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December 13, 2024 

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DEMAND AND SUPPLY DECREASE: A simultaneous decrease in the willingness and ability of buyers to purchase a good at the existing price, illustrated by a leftward shift of the demand curve, and a decrease in the willingness and ability of sellers to sell a good at the existing price, illustrated by a leftward shift of the supply curve. When combined, both shifts result in a decrease in equilibrium quantity and an indeterminant change in equilibrium price.

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BUSINESS:

A profit-motivated organization that combines resources for the production and supply of goods and services. The three primary types of legal organization for a business are proprietorship, partnership, or corporation. A business might theoretically find itself operating in an industry or market structured as perfect competition, monopolistic competition, oligopoly, or monopoly. Regardless of organization and industry structure, a business is generally motivated by the pursuit of profit.
The term business is often used synonymously with the terms firm, company, or enterprise. In some cases, business is combined with another term into a single phrases, such as business firm or business enterprise. If there is a difference, and a subtle difference at that, the term business usually refers to a productive organization that is privately owned and motivated by the pursuit of profit. The terms firm and enterprise, in contrast, could also refer to nonprofit and/or publicly controlled productive organizations. But this distinction is quite subtle and for most economic analyses the terms are used interchangeably.

Production and Supply

A large part of microeconomic analysis is devoted to an understanding of the supply side of market exchanges, especially the production activities of business. Microeconomics seeks to answer basic questions like: Why does a business produce more when the price is higher?

The key principles and concepts underlying the microeconomic analysis of supply include:

  • First, the short-run production decision of a business based on the combination of one or more variable inputs with one or more fixed inputs. This decision is primarily influenced by the law of diminishing marginal returns.

  • Second, the opportunity cost of short-run production, especially the marginal cost of incrementally changing production by a single unit. This cost is also influenced by the law of diminishing marginal returns.

  • Third, the degree of competition and the resulting structure of the market in which a business operates. Market structures affect the amount of control a business can exert over the price charged for production.

Objectives

As a general rule, a business is motivated to provide a livelihood for owners and employees, produce an output valued by society, and otherwise remain in operation. The standard economic assumption that captures this multi-faceted motivation is profit maximization. Profit maximization is the process of obtaining the highest possible level of economic profit through the production and sales of goods and services. If a business makes decisions that increase or maximize profit, then the other pursuits usually follow.

Real world firms, however, might not, and many times do not, make decisions based exclusively on the profit-maximization objective. Other objectives include sales maximization, pursuit of personal welfare, and pursuit of social welfare. In some cases, these other objectives help a firm pursue profit maximization. In other cases, they prevent a firm from maximizing profit.

Consider these four firm objectives in more detail:

  • Profit Maximization: The primary objective of a business is usually to obtain the highest possible level of profit through the production and sale of goods and services. If a business can produce a good for less cost than the revenue generated, then profit is enhanced by producing more. If production generates higher cost than the revenue received, the profit is increased by producing less.

  • Sales Maximization: A reasonable, and often pursued, objective of a business is to maximize sales. That is, to sell as much output as possible. Clearly sales lead to revenue, meaning that maximizing sales is bound to maximize revenue as well. If the cost of producing each extra unit is less than the extra sales revenue received, then sales maximization is bound to increase profit--which is not necessarily a bad business strategy. The business might not maximize profit, but it could very well increase profit.

  • Pursuit of Personal Welfare: The folks who manage a business, whether owners or not, might occasionally use the business to pursue their own personal welfare, that is, to maximize their utility. To the extent that their personal utility is connected to the profit of the business, this can be achieved through profit maximization. However, to the extent that they achieve utility in other ways, such as luxurious office accommodations or extended lunch hours, then greater personal welfare is bound to inhibit profit maximization.

  • Pursuit of Social Welfare: The folks who manage a business, whether owners or not, also might occasionally use the business to pursue a social or political agenda. They might donate revenue to a charitable organization or a political campaign. They might sponsor a junior league sports team or run "public service" announcements promoting a particular political point of view. If such expenses are unrelated to the operation of the business, then profit is likely sacrificed.
Whichever objective a business pursues on a day-to-day basis, a business that generates greater profit, by design or by luck, is more likely to remain in operation year after year. As such, this process of natural selection means that the economic analysis of a business can safely assume that firms pursue the profit-maximization goal.

Legal Types

For the modern economy, a business usually falls into one of three legal categories--proprietorship, partnership, or corporation.
  • Proprietorship: A business owned and operated by one person. The owner and the business are legally considered one and the same. As such, the owner receives any and all profit and has what is termed unlimited liability. With unlimited liability, the owner is held personally responsible for any and all debts of the business. While a large number of businesses in the economy are proprietorships, they tend to be relatively small.

  • Partnership: A business owned and operated more or less equally by two or more people. The owners and the business are legally considered one and the same. As such, each owner also has unlimited liability, which means that any owner is held personally responsible for any and all debts of the business, including those of a partner. This form of business is common for professional-types, including lawyers, accountants, dentists, and physicians.

  • Corporation: A business established through ownership shares (or corporate stock). A corporation is considered a distinct legal person, that can be sued, forced to pay taxes, etc., comparable to a human person. Unlike proprietorships and partnerships businesses, a corporation business exists separately from its owners. As such, the owners have limited liability. Owners cannot be held personally responsible for corporate debts. The owners can only lose the value of their ownership shares, but no more.
While these three legal forms of business organization dominate the modern landscape, two other variations are worth noting. One is an S-corporation, which is a special type of corporation the operates under different tax laws and ownership rules that regular corporations. Another is a limited liability company, which combines the management flexibility found in proprietorships and partnerships, with the limited liability of a corporation.

Liability

A primary difference between different legal forms of business organization is the liability of the owners. Proprietorships and partnerships have unlimited liability. Corporations have limited liability. Liability is the extent to which the owners are responsible for the debts of the business. The two alternatives are unlimited liability and limited liability.
  • Unlimited Liability: This is the condition in which owners are personally held responsible for any and all debts created by a business. The liability of the owners is, as such, unlimited. In addition to the assets and wealth of the company, the personal assets and wealth of the owners can be used to pay off any and all debts of the business.

  • Limited Liability: This is the condition in which owners are NOT held personally responsible for the debts created by a business. The liability of the owners is limited, usually to the amount that is invested in the business. The personal assets and wealth of the owners cannot be used to pay off any debts of the business.

Market Structures

A business can find itself operating in competition with a large number of other firms, with a small number of other firms, or all by itself. Four market structures reflect these alternatives--perfect competition, monopolistic competition, oligopoly, and monopoly.
  • Perfect Competition: Perfect competition is a market with a large number of relatively small firms that sell virtually identical products and that have ease of movement into and out of the market. The key feature of perfect competition is that each firm has no market control--that is, a firm has no ability to control the price. While real world markets come close to this ideal of perfect competition, NONE are PERFECT competition.

  • Monopolistic Competition: Monopolistic competition is a market with a large number of relatively small firms that sell similar but not identical products and that have ease of movement into and out of the market. Monopolistic competition is very similar to perfect competition, the primary difference is that products sold by monopolistically competitive firms are slightly different. Product differentiation gives each firm some market control and some ability to control the price. A large portion of real world markets are monopolistic competition. In fact, monopolistic competition can be considered the real world's best effort to achieve perfect competition.

  • Oligopoly: Oligopoly is a market with a small number of relatively large firms. The key feature of oligopoly is that entry into and out of the market is usually restricted. This restriction tends to limit the number of firms in an industry and gives each firm a great deal of market control, with a substantial ability to control the price. A large portion of real world markets are oligopoly.

  • Monopoly: Monopoly is a market with a single seller of a good that has virtually no close substitutes. For a monopoly market structure, the single business IS the market, it has complete control over the market price. And it has this control because buyers have no substitutes available. Several real world markets come close to monopoly, but like perfect competition, no markets are complete monopoly.

<= BUREAU OF LABOR STATISTICSBUSINESS CYCLE INDICATORS =>


Recommended Citation:

BUSINESS, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: December 13, 2024].


Check Out These Related Terms...

     | firm | company | enterprise | legal business organizations | ownership liability | business objectives | profit maximization | natural selection | plant | factory | industry |


Or For A Little Background...

     | competition | production | production cost | supply | entrepreneurship | microeconomics | private sector | institution |


And For Further Study...

     | business sector | business cycle | political views | corporate profits | second estate | free enterprise | government enterprises | laissez faire | ownership and control |


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