1.1. Business activity
- Syllabus
- 0264–2027–2028
- Topic
- 1.1
- Level
- —
Learning objectives
Combine resources to add value
| Factor of production | Meaning in a business |
|---|---|
| land | natural resources and the site used in production |
| labour | human effort, skills and time |
| capital | man-made productive assets such as machinery, tools and buildings |
| enterprise | organising the other factors, making decisions and taking business risk |
Added value is the difference between a product's selling price and the cost of bought-in materials and components. A business can increase it by raising customers' willingness to pay—through quality, design, convenience, service or branding—or by reducing bought-in input costs without damaging the product's appeal.
added value=selling price−cost of bought−in materials and components
Opportunity cost is the next best alternative forgone when a choice is made. If enterprise uses limited finance to buy machinery, the opportunity cost might be the marketing campaign that cannot now be funded.
Capital here means productive assets, not simply money. Added value is not the same as profit: wages, rent, utilities and other operating costs still have to be paid from it.