Summary of the Chapter
In this chapter we have described the nature of business and discussed the ways in which business creates profit and wealth in a society. As we have discussed, the three meanings of business are interrelated. Each is a necessary ingredient for the production of the valuable goods and services on which both personal wealth and the wealth and prosperity of a society or country depend. To understand why some countries are wealthier, or more peaceful, or more enterprising than others, look at the nature of their business commerce, occupations, and organizations. Look also, at the legal and ethical rules that govern how business is to be conducted in a society. The chapter has made the following main points: 1. Business has three main components, business as commerce, as an occupation, and an organization. Together these three components make up the business system. 2. The four main productive factors are land, labor, capital and enterprise. A company utilizes these resources to produce goods and services. 3. Business commerce involves the trade or barter of products (goods and services) to create profit. The forces of supply and demand determine a product’s market price. In turn, supply and demand are the result of peoples’ personal judgments about the utility, or satisfaction, they will get from supplying or buying a product. 4. A company’s business model describes the way it intends to use its productive resources to create profitable goods and services. 5. A company’s profitability is a measure of how well it has used its productive resources to create valuable goods and services as compared to other companies. 6. It is important to recognize that while all business activity is self-interested and competitive, this competition benefits society because it directs resources to their most highly valued use. Nevertheless, there is no business rule that says that all people need to profit from business commerce equally. 7. Some people or companies will always ruthlessly pursue their self-interest and try to cheat or defraud others. Governments can sometimes prevent this from happening by passing laws and regulating certain business activities. 8. Through the process of specialization and the division of labor, business occupations develop that increase the amount of goods and services people can produce and trade. Increasing specialization, through the invisible hand of the market, leads to increasing profitability and the generation of more capital and wealth. 9. Business organizations are created to reduce transaction costs, the costs that arise from business commerce and from the process of specialization and the division of labor. 10. Business organizations develop an organizational structure, a set of task and authority relationships, to reduce transaction costs and increase their profitability.