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This lesson introduces the fundamental idea of what a business is, why businesses exist, the distinction between goods and services, how businesses add value, and the concept of opportunity cost as it applies to business decisions. These concepts form the foundation of AQA A-Level Business topic 3.1.1.
Key Definition: A business is an organisation that provides goods or services to customers in order to satisfy their needs and wants, usually with the aim of making a profit.
Businesses exist to solve a basic economic problem: people have unlimited wants but limited resources. Businesses organise factors of production — land, labour, capital, and enterprise — to create products that satisfy these wants.
At the most basic level, a business takes inputs (raw materials, labour, capital), adds value through a transformation process, and produces outputs (goods or services) that are sold to customers.
Most modern businesses focus on satisfying wants rather than needs. Even businesses that provide necessities (supermarkets, utility companies) differentiate themselves by appealing to consumer wants — for example, offering premium organic food ranges or smart home energy systems.
Key Definition: Goods are tangible, physical products that can be touched and stored (e.g., cars, textbooks, clothing). Services are intangible activities performed for customers (e.g., haircuts, banking, legal advice).
| Feature | Goods | Services |
|---|---|---|
| Tangibility | Physical, can be touched | Intangible, cannot be touched |
| Storage | Can be stored and transported | Cannot be stored — consumed at the point of delivery |
| Consistency | Easier to standardise | Quality can vary (depends on who delivers the service) |
| Ownership | Ownership transfers to the buyer | No transfer of ownership |
| Examples | Dyson vacuum cleaner, iPhone, Cadbury chocolate | Netflix streaming, NHS healthcare, Uber ride |
Many modern businesses provide a combination of both. For example, Apple sells physical goods (iPhones, MacBooks) alongside services (Apple Music, iCloud storage, AppleCare). This blurring of the line between goods and services is increasingly common.
Exam Tip: The UK economy is now predominantly a service-based economy — services account for approximately 80% of UK GDP. This is important context when discussing the changing nature of business in the UK.
Key Definition: Adding value is the process of increasing the worth of a product by transforming inputs into outputs that customers are willing to pay more for than the cost of the inputs used. It is calculated as: Selling price − Cost of inputs = Value added.
Adding value is essential for business survival. If a business cannot add value, it cannot generate profit, and it will eventually fail.
| Method | Explanation | Example |
|---|---|---|
| Branding | Creating a strong brand identity that customers are willing to pay a premium for | Coca-Cola charges more than supermarket own-brand cola despite similar ingredients |
| Design | Improving the aesthetic or functional design of a product | Apple's minimalist design commands premium prices |
| Quality | Using higher-quality materials or processes | Rolls-Royce uses hand-stitched leather interiors |
| Convenience | Making products easier or quicker to access | Deliveroo delivers restaurant food to customers' doors |
| Unique features | Adding features competitors do not offer | Tesla's Autopilot self-driving functionality |
| Customer service | Providing exceptional service that enhances the customer experience | John Lewis's "Never Knowingly Undersold" promise and generous returns policy |
Exam Tip: When discussing adding value in an exam, always link it back to profit. The examiner wants to see that you understand adding value is not an end in itself — it is the mechanism by which businesses generate the revenue that exceeds their costs.
Key Definition: Opportunity cost is the value of the next best alternative forgone when a decision is made. In business, every decision to allocate resources in one direction means sacrificing the opportunity to use those resources elsewhere.
Every business has limited resources — limited finance, limited time, limited staff. Managers must constantly choose between competing uses of these resources. Understanding opportunity cost helps managers make better decisions by forcing them to consider what they are giving up.
Exam Tip: Opportunity cost is not just about money. Time is one of the most important resources in business. An entrepreneur who spends six months developing a new product has given up the opportunity to spend that time on marketing, recruitment, or other projects.