Introduction to Business and Economics. Bettina Fuhrmann

competition can (theoretically) be found in markets with so many suppliers and buyers that no single individual or business can possibly influence the price. Considering perfect competition, in economics we also assume the following (theoretical) prerequisites:

      ■ All market players (buyers and sellers) must have access to all information at all times.

      ■ There must not be any barriers to enter or exit the market.

      ■ There must not be any (personal) preferences – i.e. goods, as mentioned, must be replaceable.

      In real life, perfect competition is rarely found but, nevertheless, some markets come close to the concept of perfect competition. These are markets for goods and/or services that are almost identical (regardless of the supplier), e.g. agricultural markets, or that can be standardised. Even if the number of suppliers is not so high, competition can be almost “perfect” if competition among suppliers is especially fierce.

       3 Focus on different types of businesses

      [17]Private households come in many different forms – large families, singles, couples, with or without children – and so do businesses. The large variety of businesses is due to the fact that they differ in the factors of production that they combine, in the sector(s) they operate in and in size. But they all need to consider their stakeholders around them and the environment.

3.1 Businesses combine different factors of production

      As mentioned earlier in the introduction, a business is an entity that offers goods and/or services to customers. In order to do so, it combines different factors of production, the resources used to create goods and services. The most important factors are

      ■ labour (all human resources),

      ■ land (all natural resources),

      ■ capital (resources like machinery, plant, vehicles, financial resources), and

      ■ entrepreneurship (which brings land, labour and capital together) as well as

      ■ knowledge and technology.

      Depending on the factors that are dominant for the production process, a wide range of businesses can be found. Tina and Steve are mainly combining their own knowledge and skills, labour, technology and some capital as well as entrepreneurship. AT&S combines all factors of production. A winemaker with large vineyards combines land, labour, capital and entrepreneurship, but his business might also be dependent on his knowledge, experience and some technology.

3.2 Businesses operate in the primary, secondary and/or tertiary sector

      Depending on what a business does, it contributes to one (or more) of three sectors of the economy. The three-sector model differentiates between three sectors of activity:

      The primary sector refers to the extraction of raw materials from the earth. It mainly comprises farming, fishing, mining and forestry. Emerging countries (which are economically less developed) usually depend largely on the primary sector.

      Businesses of the secondary sector transform raw materials into goods (manufacturing). Such businesses produce cars, ships, machinery, printed circuit boards and IC substrates (like AT&S), computers, clothes etc.

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      The tertiary sector comprises the service industry, like distribution, banking, insurance, coaching etc. Tina and Steve offer services: they trade goods, develop software and provide technical support.

      The more the economic development of a country advances, the more important the third sector becomes. In economically highly developed countries, like EU countries with a high gross domestic product (GDP) per capita (indicating a high standard of living), the tertiary sector usually accounts for more than 70% of the output of the economy, while the primary sector – as important as it may be for providing food – only accounts for a small percentage of the output of the economy.

      Please note that GDP is the total monetary value of final goods and services that are produced within a country's borders in a certain time period (usually a year). Therefore, it is considered to measure the overall economic activity of a country. GDP is also used as an indicator for economic growth: if GDP (adjusted for inflation) increases over time, the economy is growing. However, the use of GDP is not undisputed. Critics say that not all sources of income are taken into account. What is more, GDP does not tell anything about the quality and/or sustainability of growth, nor is it a perfect indicator of economic wellbeing in a country. For example, GDP would also increase after ecological disasters that require action to rebuild infrastructure and to mitigate the damage. However, GDP is usually correlated to some indicators of well-being like health status and happiness.

3.3 Businesses can be profit-oriented or not-for-profit

      Most businesses aim to operate for a longer time period. In order to do so and to thrive over time, most businesses aim to make a profit, i.e. they intend to have higher revenues than costs and expenses. Profits are important to the business itself because they can be reinvested in the business, which enhances the durability and sustainability of the business. Of course, profits are also important to the owners and investors because the profits are their reward for the risk they have taken.

      However, there are also businesses (or organisations) that are not-for-profit and mainly aim to cover their costs. Nevertheless, they also need to achieve a certain level of revenues (or in many cases: donations) in order to be able to offer their goods and services. Any profit they make is also beneficial to the organisation, because it can be reinvested and used to enhance the services for customers or to engage in more projects. The Red Cross, the World Wildlife Fund or Greenpeace are examples of such non-profit organisations (NPOs).

3.4 Businesses come “in all sizes”, large and small

      [19]There is an enormous variety of businesses: micro, small and medium enterprises (MSME or just SME) as well as large businesses. About 99% of all businesses in the EU are SMEs. The European Commission differentiates between these types of businesses (see http://ec.europa.eu) as presented in table 1.

Company category	Staff headcount	Turnover	OR	Balance sheet total
Micro	‹ 10	≤ €2 m		≤ €2 m
Small	‹ 50	≤ €10 m		≤ €10 m
Medium-sized	‹ 250	≤ €50 m		≤ €43 m

Table 1. Size categories of businesses

      The definition of an SME is important