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July 19, 2018 

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ASSUMPTIONS, CLASSICAL ECONOMICS: Classical economics, especially as directed toward macroeconomics, relies on three key assumptions--flexible prices, Say's law, and saving-investment equality. Flexible prices ensure that markets adjust to equilibrium and eliminate shortages and surpluses. Say's law states that supply creates its own demand and means that enough income is generated by production to purchase the resulting production. The saving-investment equality ensures that any income leaked from consumption into saving is replaced by an equal amount of investment. Although of questionable realism, these three assumptions imply that the economy would operate at full employment.

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BUSINESS SECTOR:

The aggregate macroeconomic sector that contains the private, profit-seeking firms in the economy that combine scarce resources into the production of wants-and-needs satisfying goods and services. The primary economic function of the business sector is the production of goods and services. The three basic types of business organizations that comprise the business sector are proprietorship, partnership, and corporation. This is one of the four macroeconomic sectors. The other three are household sector, government sector, and foreign sector.
The business sector includes the profit-motivated firms that engage in the production of goods and services. These firms combine the services of the four factors of production, which they acquire from the household sector, to pursue their productive activities. The primary reason for the existence of the business sector is to produce the goods that satisfy the wants and needs of the household sector.

A Vast Array

The business sector is comprised of a wide range of different types of firms. Some are small and some are large. The firms might be legally organized as proprietorships, partnerships, or corporations. They might be home-based businesses or operate dozens of factories around the country.

To illustrate the possibilities, consider the Shady Valley business sector.

  • Corporations: OmniConglomerate, Inc. epitomizes the standard notion of a business firm. This corporation, owned by shareholders across the land, operates countless productive factories and employs thousands of workers. It combines resources to produce an assortment of products, ranging from athletic shoes to wireless telephone services, from automobiles to soft drinks. Other corporations doting the Shady Valley business landscape include The Wacky Willy Company, Quadra DG Computer Works, and Merciless Monolithic Media Masters, to name just a few.

  • Proprietorships: On the other end of the size spectrum is owner-operated proprietorships like Phil Gardener, the home-based zucchini grower. Phil grows zucchini in his backyard garden plot, which he sells at the local farmers market. He also combines the four factors of production in this pursuit. Other proprietorships operating in the Shady Valley metropolitan area are Becky Carpenter, who fashions fabulous furniture in her garage, Dan Dreiling, who runs a profitable drywall installation business from his house, and Dr. Nova Cain, a purportedly painless provider of dental services.

  • Partnerships: Schrumpmeyer and Schrumpmeyer, Attorneys at Law, exemplify the partnership form of jointly-owned business organization. Sally and Sean Schrumpmeyer provide legal services to the residents of Shady Valley. They also combine resources to produce their legal services. Other partnerships in Shady Valley are Tod and Randy, the Weberrific WebMasters who program websites, Unger Brothers Construction, jointly owned by brothers Efran, Antwon, and Quillan Unger, and Odyssey Business Consultants, run by two former executives of OmniConglomerate who decided to venture off on their own.

What It Does: Production

While the business sector is designated based on WHO is included--proprietorships, partnerships, and corporations--this sector can also be delineated based on WHAT it does--which is production. This sector is responsible for the economic act of production. In fact, the business sector is not so much a thing, as it is a process, a system that society has devised to combine resources for production. For example, The Wacky Willy Company is not a "company" so much as a "method" of making Stuffed Amigos.

Production is the fundamental process of combining resources in such a way that the result is a more valuable commodity or service.

  • Transformation: This process might involve, and often does, a physical transformation of materials. An example is transforming piles of iron ore, bauxite ore, silicate sand, and petroleum into a high-powered automobile.

  • Transportation: However, the process might involve little more than the spatial relocation of commodities or materials. An example is shipping an automobile to a car dealership.
Both are acts of production that enhance the value of the product.

What It Does: Investment

Although the business sector is largely responsible for producing and supplying goods and services to the household sector and the rest of the economy, they do a little buying of their own. From a macroeconomic perspective, the business sector is responsible for capital investment expenditures on gross domestic product. Business investment expenditures play a key role in short-term business cycles and long-term economic growth.

The investment activities of the business sector suggest two related notions--investment and investment expenditures. While these two terms might seem identical, and are occasionally used synonymously, there is a difference.

  • Investment: This is the generic term for the sacrifice of current consumption to enhance future production capabilities. Such investment can involved the acquisition of capital goods by the business sector or activities undertaken by the household sector, such as attending college. In particular, some investment acts might not involve expenditures by the business sector.

  • Investment Expenditures: This is a more specific term meaning actual expenditures by the business sector on capital goods such as factories and equipment. These expenditures are used to purchase a share of gross domestic product. The official government measure of investment expenditures is gross private domestic investment.

A Word or Two About the Other Three

The business sector is one of four macroeconomic sectors. The other three are the household sector, government sector, and foreign sector.
  • Household Sector: This sector includes the entire, wants-and-needs-satisfying, eating, breathing, consuming population of the economy. In a word, it includes everyone, all consumers, all people, and every member of society. Pollyanna Pumpernickel, a hardworking mother of two, is a representative member of the household sector. So too is Winston Smythe Kennsington III, an affluent corporate executive.

  • Government Sector: This sector includes all government entities that impose resource allocation decisions, that might not be made otherwise, on the rest of the economy. It consists of the three primary levels--federal, state, and local--responsible for passing and enforcing laws. Of course, all branches and agencies of the U.S. Federal Government--Congress, Department of Transportation, Environmental Protection Agency--are part of the government sector. So too is the Shady Valley City Council and the local Shady Valley Board of Education included in the government sector.

  • Foreign Sector: This sector is comprised of everyone and everything outside the political boundaries of the domestic economy. It includes households, businesses, and governments in other countries. The foreign sector of the domestic United States economy includes the governments of other nations such as the hypothetical Republic of Northwest Queoldiolia. It also includes citizens and businesses in other nations, such as Horst Duncanstein, a citizen of Northwest Queoldiolia, and Quedoldiolian Sundial Company, also located in Northwest Queoldiolia.

Selling to All Sectors

The business sector is responsible for producing gross domestic product. This output is then purchased by each of the four macroeconomic sectors. For examples, once again consider the Shady Valley business sector:
  • Household Sector: The Shady Valley business sector produces a number of goods directly for household consumption. This list is wide and varied, including Hot Momma Fudge Bananarama Ice Cream Sundaes, Quadra 9000 computers, Wacky Willy Stuffed Amigos, OmniCola, Dr. Nova Cain's dental services, and much more.

  • Business Sector: Firms in the business sector purchase capital goods from other firms in the business sector. Computers produced by Quadra DG Computer Works are valuable capital goods used by most businesses in the Shady Valley area, including The Shady Valley Gazette-Tribune-Journal (to publish the daily newspaper), Becky Carpenter (to design furniture), and even OmniConglomerate (for data processing). Of course, businesses capital also includes buildings and equipment. Becky Carpenter also fashions office furniture then finds its way into a business environment.

  • Government Sector: The OmniDefense division of OmniConglomerate is a prime military contractor, providing a wide assortment of goods purchased directly by the U.S. government. These goods range from uniforms to rifles to heavy artillery. In addition, many federal, state and local government agencies purchase computers from Quadra DG Computer Works, wireless telephone services from Digital Distance, and even an occasional zucchini from Phil Gardener.

  • Foreign Sector: Firms in the Shady Valley business sector also sell goods beyond the political boundaries of the country. Wacky Willy Stuffed Amigos are exported world wide--to folks in the foreign sector. The same can be said for cars produced by the OmniMotors division of OmniConglomerate. The fabulous furniture fashioned by Becky Carpenter has also been found in foreign lands.

Connecting to the Circular Flow

The Circular Flow
Circular Flow
The business sector is a key component of the circular flow model of the economy. The circular flow captures the continuous movement of production, income, and factor payments between producers and consumers.

A basic representation of the circular flow is displayed to the right. The four components of this simple model are: household sector, business sector, product markets, and resource markets. The household sector at the far left contains the consuming population of the economy. The business sector at the far right includes all of the producers.

The product markets at the top of the flow direct production from the business sector to the household sector in exchange for payment flowing in the opposite direction. The resource markets at the bottom of the flow direct factor services from the household sector to the business sector in exchange for payment flowing in the opposite direction.

The circular flow indicates that the income used by the household sector to purchase goods through the product markets is obtained by selling factor services through the resource markets. It also indicates that the revenue used by the business sector to pay for factor services obtained through the resource markets is generated by selling goods through the product markets.

<= BUSINESS CYCLESBUSINESS TRANSFER PAYMENTS =>


Recommended Citation:

BUSINESS SECTOR, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: July 19, 2018].


Check Out These Related Terms...

     | macroeconomic sectors | household sector | government sector | foreign sector | production | investment | macroeconomic markets | product markets | resource markets | financial markets |


Or For A Little Background...

     | macroeconomics | factors of production | ownership and control | macroeconomic goals | microeconomics | production | value |


And For Further Study...

     | circular flow | second estate | business cycles | macroeconomic problems | macroeconomic theories | capitalism | gross private domestic investment |


Related Websites (Will Open in New Window)...

     | U.S. Chamber of Commerce | World Chamber of Commerce | Better Business Bureau |


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