IGCSE Business Studies: Understanding Business Activity — Practice Questions

These are original questions written for Marlbridge, in the style and at the standard of the examination. They are not reproduced past-paper questions — examination boards hold copyright in their own papers. Use these alongside the official past papers available free from your board.

Related: Understanding Business Activity revision notes

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Section A

1. Define added value, and state two ways a business could increase it. [3]

2. Explain the difference between unlimited and limited liability. [2]

3. State three ways of measuring the size of a business. [3]

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Section B

4. Amina runs a bakery as a sole trader. She is considering forming a private limited company.

(a) State two advantages of remaining a sole trader. [2]

(b) Explain two benefits to Amina of forming a private limited company. [4]

(c) Explain one drawback of converting. [2]

5. A large supermarket chain plans to open a new store on the edge of a small town.

(a) Identify three stakeholder groups affected. [3]

(b) Explain one conflict between two of these stakeholder groups. [3]

(c) Recommend, with justification, whose interests the business should prioritise. [3]

6. A business measured by employee numbers appears small, but its capital employed is very large.

(a) Suggest what type of business this might be. [1]

(b) Explain why using employee numbers alone can be misleading. [3]

7. Distinguish between a need and a want, and explain what is meant by opportunity cost. [3]

8. State the three economic sectors of business activity, and give one example of a business in each. [3]

9. Explain what is meant by the “divorce of ownership from control” in a public limited company, and why it can cause problems. [3]

10. State one advantage and one disadvantage of forming a partnership instead of remaining a sole trader. [2]

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Answers

1. Selling price minus the cost of bought-in materials [1]. Any two: branding, improved design, better customer service, greater convenience, or reducing input costs [1] [1]. Added value is not profit — wages and rent still come out of it.

2. Unlimited liability means the owner’s personal assets can be taken to pay business debts [1]; limited liability means the owner can lose only the amount invested [1].

3. Any three: number of employees [1]; capital employed [1]; value of output or revenue [1]; market share.

4. (a) Any two: she keeps all the profit [1]; she has full control of decisions; setting up is quick and cheap; her accounts stay private [1].

(b) Limited liability [1] — her personal assets such as her home would be protected if the business failed [1]. Easier to raise capital [1] — she could sell shares to family or investors to fund expansion [1].

(c) Any one, developed: accounts must be filed publicly [1], so competitors could see her financial position [1]. (Or: formation costs and legal paperwork; loss of some control if shares are sold.)

5. (a) Any three: customers, employees, local community, existing local shops, suppliers, shareholders, local government [1] [1] [1].

(b) For example: the local community wants low traffic and to keep local character [1], while the shareholders want the store built to increase profit [1]. These conflict because expansion that raises profit also brings increased traffic, noise and competition for existing shops [1].

(c) A justified answer, e.g.: prioritise customers [1], because without their custom the store generates no revenue and the other stakeholders’ interests cannot be met either [1] — though this depends on whether local opposition could block planning permission [1]. Credit any well-argued choice. The mark is for the justification, not the choice.

6. (a) A capital-intensive business, such as an oil refinery or an automated factory [1].

(b) It employs few people because production is highly automated [1], but it has invested heavily in machinery and equipment [1]. Employee numbers therefore understate its true size, so more than one measure should be used [1].

7. A need is essential for survival (food, shelter, clothing), while a want is desirable but not essential [1]. Opportunity cost is the value of the next best alternative given up when a choice is made, arising because resources are scarce but wants are unlimited [1] [1].

8. Primary — extracts natural resources, e.g. farming or mining [1]. Secondary — manufactures or processes, e.g. car assembly or baking [1]. Tertiary — provides services, e.g. retail or banking [1].

9. Shareholders own the business, but directors run it day to day [1], and the two groups’ objectives may diverge — for example, directors may prioritise growth or their own pay over the dividends shareholders want [1], creating a conflict of interest that is harder to resolve than in a business run directly by its owner [1].

10. Advantage: a partnership brings in more capital and shared expertise [1]. Disadvantage: profit must be shared among partners, and there is the possibility of disagreement between them [1].

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Where marks are usually lost

• Confusing added value with profit.
• Saying limited liability means the business has limited debts.
• Listing stakeholders without explaining the conflict between them.
• Giving a recommendation with no justification.
• Using a single measure of business size without acknowledging its limits.
• Confusing needs with wants, or defining opportunity cost as simply “the cost of something”.
• Placing a business in the wrong economic sector, e.g. calling a bakery “primary” rather than “secondary”.
• Assuming shareholders and directors always want the same thing.