Читать книгу Introduction to Business and Economics - Bettina Fuhrmann - Страница 7

2 Basic economic concepts

[9]Before going into details about what a business is and how it is run, it is necessary to understand the business environment, and the economy that it becomes a part of. It is also important to understand some basic economic concepts that have an influence on the economic decisions not only of businesses but also of individuals, such as what to offer (to sell) and what to purchase, how to manage the available resources and how to finance the expenditures.

2.1 Being part of the economy

By running a business, Tina and Steve are an active part of the economy as entrepreneurs. Businesses provide goods like computers and services like installing software for people who need these goods and services to satisfy their needs. Their needs might include having a computer as well as getting technical support. Not only individuals, but also businesses have needs: manufacturers of smartphones, tablets and laptops might need the printed circuit boards (PCBs) that are produced by AT&S. In turn, AT&S needs raw materials and a workforce to produce these PCBs. And individuals might also exchange goods and services with each other, like selling a house, an apartment or a used car, or exchanging vegetables or flowers from the garden and getting a bottle of wine in return. In the economy, people and businesses exchange goods and services to fulfil their needs and wants.

Therefore, Tina and Steve were part of the economy a long time before starting their business. As individuals, they have been part of private households and have bought goods and services from a wide range of businesses. Like thousands of other households, they need food, a home to live in, medical care, a car and/or other kinds of transportation, they want to do sports or go to the cinema, to a café or a restaurant. Businesses offer the goods and services that people (as part of private households or other businesses) need and/or want.

■ Exchanging would be much easier if all that we want or need is available in abundance, but that is not the case.

■ Resources are scarce and need to be managed.

■ This is why we all need to economise. No one is able to opt out of making economic decisions.

2.2 Scarcity of resources and opportunity cost

Both households and businesses only have limited resources to pursue their goals: businesses have a certain number of machines and tools and a limited amount of material and financial resources to produce their goods and provide their services. Likewise, households only have a certain income that they are able to spend on purchasing goods and services, with maybe a part of that income left for saving. Resources are always scarce, and this scarcity of resources forces businesses as well as individuals to make decisions on how to use those limited resources: what and how to produce, what to buy, how much to spend.

It is a basic economic problem of households, businesses and the government to decide how to use their limited resources and to make choices when allocating these scarce resources between different options. Tina and Steve can either found their own business or they can take jobs at another business and become employed. If they earned 35,000 euros[10] per year in such a job, this 35,000 euros would be their opportunity cost per person if they decided to set up their own business. If they took these jobs, they would also have opportunity cost: the amount of money that they could have earned with their business. Of course, it would be difficult to tell how much that could have been. Opportunity cost is the (financial) benefit of the (next best) alternative that is lost or given up in order to choose or achieve something else.

2.3 Economics is the study of economic decisions

Economics is the study of how individuals (as part of private households) and businesses make decisions to satisfy their needs and wants with limited resources. It comprises a number of scientific fields and branches, two of which are microeconomics and macroeconomics. Microeconomics focuses on the behaviour and decisions of individual households and businesses and how they interact. A question in microeconomics could focus on the change in demand of electric cars if buyers of electric cars receive a bonus. In contrast, macroeconomics looks at the bigger picture and deals with questions concerning the overall economy (of one country for example) and aggregate quantities. Among other phenomena, it studies economic growth, unemployment, interest rates, price levels and inflation. As a science, economics strives to explain the observed phenomena and also to make predictions, both based on various theories.

2.4 Exchanging goods and services creates a circular flow and division of labour

While households mainly offer labour and receive wages, businesses offer goods and services that are bought by households and other businesses and receive money for what they sell (see figure 1). This is how a circular flow of goods, services and money is created. As money is used as a means of exchange that is widely used and accepted, these exchanges can be carried out relatively easily. Without money, people would have to barter, which is much more complicated. If you want to acquire a good from another person, but do not have what this person wants in return, there will be no exchange. Money allows for a

■ flexibility of exchange (first function: medium of exchange). It also allows us to express the

■ value of things (second function: unit of account) and to

■ store value over time (third function: store of value).

Money fulfils these functions best if its value remains pretty stable over time. However, if there is a general rise in prices of goods and services, you can only buy a lower amount of goods and services, which means that the purchasing power of money (i.e. its value) declines.

Price indexes allow us to measure the extent of this general increase in prices, a phenomenon that is also called inflation. Low inflation rates can be tolerated. The European Central Bank considers an inflation rate of slightly below 2% per year most beneficial to the economy. But if inflation rates are considerably higher, the purchasing power of money decreases considerably. As the amount of goods and services that can be bought for a certain amount of money continuously decreases, people lose their trust in money and try to get rid of it.

[11]In the circular flow of the economy (see figure 1), public authorities (mainly governments) also play an important role. They levy taxes from households and businesses and use the money to provide goods, transfer payments and subsidies. Such goods as infrastructure (e.g. streets and street lights) and services like national defence and public security (e.g. police) need to be provided by governments and financed by taxation. There is demand for these goods, but private businesses would not want to supply them as “free riders” (people who do not pay for a good or service) cannot be excluded from enjoying them. In many – but not all – countries health care and education are also provided (at least to a large extent) by public authorities.

Figure 1. The circular flow of goods, services and money within the economy

Division of labour and specialisation

Without exchange of goods and services, individuals would have to produce everything they need themselves. That would be very difficult, time-consuming and inefficient because they would have to spend time on performing tasks that they lack the skills for. Exchanging goods and services allows for the division of labour and therefore specialisation. Individuals and businesses can concentrate on what they can do best. This explains the wide variety of jobs and of businesses. Using a widely accepted means of exchange like money facilitates the exchanges.

Specialisation can be found on many levels:

■ Within households, for example where individuals can concentrate on what they can do best or what they like doing (like one individual does the shopping, the other one the cooking).

■ The same principle applies to businesses: within businesses, some people concentrate on production, others on procurement, some others on sales, on recording all[12] financial transactions or on managing human resources. Accordingly, these (different) tasks of a business are often summarised in different departments of a business: procurement, production, sales department, marketing, finance and accounting.

■ Specialisation can also be found between businesses as every business focuses on a special range of products: some offer all kinds of furniture, others just beds and couches, some others just produce kitchens. These businesses operate on the same level of production. But specialisation can also be based on division of labour between businesses on different levels of production (first level: production of wood and iron, second level: production of boards and nails, third level: production of tables, final level: selling them) or in different sectors of the economy (see chapter 3).

■ Specialisation can also be found on an international level, as countries differ in climate, natural resources, geographical position and many other characteristics. Due to very different characteristics, countries also differ in their conditions for different industries (industry being a number of businesses that produce or sell the same product) and different business functions. AT&S for example has production sites in Europe as well as in Asia (China, India and South Korea). While production in Europe is highly diversified and relatively low in volume, production in Asia reaches a much higher volume but has a lower product diversity. This kind of division of labour can be explained by differences in terms of know-how of the workforce, labour costs, availability of other resources and the legal framework in different countries.

While division of labour has many advantages, it also has some disadvantages that need to be considered: for very specialised workers, work may become boring over time. Being specialised also means less flexibility as it is hard to develop other skills or develop competencies in other fields. A specialised business may be brilliant in that field, but if – for some reason – that specialisation is not needed anymore, the business is at risk and people could lose their jobs.

2.5 Different economic systems

The role of governments described above is mainly true for the governments in some sort of market economy. While in market economies individuals and businesses are – more or less – allowed to make many of their own economic decisions, in planned economic systems the governments play a dominant role. They (mainly or partly) decide which goods are produced and which services are offered (at which prices). Furthermore, they (mainly or partly) control the resources and the means of production. People have a limited choice of which job to do and which products to buy.

In most countries of the world, economies can be characterised as some kind of market economy. In some of these countries, the governments play a minor role by only providing the legal framework and not influencing the economy much, so their economic system comes close to what is called a “free market economy”. In many other countries, the government plays a more important role by influencing the economy to a somewhat higher extent, by supporting the poor and protecting the environment for example. These systems are called “social market economies” or “eco-social market economies”.

Over the past decades, a lot of former communist countries that used to have planned economic systems have adopted the main principles of the market economy. Many Central and Eastern European Countries (CEE), China and former Soviet countries are examples of such a transformation.

2.6 Supply and demand: Households, businesses and the government meet in the market

[13]In a market economy, goods and services are offered and sold on/at markets. Buyers and sellers meet to communicate the conditions of exchanging goods and services and thus form a market. A market can be an actual place, like a flower market in the city of Rome or a flea market in a small village, but it can also be a virtual place like a market on the Internet (e.g. eBay, Amazon). Buying and selling take place in shops, but also on the phone. Therefore, there are many different markets, also depending on what is offered: consumer goods markets, labour markets (supply and demand for work), housing markets, money markets, capital markets, commodity markets (supply and demand for raw materials).

2.6.1 The law of supply

Supply of a certain good or service is the quantity of that good or service that is available for purchase. Basically, this quantity mainly depends on the businesses’ production capacities and the available resources, but also on the price that can be charged for the good or the service. The higher this price is, the higher the supply will be. All other things held constant (“ceteris paribus”), this relationship is true for most goods and services in the economy (law of supply).

In Tina’s and Steve’s case, the quantity of hours that they (as well as other providers of similar computer support services) are willing to work depends on the price they can charge and that will be paid. It is tiring work and the providers of this service need to be very skilled. If the price is low, let’s say below 30 euros per hour for example, no provider would offer that service. The opportunity cost would be too high: as the providers are very skilled, they could earn more money by doing something else (that is also less tiring), so they would leave this market and offer another kind of service. The higher the price, the higher the number of hours that would be offered. More potential providers would enter the market and would be willing to offer a higher number of hours of their service.

The shape of the supply curve can also be explained by the concept of increasing marginal costs faced by many industries and businesses. Marginal cost is the cost of producing an additional unit of a good or by providing an additional unit of a service. As output increases and exceeds a certain level it will become more and more costly to produce; businesses need to build higher capacities (machinery, personnel) so marginal costs would rise. Only if the price level increases and exceeds (or at least equals) marginal costs would businesses be willing to produce and supply a higher amount.

Figure 2. The supply curve (price in euros, quantity in 1,000 hours)

[14]Figure 2 shows the relationship between prices and supply in the market for computer support services (e.g. within a country).

2.6.2 The law of demand

Demand, on the other hand, is the quantity of a good or service that customers are willing and able to buy. Usually the higher the price is, the lower demand will be. The more Tina and Steve as well as other providers charge for their technical computer support service per hour, the more demand will decrease (because more and more people cannot afford such high prices or are not willing to pay such high prices for that service and will instead look for other ways to get help with their computer problems). People’s willingness to pay a certain price is related to the utility or the level of satisfaction the people get from consuming the service. Figure 3 gives you an idea of how many hours of technical support would be demanded in the market, depending on the price.

Figure 3. The demand curve (price in euros, quantity in 1,0 hours)

The graph in figure 3 shows that the quantity demanded decreases as the price rises. Accordingly, the quantity demanded (the quantity that people are willing and able to buy) increases as the price falls. Therefore, the quantity demanded is negatively or inversely related to the price. All other things equal (“ceteris paribus”), this relationship can be found with almost all goods and services in the economy, so that it is also called the law of demand.

2.6.3 The market equilibrium

If we have a look at both curves, we can see that they intersect at a certain point, at the price of 150 euros. At this point, the quantity of hours that is demanded in the market equals the quantity of hours that is supplied.

Assuming that these curves represent supply and demand in the whole market for computer support services, this price would also be called the market price or equilibrium price (because supply equals demand). At the price of 150 euros per hour demand and supply balance each other out. As the quantity supplied equals the quantity demanded, there is neither a surplus (higher supply than demand) nor a shortage (higher demand than supply). At a higher price, demand would be lower than supply and vice versa.

[15]

Figure 4. Supply and demand intersect at the market price (price in euros, quantity in 1,000 hours)

In the real world, other factors than price also affect demand and supply.

Demand is also affected by:

■ Changes in income: If income increases, people can afford more (and more expensive) computer services and – all other things held constant – demand would increase (so the demand curve would shift to the right). Similarly, if income decreased, people would not be able to spend so much money on technical support anymore, and consequently, demand would decrease (and the demand curve would shift to the left).

■ Changes in consumer preferences: More and more people might want to have additional technical support, so demand would increase. In a different scenario, people could possibly like to have new and faster computers, so demand for used computers would decrease (regardless of the price).

■ Complementary goods: If an additional service is offered that is related to the computer support service and that people are highly interested in, demand for computer services would be very likely to increase.

■ The availability of substitute goods: If people found a service that perfectly substitutes computer support services, the demand for computer support service offers would also decrease. This effect will also be discussed in chapter 5, Marketing.

Supply is also affected by:

■ Number of suppliers: The more profitable a market is considered to be, the more suppliers will enter this market. As the number of suppliers increases, supply will increase (the supply curve would shift to the right), until supply is so high that prices fall again and no more additional suppliers enter the market.

■ Technological changes: These might enable more people to provide computer services and enter the market.

■ Changes in resource prices: If the costs for offering the service decreased but prices for the services stayed the same, more providers would be willing to enter the market.

■ Price expectations: If providers think that prices in the computer market could fall, they will probably think of some other field of business to work in and reduce their supply in their original field of business.

[16] Supply and demand for money

Please note that the laws of supply and demand also help to understand one of the main causes of inflation. If the quantity of money within a country is increased (in order to stimulate the economy), people and businesses are able to buy more and to invest, so demand for goods and services usually rises. If the quantity of available goods and services in this country remains the same and does not increase accordingly, then the prices for goods and services will rise. “Too many dollars chasing too few goods” expresses very well what inflation is about. It is by increasing the price for money, i.e. the interest rates, that inflation can be fought. If it is more expensive to borrow money, people and businesses tend to spend less, demand for goods and services decreases again and so do their prices.

2.7 Competition in the market

The level of competition in a market is mainly influenced by the number of suppliers and the availability of substitute goods. If there is just one supplier, the market situation is called a monopoly. Monopolies are rare in a market economy but there might be goods and services that are only provided by one business (like the railway in some countries).

Some businesses might not be the sole suppliers in the whole market, but they might be the only supplier within a certain area, which also makes them a kind of monopolist. The owners of a ski hut might be in a monopoly-like situation if they are the only ones to offer food and beverages on a particular mountain. A theatre bar is in a similar situation. Tina and Steve could find themselves in such a situation if they are the only ones that offer such a service within a radius of 50 km for example.

If there are a few suppliers, the market form is called an oligopoly. Each supplier has a relatively large share of the market (e.g. telecom companies, car manufacturers). Competition can be strong, because as soon as one supplier changes the product or the price, its competitors are very likely to react in order to maintain their share of the market. Alternatively, suppliers could try to negotiate their terms of sale in order to prevent such harmful competition. Such agreements – also called a cartel – are usually not considered legal. In general, laws support competition in a market because it is considered beneficial for customers.

Perfect competition can (theoretically) be found in markets with so many suppliers and buyers that no single individual or business can possibly influence the price. Considering perfect competition, in economics we also assume the following (theoretical) prerequisites:

■ All market players (buyers and sellers) must have access to all information at all times.

■ There must not be any barriers to enter or exit the market.

■ There must not be any (personal) preferences – i.e. goods, as mentioned, must be replaceable.

In real life, perfect competition is rarely found but, nevertheless, some markets come close to the concept of perfect competition. These are markets for goods and/or services that are almost identical (regardless of the supplier), e.g. agricultural markets, or that can be standardised. Even if the number of suppliers is not so high, competition can be almost “perfect” if competition among suppliers is especially fierce.