Chapter 1: The purpose of Business Activity
The economics problem: needs and wants.
Basically, all humans have needs and wants. Needs are things we can't
live without, while wants are simply our desires that we can live
without. We all have unlimited wants, which is true, since all of us
want a new PC, a car, new graphics card, etc. that we actually do not
need to live. Businesses produce goods and services to satisfy needs
Although we have unlimited wants, there are not enough resources for
everyone. Resources can be split into 4 factors of production, which
Land: All natural resources used to make a product or service.
Labour: The effort of workers required to make a product or service.
Capital: Finance, machinery and equipment required to make a
product or service.
Enterprise: Skill and risktaking ability of the entrepreneur.
Entrepreneurs are people who combine these factors of production to
make a product.
With these discussed, lets move on to the economic problem. The
economic problem results from limited resources and unlimited
wants. This situation causes scarcity, when there are not enough goods
to satisfy the wants for everybody. Because of this, we will have to
choose which wants we will satisfy (that will be of more benefit to us)
and which we will not when buying things. For any choice, you will
have to would have obtained if you didn't spend that money. For
example, you would have got a book if you didn't buy the pen, or you
would have a burger if you didn't buy the chips. Basically, item that you didn't buy is the opportunity cost. Make sure that the opportunity cost
isn't higher than what you bought!
"Opportunity cost: the next best alternative given up by choosing
Here is a diagram showing the whole economic problem:
Division of labour/Specialisation
Because there are limited resources, we need to use them the most
efficient way possible. Therefore, we now use production methods that
are as fast as possible and as efficient (costs less, earns more) as
possible. The main production method that we are using nowadays is
known as specialization, or division of labour.
"Division of Labour/Specialisation is when the production process is
split up into different tasks and each specialized worker/ machine
performs one of these tasks."
• Specialized workers are good at one task and increases efficiency and
output. • Less time is wasted switching jobs by the individual.
• Machinery also helps all jobs and can be operated 24/7.
• Boredom from doing the same job lowers efficiency.
• No flexibility because workers can only do one job and cannot do
others well if needed.
• If one worker is absent and noone can replace him, the production
Why is business activity needed? (summary)
Provides goods and services from limited resources to satisfy
Scarcity results from limited resources and unlimited wants.
Choice is necessary for scarce resources. This leads to opportunity
Specialisation is required to make the most out of resources.
1. Combine factors of production to create goods and services.