selling price minus the cost of bought-in materials. It is what the business adds to the materials it buys. Other costs come out of it before profit.

Which would increase added value?

creating a brand that customers will pay more for. A higher price for the same materials means more value added.

Which is a need, not a want?

clean drinking water. A need is essential for living.

Why does specialisation benefit a business?

People concentrate on what they do best, so more is produced. Skill and speed rise when people stick to what they are good at.

What business is for, and adding value · Cambridge IGCSE Business Studies

In plain words

A business takes things in (materials, people's work, machines) and turns them into something people will pay for. A baker buys flour for $1 and sells the bread for $3. The $2 difference is the value the baker has added.

That is the purpose of business activity: to combine resources into goods and services that satisfy people's needs and wants.

5 things to know

A need is something essential for living, such as food and shelter. A want is anything else people would like to have.
Added value is the difference between the selling price of a product and the cost of the materials and parts bought in to make it.
Added value is not profit. Wages, rent and other costs still have to be paid out of it.
Ways to add more value: raise the price by improving quality, design, branding or service, or reduce the cost of bought-in materials without lowering quality.
Specialisation, where people and businesses concentrate on what they do best, raises output and efficiency.

Worked example

A furniture maker buys wood and fittings for $40 and sells the finished table for $130. What is the added value?

Added value = selling price − cost of bought-in materials.
Added value = 130 − 40.
Added value = $90.

Tips and tricks

Do not write "added value is the profit". The $90 above still has to cover wages, rent and electricity before any profit is left.
Asked how a business could add more value? Give a way that raises the price customers will pay, such as a strong brand, as well as a way that cuts material costs.

5 questions, about 2 minutes.

It lands in your notebook with its questions as flashcards.

What business is for, and adding value: 5 questions and answers

These are the quiz’s questions. Do the quiz first, then come back here for the ones that got you.

What is added value?
- the profit a business makes
- selling price minus the cost of bought-in materials (the answer)
- the total cost of making a product
- the wages paid to workers
It is what the business adds to the materials it buys. Other costs come out of it before profit.
A jeweller buys silver for $25 and sells the ring made from it for $80. What is the added value?
- $25
- $55 (the answer)
- $80
- $105
80 − 25 = $55.
Which would increase added value?
- paying more for raw materials
- lowering the selling price
- creating a brand that customers will pay more for (the answer)
- employing more workers
A higher price for the same materials means more value added.
Which is a need, not a want?
- a games console
- a holiday abroad
- clean drinking water (the answer)
- designer trainers
A need is essential for living.
Why does specialisation benefit a business?
- Workers do every job in turn.
- People concentrate on what they do best, so more is produced. (the answer)
- It removes all costs.
- It means the business needs no customers.
Skill and speed rise when people stick to what they are good at.

5 questions

Tap an answer and you’ll see straight away whether it’s right, and why.

Worksheet

3 questions, 7 marks. Write your answers on paper, then check them.

What business is for, and adding value

Cambridge IGCSE Business Studies 0450 · 7 marks · papermunch.org

Name ______________________________ Date ______________

Define added value.[2]
Show answerHide answer
The difference between the selling price of a product and the cost of the bought-in materials and components used to make it.
I got this one
A café buys the ingredients for a sandwich for $1.20 and sells the sandwich for $4.50. Calculate the added value.[2]
Show answerHide answer
$3.30. 4.50 − 1.20.
I got this one
Explain two ways a clothing business could increase its added value.[3]
Show answerHide answer
It could build a well-known brand, so that customers are willing to pay a higher price. It could find a cheaper supplier of cloth of the same quality, which lowers the cost of materials.
I got this one

Answers: What business is for, and adding value

1. The difference between the selling price of a product and the cost of the bought-in materials and components used to make it.
2. $3.30. 4.50 − 1.20.
3. It could build a well-known brand, so that customers are willing to pay a higher price. It could find a cheaper supplier of cloth of the same quality, which lowers the cost of materials.