Understanding Business Functions and Market Dynamics
Company Functions
A company’s primary function is coordinating production factors to create goods and services. Its secondary function transforms raw materials into finished products, enhancing their usefulness and value to meet human needs. This added value is the difference between the value of goods produced and the cost of raw materials: Value Added = Production Value – Raw Material Cost.
Company Objectives
While maximizing profit through sales revenue is a key objective, companies also pursue growth, market power, stability, adaptability, and social responsibility.
Production Cycle
- Purchase: The company acquires raw materials from suppliers.
- Storage: Raw materials are stored until needed for manufacturing.
- Manufacturing: Raw materials are processed into finished products.
- Storage: Finished products are stored until sale.
- Sales: Products are sold to customers.
- Payment: Customers pay for products, allowing the company to pay suppliers and restart the cycle.
Company Components
- Human Resources: The employees or workers within the company.
- Assets: The resources necessary for business operations.
- Organization: The relationships, coordination, and communication within the company.
- External Environment: The surrounding factors that influence and are influenced by the company.
Efficiency
Technical Efficiency: Achieving maximum production with given resources.
Economic Efficiency: Achieving maximum production with minimum cost.
Cost Calculations
Total Cost (TC): TC = Fixed Costs (FC) + Variable Costs (VC) – The sum of fixed and variable costs in a given period.
Average Cost (CM): CM = TC / Quantity (Q) – The cost of producing one unit of product on average.
Average Variable Cost (AVC): AVC = VC / Q
Revenue and Profit
Income (I): I = Price (P) x Quantity (Q)
Profit (B): B = I – TC
Company Structures
- Corporation (SA): Capital comes from partners’ contributions of goods or money (typically large companies).
- Collective Society (S Collective): Partners contribute capital and labor, with unlimited and joint liability for debts.
- Limited Liability Company (SL): Members’ liability is limited to their contributions, called shares.
- Multinational: A parent company with subsidiaries in multiple countries sharing common objectives.
Market Principles
A market connects buyers and sellers of a particular good. Bartering involves the direct exchange of goods and services without money. Money acts as a medium of exchange, while price represents the value of goods or services in monetary units.
Market Pillars
- Suppliers
- Buyers (Plaintiffs)
- Prices
Demand
The demand function indicates the quantity of a good or service consumers are willing to buy at each price level, considering factors like related goods’ prices, consumer tastes, and income.
Supply
The supply function indicates the quantity of a good or service producers are willing to sell at each price level, considering production costs and business expectations.
Demand Elasticity
Inelastic Demand: A price change causes a small percentage change in quantity demanded. A price increase raises total income, while a price decrease reduces it.
Elastic Demand: A price change causes a large percentage change in quantity demanded. A price increase reduces total income, while a price decrease raises it.
Price Elasticity of Demand: Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price. If elasticity > 1, demand is elastic; if elasticity < 1, demand is inelastic.