CHAPTER 1
THE PURPOSE OF
BUSINESS ACTIVITY
The economics problem: needs and wants.
Basically, all humans have needs and wants.
Needs are things we can't live without, while wants are simply
our desires that we can live without. We all have unlimited
wants, which is true, since all of us want a new PC, a car, new graphics
card, etc. that we actually do not need to live. Businesses produce goods and
services to satisfy needs and wants.
Although we have unlimited wants, there are not enough resources for
everyone. Resources can be split into 4 factors of production,
which are:
-
Land: All natural resources used to make a product or service.
-
Labor: The effort of workers required to make a product or
service.
-
Capital: Finance, machinery and equipment required to make a
product or service.
-
Enterprise: Skill and risk-taking ability of the entrepreneur.
Entrepreneurs are
people who combine these factors of production to make a
product.
With these discussed, let’s move on to the economic
problem. The economic problem results from limited resources and unlimited
wants. This situation causes scarcity, when there are not
enough goods to satisfy the wants for everybody. Because of this, we will have
to choose which wants we will satisfy (that will be of more
benefit to us) and which we will not when buying things. For any choice, you
will have to would have obtained if you didn't spend that money. For example,
you would have got a book if you didn't buy the pen, or you would have a burger
if you didn't buy the chips. Basically, item that you didn't buy is the opportunity
cost. Make sure that the opportunity cost isn't higher than what you
bought!
"Opportunity
cost: the next best alternative given up
by choosing another item."
Here is a diagram showing the whole economic problem:
Division of labor/Specialization
Because there are limited resources, we need to use them the
most efficient way possible. Therefore, we now use production methods that are
as fast as possible and as efficient (costs less, earns more) as
possible. The main production method that we are using nowadays is known
as specialization, or division of labor.
"Division
of Labor/Specialization is when
the production process is split up into different tasks and each specialized
worker/ machine performs one of these tasks."
Pros:
·
Specialized workers are good at one task and increases efficiency
and output.
·
Less time is
wasted switching jobs by the
individual.
·
Machinery also helps all jobs and can be operated 24/7.
Cons
·
Boredom from doing the same job lowers efficiency.
·
No flexibility because
workers can only do one job and cannot do others well if needed.
·
If one worker is absent and no-one
can replace him, the production process stops.
Why is business activity needed? (Summary)
- Provides goods and services from limited resources to
satisfy unlimited wants.
- Scarcity results from limited resources and unlimited
wants.
- Choice is necessary for scarce resources. This leads to
opportunity costs.
- Specialization is required to make the most out of
resources.
Business activity:
1.
Combine factors of production to
create goods and services.
2.
Goods and services satisfy people’s
wants.
3.
Employs people and pays them wages
so they can consume other products.
Business Objectives:
All businesses have aims or objectives to achieve. Their
aims can vary depending on their type of business or these can change depending
on situations. The most common objectives are:
1.
Profit: Profit is what keeps a company going and is the main
aim of most businesses. Normally a business will try to obtain a satisfactory
level of profits so they do not have to work long hours or pay too much
tax.
2.
Increase added
value: Value added is the difference
between the price and material costs of a product. E.g. If the price when
selling a pen is $3 and it costs $1 in material, the value added would be $2.
However, this does not take into account overheads and taxes. Added value could
be increased by working on products so that they become more expensive finished
products. One easy example of this is a mobile phone with a camera would sell
for much more than one without it. Of course, you will need to pay for the
extra camera but as long as prices rise more than costs, you get
more profit.
3.
Growth: Growth can only be achieved when customers are satisfied
with a business. When businesses grow they create more jobs and make them more
secure when a business is larger. The status and salary of managers are
increased. Growth also means that a business is able to spread risks by moving
to other markets, or it is gaining a larger market share. Bigger businesses
also gain cost advantages, called economies of scale.
4.
Survival: If a business do not survive, its owners lose
everything. Therefore, businesses need to focus on this objective the most when
they are: starting up, competing with other businesses, or
in an economic recession.
5.
Service to the
community: This is the primary goal for most
government owned businesses. They plan to produce essential products to
everybody who need them.
These business objectives can conflict because different
people in a business want different things at different times.
Stakeholders:
Stakeholders are a person or a group which has interest in a
business for various reasons and will be directly affected by its decisions. Stakeholders
also have different objectives and these also conflict over time.
There are two 6 types of stakeholders, and these types can
be classified into two groups with similar interests.
Group 1: Profit/Money
a. Owners:
1.
Profit, return on capital.
2.
Growth, increase in value of
business.
b. Workers
1.
High salaries.
2.
Job security.
3.
Job satisfaction.
c. Managers
1.
High salaries.
2.
Job security.
3.
Growth of business so they get more
power, status, and salary.
Group 2: Value
a. Customers
1.
Safe products.
2.
High quality.
3.
Value for money.
4.
Reliability of service and
maintenance.
b. Government
1.
Employment.
2.
Taxes.
3.
National output/GDP increase.
c. Community
- Employment.
- Security.
- Business does not pollute the
environment.
- Safe products that are socially
responsible.
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