality, packaging or service. Customers who see higher perceived quality will accept it. Cheaper materials come from a cheaper supplier.

Explain each route as a chain that ends at the price or the material cost. New packaging that only "attracts more customers" earns nothing. In a question that asks for a recommendation, weigh the risk too: a higher price can lose sales.