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9609 · 1.1.1

The nature of business activity — practice questions

Practice and worked examples for 9609 The nature of business activity. Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

Coffee shop buys beans for $2 per cup served, sells drinks for $5. Explain adding value and name two factors of production used.

Show solution outline

Adding value = 5−5 − 2 = $3 per cup — covers labour (barista wages), capital (machine, rent), enterprise (owner's risk), and profit.

Factors used: Land (premises location), labour (staff), capital (espresso machine), enterprise (owner planning and risk).

Opportunity cost: Owner could have rented premises to another tenant — forgone rent is opportunity cost of running the shop.

Worked example 2

Elegant Chairs Ltd, a furniture manufacturer, produces wooden dining chairs. The cost of bought-in materials (wood, screws, varnish) is $45 per chair. The company sells each finished chair to retailers for $120. The management team decided to invest $500,000 in a new automated cutting machine instead of using the funds for a major advertising campaign.

  1. Calculate the value added per chair.
  2. Explain the opportunity cost of this investment decision.
  3. Identify the economic sector Elegant Chairs Ltd operates in.
Show solution outline

1. Calculation of Added Value:

  • Formula: Added Value = Selling Price - Cost of Bought-in Materials
  • Calculation: 120−120 - 45 = 7575
  • Answer: The value added per chair is $75. This is the extra worth created by the manufacturing process. This amount is used to cover other business costs such as labour, factory overheads, and marketing, with the remainder contributing to profit.

2. Explanation of Opportunity Cost:

  • The business chose to invest $500,000 in a new machine.
  • The alternative option forgone was a major advertising campaign.
  • Therefore, the opportunity cost of buying the machine is the potential benefits lost from not running the advertising campaign. These benefits could include increased brand awareness, a stronger market presence, and potentially higher sales revenue in the short-to-medium term.

3. Identification of Economic Sector:

  • Elegant Chairs Ltd operates in the secondary sector of the economy. This is because it is engaged in manufacturing – transforming raw materials (wood) into finished goods (chairs).
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