Role of Business in Economic Setting Lecture-1 Business is everywhere in the world and everyone is a part of it. The pizza you eat, the jeans you wear, the car you drive, the television you watch - all are produced, distributed and sold by businesses. To be able to buy these things you earn money working in a business. The bank where you keep that money is a business. Think of a loaf of bread: first a farmer grew the wheat with the help of fertilizer supplied by a chemical company; when it was ripe, he harvested it using a machine he bought (with the help of a bank) from a manufacturer. He trucked the wheat to a mill, which ground it into flour and sold it to a bakery. That company brought the flour by train to its plant. Where it was combined with other ingredients bought from other suppliers to make bread. The bakery then wrapped the bread in plastic bought from yet another company. Using the trucks it bought from a truck manufacturer, the bakery transported the bread to a retail store where you were able to purchase it. Goods and Services-Producing Firms Businesses are either goods-producing or service-producing firms. Goods-producing firms, such' as mining construction and manufacturing firms, produce tangible products or goods - commodities that have a physical presence. Service-producing firms provide services - activities that benefit consumers or other businesses. Transportation firms, insurance companies, beauty shops and repair shops are examples of service businesses. The Role of Profit Regardless - of whether a business produces a good or provides a service the common ingredient is profit. Profit is the deference between a business's total revenues or sales receipts and the total of its production costs, operating expenses and taxes. In our bread bakery example, the bakery has to pay for its raw materials (flour, butter or shortening, yeast, salt), equipment mixers (ovens. wrapping machines), employees and the energy it uses. When the bakery sells the bread to the supermarket, it charges more than the cost of making the bread. That extra part of the selling price is profit. Characteristics of Private Enterprise The private enterprise system is an economic system where both 'the resources necessary for production and the businesses are owned by private individuals. Private enterprise is based on four principles or rights: The Right to Private property. Individuals have the right to buy, own, use and sell property as they see fit. This right of ownership includes land, buildings, equipment and intangible property such as inventions. The Right of Freedom of Choice. It also provides the right of freedom of choice. This freedom of choice applies to the individual's right to decide what type of work to do where to work and how and where money is to be spent. The Right to Profit. In the private enterprise system, the person who takes the chance in starting the business by investing is guaranteed the right to all profits. This right is what attracts people to begin businesses and it is the ultimate goal of business. Inherent in starting a business is the freedom to fail. Not 'all entrepreneurs are successful. The Right to compete. Under the private enterprise system people have the freedom to compete with others. Competition, along with profit is the cornerstone of the private enterprise system. Competition pits one company against another in the struggle to attract and retain the consumer. The Factors of Production The private enterprise system. as do all economic systems, requires resources for its business to produce goods and services. The resources used to provide goods and services are the factors of' production: land, labor, capital, and entrepreneurship. Land is the natural resources that can be used to produce goods and services. Natural resources are all resources growing on and under the earth's surface, such as trees, minerals, oil and gas. Labor is the total human resource required to turn raw materials into goods and services. It would include all employees of the business from top management through the entire organization structure. Capital is the total of tools, equipment, machinery and buildings used to produce goods and services. In this case capital does not refer simply to money. Money by itself is not productive: but when it purchases drills, typewriters, forklifts and the building to place them in it, becomes productive. Entrepreneurship is the group of skills and risk taking needed to combine the other three factors of production to produce goods and services. Entrepreneurship is the catalyst - like heat to a fire. It is supplied by an entrepreneur, an individual or individuals who are willing to take risks in return or profits. How Private Enterprise Functions In the private enterprise system (unlike other economic systems we will discuss), the factors of production are owned by individuals in households. (In economic terms a household is any person or group of people living under the same roof and functioning as an economic unit. Businesses must pay the members of the households in order to acquire the factors of production. 1. Your business needs to hire two employees. The factor of production, labor is to be found living in the households. - The business purchases the labor by persuading the persons in the household to go to work for an agreed-on wage (income). 2. The business then combines' the labor of the employees with natural resources, capital, and entrepreneurial skills to produce goods and services. The individuals in the households need or want the goods produced by the business. Using the income received as wages, the individuals in the households go to the marketplace and purchase the goods and services produced by the company. 3. The business then takes the money received from the sale of the goods and services and uses it to purchase more factors of production. Factor of production Land Labor Capital Entrepreneurship Income Received Rent Wages or salaries Interest Profit An economic system is the method society uses to allocate its resources (land, labor, capital and entrepreneurship) to satisfy its needs. What distinguishes one economic system from another, is the control of the factors of production and the interaction of business government and consumers. In the modern world there' are three primary types of economic systems. The system we have been referring to as the private enterprise system is also called capitalism. Capitalism is an economic system where the factors of production are in private hands. As originally described by Adam Smith in his eighteenth-century book “The Wealth of Nations” our economic system was pure capitalism or a market economy, one in which economic decisions are made freely according to the market forces of supply and demand. In this system the economic questions are: What is to be produced? How much to be produced? Who will produce it? How much will it cost? Who will get it? In pure capitalism industry and individuals use resources as they choose. The government takes a laissez-faire, or hands-off, approach and does not interfere in the economic system. Producers and consumers pursue their own self-interests. Producers make as much as they can sell and consumers buy as much as they can afford. In ·this system each person behaves in the best interests of society. The marketplace is regulated by the interaction of the buyers and producers. Mixed Capitalism Over time the United States has evolved to a system of mixed capitalism which is an economic system based on a market economy with limited government involvement. The government has abandoned the principle of the invisible hand in favor of a more visible' involvement in economic life. In mixed capitalism the government has two economic tools: the power to tax and the power to spend. By taxing individuals and businesses it acquires funds to provide essential public programs: defense, education, transportation and social services. In turn the money spent for these services creates lore demand for the goods arid services produced by businesses. Government-owned entities such as the Tennessee Valley Authority which provides power to rural communities. Government agencies that regulate the activities of some businesses, as when the Food andDrug Administration prevents a pharmaceutical company from selling a new medicine until tests are made Government involvement in employer-employee relations, for example setting a minimum wage and initiating programs to create jobs for the unemployed. Communism This is an economic system under which the government controls the factors of production. Land, labor and capital are under the control of the government and entrepreneurship is supplied by the government. As a result, all the economic decisions about production, distribution, consumption, and property ownership are made by the government. Supply, demand and competition have no influence in this system. Central government planners make all the economic decisions about production and resource allocation. Socialism It is an economic system in which much ownership is private but the government controls the operation and direction of basic industries. This control and direction are based on the belief that there are certain products and services that everyone should have. In essence this means that these need to be controlled so that all people will have them - not just those people who have enough money. The industries 'normally under control of the government include mining, steel production, transportation, communication, health care and auto manufacturing. In Sweden, for example, the government owns the transportation network, communications, the banks, and the mining, steel and chemical industries. At present, no examples of pure capitalism or pure communism exist. Most economies stretch from the complete private ownership and market economy of pure capitalism to the total public ownership of communism. Even in the Soviet Union, some private enterprise exists. Private vendors, for example, can be seen in railroad stations and on country roads selling home grown flowers and vegetables. Yugoslavia has developed an interesting variation of public ownership, with production decisions being made at the factory, rather than by the central government and being regulated by supply and demand. Comparing Economic Systems Comparing economic systems is difficult because they are organized differently; the goals and conditions under which they operate are different. One yardstick for measuring the reference of an economy is measuring the goods and services that a country produces in one year. Another measure developed by economists is to divide total GNP by the country’s population, which produces a figure called GNP per captta (literally, “per head”) or per person. The numbers also reveal that it is impossible to say that one economic system is superior to another. While the largely capitalist United States does better than the communist economies, it trails a socialist economy, Sweden. In the United States, the emphasis is on the freedom of the individual to make choices. Individuals own the factors of production; have freedom to choose their careers and where they want to work and live, and above the right to have profits. The Soviet Union’s main goal is to provide greater security, guarding against both the fluctuations of the economy and the instability of unemployment. To provide that security, the government takes greater control of the economy and allows the individual less freedom of choice. A Brief History of American Business The Colonial Era The American business system in the colonial era was agriculture based: society depended on the production of agricultural products as the basis of commerce. In addition the economy was closely tied to England. In exchange for raw materials and precious metals. England exchanged finished goods and provided financing. The Industrial Revolution The Industrial Revolution. which began in the mid 1700s dramatically changed the American business system. The implementation of both power-driven machinery and new production methods changed the manufacturing processes. Instead of skilled craftsmen hand-producing products in cottages, factories were built and the goods were mass-produced. The skilled workers left their homes and became employees in the factories. Growth of Modern Industry During this time period America was transformed from the doorstep of industrialization into an industrial nation. A number of developments contributed to that evolution. Business Today and Tomorrow What trends and challenges does business need to be aware of for tomorrow? The Growing Scarcity of Resources: As energy sources continue to diminish, business have to devise new ways to provide goods and services that use less energy or else find alternative sources of energy. The Importance of International Business: The scope of international business involvement continues to expand. Both the number of businesses involved and the percentage of business transacted on an international scale continue to increase. The Challenge of Technology Industries: It is in the midst of a technological revolution. Computer technology is evolving at breakneck speed; robotics and laser technology also are making their presence felt in the workplace. Heavy industries like steel and auto making will have to update their facilities with new technology to compete. The Need for Improved Productivity: Managerial talent will have to be focused on the productivity dilemma: our output per worker is not keeping stride in relationship to the rest of the world. Answers are needed to maintain our production capabilities. The Increased Importance of Business's Social Responsibility: More demands will be placed on the business sector to accomplish the dual objectives of profitability and social responsiveness.
