Reading: Lesson 5 - The Nature of Business

3.5.A - The Nature of Business

1. MANAGEMENT OF BUSINESS ACTIVITIES

1. American businesses work for Nora and Sean Mackin and their family (introduced in the opening scenario), as well as for millions of other people in the United States and around the world. As the family’s financial manager, Nora budgets the family’s money and pays the bills. All four members of the family are consumers. They buy goods such as clothes, computers, food, and sporting goods. Likewise, they buy services such as trips to the orthodontist and repairs for their automobile. Businesses work very hard to provide the goods and services needed—or desired—by consumers.
   
2. The story of American business is a fascinating one. Products found in most homes come from countless types and sizes of businesses. The flowers and plants growing on the Mackin’s front porch could have been purchased from a vendor at the local farmers’ market. The new sleeping bags could have been produced by a business with 10 manufacturing plants and over 100,000 employees. Jake’s video game console may have been assembled by a company that purchases hundreds of parts from several other companies around the world. The cupcakes for Bella’s softball team may be baked by one of the 15 employees of the neighborhood bakery. These and scores of other products found in homes, offices, shops, and factories are produced and sold by many kinds of businesses.
   
3. An organization that produces or distributes a good or service for profit is called a business. Profit is the difference between income and costs. Every business must manage at least three major activities. The first activity, production, involves making a product or providing a service. Manufacturing firms create products that customers purchase to satisfy needs, whereas service firms use the skills of employees to offer activities and assistance to satisfy customer needs. Examples of service firms are doctors’ offices, airlines, restaurants, and home repair businesses. Today the number of service firms far exceeds the number of manufacturing firms. For this reason, it is sometimes said that we live in a service economy.
   
4. The second activity that businesses must manage is marketing. Marketing includes the activities between businesses and customers involved in buying and selling goods and services. The third management activity, finance, deals with all of the money matters involved in running a business. Whether a business has one worker or thousands of workers, it must manage its production, marketing, and finance activities.
   
5. The price that Nora and Sean pay for Jake’s video game will be based in large part on supply and demand for the game. Supply of a product refers to the number of similar products that will be offered for sale at a particular point in time and at a particular price. If there are many similar products available, the price is likely to be lower. Demand, on the other hand, refers to the number of similar products that will be bought at a particular point in time at a particular price. If there are many people looking to buy the same video game, the price is likely to be higher.
   

2. TYPES OF BUSINESSES

1. Generally, there are two major kinds of businesses—goods-producing businesses and service businesses. Goods-producing businesses produce goods used by other businesses, organizations, governments, or consumers. Companies that mine coal and extract oil from the earth provide resources that are used by other companies and consumers. Automotive companies sell to businesses as well as consumers. Goods-producing companies construct buildings, build bridges, manufacture airplanes, and assemble televisions. Farmers and other agricultural producers are goods-producing businesses because they grow crops and raise livestock needed for the food we eat, with other agricultural products used in the manufacture of common goods.
   
2. Unlike goods-producing businesses, service businesses are a type of business that primarily use labor to offer mostly intangible products to satisfy consumer needs. Service business examples include firms engaged in marketing (wholesalers and retailers), in finance (banks and investment companies), and in providing services (medical offices, fitness centers, and hotels) as their primary business activities.
   
3. Industry is a word often used to refer to all businesses within a category doing similar work. For example, the publishing industry includes any business that deals with producing and selling books, magazines, newspapers, and other documents prepared by authors, whether printed or distributed electronically. The automotive industry includes all manufacturers of automobiles, trucks, and other vehicles as well as the producers of related automotive products. Government can also be considered an industry, because it provides services such as fire and police protection, libraries and schools, and many other services required by the citizens the government serves. The Figure below shows the number of people employed in selected industries.