Elements of a Business System
By Lhenn on Jan 27, 2010 with Comments 0
Economics is the study of how a society produces and distributes its desired goods and services. It deals with how society uses it resources to produce goods and services. These economic resources to produce are called factors of production. They are land, labor, capital, and the entrepreneur.
· Land pertains to all natural resources, including timber, minerals, petroleum; and the land itself.
· Labor refers to the physical and mental input of the people who produce goods and services.
· Entrepreneur or businessman buys and organizes these three factors of production – land, labor and capital to provide goods and services. In return, he profits if his products are in demand and inherent in all business ventures.
Before an entrepreneur invests, there are several important questions he has to answer.
1. Do I know enough about the type of business I am entering?
2. Can the business offer the goods and services at competitive prices?
3. What is the rate of return on his investment?
Every businessman expects a reasonable rate of return on his investment. The question is: What is “reasonable”? Different businessmen have different expectations of their businesses. Besides, no two businesses are exactly the same. In general, the amount of profits a businessman expects usually depends on the risk involved. If, by putting the money in a fixed deposit bank account he can get a ten percent return, he would expect more than ten percent profit for a risky venture. In other words, high risk should bring high return. If he risks losing all his capital, the investor expects a very high rate of return.
Profit Motive
Profit is the difference between the income an entrepreneur receives from the sale of his goods and services and the expenses he incurs to produce them, — it is income minus expenses. Profit is important in business. It is the prime motivator in a capital system. Entrepreneurs produce goods and services that consumers are willing to buy. If demand is high, the entrepreneurs make large profits. In turn, they invest more funds to expand their businesses and produces new goods and services to satisfy consumer demands. Without profits, businessmen will not invest.
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