IGCSE Business Studies: Understanding Business Activity — Revision Notes

Condensed for the final weeks. For the full explanation, use the Understanding Business Activity study guide.

Purpose and added value

Businesses exist to satisfy needs (essential for survival — food, shelter, clothing) and wants (desirable but not essential).

added value = selling price - cost of bought-in materials

Added value can be increased by raising the price through branding, better design, superior customer service or convenience, or by reducing input costs. Note it is not profit — wages, rent and other costs still have to be paid out of it.

Opportunity cost is the value of the next best alternative given up when a choice is made. It exists because resources are scarce while wants are unlimited, so choosing to produce or buy one thing always means giving up something else — the concept underlying every needs-versus-wants and resource-allocation question in this topic.

The three sectors

Sector	Activity	Example
Primary	Extracting natural resources	Farming, mining, fishing
Secondary	Manufacturing and processing	Car assembly, baking
Tertiary	Providing services	Retail, banking, transport

Deindustrialisation is the decline of secondary and rise of tertiary as an economy develops — usually because manufacturing relocates to countries with lower labour costs while domestic incomes rise and demand shifts towards services.

Classification and objectives

Private sector — owned by individuals, usually profit-motivated. Public sector — owned by government, aims at service provision, employment and public welfare rather than profit. Most real economies are mixed economies, containing both a private and a public sector operating alongside each other, rather than being purely one or the other.

Business objectives: survival (the priority for a start-up), profit, growth, market share, and increasingly social and environmental objectives. Objectives change over time — survival first, then profit and growth once established.

Social enterprises pursue social and environmental aims alongside financial ones, reinvesting profit rather than distributing it.

Stakeholders

Stakeholder	Main interest	Conflicts with
Owners / shareholders	Profit, dividends, share price	Employees wanting higher wages
Employees	Wages, job security, conditions	Owners seeking to cut costs
Customers	Quality, low prices, service	Owners seeking higher margins
Suppliers	Regular orders, prompt payment	Business seeking lower prices
Government	Tax revenue, employment, legal compliance	Business seeking to minimise costs
Local community	Jobs, minimal pollution and disruption	Business expansion plans

Stakeholder conflict is the highest-scoring part of this topic. A strong answer identifies the conflict, explains why the interests oppose, and then evaluates which stakeholder the business should prioritise and why.

Legal structures

Type	Liability	Ownership	Key point
Sole trader	Unlimited	One owner	Easy to set up, keeps all profit, but bears all risk and has limited capital
Partnership	Unlimited (usually)	2–20 partners	More capital and shared expertise, but shared profit and disagreements
Private limited (Ltd)	Limited	Shares sold privately	Separate legal identity; shares cannot be sold to the public
Public limited (plc)	Limited	Shares on the stock exchange	Large capital, but expensive to form, accounts public, risk of takeover and divorce of ownership from control

Unlimited liability means the owner’s personal assets can be taken to pay business debts. Limited liability means the owner can lose only what they invested. This is the single most examined distinction in the syllabus, and the phrase “personal assets” is what earns the mark.

Divorce of ownership from control arises in a plc: shareholders own the business but directors run it, and their objectives may differ — directors may pursue growth or their own status while shareholders want dividends.

Business size

Measured by number of employees, capital employed, value of output, or market share — never by one measure alone, since a capital-intensive firm may employ few people yet be very large. Profit is not a measure of size.

Exam traps

• Confusing added value with profit.
• Saying limited liability means the business has limited debts.
• Treating public sector and public limited company as the same thing — they are opposites in ownership.
• Listing stakeholders without explaining the conflict between them.
• Using a single measure of business size without acknowledging its limitations.
• Giving generic advantages without applying them to the business in the case study.

Self-test

1. Define added value and give two ways to increase it.
2. Distinguish unlimited from limited liability.
3. Name three stakeholder groups and one conflict between two of them.
4. What is the divorce of ownership from control, and where does it arise?
5. Give three ways of measuring business size and one limitation of using employees alone.

Answers: 1. Selling price minus the cost of bought-in materials; raise it by branding or improved service and design, or by reducing input costs. 2. With unlimited liability the owner’s personal assets can be seized to pay business debts; with limited liability the owner can lose only the amount invested. 3. For example owners, employees and customers; owners want to cut costs to raise profit while employees want higher wages. 4. Shareholders own a plc but directors control day-to-day decisions, so the two groups’ objectives may diverge. 5. Number of employees, capital employed, value of output or market share; employee numbers mislead for capital-intensive firms that produce a great deal with few staff.