The sprawling Chrysler headquarters and plant illustrate the large amount of capital and labor involved in a major corporate
enterprise. Government loan guarantees saved Chrysler from a possible permanent shutdown.
heed in 1971, Chiysler in 1980, and Continental Illinois in 1984, by
standing behind new loans extended by creditors to keep the
firm functioning.
Identifying consumer wants The first function of any type of
business firm is to determine what will be produced by identifying
what consumers want and will pay for. Farmers have a
particularly difficult time predicting this because they must
make their production decisions at planting time on the basis of
what they think the market will be the following year at
harvest time. And because American farmers are so dependent on foreign markets in which to dispose of a large part of
their output, their decision about what to produce is complicated by the need to know what world demand will be as
well as what domestic demand will be.
But producers in other industries have different problems in
identifying consumer wants. At least farmers are producing
necessities that are always in demand—food and fibers.
Producers of luxury goods are at the mercy of changing fads.
Identifying what new products consumers will buy is the first
task of the entrepreneur.
Organizing production The second function of businesses is to
organize production. It is the most complex function of business
firms. How effectively they perform it usually determines
whether the business succeeds or fails. Business firms must
decide what mix of the factors of production—land, labor, and
capital—will best achieve the desired output. Many farmers invested too heavily in farm equipment in the 1970s and found
entrepreneur a business innovator who
sees the opportunity to make a profit from a
new product, new process, or unexploited
raw material and then brings together the
land, labor, and capital to exploit the
opportunity, risking failure.
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An 1,800 Ib, black Texas Longhorn bull
being filmed in front of the New York
Stock Exchange for a TV commercial
for Merrill Lynch, Pierce, Fenner &
Smith Inc. (stockbrokers) who obviously
hope for a bull market.
real capital the buildings, machinery,
tools, and equipment used in production.
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themselves capital-poor as well as land-poor when markets
weakened in the 1980s. They had so much invested in expensive
equipment and land that they couldn't meet their current bills.
Farmers who had invested less in land and capital equipment,
depending more on their labor for cultivating and harvesting
and hiring the large machinery when it was needed, survived
better.
At the other end of the size scale of business, corporate farms
are able to make efficient use of capital equipment because they
can employ it more intensively; it is not idle as much of the
time. In the 1980s at least, the farm production models that
seemed to work best were the labor-intensive small proprietorship and the capital- and land-intensive corporate farms. The
in-between size farms that had invested heavily in equipment
that was not fully utilized and in high-priced land found that
they had the wrong combination of production factors and
could not compete. They had the wrong answer to the "how"
question.
Allocating revenues As part of the circular flow of economic
activity, businesses allocate the revenue they receive from sales to
pay their employees, suppliers, and investors. The economic
difficulties of the farmers spread to their suppliers—the farm
equipment dealers, the fertilizer companies, the banks that lent
them money—and to the whole farm communities.
Businesses not only decide what will be produced and how,
but they also decide how purchasing power is allocated. This is
their third function. In resolving the "for whom" question, they
do not decide who will purchase their products; consumers
decide for themselves what they will purchase under the
principle of consumer sovereignty. But businesses do determine
how much will be paid to the suppliers of inputs and therefore
how much purchasing power each supplier has. The income
received by the firms' employees and other factor inputs is
spent, in turn, on other goods and services, or it is saved. In
a freely functioning market economy, it is purchasing power
that determines the answer to the "for whom" question.
Real capital investment The fourth function of business firms is
to increase the economy's stock of real capital—the factories,
office buildings, machinery, tools, and equipment used to
produce goods and services. This investment in real capital is
an important economic function because it makes possible the
expansion and modernization of production. One thing that
has led to such an increase in agricultural production in this
country so that it can supply its food needs with fewer and
fewer farmers is the investment in real capital. American
agriculture is the most productive in the world. Although this
has not always benefited the farmers, it has been very good
for consumers.