The Back Bone of Economy |
Amy Lopez |
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Business is the back bone of any economy. It forms an economies foundation and without business your economy would be almost no existent and nothing more than a barter system really. Life would look much like a feudal system of our ancestors.
In the US we have a capitalistic economy and business is the main component of it. Business is in every corner of every sector of what we ...view middle of the document...
This type of society would not be practical at all.
This is why people create trade with each other. Instead of having to provide ourselves with everything, we can focus on producing one product or expertise. We can then specialize in that product or expertise to make it the best on the market and then sell it for a profit. If everyone else does the same (in theory) we can all trade with each other and all obtain the best goods and the best knowledge.
A major part of this capitalist economy we have created is a competitive market. Competitive markets work fairly simply. How much wheat should a Farmer produce if wheat sells at $3 per bushel? How many pairs of shoes should Stride rite produce and sell if the market price of shoes is $40? These questions concern the supply behavior of perfectly competitive firms. We assume that our competitive firm maximizes profits, which are equal to total revenues minus total costs. Profit maximization requires that the firm manage its internal operations efficiently and make sound decisions in the market place.
Why would a firm want to maximize profits? Profits are like the net earnings or take home pay of a corporation. They represent the amount a firm can pay in dividends to the owners, reinvest in new plant and equipment, or employ to make financial investments. All these activities increase the value of the firm to its owners.
Competitive firms cannot affect the price; the price for unit sold is the extra revenue that the firm will earn. For example, at a market price of$40 per unit, the competitive firm can sell all it wants at $40. If it decides to sell 101 units rather than 100 units, its revenue goes up by exactly $40.
I’ve mainly discussed what a business that is for profit does in our economy but what about nonprofits? How do they work? A nonprofit organization, or NPO for short, is an organization that uses extra revenues to achieve a goal typically instead of distributing its profits. That’s not to say all nonprofits are charities. Kaiser Permanente, one of the largest health care providers in the US, is a nonprofit. Credit Unions are also nonprofits.
While not-for-profit organizations are permitted to generate excess revenues, they can’t be spent by the organization unless that spending is for...