A economic systems share the problem that human wants are unlimited while the resources with which to satisfy them are limited you confront this problem every day and cope with it by assigning priorities to your wants and spending your limited income accordingly. In our economic system, business firms try to anticipate what their target customers want and produce goods and services that they hope will satisfy these wants. •Business people can profit if they produce things consumer want, but they assume the risk of losing their investment if they produce things that consumers do not want. •A different situation exists in some other types of economic systems. •Although these economic systems must also cope with unlimited human wants and limited productive resources, •They allow individual consumers and business people very little voice in coping with the economic problem •Because there are not enough resources to satisfy our unlimited wants we must choose what will and what will not be produced. •These choices determine how resources will be used. •Under our economic system, independent decisions made by consumers and producers guided by the price system determine how resources are allocated. •The business firm is the basic building block for the production of goods and services in our system.
• Most economic activity is channeled through business firms, which gather and organize re- sources for production. • They do so in the hope of making a profit. • In other words, businesses seek to make a profit in our market economy by supplying products that their present and potential customers want. Doing so, however, requires that they be willing to assume the risk of going into business • Let's begin with a look at how a market economy works THE BUSINESS FIRM • Demand gives a firm an opportunity to provide want satisfying goods and services. • Supply results from efforts by business firms to profit from this demand. • The business firm is the basic building block for organizing production in our system. • Through it, resources are organized for production. • Land, labor, and capital must be gathered and converted into goods and services that can be sold. • This business activity must be directed and guided by the management of business firms.
• Business activity requires decision making to produce and sell goods and services. • It requires buying as well as selling. Thus the market plays a role. • How resources are used depends basically on choices made by firms and consumers. • Both are guided by market prices. • The firm is the key to the market's operation. • It guides the flow of resources through the marketplace. The firm is an inputoutput system. • The inputs are productive resources that the firm buys in the marketplace. • The outputs are the products and services it produces and sells in the marketplace. • Both input and output depend on market prices. • Resources and the goods and services produced from them are all scarce, which is why hey command prices. • The firm's costs of doing business (converting resources from one form to another) must be less than the sales revenues it receives from selling its output if it s to earn a profit. • To determine how profitable it is, a firm must keep records of its costs IUd sales. • The process of accounting traces the effects of resource flows on a firm's profits.