Introduction to Business and Economics. Bettina Fuhrmann

Questionscovered in chapterWhich people and organisations have an interest in the business and/or are influenced by Tina’s and Steve’s business activity?How does Tina’s and Steve’s business influence the environment and the economy?Chapter 2Basic economic conceptsWhat kind of business will Tina’s and Steve’s business be?Chapter 3Focus on different kinds of businessesTina and Steve work as a team, so which legal form should their business have?Do Tina and Steve have enough funds to finance their business? What sources of finance could and should they use?As they will have bills to pay or might have to repay a loan, how can they make sure that they have the funds for that and who will be liable for these payments?Chapter 4Forms of business ownership and sources of finance[8]What exactly do their potential customers want and need, and how can these needs be addressed? Will there be (continuous) demand for what they want to offer?Chapter 5MarketingHow many people could potentially be interested in their offer (market potential), and are there any competitors in the market?How much would people be willing to pay for their products and services and in which way would this price be affected if the market changed?How can a business communicate its offer to its potential customers?How will Tina and Steve know that their business is thriving?How will they know if their financial situation is solid?How will they know if their business not only generates profit but also turns profits into cash?Chapter 6Accounting – keeping record of business transactionsWhy are skilled and talented people so important for a business?What are the tasks of personnel management and how can employees be motivated?Chapter 7Personnel management – because people matterWhat is a business plan and why is it written?What is the structure and the content of a business plan?Chapter 8Writing a business planSummary and application of the learning contentChapter 9Case study

      As Tina and Steve are thrilled about their business idea, they cannot wait to find answers to all these questions.

       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