The nature of business

A business is a person, a group of people, or an organization that meets needs. All businesses start with an idea. A person or an organization identifies a need or demand and decides to meet that demand. A business is then organized to put that idea to work. Behind the idea lies motivation. One motivating force in business is profit, the income earned by a business.

Meeting needs has two sides. The person or organization with the demand is the buyer, or customer. The person or organization that meets the demand is the seller, or supplier.

You have demands for both goods and services. You meet these demands by doing business with people or organizations that can meet your demands. In exchanging something of value, such as money, for something you want, you are taking part in a business transaction. A transaction, then, is the basic act of doing business.

Operating a business requires an investment of resources. Resources include money, time, skill, experience and work. An investment involves risk – a business can fail.

F ig. 4.1. The economy has a cir­cular flow of goods and services and an oppos­ing flow of money to pay for the goods and services.

Businesses circulate money. The income of a business provides money for the payroll, supplies, and other expenses of operation. The proprietor draws income from money left after expenses. Employees of the business are customers of other businesses. The business itself is a customer of other businesses from which it purchases the products it needs to operate.

The financial condition of a business is determined by a process called accounting. Original entries of business transactions are recorded in journals. At specific intervals, the information is summarized into financial statement. Accountants then interpret the figure to determine the financial strength of the business.

The world of business revolves around putting ideas and resources to work to create opportunities.

Businesses are created in response to the market system.

The economy is the sum of all business transactions, jobs, and goods and services produced, sold and purchased. Economics exist at national, state, regional, and local levels.

Economics is the social science that studies the economy.

Demand is the amount of goods or services consumers are willing and able to buy. Supply is the amount of goods and services businesses are willing and able to provide at a certain price. Price responds to pressures of demand and supply. When demand exceeds supply, a shortage exists. A surplus exists when supply exceeds demand.

There is a circular flow of income within an economy. Consumers use their income to pay for goods and services. Businesses use their income to pay for the factors of production of natural resources, labour, capital and technology. There is also a circular flow of goods and services. Consumers sell their time and skills as labour. Some consumers also own natural resources and or invest in the capital of production.

Businesses use these factors of production to provide the goods and services demanded by consumers.

The interaction of demand and supply determines the prices of consumer goods and services. The market price is the point at which the supply and demand curves intersect. In this case, consumer demand for a product or service equals the willingness and ability of business to provide it. There is neither a shortage nor a surplus.

Competition is important for consumers because it keeps prices at their lowest possible level. Competition also permits consumers to make choices based on the quality, appearance, and utility of consumer goods.