5/20/2015 7:59:00 PM
Chapter 1: Understanding Business
What Is Business?
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A formal definition of a business is as follows: an organization that produces or sells goods or services to
satisfy the needs, wants, and demands of consumers for the purpose of making profit.
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It can also be described by:
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The type of ownership
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The goods it produces or services it offers
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The different functions that it performs in its community
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The type of jobs it provides
People who take a risk and start business to solve a problem or to take advantage of an opportunity are
called entrepreneurs.
Goods and Services
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A need is an item that is necessary for survival such as food, clothing, or shelter. A want is an item that is
not necessary for survival but it adds pleasure and comfort to life.
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Goods are produced and you can touch them. Something you can see and touch, like a good, is referred to
as a tangible item.
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Most services also have monetary value because people are willing to pay for them. However, services are
considered intangible, because they do not result in a product that you can touch.
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A not-for-profit organization is a business that does not seek to make profit. it is usually a charitable
organization that helps numerous people.
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Having two or more businesses under one roof is commonly referred to as co-branding. Co-branding
allows businesses to share space, reduce the costs of operation and increasing the opportunity for profit.
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Essential goods and essential services are thing that we need for survival. Essential goods include food,
clothing, and shelter. Utilities such as heating, lighting, and water are examples of essential services.
Luxury goods and luxury services are enjoyable but not necessary for survival.
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Economic resources, also commonly referred as factors of production, are the means through which
goods and services are made available to consumers.
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There’re 3 kinds of economic resources: natural resources, human resources, and capital resources.
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Natural resources are those raw materials that come from the earth, water, and air.
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Human resources are the people who work to create the goods and services.
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Capital resources are the third factor of production. They include buildings, equipment, tools,
trucks, and factories.
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A producer is someone who makes the product.
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A consumer is someone who uses the product.
Demand, Supply, and Price
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Demand is the quantity of a good or service that consumers are willing and able to buy at a particular
price. Demand is expressed when we buy a particular good or service.
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The Law of Demand states that when prices decrease, consumer demand increase and when prices
increase, consumer demand decreases
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Four Conditions That Can Create Demand:
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Consumer must be aware of or interested in the good or service, which may be done through
advertising
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Having an ample supply of good or service available for the consumer
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Establishing prices that are reasonable and competitive
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Conveniently located for the consumer to purchase
Factors That Affect Demand:
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Change in consumers’ income
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Change in consumers’ taste
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Change in expectations of future conditions
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Change in population
Supply is the quantity of a good or service that businesses are willing and able to provide within a range
of prices that people would be willing to pay.
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The Law of Supply states that when the price of a product increases, so will the quantity supplied and
when the price of product decreases, so will the quantity supplied.
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Conditions That Affect Supply:
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A change in the number of producers
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The price of related goods
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A change in technology
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A change in expectations
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A change in cost of production
Conditions That Affect Price:
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Consumer demand and supply
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The cost of producing a good or service
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Prices tend to fluctuate sometimes rapidly, due to demand and supply constant changing
Profit and Competition
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A business must earn some profit to be successful.
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Profit is the income that is left after all costs and expenses are paid.
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Expenses are those expenditures that are involved in running a business, such as wages, as well as those
assets that get “used up” in the process, such as a car.
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Costs are the mound of money required for each stage of production, such as the cost of raw materials.
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Making a profit enables a business to put more money back into the operation for expansion and growth;
they can also use the profit to spend on personal needs and wants.
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Solvent: Having the ability to pay all debts and other obligations.
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Competition is a situation in which two or more businesses try to sell the same type of product or
service to the same customer.
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It has an influence on price. Since there are many companies selling one product, this
competition helps keep car prices at a reasonable level.
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In Canada, free enterprise and competition among businesses is encouraged and promoted.
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Free enterprise is an economic system in which economic resources are privately
owned and decisions about what to produce are made freely by individual owners.
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Consumers can benefit from competition among businesses in several ways, such as:
i. Lower price
ii. High quality goods and services
iii. Lead to the development and introduction of new products.
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Key to Business Survival
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Over many years, many products become obsolete, which means they are no longer in use.
Interdependence
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Our society is interdependent, which means we rely on the goods and services provided by
thousands of different businesses to satisfy our needs and wants. In return, businesses also rely
on consumers to buy their goods in order to make profits.
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Businesses are also highly interdependent between each other.
Decision-Making Model
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One important business decision is determining how much inventory a business must carry to satisfy the
needs and wants of consumers.
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Inventory (or stock) is the quantity of goods and materials kept on hand.
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If a business keeps too much inventory, a lot of financial resources are tied up, so that money is
no longer available to generate income for the business.
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A decision-making model could help the owner with this problem.
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Decision-making model is a five-step procedure that assists in making the most appropriate
choice among competing alternatives.
1. Define the decision to be made.
2. Identify the alternatives.
3. Evaluate the advantages and disadvantages of each alternative.
4. Make a decision and take action.
5. Evaluate the decision.