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Introduction to Business
Understanding Basic Economics
Economics is the study of rational human behavior in trying to meet basic wants and needs. This is especially important because humans live in an environment of limited resources to fulfill those wants and needs. The better you understand economics the better you will be able to satisfy those basic wants and needs. In the final analysis, economics focuses on how individuals and nations make choices, in a world of limited resources, to meet basic wants and needs. Business is one important component of economics.
What is "Business"?
A business is an organized effort of individuals to produce and sell goods and services for a profit. Businesses vary in size, as measured by number of employees or by sales volume. Large companies such as ExxonMobil and General Motors count their employees in the hundred thousands and their sales revenues in the billions. But most (98 percent) of the businesses in the United States are small businesses—independently owned and operated and having fewer than twenty employees. The key people responsible for creating businesses, either as a result of their original ideas or willingness to bear the inherent risks—or both—are called entrepreneurs.
All businesses, whether they employ one person working at home, 100 working in a retail store, 10,000 working in a plant or factory, or 100,000 working in branch offices nationwide, share the same basic definition and are generally organized for the same primary purpose: to earn profits. Profit is the money that remains after the costs of a business(expenses and taxes) are subtracted from the revenue received from the sales of goods and services.
Goods and Services
The source of a business's revenues and, therefore, of its profits, is its goods and services. Goods are tangible items; that is, products such as automobiles, shoes, iPods, computers, and cellular phones. Services are intangible items, such as the professional advice and assistance provided by lawyers, doctors, electricians, accountants, and hairdressers. Consumers and businesses will buy only those goods and services they need or want. Therefore, to be successful, businesses must provide goods and services that satisfy consumers' and businesses' needs and wants. Consumers need shoes and will buy shoes. Consumers may not need expensive high-tech sports shoes, but they may purchase them if they want them. In the same way, businesses need manufacturing and other materials to produce goods and services. Thus, identifying consumer and business needs and wants are key factors in business success.
Factors of Production
All goods and services are produced from five specific resources: land, labor, capital, information resources, and entrepreneurs. These resources, known as the factors of production, are the basic elements a business uses to produce goods and services.
Land includes not only real estate but the resources associated with land—water, minerals, and timber.
Labor, sometimes called human resources, refers to the mental and physical skills and abilities of employees. Labor includes all the employees, from top-level executives to truck drivers, who produce and distribute the goods and services a business sells.
All businesses require capital (money) to operate. Businesses need capital to buy buildings, machinery, and tools, all of which are also considered capital. In addition, they need capital to hire labor, distribute finished products, and so on.
Information resources supply the facts, intelligence, and knowledge needed to manage and operate a business. Because information resources enable managers to control and to effectively use all other resources, its value as a factor of production has increased greatly in recent years. In fact, the era in which we find ourselves is often referred to as the Information Age, emphasizing the importance of information access, processing, and utilization.
Entrepreneurs are the risk-takers who create businesses; the persons who assemble all the other factors of production in an effort to start and operate a business and to make a profit. Entrepreneurs have vision. Recognizing consumers' needs and wants for certain goods and services, they risk their time and financial resources, gather capital, and apply their information resources to create and manage a business enterprise.
Availability of Resources
Economics is the study of how goods and services are produced, distributed, and consumed. In any society, the resources that are available are limited, and economics is concerned with (1) how one segment of society—that is, businesses—uses those limited resources to create and distribute goods and services; and (2) how the other segment of society—consumers, which includes individuals and other organizations, including other businesses—consume those goods and services.
Economics can be partitioned into two fields: macroeconomics and microeconomics. Macroeconomics addresses the broader, big picture of the behavior of the nation's economy. Microeconomics has a narrower focus; it studies the behavior of individual organizations or people in particular markets. Business is applied economics. Moreover, because resources are limited, businesses must consider factors related to resource limitations, including scarcity and opportunity cost.
All resources, those related to humans as well as those related to nature, are limited in some ways. Here are several examples: (1) skilled labor may not be plentiful in a particular location; (2) capital is not free; (3) some natural resources, such as timber, are renewable, but others, such as oil, are nonrenewable. The scarcity of resources forces society, including businesses, to make choices.
Opportunity cost is the foregone value of the next best alternative use of a resource. For example, one important opportunity cost of your attending college is the money you could otherwise earn if attending college prevented you from working full-time. You cannot receive the wages or salary (e.g., $12,000) you could earn from the alternative use of selling your services to an employer if you were not in college. Consequently, the total cost of your education is the actual cost (tuition, fees, and room and board), plus the $12,000 opportunity cost. Similarly, if you spend your last $100 dollars on an outfit, you cannot spend that $100 on another desirable product, say a pair of $100 shoes. The opportunity cost of purchasing the outfit . . .Introduction to Business. Copyright © by H. Williams. Reprinted by permission of HarperCollins Publishers, Inc. All rights reserved. Available now wherever books are sold.