Business Activity and Classification (Cambridge IGCSE 0450)
Every business exists to satisfy needs and wants using scarce resources. This page covers the purpose of business activity, added value, sector classification and the difference between the private and public sectors for Cambridge IGCSE Business Studies 0450.
Why business activity exists
People have unlimited wants but limited resources, so choices must be made. A need is something required to survive, such as food or shelter; a want is something people would like but can live without, such as a games console. Because resources are scarce, choosing one option means giving up the next best alternative, which economists call opportunity cost.
Businesses combine the four factors of production, land, labour, capital and enterprise, to produce goods and services. In doing so they create added value: the difference between the selling price of a product and the cost of the materials bought in to make it. A coffee shop might buy beans, milk and a cup for $0.60 and sell the finished drink for $3.50. The extra $2.90 is added value, created through convenience, service, branding and atmosphere, and it pays wages, rent and profit.
Primary, secondary and tertiary sectors
Business activity is classified into three sectors.
- Primary sector: extracting natural resources, for example farming, fishing, forestry and mining.
- Secondary sector: manufacturing and construction, turning raw materials into finished goods. Toyota assembling cars in a factory is secondary sector activity.
- Tertiary sector: providing services to consumers and other businesses. Zara shops, McDonald's restaurants, banks and airlines are all tertiary.
The relative importance of each sector differs between countries. In many developed economies, manufacturing has declined while services have grown, a change known as de-industrialisation. Rising incomes mean consumers spend more on services, and cheaper manufacturing abroad shifts factory work overseas. In many developing economies a larger share of workers is still employed in the primary sector.
Private sector, public sector and the mixed economy
In the private sector, businesses are owned by private individuals or shareholders. Their main objectives are usually survival, growth, market share and profit. In the public sector, organisations are owned and controlled by the government, for example state schools, public hospitals and, in some countries, railways or the postal service. Public sector objectives focus on providing a service to the whole population rather than making profit.
Almost every country operates a mixed economy, where both sectors exist side by side. Governments sometimes sell public sector businesses to private owners, called privatisation, hoping competition will improve efficiency and quality. Critics argue that private owners may cut unprofitable services, such as rural bus routes, because their priority is profit. Exam answers score well when they weigh service quality against cost and profit motives.
Key terms
Practice questions
Identify two examples of businesses that operate in the tertiary sector. [2 marks]
Model answer guidance: Any two service businesses gain the marks. Examples include a bank, a hairdresser, a supermarket, an airline or a fast-food restaurant such as McDonald's. Each correct example earns one mark, so no explanation is needed.
Explain two ways a chocolate manufacturer could increase its added value. [4 marks]
Model answer guidance: It could build a strong brand image through packaging and advertising, allowing it to charge a higher price for the same bought-in ingredients. It could also move into luxury or gift products, where consumers pay much more per bar. In both cases the gap between selling price and material cost widens, which is exactly what added value measures.
Explain two reasons why the tertiary sector has grown in many developed economies. [6 marks]
Model answer guidance: First, as incomes rise, households spend a larger share of their money on services such as travel, entertainment and eating out, so service businesses expand to meet demand. Second, manufacturing has moved to countries with lower labour costs, so a smaller share of jobs remains in factories at home. Together these changes mean services make up a growing share of output and employment.
Consider whether a vegetable farmer should start making and selling ready-prepared soups. Justify your answer. [8 marks]
Model answer guidance: Moving into the secondary sector lets the farmer capture more added value, because prepared soup sells for far more than raw vegetables, and it reduces reliance on volatile crop prices. However, food processing needs new capital equipment, hygiene approval and marketing skills the farmer may lack, so risk and costs rise. On balance the move is worthwhile if the farmer can secure finance and test demand on a small scale first, because the profit margin per kilogram of vegetables should improve.
Do you think the government of a country should own and run its railway network? Justify your answer. [12 marks]
Model answer guidance: Government ownership can protect loss-making but socially important routes, keep fares affordable and coordinate the network as one service rather than many competing operators. On the other hand, public sector organisations may lack the profit incentive to control costs and innovate, and rail subsidies carry an opportunity cost such as less money for schools or hospitals. A justified conclusion might argue that ownership matters less than regulation: a privately run railway with strict government rules on fares and service levels can combine efficiency with public service. Strong answers pick a side and support it with a clear comparison of both options.
Examiner tips
- Learn the exact definition of added value: it is selling price minus the cost of bought-in materials, not the same as profit, because other costs such as wages have not yet been deducted.
- When classifying a business, focus on what the described activity does, not the company name: Toyota factories are secondary, but a Toyota showroom is tertiary.
- For 8 and 12 mark questions, always apply your answer to the business in the case material and finish with a justified conclusion, as the command words Consider and Justify demand.
In The Business School simulation your students make these exact decisions in a live market against rival firms — every choice mapped to the specification. Free teacher demo, no installs, students join with a PIN.