Understanding the Economic Problem and Factors of Production
Land – this term is used to cover all of the natural resources provided by nature and includes fields and forests, oil, gas, metals and other mineral resources.
Labour – this is the number of people available to make products.
Capital – this is the finance, machinery and equipment needed for the manufacture of goods.
Enterprise – this is the skill and risk-taking ability of the person who brings the other resources or factors of production together to produce a good or service. For example, the owner of a business.
Specialisation: the best use of limited resources. Nearly all workers specialise in one skill and most businesses specialise on one product. Specialisation is now very common because specialised machinery and technology are now widely available, increasing competition means that businesses have to keep costs low, and most people recognise that higher living standards can result from being specialised.
Specialisation and the Division of Labour
Advantages – Workers are trained in one task and specialise in this, increasing efficiency and output. Less time is wasted moving from one workbench to another.
Disadvantages – Workers can become bored doing just one job, and efficiency might fall. If one worker is absent and no one else can do the job, production might be stopped. People have unlimited wants.
The four factors of production – the resources needed to make goods – are in limited supply. Scarcity results from limited resources and unlimited wants. Choice is necessary when resources are scarce. This leads to opportunity cost. Specialisation improves the efficient use of resources.
Business Activity
Business activity therefore combines scarce factors of production to produce goods and services, produces goods and services which are needed to satisfy the needs and wants of the population, and employs people as workers and pays them wages to allow them to consume products made by other people.
Added Value
This is a very important idea. All businesses attempt to add value. If value is not added to the materials and components that a business buys in then, other costs cannot be paid for and no profit will be made. Added value is important because sales revenue is greater than the cost of materials bought in by the business.
Stages of Economic Activity
Stage 1 is called the primary stage of production. This stage involves the earth’s natural resources. Activities in the primary sector of industry include farming, fishing, forestry and the extraction of natural materials, such as oil and copper ore.
Stage 2 is called the secondary stage of production. This stage involves taking the materials and resources provided by the primary sector and converting them into.
Stage 3 is called the tertiary stage of production. This stage involves providing services to both consumers and other businesses. Activities in the tertiary sector of industry include transport, banking, retail, insurance, hotels and hairdressing.
Mixed Economy
Private sector – businesses not owned by the government. These businesses will make their own decisions about what to produce, how it should be produced and what price should be charged for it.
Public sector – government- or state-owned and controlled businesses and organisations. The government, or other public authority, makes decisions about what to produce and how much to charge consumers. Some goods and services.
Enterprise and Entrepreneurship
Benefits of being an entrepreneur
* Independence – able to choose how to use time and money
* Able to put own ideas into practice. It may become famous and successful if the business grows
* May be profitable and the income might be higher than working as an employee for another business
* Able to make use of personal interests and skills
Disadvantages of being an entrepreneur
* It risk – many new entrepreneurs’ businesses fail, especially if there is poor planning
* Capital – entrepreneurs will have to put their own money into the business and, possibly, find other sources of capital. Lack of knowledge and experience in starting and operating a business. Opportunity cost – lost income from not being an employee of another business
Characteristics of Successful Entrepreneurs
Hard working – Long hours and short holidays are typical for many entrepreneurs to make their business successful.
Risk taker – Making decisions to produce goods or services that people might buy is potentially risky.
Creative – A new business needs new ideas – about products, services, ways of attracting customers – to make it different from other existing firms.
Optimistic – Looking forward to a better future is essential – if you think only of failure you will fail!
Self-confident – Being self-confident is necessary to convince other people of your skills and to convince banks, other lenders and customers that your business is going to be successful.
Innovative – Being able to put new ideas into practice in interesting and different ways is also important.
Independent – Entrepreneurs will often have to work on their own before they can afford to employ others. Entrepreneurs must be well motivated and be able to work without any help.
Effective communicator – Talking clearly and confidently to banks, other lenders, customers and government agencies about the new business will raise the profile of the new business
How Can Businesses Grow?
Businesses can expand in two main ways:
* By internal growth, for example, a restaurant owner could open other restaurants in other towns – this growth is often paid for by profits from the existing business. This type of growth is often quite slow but easier to manage than external growth
* By external growth, involving a takeover or a merger with another business.
Three examples of external growth are shown below.
* Horizontal merger (or horizontal integration) – when one firm merges with or takes over another one in the same industry at the same stage of production.
* Vertical merger (or vertical integration) – when one firm merges with or takeover another one in the same industry but at a different stage of production.
* Conglomerate merger (or conglomerate integration) – when one firm merges with or takes over a firm in a completely different industry. This is also known as diversification.
Private Limited Companies
There is one essential difference between a company and an unincorporated business, such as a sole trader or partnership. A company is a separate legal unit from its owners – they are incorporated businesses. This means that:
* A company exists separately from the owners and will continue to exist if one of the owners should die
* A company can make contracts or legal agreements
* Company accounts are kept separate from the accounts of the owners.
Limited Partnerships
Shares in such businesses cannot be bought and sold. This type of partnership is a separate legal unit which still exists after a partner’s death, unlike ordinary partnerships that end with the death of one of the partners
Public Limited Companies
Most large, well-known businesses are public limited companies as they have been able to raise the capital to expand nationally or even internationally. They are not owned by the government but by private individuals and as a result they are in the private sector.
The title given to public limited companies can cause confusion. This is why in the UK, public limited companies are given the title ‘plc’ after the business name.