The Important Role of Economics for Small Business to Succeed

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Knowledge of economics, even the most basic, is helpful for any kind of business, big or small. Why? It has something to do with important business decisions such as prices, marketing, and production output that successful businesses take seriously.

A descriptive definition of economics is in order. Economics is the study of allocation decisions in society. Being so, it examines how resources are used to produce goods and services. A basic economic problem is that people have unlimited appetite or wants for goods and services, while resources available are limited to produce. This then creates a scenario whereby producers are required to choose what to produce and consumers to choose what to buy.

Business outfits, corporations, or small businesses, are the producers of goods and services and households/families are consumers of these goods and services. Resources are inputs to production. What are these resources?

Resources in Producing Goods and ServicesLand

  • Labour (people)
  • Capital (plants, machineries, and equipments)
  • Entrepreneurship or Business Owners (management and leadership)
  • Technology

Economics of Demand and Supply

Demand and supply forces exist in any market for goods, services, or resources. Market price is determined by the forces of demand and supply. There are many factors affecting demand and supply. Essentially, demand relates to consumers’ willingness to buy and supply refers to producers’ willingness to produce and sell.

The effects on market price of movements in demand and supply:

  • When demand increases, price rises
  • When demand decreases, price drops
  • When supply increases, price drops
  • When supply decreases, price rises

In regulated markets where the government control the prices, demand and supply forces may not affect prices.

The Business Sectors

Broadly, a business activity is a systematic organization of resource to continually sell goods and/or services for profit-making purpose. It exists when there is continuous selling of goods and/or services, and for a profit-making purpose.

There are different types of business activities. Each one can be distinguished in terms of the resources used and the products and/or services provided. The main sectors that embrace all types of business activities within the economy are the primary, secondary, and tertiary sectors.

Primary Sector of the Economy

The primary sector consists of all business activities that use the natural environment to produce raw materials or foodstuffs for manufacturing processes. Operations are land-intensive as they include a wide range of rural and mining activities. Examples are livestock owners, crop growers, and miners.

Secondary Sector of the Economy

The secondary sector involves business activities that consume and transform raw materials in a production process to produce final products. These businesses are essentially manufacturers and therefore are capital-intensive due to the large outlays of money needed for equipments. Manufacturing activities range from large car assembly lines to small engineering workshops and small business bakeries.

Tertiary Sector of the Economy

The tertiary sector incorporates all the businesses that provide a service. These are buy and sell trading stock or sell labour services. They are described as labour intensive since the cost of labour is often the main operating cost. Service businesses include wholesalers, retailers, professional services, and consultants, technical services, and building services.

Most small business enterprises are retail shops, office suites in suburban shopping centres, corner stores and takeaways, home-based businesses, and small factories in outer-suburban areas. There are fewer small businesses, if any, found in the central business district of major cities.

The Business Cycle or Economic Cycle

All businesses are affected by periodic fluctuations in the general level of economic activity known as the business cycle or economic cycle. During boom conditions, most businesses prosper, leading to increased business sales. As a result, significant price inflation often occurs in which prices are pushed upwards by excess consumer demand.

In a recession, most businesses are adversely affected, inflation is virtually non-existent, and profit margins are usually trimmed. Consumer spending and confidence is low and so is the volume of business sales and activities.

The general, levels of business activities are measured by variables known as economic performance indicators. With careful data analysis, these tools can provide indications of the general level of business activities and also offer projections into the future. An important factor of the economic performance indicator to small businesses is that it can be used in determining a suitable time to start a business.

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