Why people start businesses
A business is any organisation that provides goods or services to customers.
People start one for different reasons:
- to make a profit (earn more than they spend)
- to be independent: their own boss
- to meet a need or gap in the market
- to help others (a social enterprise or charity)
Businesses also create jobs and pay taxes, so they help the whole community.
Goods and services, needs and wants
Goods are things you can touch: bread, a phone, a bicycle.
Services are actions done for you: a haircut, a bus ride, a doctor's check-up.
Needs are things we must have to live: food, water, shelter, basic clothing.
Wants are things we would like but can live without: a video game, a cinema ticket.
People have unlimited wants but limited money, so businesses compete to satisfy them.
Factors of production and opportunity cost
The factors of production are the resources needed to make any product:
- Land: natural resources, such as the site, water, minerals. Reward: rent.
- Labour: people's work, both physical and mental. Reward: wages.
- Capital: man-made tools, machines, buildings and money to buy them. Reward: interest.
- Enterprise: the person who brings the others together and takes the risk. Reward: profit.
Resources are scarce (limited). So every choice means giving something up. The opportunity cost is the value of the next best option you did not choose.
Primary, secondary and tertiary sectors
- Primary sector: takes raw materials from nature. Farming, fishing, forestry, mining.
- Secondary sector: turns raw materials into products. Factories, construction, food processing.
- Tertiary sector: provides services. Shops, banks, hotels, transport, schools.
The sectors depend on each other: no shop can sell bread without a farmer and a bakery. In most richer countries, most people now work in the tertiary sector.
Entrepreneurs, aims and a changing world
Entrepreneurs
An entrepreneur starts and runs a business, organises resources and takes the risk of losing money. Common traits: willing to take risks, hard-working, creative, determined, good at spotting chances. The reward for risk is profit, and also independence and satisfaction.
Business aims
A new business usually aims to survive first. Later aims: profit, growth, market share, customer satisfaction, and social or ethical aims. Aims differ between businesses and change over time.
Business in a changing world
Businesses must adapt to new technology (online selling, digital payments), changing customer tastes, the economy (incomes, interest rates), and ethical and environmental concerns.
Key formulas and definitions
- Profit = Revenue − Total costs
- Factors of production: Land (rent), Labour (wages), Capital (interest), Enterprise (profit)
- Opportunity cost = the next best alternative given up
- Goods = tangible; Services = intangible
- Primary → Secondary → Tertiary (grow → make → serve)
Worked examples
1. Riya has $500. She can buy a laptop for her design business or a short marketing course. She buys the laptop. What is the opportunity cost?
The marketing course, because it is the next best choice she gave up.
2. Classify each into its sector: (a) a tea plantation (b) a car factory (c) a hotel (d) a fishing boat.
(a) primary, (b) secondary, (c) tertiary, (d) primary.
3. A café takes $2,400 in a week. Its costs are $1,900. Find the profit, and say which factor of production earns it.
Profit = 2,400 − 1,900 = $500. Profit is the reward for enterprise (the entrepreneur's risk).
Common mistakes
- Thinking capital means only money. In factors of production, capital mainly means man-made tools, machines and buildings.
- Calling the opportunity cost "everything you gave up". It is only the next best alternative.
- Putting shops in the secondary sector. Shops give a service, so they are tertiary.
- Saying every business aims only for profit. New firms aim to survive; charities and social enterprises have social aims.