Introduction to Business Studies – Need, Want, Scarcity, and the Economic Problem

  • Business originated from the necessity to deal with the economic problem of scarcity.
  • The 4 most basic concepts used to describe this economic problem are:
  1. Need – Any good or service that is essential for sustaining life, or allowing one to enjoy a decent living. This includes food, house, clothes, education, and decent healthcare services.
  2. Want – Any desired good or service that can make life more comfortable, but is not essential for sustaining life. This includes a fancy smartphone, curved mart television (TV), and high-end car. Wants usually improve the standards of living of a person.
  3. Scarcity – This is the state that exists when the available resources and means of production of goods and services cannot deliver enough goods and services to meet the wants of the population.
  4. Economic problem – A state where available resources are limited, and available supply of goods and services cannot meet the demand of wants in the market or community, hence causing scarcity. Evidently, the economic problem is scarcity.
  • Wants can be infinite (that is [i.e], unlimited), while needs can be finite.
  • The ability to meet one’s needs and wants can be used to designate the relative wealth status of a person. A person who fails to meet his/her needs is considered poor, while one who can meet most of his/her wants is considered rich.
  • Scarcity is caused by limited factors of production.
  • Factors of Production is the collective designation of the resources required to create goods and services. If these factors of production are limited, then it follows that production of goods and services are limited.
  • The factors of production are:
  1. Natural Resources – This is land and all resources availed by nature including natural forests, wildlife, water bodies, and minerals such as oil, gas, and metals, as well as domesticated animals. It usually provides the raw material that needs to be converted to a product that can be sold.
  2. Labor – It is the collective term that describes the pool of people ready to expend/use their energy, skills, and knowledge to transform a raw material into a final product.
  3. Capital – This term describes the resources needed to convert the raw material into goods that can be traded, i.e tradable goods. It includes finance, machinery (including heavy machines needed for extracting the raw material), and other manufacturing equipment needed for processing the raw material into tradable goods.
  4. Enterprise – This is the quality of a person or entity to take risk and use skills to bring together the 3 aforementioned factors of production so as to produce tradable goods. The enterprise can be a mining company, a manufacturing company, bank, retail business, or wholesale business.
  • The person who engages in enterprise is called an entrepreneur.
  • Limited resources compel a person to satisfy one want and forego another want, i.e one is forced to choose to fulfil one want and not the other. This choice of meeting a specific want over another want creates an opportunity cost, which is the value of the unmet want. For example (e.g), if a company has a fixed amount of money which can be used to buy either a lathe machine or a stamping machine, and the business then decides to purchase the lathe machine, then the opportunity cost is equal to the value of the stamping machine because the business will not have this machine nor benefit from its services.
  • Unlimited wants and limited resources to fulfil them creates choice of which want to fulfil, and this creates a priority of wants with high-priority wants being fulfilled first while low-priority wants are fulfilled later.
  • To efficiently use the available limited resources, specialization is necessary. Specialization simply means that each business, person, or entrepreneur focuses on what (s)he/it is best at. Specialization creates division of labor during production.
  • The production process can be divided into its constituent tasks, and a worker is assigned to complete only one task. This is division of labor.
  • Business is related to enterprise, and it serves to combine the factors of production in a way that they can produce products that can meet the wants of a population.
  • A product is any good or service that can be sold in the market. A good is any tangible product such as food, car, house; while a service is any intangible product such as banking and insurance.
  • Business activity can be summarized as the process that combines scarce resources to produce products that the population wants, while employing workers who are paid wages and salaries that allows them to purchase products in the market. Therefore, business activity is associated with production of products, and generation of payments for labor.
  • An efficient business adds value to its products or raw materials. A product is usually sold at a higher price than the cost of purchasing or making it, and this difference between the selling price and production cost (which includes the buying price for finished products) is called the added value. For instance, a rancher buys a bull for US$1000, then goes to feed and vaccinate it before selling it off for US$2500. The added value is US$1500, and it covers the cost of feeding, vaccinating, housing, and deworming the bull among other miscellaneous costs (including transporting it to and from the ranch), as well as the profit the rancher made. Thus, added value includes the profit but it is not the profit. If the added value does not cover all the expenses used by the business before the product is sold, then the product is said to be sold at a loss.
  • There are 2 main ways to increase the added value – raise the selling price, or reduce the manufacturing cost or buying price.
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