Why businesses exist
From WikiTextbook
Contents |
Wants and needs
Humans have a minimum level of needs which are necessary for survival, food, shelter, heat and clothing. Despite this people would rather enjoy a higher standard of living, this is because we all have an unlimited number of wants, e.g.:
- cars.
- houses.
- holidays
Businesses exist because customers demand goods and services in order to satisfy their needs and wants.
Factors of production
Businesses have to obtain, organise and use a variety of resources including people and equipment. They must produce goods and services by making the best use of its factors of production, they are:
- Capital – this refers to all of the tools, buildings, machines etc. that are used in the production of goods. It also includes the money the business has and uses.
- Enterprise – this is carried out by entrepreneurs who:
- Think of ideas.
- Organise the other three factors of production.
- Take risks with their own money and the financial capital of others.
- Land – this is not only the land, but it includes all of the natural resources as well, for example, gold, oil, fish and wheat. There are two types of land:
- Non-renewable resources, for example, oil, gas and copper.
- Renewable resources, for example, fish, forests and corn.
- Labour – this is the workforce of the economy. All workers possess different qualities.
It may help you to remember the factors of production if you think of CELL. These factors of production (inputs) then go through a process which converts them into outputs. This process must be carefully managed and the correct inputs must be found and used.
Primary, Secondary and Tertiary Sectors
Businesses can be placed into one of three different sectors: Primary, Secondary and Tertiary.
Extraction of raw materials, for example, fishing and agriculture for food, forestry and mining for materials.
Secondary Sector
The manufacture of goods, for example, producing beer and televisions for customers and machinery for other businesses.
Tertiary Sector
Sales of goods (for example, retail, wholesale, mail order, internet) and services (for example, financial, health care, leisure and sport, internet access, transport and communications). Examples of workers in this sector include bus drivers, secretaries and people who work in highstreet shops, such as Argos.
Customers
Businesses will have many different customers both within and outside of the business. All of the customers are important to the survival of the business. Each customer will have different expectations of the business; they will all expect to receive high levels of service.
Customers within the business are called internal customers. An example of internal customers are other departments, known as functional areas, within the business, for example, the manufacturing area at Disney produces toys which are then delivered to the Disney retailing area. The retailing functional area will have the same expectations as any other customer; they will expect goods to be of a high quality, delivered quickly and on time, and at a low cost. The manufacturing functional area can lower costs by reducing the number of products that have to be rejected due to defects.
The Disney retailing functional area will then sell goods to external customers, in other words members of the general public, these are called consumer goods. External customers could also be other businesses, for example Sony will sell their goods to Comet, these are called producer goods.
Opportunity Cost
As customers only have a limited amount of money they have to make decisions about what to do with it. It isn’t possible to buy all of your wants.
You have £40, do you spend it on a t-shirt or a night out? Does the government spend £100 million on healthcare or weapons?
A rational customer will choose whatever gives them the greatest amount of satisfaction.
The satisfaction you lose from not being able to have your next best alternative (the second choice) is called the opportunity cost. If you spend £40 on a night out the opportunity cost will be the t-shirt. If the government spends £100 million on weapons the opportunity cost will be healthcare. If a school decides to spend £1,000 on a new computer the opportunity cost will be 20 tables.
For examples of opportunity cost click here
Links
Yacapaca quiz on why businesses exist
Opportunity cost of the Iraq war
