New businesses are set up by entrepreneurs. There are both risks and benefits involved in setting up a new business.
The economy is divided into different business sectors. All businesses have inputs and outputs and must add value during production.
Making goods or providing services
A business is any organisation that makes goods or provides services.
There are many types of business in the UK. These range from small firms owned and run by just one self employed person, through to large companies which employ thousands of staff all over the world.
Businesses exist to provide goods or services.
Goods are physical products - such as burgers or cars.
Services are non-physical items - such as hairdressing.
Customer needs are the wants and desires of buyers.
Nearly half a million businesses start up each year. A business start up is a new firm operating in a market for the first time.
The vast majority of businesses are very small and operate in the service sector.
Suppliers, customers and markets
Businesses buy the products they need from suppliers – firms selling products to other businesses - and sell to customers. The individual who uses the product is called a consumer. Sometimes the customer and consumer are different people - for example, parents buy a pen for their child to use at school.
Businesses sell to customers in markets. A market is any place where buyers and sellers meet to trade products - this can be a high street shop or a website.
Businesses are likely to be in competition with other firms offering similar products.
In order to create goods and services, a business buys or hires inputs such as raw materials, equipment, buildings and staff. These inputs are transformed into outputs called products. These products are the goods and services used by consumers. Production is the business activity of using resources to make goods and services.
A business adds value when the selling price of an item produced is higher than the cost of all the resources used to make it. Think of a pair of designer sunglasses which sell for £100. If the cost of the materials, employees, marketing and all other inputs used in making one set of sunglasses is just £20, then £80 worth of value has been added by the firm during production.
Primary, secondary and tertiary sectors
There are three main types of industry in which firms operate. These sectors form a chain of production which provides customers with finished goods or services.
Primary production: this involves acquiring raw materials. For example, metals and coal have to be mined, oil drilled from the ground, rubber tapped from trees, foodstuffs farmed and fish trawled. This is sometimes known as extractive production.
Secondary production: this is the manufacturing and assembly process. It involves converting raw materials into components…