Business, Finance, and the Public Sector: Roles and Relationships
**Business: The Company**
The Company: Is the basic unit of production. It contracts work and buys or rents other factors in order to make and sell goods and services. The existence of firms can be justified by:
- Meeting the financial resources needed to produce goods and services.
- Production needs to be controlled, managed, and supervised.
- The ability to take advantage of lower costs of production scale.
**A. The Company and its Environment**
Plant: Any physical and organizational structure aimed at producing a good or service in any quantity of output or product. In the economic sense, it is broader than the factory, as it also includes local commercial or any services.
Industry: The companies that produce the same good or service. The textile industry includes companies that produce or process tissues.
Sector: A group of industries with similar characteristics.
**B. Types of Companies According to Their Activity**
Companies are classified into the following categories:
- Industrial: These are processing companies. They acquire raw materials to transform them into products ready for consumption.
- Commercial: They buy goods to then sell at higher prices in order to obtain a profit.
- Services: They provide consumers the direct enjoyment of an activity.
**C. Types of Companies According to Legal Form**
- Individually Owned Businesses: The easiest way to establish a business. The company belongs to an individual who directs it, and as the owner, is responsible with all assets.
- Corporate Social: Belonging to a legal person or a group of members. It may be a company:
- Collective-Regulated: When the partners contribute both work and capital and have unlimited liability.
- Collective Irregular: When only some members contribute work.
- Limited Partnership (Commandite): There are collective members who bring capital, and their liability is limited to the capital contributed.
- Joint-Stock Company (Commandite by Shares): Capital is provided through shares.
- Limited Partnership: Partners contribute capital and are liable for their subscriptions.
- Corporations: Capital is divided into small equal parts called shares, as it provides a way to gather large sums of capital. Each partner (shareholder) has limited liability.
- Labor Corporations: Members contribute both labor and capital. When created to meet the specific needs of members, they are called cooperatives. In corporations, especially in larger companies, there is a separation between ownership (shareholders) and direction exercised by the board.
**D. The Financing of the Company**
To create a company, operate it, and provide for its growth, financial resources are needed. According to the source, resources are classified into:
Own Resources and Outside Resources
Own Funding: These are the resources provided by the owners or partners of the company, which constitute the capital, as well as part of the profits not distributed among the owners. This is the company’s self-financing. Corporations can obtain funding for operations in stock markets or exchanges. The incentive to become a shareholder is participation in company profits depending on the number of shares purchased. As the benefits vary from year to year, the income or dividends that shareholders receive will also vary.
Share: A title representing a proportion of ownership of a company. Shares are equity securities whose value depends on the performance and benefits distributed to shareholders.
External Financing: Ways to obtain financial resources from outside the company:
a) Banks, savings banks, and other financial institutions through loans and credits. The company promises to return the amount received plus the cost of borrowing. In a loan, the company receives the requested amount immediately, while in a credit, a certain amount is put at the disposal of the company, which the company will withdraw as needed, paying interest only for the quantity actually used.
b) The issuance of bonds or obligations. The company divides all the money it needs into small equal quantities, issues securities for this value, and sells them. People who buy these securities are called bondholders. The bondholder is entitled to receive a particular interest, which is fixed from the time of issuance and cannot vary. Therefore, the obligation is called a fixed-income security.
c) Credit granted by commercial vendors or suppliers of the company. A common commercial practice is that companies do not pay cash to the entities that provide them with supplies.
**Families or Households**
Families or households purchase goods and services produced by companies. They are assumed to act rationally and seek to maximize the satisfaction they derive from the goods and services they demand. Families and other entities whose main activity is making consumption decisions. The spending capacity of families depends on their income, which they receive as a result of the remuneration of factors of production, especially their labor. Along with this activity in the circular flow of income, families, who are the ultimate owners of productive resources, provide these resources to companies so that they can carry out the production of goods and services.
Circular Flow of Income: Company payments to families in exchange for their work and other productive services, and payments from families to businesses in exchange for goods and services.
**The Public Sector**
Public Sector: A scope broader than the nation-state in modern political organizations. It consists of a set of bodies and public administrations, with three levels of government:
a) Local authorities: municipalities and provincial councils.
b) Regional and autonomous governments.
c) The central administration: the government, ministries, and other state agencies.
**A. The Development of Public Sector Functions**
Public sector functions have expanded and diversified into areas such as health, education, and other public services. To perform these activities, it uses taxes, public spending, and regulation. It coordinates and regulates the market while establishing macroeconomic policy, aiming to achieve overall objectives, stable growth of national product, and price stability. It establishes the institutional and legal framework that regulates the development of economic activity. Economic regulation affects prices or services in any industry or sector, social regulation deals with labor and social issues, and environmental regulation tries to correct the external effects generated by some activities.
**B. The Public Sector and Economic Activity**
The basic tools used by the public sector, particularly the state, are: taxes, regulation, and spending.
Tax: Income levied on goods and services, reducing private spending and private income while providing resources for the public sector. The set of taxes is used to reduce the incentives to engage in certain activities subject to tax.
Expenses: Expenses of the state.