Fundamental economic notions

Economics studies how various resources are best allocated to produce the highest standard of living and quality of life. The resources that go into creation of goods and services are called the factors of production. They include natural resources, human resources and capital. Each factor of production has a place in the economic system and each has a particular function.

Our country is rich in natural resources that include land, water, mineral resources and climate. The price paid for the use of land is called rent. Rent becomes income to the owner of the land.

Physical and mental efforts that people put into creation of goods and services are called labour or human resources. The price paid for the use of labour is called wages or salary. Closely associated with labour is the concept of entrepreneurship, meaning the managerial or organizational skills used by firms to produce goods and services. The reward to entrepreneurs for the risks, innovative ideas and efforts that they have put into the business are profits. Profit is whatever remains after the owners of land, labour and capital received their payments.

Capital is something created by people to produce goods and services. A factory, tools and equipment are capital resources. The term ‘capital’ is often used by business people to refer to money they can use to buy factories, machinery and other productive resources. Payment for the use of someone else’s money or capital is called interest.

Human wants are unlimited while resources needed to satisfy these wants are scarce or limited. Thus every society has to address the main economic problems: What goods and services to produce? How to produce them? Whom to produce them for? The way in which a society deals with these problems is known as its economic system.

What is business?

Business is a word that is commonly used in many different languages. But exactly what does it mean? Traditionally business simply meant exchange or trade for things people wanted or needed. Today this broad term can be applied to different kinds of human activity and many kinds of enterprise.

All activities traditionally related to business can be grouped under three headings: production, distribution and sales. The first group of activities, production, concerns the changing of materials into products or the creation of services. Some businesses produce what is called tangible goods, such as cars, clothes, foodstuffs. Others produce intangible goods or services, which are activities that people perform for other people. Such activities as insurance, banking operations or health protection are referred to as services.

The second group of activities is known as distribution. Distribution is the process of getting goods from the producer to the consumer in the quickest and most efficient way. Distribution is performed through distribution channels that link the producer and the consumer directly or indirectly with the aid of intermediaries.

Third is the sale of goods and services. Sale is the exchange of a good or service for money. Money that a company receives from the sale of its products is called revenues. If the company is a success its revenues not only cover its expenses, that are the money spent on the production of the output, but also contain some surplus. This surplus is commonly defined as profit or the difference between the company’s revenues and expenses. Thus, creating an economic surplus or profit is the primary goal of any business activity.

Just as important as profits are social and ethical responsibilities that companies bear in their dealing with employees, consumers, suppliers, competitors, government and the society. Business, then, can be broadly defined as all profit-seeking activities and enterprises that provide the means through which the society’s standard of living improves.