SQA National 5 Business Management

Businesses exist because people have more wants than they have the means to satisfy. A need is something a person must have to live, such as food, water, clothing and shelter, while a want is something they would like and can live without, such as a games console or a holiday. Because the resources available are limited and wants are not, businesses take resources and turn them into the goods and services that people choose to buy, and in doing so they create wealth, provide jobs and pay taxes that fund public services.

Factors of production

The resources a business uses to produce goods or provide services are the factors of production. There are four, and each earns its owner a reward.

The word capital is also used for the money an owner puts in, which is then spent on the buildings and machines that count as capital in the table. The person who provides enterprise is the entrepreneur, and profit is their reward because they could lose everything they have invested if the business fails.

Production, consumption and goods and services

Production is making goods or providing services. Consumption is using them to satisfy a want. A baker who makes a loaf is producing, and the family who eat it are consuming.

A good is a physical item that can be touched. Goods split into two groups by how long they last.

• Durable goods last for a long time and are used many times, such as a washing machine, a car or a laptop.
• Non-durable goods are used up quickly or in one go, such as food, petrol or toothpaste.

A service is something done for the customer that has no physical form to keep, such as a haircut, a bus ride, a medical appointment or an insurance policy. A service is produced and consumed at the same time, so it cannot be stored.

Goods that a business buys to produce other goods, such as an oven in a bakery or a delivery van, are capital goods and are sometimes called assets of the business, because they are owned and will be used for a long time.

Sectors of industry

Industry is divided into three sectors according to what stage of production the business is at.

A chain of production often passes through all three. A farmer in the primary sector grows wheat, a miller and baker in the secondary sector turn it into bread, and a supermarket in the tertiary sector sells it. A single business can also straddle sectors: a farm that sells its own produce at a shop on site is both primary and tertiary.

Sectors of the economy

The economy is also divided by who owns and controls the organisations.

The private sector is paid for by its customers and the public sector mostly through taxation. The third sector depends on a mix of donations, grants, fundraising and trading income.

How businesses satisfy wants and create wealth

A business adds value when what it sells is worth more to customers than the cost of the inputs it used. A baker who turns flour, yeast and an hour of work into bread that sells for more than the ingredients and labour cost has added value. That difference pays wages, covers overheads and leaves a profit for the owner, and the wages and profits are then spent elsewhere, which supports other businesses. Employment, taxes paid to the government and the goods and services themselves are how a successful business benefits the wider society, and it is why governments try to create conditions in which businesses can start and grow.