The Nature of Business Activity

Exam code: 7115

Written by: Ashika|Reviewed by: Caroline Carroll|Updated 2 July 2026

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

Land	Capital
Non-man-made natural resources available for production Some countries have a vast amount of a particular natural resource, so are able to specialise in its production For example, Kuwait specialises in the product of oil which accounts for 95% of its exports	Capital is any man-made resource that is used to produce goods and services Examples include tools, buildings, machines and computers
Labour	Enterprise
The human input into the production process, labour involves mental or physical effort Not all labour is of the same quality It can be skilled or unskilled Some workers are more productive than others because of their education, training and experience	Enterprise involves taking risks in setting up or running a firm An entrepreneur decides on the combination of the factors of production necessary to produce goods and services with the aim of generating profit

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

Method	Example
Branding	Apple has built a brand that many customers believe is superior to other brands They have achieved this through the use of quality materials, innovative design and good marketing This branding allows the firm to charge a higher price for its products, thus increasing the added value
Convenience	Persil initially provided a bottle of dishwashing liquid for dishwashing machine use This resulted in spillage as customers added the liquid to their machines, so Persil then created tablets The tablets offered a much more convenient option and Persil was able to charge a higher selling price for them
Quality	Jo Malone perfume products are well known for their beautiful packaging, which creates an exciting opening experience for the customer This allows the firm to charge a higher price for its products, thus increasing the added value
Unique selling points (USPs)	MoonPig birthday cards can be completely customised (size, colour, design etc.) and the level of customisation has helped them gain a competitive advantage This customisation allows the firm to charge a higher price for its cards, thus increasing the added value
Design	Samsung Galaxy Watch 5 has robust health tracking tools built into it, along with an amazing screen, which has helped it gain a competitive advantage These features allow the firm to charge a higher price for its products, thus increasing the added value

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)

Factors of production