The word ‘business’ is very familiar to us. We are surrounded by businesses and we could not imagine our life without the products we buy from them. So what is a business, or what is business studies? Here’s the very posh definition for it: “the study of economics and management”
Not clear? Don’t worry, by the end of this chapter, you should be getting a clear picture of what a business is.
The Economic Problem
Need: a good or service essential for living. Examples include water and food and shelter.
Want: a good or service that people would like to have, but is not required for living. Examples include cars and watching movies.
Scarcity is the basic economic problem. It is a situation that exists when there are unlimited wants and limited resources to produce the goods and services to satisfy those wants. For example, we have a limited amount of money but there are a lot of things we would like to buy, using the money.
Opportunity cost is the next best alternative forgone by choosing another item. Due to scarcity, people are often forced to make choices. When choices are made it leads to an opportunity cost
SCARCITY → CHOICE → OPPORTUNITY COST
Example: the government has a limited amount of money (scarcity) and must decide on whether to use it to build a road, or construct a hospital (choice). The government chooses to construct the hospital instead of the road. The opportunity cost here are the benefits from the road that they have sacrificed (opportunity cost).
Factors of Production
Factors of Production are resources required to produce goods or services. They are classified into four categories.
- Land: the natural resources that can be obtained from nature. This includes minerals, forests, oil and gas. The reward for land is rent.
- Labour: the physical and mental efforts put in by the workers in the production process. The reward for labour is wage/salary
- Capital: the finance, machinery and equipment needed for the production of goods and services. The reward for capital is interest received on the capital
- Enterprise: the risk taking ability of the person who brings the other factors of production together to produce a good or service. The reward for enterprise is profit from the business.
Specialization occurs when a person or organisation concentrates on a task at which they are best at. Instead of everyone doing every job, the tasks are divided among people who are skilled and efficient at them.
- Workers are trained to do a particular task and specialise in this, thus increasing efficiency
- Saves time and energy: production is faster by specialising
- Quicker to train labourers: workers only concentrate on a task, they do not have to be trained in all aspects of the production process
- Skill development: workers can develop their skills as they do the same tasks repeatedly, mastering it.
- It can get monotonous/boring for workers, doing the same tasks repeatedly
- Higher labour turnover as the workers may demand for higher salaries and company is unable to keep up with their demands
- Over-dependency: if worker(s) responsible for a particular task is absent, the entire production process may halt since nobody else may be able to do the task.
Purpose of Business Activity
So we’ve gone through factors of production, the problem of scarcity and specialization, but what is business?
Business is any organization that uses all the factors of production (resources) to create goods and services to satisfy human wants and needs.
Businesses attempt to solve the problem of scarcity, using scarce resources, to produce and sell those goods and services that consumers need and want.
Added value is the difference between the cost of materials bought in and the selling price of the product.
Which is, the amount of value the business has added to the raw materials by turning it into finished products. Every business wants to add value to their products so they may charge a higher price for their products and gain more profits.
For example, logs of wood may not appeal to us as consumers and so we won’t buy it or would pay a low price for it. But when a carpenter can use these logs to transform it into a chair we can use, we will buy it at a higher cost because the carpenter has added value to those logs of wood.
How to increase added value?
- Reducing the cost of production. Added value of a product is its price less the cost of production. Reducing cost of production will increase the added value.
- Raising prices. By increasing prices they can raise added value, in the same way as described above.
But there will be problems that rise from both these measures. To lower cost of production, cheap labour, raw materials etc. may have to be employed, which will create poor quality products and only lowers the value of the product. People may not buy it. And when prices are raised, the high price may result in customer loss, as they will turn to cheaper products.
In a practical sense, you can add value by:
- Adding special features
- Provide premium services etc.
In a practical example, how would you add value to a jewellery store?
- Design an attractive package to put the jewellery items in.
- An attractive shop-window-display.
- Well-dressed and knowledgeable shop assistants.
All of this will help the jewellery store to raise prices above the additional costs involved.
For detailed explanation on factors of production and opportunity cost, head over to our Economics section on the same topic.
Notes submitted by Gayatri
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