In
economics, a business is a legally recognized organizational entity
existing within an
economically free country designed to sell
goods and/or
services to
consumers
or other
businesses, usually in an effort to generate
profit.
In
predominantly
capitalist economies, where most businesses are privately owned,
businesses are typically formed to earn
profit and
grow the personal
wealth of their owners. The owners and operators of a business have as one
of their main objectives the receipt or generation of a
financial return in exchange for their
work and their acceptance of
risk. Notable
exceptions to this rule include
cooperative businesses and
government institutions. This model of business functioning is contrasted
with
socialistic systems, which involve either government, public, or worker
ownership of most sizable businesses.
The
etymology of "business" relates to the state of being busy either as an
individual or society, doing commercially
viable and
profitable work. The term "business" has at least three usages, depending on
the scope — the singular usage (above) to mean a particular
company or
corporation, the generalized usage to refer to a particular
market sector, such as "the record business," or the broadest meaning to
include all activity by the community of suppliers of goods and services.
However, the exact definition of business, like much else in the
philosophy of business, is a matter of debate.
Business Studies, the study of the
management of individuals organizing to maintain collective
productivity toward accomplishing particular creative and
productive goals (usually to generate profit), is taught as an
academic
subject in many schools.
Basic forms of ownership
Although forms of business ownership vary by country and local government,
there are several common forms of business ownership:
- Sole proprietorship: A
sole proprietorship is a business owned by one person. The owner may
operate on his or her own or may employ others. The owner of the business
has total and unlimited personal liability of the debts incurred by the
business.
- Partnership: A
partnership is a form of business in which two or more people operate
for the common goal of making profit. Each partner has total and unlimited
personal liability of the debts incurred by the partnership. There are three
typical classifications of partnerships:
general partnerships,
limited partnerships, and
limited liability partnerships.
- Corporation: A business
corporation is a for-profit,
limited liability entity that has a separate legal personality from its
members. A corporation is owned by multiple
shareholders and is overseen by a
board of directors, which hires the business's managerial staff.
- Cooperative: Often referred to as a "Co-Op business" or "Co-Op",
a
cooperative is a for-profit, limited liability entity that differs from
a corporation in that it has
members,
as opposed to shareholders, who share decision-making authority.
Cooperatives are typically classified as either
consumer cooperatives or
worker cooperatives. Cooperatives are fundamental to the ideology of
economic democracy.
Classifications
Wall Street,
Manhattan is the location of the
New York Stock Exchange and is often used as a
symbol
for the world of business.
There are many types of businesses, and, as a result, businesses can be
classified in many ways. One of the most common focuses on the primary
profit-generating activities of a business:
Manufacturers produce
products, from
raw
materials or component parts, which they then sell at a profit.
Companies that make physical
goods, such
as cars or pipes, are considered manufacturers.
Service businesses offer intangible goods or services and typically
generate a profit by charging for labor or other services provided to
government, other businesses or
consumers.
Organizations ranging from house decorators to consulting firms to
restaurants and even to entertainers are types of service businesses.- Retailers
and
Distributors act as middle-men in getting goods produced by
manufacturers to the intended consumer, generating a profit as a result of
providing sales or distribution services. Most consumer-oriented stores and
catalogue companies are distributors or retailers. See also:
Franchising
Agriculture and
mining
businesses are concerned with the production of raw material, such as plants
or minerals.
Financial businesses include banks and other companies that generate
profit through investment and management of
capital.- Information businesses generate profits primarily from the resale of
intellectual property and include movie studios, publishers and packaged
software companies.
Utilities produce public services, such as heat, electricity, or sewage
treatment, and are usually government chartered.
Real estate businesses generate profit from the selling, renting, and
development of properties, homes, and buildings.
Transportation businesses deliver goods and individuals from location to
location, generating a profit on the transportation costs
There are many other divisions and subdivisions of businesses. The
authoritative list of business types for North America (although it is widely
used around the world) is generally considered to be the
North American Industry Classification System, or NAICS. The equivalent
European Union list is the NACE.
Organization
Most businesses must accomplish similar functions regardless of size, legal
structure or industry. These functions are often organized into departments.
Common departments include (but are not limited to):
Accounting- Typically responsible for
financial reporting, financial controls and the raising of the capital
necessary to run the business.
Human Resources- Typically responsible for hiring, firing, payroll, benefits, etc.
- Marketing and sales
- responsible for selling the business' goods or services to the customer
and for managing the relationships with the customer
Marketing- Typically responsible for promoting interest in, and generating
demand for, the business' products or services, and
positioning them within the market - Sales
- finding likely purchasers and obtaining their agreement (known as a
contract) to buy the business' products or services
- Operations
- makes the product or delivers the service
Production- produces the raw materials into the delivered goods, if they require
processing
Customer service- supports customers who need help with the goods or services
Procurement- responsible for acquiring the goods and services necessary for the
business. Sometimes organized as:
Strategic sourcing- determines the business' needs and plans for acquiring the necessary
raw materials and services for the business - Purchasing
- processes the
purchase orders and related transactions
Research and Development- tests to create new products and to determine their viability (e.g.
pilot
plants)
Information Technology- manages the business' computer and data assets
- Communications/Public Relations
- responsible for communicating to the outside world
- Administration
- provides administrative support to the other departments (such as
typing, filing, etc.)
Internal Audit- an independent control function typically accountable to the Board of
Directors for reporting on the proper functioning of the other departments
Management is sometimes listed as a "department" but typically refers to
the top level of leadership within the business regardless of their functional
role
Economics
Face-to-face trading interactions on the
New York Stock Exchange trading floor. Financial decisions can be
one of those many economic choices people make.
Economics is the
social science that studies the production,
distribution, and consumption of
goods and services. The term economics comes from the
Greek for oikos (house) and nomos (custom or law), hence
"rules of the house(hold)."[1]
A definition that captures much of modern economics is that of
Lionel Robbins in a
1932 essay: "the science which studies human behaviour as a relationship
between ends and scarce means which have alternative uses."[2]
Scarcity
means that available
resources are insufficient to satisfy all wants and needs. Absent scarcity
and alternative uses of available resources, there is no
economic problem. The subject thus defined involves the study of
choices as they are affected by incentives and resources.
Areas of economics may be divided or classified into various types,
including:
microeconomics and
macroeconomics
positive economics ("what is") and
normative economics ("what ought to be")
mainstream economics and
heterodox economics- fields and broader
categories within economics.
One of the uses of economics is to explain how
economies,
as economic systems, work and what the relations are between economic players
(agents)
in the larger society. Methods of economic analysis have been increasingly
applied to fields that involve people (officials included) making choices in a
social context, such as crime,[3]
education,[4]
the
family,
health,
law,
politics, religion,[5]
social institutions, and war.[6]
In the beginning
Adam Smith, author of The Wealth of Nations (1776),
generally regarded as
initiating modern economics.
Although discussions about production and distribution have a long history,
economics in its modern sense is conventionally dated from the publication of
Adam
Smith's
The Wealth of Nations in 1776.[7]
In this work Smith describes the subject in these practical and exacting
terms:
- Political economy, considered as a branch of the science of a statesman
or legislator, proposes two distinct objects: first, to supply a plentiful
revenue or product for the people, or, more properly, to enable them to
provide such a revenue or subsistence for themselves; and secondly, to
supply the state or commonwealth with a revenue sufficient for the public
services. It proposes to enrich both the people and the sovereign.
Smith referred to the subject as 'political
economy', but that term was gradually replaced in general usage by
'economics' after 1870.
Areas of economics
Areas of economics may be classified in various ways, but an
economy is
usually analyzed by use of microeconomics or macroeconomics.
Microeconomics
Microeconomics examines the economic behavior of
agents (including individuals and firms) and their interactions through
individual markets, given scarcity and
government regulation. A given market might be for a product, say
fresh corn, or the services of a
factor of production, say bricklaying. The theory considers
aggregates of quantity demanded by buyers and quantity supplied
by sellers at each possible price per unit. It weaves these together to
describe how the market may reach equilibrium as to price and quantity or
respond to market changes over time. This is broadly termed
demand-and-supply analysis. Market structures, such as
perfect competition and
monopoly,
are examined as to implications for behavior and
economic efficiency. Analysis often proceeds from the simplifying
assumption that behavior in other markets remains unchanged, that is,
partial-equilibrium analysis.
General-equilibrium theory allows for changes in different markets and
aggregates across all markets, including their movements and
interactions toward equilibrium.[8][9]
Macroeconomics
Macroeconomics examines the economy as a whole "top down" to explain broad
aggregates and their interactions. Such aggregates include
national income and output, the
unemployment rate, and price
inflation
and subaggregates like total consumption and investment spending and their
components. It also studies effects of
monetary policy and
fiscal policy. Since at least the 1960s, macroeconomics has been
characterized by further integration as to
micro-based modeling of sectors, including
rationality of players,
efficient use of market information, and
imperfect competition.[10]
This has addressed a long-standing concern about inconsistent developments of
the same subject.[11]
Analysis also considers factors affecting the long-term level and
growth of national income within a country and across countries.[12][13]
Related fields, other distinctions, and
classifications
Recent developments closer to microeconomics include
behavioral economics and
experimental economics. Fields bordering on other
social sciences include
economic geography,
economic history,
public choice,
cultural economics, and
institutional economics.
Another division of the subject distinguishes two types of economics.
Positive economics ("what is") seeks to explain economic phenomena or
behavior.
Normative economics ("what ought to be," often as to public policy)
prioritizes choices and actions by some set of criteria; such priorities
reflect value judgments, including selection of the criteria.
Another distinction is between mainstream economics and heterodox
economics. One broad characterization describes
mainstream economics as dealing with the
"rationality-individualism-equilibrium nexus" and
heterodox economics as defined by a "institutions-history-social structure
nexus." [14]
The
JEL classification codes of the
Journal of Economic Literature provide a comprehensive, detailed way of
classifying and searching for economics articles by subject matter. An
alternative classification of often-detailed entries by mutually-exclusive
categories and subcategories is
The New Palgrave: A Dictionary of Economics.[15]
Mathematical and quantitative methods
Economics as an academic subject often uses geometric methods, in addition
to literary methods. Other general mathematical and quantitative methods are
also often used for rigorous analysis of the economy or areas within
economics. Such methods include the following.
Mathematical economics
Mathematical economics refers to application of mathematical methods to
represent economic theory or analyze
problems posed in economics. It uses such methods as
calculus
and
matrix algebra. Expositors cite its advantage in allowing formulation and
derivation of key relationships in an
economic model with clarity, generality, rigor, and simplicity.[16]
For example,
Paul Samuelson's book
Foundations of Economic Analysis (1947) identifies a common
mathematical structure across multiple fields in the subject.
Econometrics
Econometrics applies mathematical and
statistical methods to analyze
data related to
economic models. For example, a theory may hypothesize that a person with
more education will on average earn more income than person with less
education holding everything else equal. Econometric estimates can estimate
the magnitude and
statistical significance of the relation. Econometrics can be used to draw
quantitative generalizations. These include testing or refining a theory,
describing the relation of past variables, and forecasting future variables.[17]
National accounting
National accounting is a method for summarizing economic activity of a
nation. The national accounts are
double-entry accounting systems that provide detailed underlying measures
of such information. These include the
national income and product accounts (NIPA), which provide estimates for
the money value of output and income per year or quarter. NIPA allows for
tracking the performance of an economy and its components through
business cycles or over longer periods. Price data may permit
distinguishing
nominal from real amounts, that is, correcting money totals for price
changes over time.[18][19]
The national accounts also include measurement of the
capital stock,
wealth of a nation, and
international capital flows.[20]
Selected fields
Development Economics
Development economics examines economic aspects of the development
process in relatively
low-income countries with a focus on methods of promoting economic growth.
Approaches in development economics frequently incorporate social and
political factors to devise particular plans.[21][22]
Economic systems
Economic systems is the
branch of economics that studies the methods and
institutions by which societies determine the ownership, direction, and
allocaton of economic resources. An economic system of a society is the
unit of analysis. Among contemporary systems at different ends of the
organizational spectrum are
socialist systems and
capitalist systems, in which most production occurs in respectively
state-run and private enterprises. In between are
mixed economies. A common element is the interaction of economic and
political influences, broadly described as
political economy.
Comparative economic systems studies the relative performance and
behavior of different economies or systems.[23][24]
Environmental economics
Environmental economics is concerned with issues related to degradation,
enhancement, or preservation of the
environment. In particular,
public
bads from production or consumption, such as air pollution, can lead to
market failure. The subject considers how public policy can be used to
correct such failures. Policy options include regulations that reflect
cost-benefit analysis or market solutions that change incentives, such as
emission fees or redefinition of property rights.[25][26]
Financial economics
Financial economics, often simply referred to as
finance, is
concerned with the allocation of financial resources in an uncertain (or
risky)
environment. Thus, its focus is on the operation of
financial markets, the pricing of
financial instruments, and the
financial structure of companies.[27]
Game theory
Game theory is a branch of
applied mathematics that studies strategic interactions between agents. In
strategic games,
agents choose strategies that will maximize their payoff, given the
strategies the other agents choose. It provides a formal modeling approach to
social situations in which decision makers interact with other agents. Game
theory generalizes maximization approaches developed to analyze markets such
as the
supply and demand model. The field dates from the 1944 classic
Theory of Games and Economic Behavior by
John von Neumann and
Oskar Morgenstern. It has found significant applications in many areas
outside economics as usually construed, including formulation of
nuclear strategies,
ethics,
political science, and
evolutionary theory.[28]
Growth economics studies factors that explain
economic growth – the increase in output
per
capita of a country over a longer period of time. The same factors are
used to explain differences in the level of output per capita
between countries, Much-studied factors include the rate of
investment,
population growth, and
technological change. These are represented in theoretical and
empirical
forms (as in the
neoclassical growth model) and in
growth accounting.
[29][30][31]
Industrial organization
Industrial organization studies the strategic behavior of firms, the
structure of markets and their interactions. The common market structures
studied include
perfect competition,
monopolistic competition, various forms of
oligopoly,
and monopoly.[32]
Information economics
Information economics examines how information (or a lack of it) affects
economic decision-making. An important focus is the concept of
information asymmetry, where one party has more or better information than
the other. The existence of information asymmetry gives rise to problems such
as
moral hazard, and
adverse selection, studied in
contract theory. The economics of information has relevance in many
fields, including
finance,
insurance,
contract law, and decision-making under risk and uncertainty.
International economics
International trade studies the determinants of the flow of goods and
services across international boundaries.
International finance is a macroeconomic field which examines the flow of
capital
across international borders, and the effects of these movements on
exchange rates. Increased trade in goods, services and capital between
countries is a major effect of contemporary
globalization.
Labour economics
Labour economics seeks to understand the functioning of the
market and
dynamics for
labour.
Labour markets function through the interaction of workers and employers.
Labour economics looks at the suppliers of labour services (workers), the
demanders of labour services (employers), and attempts to understand the
resulting patterns of wages and other labour income and of employment and
unemployment, Practical uses include assisting the formulation of
full employment of policies.[33]
Law and economics
Law and economics, or economic analysis of law, is an approach to legal
theory that applies methods of economics to law. It includes the use of
economic concepts to explain the effects of legal rules, to assess which legal
rules are
economically efficient, and to predict what the legal rules will be.[34][35]
A seminal article by
Ronald Coase published in 1961 suggested that well-defined property rights
could overcome the problems of
externalities.[36]
Managerial economics
Managerial economics applies
microeconomic analysis to specific decisions in business firms or other
management units. It draws heavily from quantitative methods such as
operations research and programming and from statistical methods such as
regression analysis in the absence of certainty and perfect knowledge. A
unifying theme is the attempt to
optimize business decisions, including unit-cost minimization and profit
maximization, given the firm's objectives and constraints imposed by
technology and market conditons.[37]
[38]
Public finance
Public finance is the field of economics that deals with budgeting the
revenues and expenditures of a
public sector entity, usually government. The subject addresses such
matters as
tax
incidence (who really pays a particular tax), cost-benefit analysis of
government programs, effects on
economic efficiency and
income distribution of different kinds of spending and taxes, and fiscal
politics. The latter, an aspect of
public choice theory, models public-sector behavior analogously to
microeconomics, involving interactions of self-interested voters, politicians,
and bureaucrats.[39]
Welfare economics
Welfare economics is a branch of economics that uses
microeconomic techniques to simultaneously determine the
allocative efficiency within an economy and the income
distribution associated with it. It attempts to measure
social welfare by examining the economic activities of the individuals
that comprise society.[40]
Economic concepts
Supply and demand
The theory of demand and supply is an organizing principle to explain
prices and quantities of goods sold and changes thereof in a
market
economy. In
microeconomic theory, it refers to price and output determination in a
perfectly competitive market. This has served as a building block for
modeling other market structures and for other theoretical approaches.
For a given market of a
commodity, demand shows the quantity that all prospective buyers
would be prepared to purchase at each unit price of the good. Demand is often
represented using a table or a graph relating price and quantity demanded (see
boxed figure).
Demand theory describes individual consumers as "rationally"
choosing the most preferred quantity of each good, given income,
prices, tastes, etc. A term for this is 'constrained utility maximization'
(with income as the "constraint"
on demand). Here, 'utility'
refers to the (hypothesized) preference relation for individual consumers.
Utility and income are then used to model hypothesized properties about the
effect of a price change on the quantity demanded. The law of demand
states that, in general, price and quantity demanded in a given market are
inversely related. In other words, the higher the price of a product, the less
of it people would be able and willing to buy of it (other things
unchanged). As the price of a commodity rises, overall
purchasing power decreases (the
income effect) and consumers move toward relatively less expensive
goods (the
substitution effect). Other factors can also affect demand; for
example an increase in income will shift the demand curve outward
relative to the origin, as in the figure.
Supply is the relation between the price of a good and the quantity
available for sale from suppliers (such as producers) at that price. Supply is
often represented using a table or graph relating price and quantity
supplied. Producers are hypothesized to be profit-maximizers, meaning that
they attempt to produce the amount of goods that will bring them the highest
profit. Supply is typically represented as a directly proportional
relation between price and quantity supplied (other things unchanged). In
other words, the higher the price at which the good can be sold, the more of
it producers will supply. The higher price makes it profitable to increase
production. At a price below equilibrium, there is a shortage of quantity
supplied compared to quantity demanded. This pulls the price up. At a price
above equilibrium, there is a surplus of quantity supplied compared to
quantity demanded. This pushes the price down. The
model of supply and demand predicts that for a given supply and demand
curve, price and quantity will stabilize at the price that makes quantity
supplied equal to quantity demanded. This is at the intersection of the two
curves in the graph above,
market equilibrium.
For a given quantity of a good, the price point on the demand curve
indicates the value, or
marginal utility[41]
to consumers for that unit of output. It measures what the consumer would be
prepared to pay for the corresponding unit of the good. The price point on the
supply curve measures
marginal cost, the increase in total cost to the supplier for the
corresponding unit of the good. The price in equilibrium is determined by
supply and demand. In a
perfectly competitive market, supply and demand equate cost and value at
equilibrium.[42]
Demand and supply can also be used to model the
distribution of income to the
factors of production, including labour and capital, through factor
markets. In a labour market for example, the quantity of labour employed
and the price of labour (the wage rate) are modeled as set by the
demand for labour (from business firms etc. for production) and supply of
labour (from workers).
Demand and supply are used to explain the behavior of perfectly competitive
markets, but their usefulness as a standard of performance extends to any type
of market. Demand and supply can also be generalized to explain
macroeconomic variables in a
market economy, for example,
quantity of
total output and the general
price
level.
Prices and quantities
Even a
currency has a price, its
exchange rate in currency markets. Its determination by supply and
demand is an important issue in
international trade.
In supply-and-demand analysis, price, the going rate of exchange for
a good, coordinates production and consumption quantities. Price and quantity
have been described as the most directly observable characteristics of a good
produced for the market.[43]
Supply, demand, and market equilibrium are theoretical constructs linking
price and quantity. But tracing the effects of factors predicted to change
supply and demand -- and through them, price and quantity -- is a standard
exercise in applied
microeconomics and
macroeconomics. Economic theory can specify under what circumstances price
demonstrably serves as an efficient communication device to regulate
quantity.[44]
A real-world counterpart might attempt to measure how much variables that
increase supply or demand change price and quantity.
Elementary demand-and-supply theory predicts equilibrium but not the speed
of adjustment for changes of equilibrium due to a shift in demand or supply.[45]
In many areas, some form of "price stickiness" is postulated to account for
quantities, rather than prices, adjusting in the short run to changes on the
demand side or the supply side. This includes standard analysis of the
business cycle in
macroeconomics. Analysis often revolves around causes of such price
stickiness and their implications for reaching a hypothesized long-run
equilibrium. Examples of such price stickiness in particular markets include
wage rates in labour markets and posted prices in markets deviating from
perfect competition.
Another area of economics considers whether markets adequately take account
of all social costs and benefits. An
externality is said to occur where there are significant social costs or
benefits from production or consumption that are not reflected in market
prices. For example, air pollution may generate a negative externality, and
education may generate a positive externality (less crime, etc.). Governments
often tax and otherwise restrict the sale of goods that have negative
externalities and subsidize or otherwise promote the purchase of goods that
have positive externalities in an effort to correct the price distortions
caused by these externalities.[46]
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