CAIE A-Level Business 1.1.1 Business Activity

Practise defining factors of production, added value and opportunity cost and analysing how a dynamic environment or resource decision contributes to business success or failure.

[Maximum number: 3]

Office Furniture Designs (OFD)

Markus is an entrepreneur and is planning to set up a private limited company called OFD in four weeks' time. OFD will be an online retailer selling office furniture directly to business customers. Products will be sent directly to customers from OFD's warehouse. OFD's product range will include office chairs, desks and filing cabinets.

Markus will have limited start-up funds. OFD will operate in a competitive market and Markus is keen to offer high-quality customer service. He also will have to think carefully about opportunity cost.

As part of his business planning, Markus has prepared a cash flow forecast (see Table 1.1).

$Table 1.1 OFD's cash flow forecast June - August 2023 (\$ 000)$

Table 1.1 OFD's cash flow forecast June - August 2023 (\$ 000)

Markus plans to offer all customers one month trade credit. However, as OFD is a new business, suppliers may insist on payment on delivery. Markus is currently researching sources of finance to improve OFD's cash flow.

OFD will need five employees who will work in the warehouse and three customer service assistants. Markus plans to offer two weeks of induction training to all employees.

Explain the term opportunity cost.

Figure for Answer to Question 1.1.1—Business activity question 1 — CAIE A-Level Business AS

Indicative content

AO1 Knowledge and understanding

Knowledge of opportunity cost may include:

- Opportunity cost is the benefits forgone/lost of the next best alternative/when a decision is made.

- What is lost when a decision is made.

AO2 Application

Limited application applies knowledge of opportunity cost to a

- choice/decision OR to the lost benefit.

Developed application □ + applies knowledge of opportunity cost to a

- choice/decision AND to the lost benefit.

Application can be made to Markus/OFD or any other scenario/context/business/person.

Accept all valid responses.

1(a)(ii)

Mark

Rationale

The next best alternative that has been given up □. For example, if Markus chooses to spend money on customer services and not marketing then the opportunity cost would have been the loss of the marketing benefits □.

3

An answer which starts with the knowledge and then applies it to Markus.

3

Again, knowledge first, followed by application to a
decision (choose to buy some desks) and to the lost benefit (not being able to buy chairs).

The next best thing forgone when making a decision. A business could choose to buy some desks, but they would miss out on being able to buy chairs.

If a business has £ 100 and they choose to buy inventory instead of fuel 四, then the opportunity cost is the lost benefit of the fuel because it has been lost □.

3

A different way of answering the question. There is application of both elements of opportunity cost (the
choice and the lost benefit) as well as clear knowledge of the concept by the end of the response.

The next best opportunity forgone. For example,
when you choose to buy a chocolate bar

2

Clear knowledge. Some application of a choice, but not the lost benefit.

What you miss out on when a decision is made.

1

Not a perfect definition, but enough to award the knowledge mark. No attempt to apply.

It is about choices that have to be made by a business, for example choosing to buy a new piece of machinery.
□

0

No knowledge of opportunity cost. Too vague.

All question bank results loaded

1.1.1—Business activity question 1