Start with a loaf of bread: Lena runs a small bakery. Every morning she buys flour, yeast and butter, switches on the ovens, and by seven o'clock there are loaves on the shelf that people pay for.
That is the whole idea of a business in one morning: things go in, work happens, and something people want comes out.
A business is an organisation that takes in resources, turns them into goods or services, and sells them to people who need or want them. The word to notice is turns. Nothing is sold in the form it arrived.
Inputs
What goes in
- Flour, yeast and butter: the materials
- Lena and her two bakers: people and their skills
- Ovens and the shop: equipment and a place to work
- Money to pay for all of it before a single loaf is sold
Process
The work
- Mixing, proving and baking
- Slicing, wrapping and serving
- Deciding what to bake and how much of it
Outputs
What comes out
- Loaves and cakes that customers buy
- Money coming back in when they pay for them
Same shape, different business: A hairdresser takes in shampoo, scissors, a chair and a trained stylist. The process is the haircut. The output is a customer who walks out looking different.
No shelf and no loaf, but still inputs, a process and an output.
Three kinds of resource go in. People and their skills (human resources), things you can touch such as ovens and buildings (physical resources), and the money that pays for them (financial resources). A business is the organisation that pulls the three together on purpose.
The definition to carry: A business is an organisation that combines resources to produce goods or services that satisfy customers' needs and wants.
Every word earns its place: organisation (planned, not accidental), combines resources (the inputs), goods or services (the outputs), needs and wants (the reason anyone pays).
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Lena's shelf holds loaves. Her noticeboard offers a Saturday cake-decorating class. Both are things she sells, but they are not the same kind of thing.
Goods: things you can hold
- Physical. A loaf, a phone, a pair of shoes. You can touch it and take it home.
- Made first, sold later. Lena bakes at five and sells at nine. A good can sit on a shelf.
- The same every time. Loaf number forty is the same as loaf number four.
Services: things done for you
- Not physical. A haircut, a bus ride, a cake-decorating class. There is nothing to carry home.
- Made and used at the same moment. The class happens while the students are in the room. It cannot be stored for next week.
- Different every time. Two classes with two groups are never quite the same.
A quick test: Could Lena keep it on a shelf overnight? A loaf, yes: a good. A class, no: a service.
Goods can be touched (they are tangible). Services cannot (they are intangible).
Most businesses sell a mix. A restaurant sells the food (a good) and the cooking and serving (a service). A phone shop sells the phone and the repair. Lena sells loaves and classes. When a question asks what a business provides, look for both.
Sort these
- A bus ticket to town: a service. You are taken somewhere and there is nothing to keep.
- A jar of jam: a good. You carry it home and it waits in the cupboard.
- A dentist filling a tooth: a service. Done to you, done at the time.
- A pair of running shoes: a good. Made months ago, sold today.
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Bread and a birthday cake: One customer buys a loaf because there is nothing for breakfast. Another orders a cake with her son's name piped on top.
The first is buying something she cannot do without. The second is buying something she would like. Businesses sell to both.
A need is something a person must have to live: food, water, somewhere to sleep, basic clothing, medical care. A want is anything beyond that, something a person would like but could live without. Nobody dies without a birthday cake.
| Need | Want | |
|---|---|---|
| What it is | Something you must have to live | Something you would like to have |
| At Lena's | A plain loaf when the cupboard is empty | A cake with a name piped on top |
| The list | Short, and the same for everyone | Endless, and different for everyone |
The trap: deciding by price: Expensive does not mean want, and cheap does not mean need. A hospital bed is a need and costs a fortune. A chocolate bar is a want and costs almost nothing.
Ask one question only: could the person live without it?
Why does this matter for a business? Needs are a short list and everyone has the same ones, so many businesses compete to meet them. Wants are endless and different for every customer, which is where most new products come from. Lena's plain loaves keep the shop open; her decorated cakes are where she earns the most.
The flour, yeast and butter in one of Lena's loaves cost her about $0.60. She sells the loaf for $3.00. Nobody feels cheated. Why not?
The gap is the point: Between the $0.60 of ingredients and the $3.00 loaf sits everything the bakery did: the skill, the ovens, the early start, the shop on the corner, the trust that the bread is good.
That gap is added value: the difference between what the inputs cost and what the customer will pay for the output. Creating it is what a business is for.
Where the extra value comes from
Skill and work
Raw flour is no use at breakfast. Baking turns it into something you can eat.
Convenience
The loaf is ready at seven, two streets from home. Customers pay for not having to bake.
Quality and trust
People come back because last week's loaf was good. A name they trust is worth paying for.
Design and feel
The decorated cake uses the same flour as a plain one and sells for ten times the price. The value is in the design.
Working it out: Added value = selling price − cost of the materials bought in.
Lena's loaf: $3.00 − $0.60 = $2.40 of added value. Wages, rent and electricity are paid out of that $2.40; they are not subtracted to find it.
Two businesses can add very different amounts of value from the same inputs. A supermarket sells a factory loaf for $1.20; Lena sells hers for $3.00. Same flour. The difference is what each business adds, and that is why one is a bakery and the other is a shelf.
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How this comes up: Nobody writes an essay about what a business is. This micro is tested in short knowledge questions: define a term, or describe one feature or one difference, for two marks.
The term usually sits inside a case study about a company, with a line number telling you where it appears.
What a two-mark definition needs
- The kind of thing it is. A business is an organisation. A good is a product. Start with the noun.
- What makes it that thing. Combines resources to produce goods or services that satisfy needs and wants. One clause, the whole idea.
- A meaning, not an example. 'A business is something like Lena's bakery' names one; it does not say what a business is.
The trap: half a definition: 'A business is an organisation that sells things' is true and gets you halfway. It says nothing about resources going in or about needs and wants.
A half definition earns half the marks. Write the whole sentence, then stop; a third sentence adds nothing.
Define the term business.
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