Businesses provide us (the customers) with goods and services that meet our needs and wants.
GOODS AND SERVICES:
Goods are considered products that a person can PHYSICALLY TOUCH such as cars, water, food, etc. On the other hand, a service is something intangible (you cannot touch) yet still maintains its value such as car insurance, knowledge, etc.
NEEDS VS WANTS:
A “need” is something you cannot live without such as food, water, a home, etc. We say that they are necessities and needed for survival. We can also say that they are limited i.e. they are not endless. A want, however, is a desire and a wish such as a watch, makeup, the newest iPhone, etc. They are said to be unlimited.
*Humans always introduce and invent which increases our wants. However, the earth has limited resources hence causing economic problems such as shortage of goods and services.
FACTORS OF PRODUCTION:
LAND:
- All raw materials and natural resources
- Physical land/extractable resources like coal, oil, and gas
CAPITAL:
- Money and investment
- Man-made tools that help the production such as equipment and machinery
LABOR:
- People who work in the business (workers) and contribute to the production of goods/services
ENTERPRISE:
- Bringing together the factors needed of production to make a good/service
- Includes entrepreneurs: people who take risks in order to make profit (will be discusses thoroughly later in the course)
SCARCITY:
- Not enough goods and services to meet the wants/needs of the population. For example, 2000 people want to purchase the new iPhone but Apple does not have the materials to manufacture 2000 iPhones.
- We say it s the gap between limited resources and limitless wants
—-> Scarcity= Unlimited wants + Limited resources
OPPORTUNITY COST:
- It is the next best alternative forgone when a choice/decision is made. For example, you choose to study at home instead of going to a party. Your opportunity cost (what costed you) is going to a party.
SPECIALIZATION:
- Comes from the word “special” and it means being good or understanding of a specific area. For example, a math teacher, an architectural engineer, a psychotherapist, etc.
- Advantages:
- Increases efficiency
- Production is faster because time and energy is saved
- Quicker to train workers
- Skill development
- Disadvantages:
- Can get monotonous (boring) since workers perform the same tasks over and over again
- High labor turnover since low job satisfaction so more people will leave
- Over-dependency as the business is relying on one person to perform a task. So, if for any reason that person did not show up, the production may stop
WHY IS SPECIALIZATION COMMON?
- Specialized machinery is available
- Higher competition means that businesses have to keep their costs low
- People think that being specialized causes higher living standards
DIVISION OF LABOR:
- Dividing a job into many specialized parts where everyone is responsible to perform small tasks
- Leads to efficiency
- Advantages:
- Saves time
- Each employee is given tasks that suit their skill
- Increases productivity
- Disadvantages:
- Fall in motivation due to boredom
- If an employee is absent, the production may stop (over-dependency)
ADDING VALUE:
- It is the difference between the selling price and the cost of materials bought
—-> Value added= Selling price – Cost of materials bought
- Adding value is not the same as profit
- For example, a car has a selling price of $100,000. $30,000 were used in materials such as metal, tires, and mirrors. So, $100,000 – $30,000= $70,000 added. But what do we use the value added for?
- The value added is used to pay wages of workers, rent, water, electricity, etc. It is NOT profit.
HOW TO INCREASE ADDED VALUE?
- After-buy service
- Personalize the product/service
- Add an extra feature
- Branding and quality
REMARKS:
- Scarcity —-> Choice —-> Opportunity cost
- A business is any organization that uses all factors of production (resources) to create goods/services to satisfy needs/wants of consumers.
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