GOODS AND SERVICES

Business exists to provide the things that people need and want. Our needs
are all the essential things that we require to survive (food, clothes, a place to
live etc.). Once these basic needs are satisfied, we also have a potentially
endless list of wants (computers, cars, holidays etc.). Of course, in the modern
world, it is not always easy to decide what is a “need” and what is a “want”.
The things that business produces can be divided into two categories: goods
and services.

Goods
They are physical objects, such as telephones, bicycle or potatoes. • Durable
goods are those which last for a long time, for example a table or a knife.
• Non-durable goods are those which have a limited life and are often sold
with a “sell by” date: these include most food products like milk and
meat but also products like flowers and newspapers.

Services
They are activities to help people in some way but which do not involve the
production of physical objects (e.g. cleaning clothes, repairing cars). There are
many different types of services.
• Personal services, such as hairdressing or dental treatment, are
designed to help individual people.
• Business services, like market research and advertising, help companies
to operate.
• Financial services, such as banking and insurance, are concerned with
money matters.

All the different companies which together produce goods or services in one
particular field are described as an “industry” (the car industry, the film
industry, the advertising industry etc.).
FACTORS OF PRODUCTION
There are four essential ingredients that any business needs in order to
successfully produce goods or services. They are called “factors of production”.
1. Natural resources
These include land, water, forests, animals, mineral deposits and any
other form of raw material. They are obviously essential for activities like
agriculture, mining and manufacturing but even service industries
depend on natural resources such as electricity and water.
2. Capital
This is the money that a company needs to buy buildings and equipment
in order to produce goods and services. Continual investment in new
technology is essential for a company to keep up with competitors.
“Working capital” is also needed to pay workers, buy supplies and pay
bills.
3. Labour
This refers to the work done by the company’s employees. All industries
require labour but some, especially service industries, are more labour
intensive than others, employing large numbers of people. The quality of
this “human capital” depends on the level of training, experience and
skills among workers.
4. Management
This is a special kind of labour required to set up the company in the
beginning and then to make crucial decisions about how to organize the
other three ingredients – natural resources, capital and labour – so that
the business operates efficiently. A successful business requires
entrepreneurial skills, involving a combination of initiative and
imagination.
SECTORS OF ACTIVITY
Economic activities can be divided into three sectors.
• Primary sector: the primary sector involves the production or extraction
of raw materials from the land or the sea. Raw materials are the natural
resources of the earth which have not yet been processed in any way:
for example wood, coal, oil or iron ore. Important industries in this
sector are mining and drilling (extracting minerals from the earth),
 agriculture (growing crops and raising farm animals), fishing (catching
fish and other seafood), forestry (growing trees to produce wood).
• Secondary sector: the secondary sector transforms raw materials into
finished products through manufacturing, processing or construction.
Examples include textiles (making cloth out of raw cotton or wool),
furniture (making tables and chairs out of wood), clothing (making
clothes out of textiles), construction (making buildings out of concrete,
wood, metal etc.).
Some secondary industries make new products not out of raw materials
but from the products of other secondary industries (e.g. the clothing
industry uses textile products to make clothes).
• Tertiary sector: the tertiary sector produces services not goods.
Examples of “service industries” include entertainment (producing films,
music, TV programmes etc.), travel and tourism (organizing
transportation, accommodation, catering etc.), retailing (selling goods to
the public through shops), health (providing medical treatment).
Until the 1800s most people all over the world were involved in primary
activities, mainly agriculture. This is the case in most undeveloped countries.
Following the industrial revolution many people in western Europe and the
United States moved away from the land and into the growing industrial cities
where they found jobs in secondary industries, producing manufactured goods.
In the 20th century the industrial revolution reached other parts of the world,
especially Asia. Manufacturing industries there have taken over a lot of
production. In western nations, the secondary sector has declined and the
tertiary sector has expanded as people are increasingly employed in service
industries.
ECONOMIC SYSTEMS
There are conflicting ideas about the best way to organize the economy and
how much influence the government should have.
State control
Under this system, also called “public ownership”, the national economy is
planned and managed by the government. The state owns the means of
production and distribution (land, factories, shops etc.) and the government
makes all the important decisions: what and how much to produce and what
the price should be. In the 20th century the Soviet Union and other communist
countries had a state-controlled economy. After World War II, in many
European countries, there was a policy of “nationalisation”: important
industries – such as the railways, coalmines and electricity – which had
belonged to private companies were taken over by the government and
brought under state control.
Free market
under this system, also known as “capitalism”, economic activities are run by
private business, not the state. Companies are free to produce what they want
and to compete against each other. Levels of production and prices are decided
by supply and demand in a free market: consumers can choose from a variety
of competing products. The role of the state government is limited to creating
the rules that all companies must follow in order to guarantee fair competition,
health and safety requirements, protection of the environment etc. The United
States is the leading nation with a mainly free market economy.
Mixed economy
Nowadays most countries have a mixed economy combining the free market
with some state control. Even the USA does not have a completely free market
economy since there is also public ownership in important areas such as
education, health and defence. In most European countries the “public sector”
is much bigger than in the USA, often including industries such as transport
and energy. However, over the last 30 years, there has been a movement
away from state control towards the free market. After the end of the Soviet
Union in the early 1990s communist state control was replaced in many
countries by a more capitalist system. In many other countries nationalisation
policies were replaced by “privatisation”: governments soldstate-controlled
industries to private businesses. In Britain, for example, water, gas and
electricity suppliers, the railway and the national airline have all been
privatised.

GOVERNMENT TAXATION AND SPENDING

Even in a free market or mixed economy the government has enormous
economic influence because of its power to take money away from people and
businesses through taxation and to spend it through state-controlled
institutions. In most economies 40-50% of all spending is by the government.
Government income
The main taxes are:
• Income Tax: a proportion of the money that people earn through their
work.

• National Insurance: a percentage of people’s wages, used to pay

specifically for social security and health services.

• Value Added Tax (VAT): a percentage added on to the price that

consumers pay for goods and services.

• Corporation Tax: a percentage of the profits made by businesses.

Government expenses

The main areas are:

• Social Security: pensions, unemployment benefit etc.

• Health: hospitals, doctors, nurses etc.

• Education: schools, teachers etc.

• Defence: army, navy, air force.

• Justice: police, courts, prisons etc.

THE ECONOMIC CYCLE
Boom and recession
Gross Domestic Product (GDP) shows the size of a country’s economy. It
represents the total value of all the goods and services produced by the
country during one year. GDP goes up and down from year to year: a rise in
GDP indicates that the economy is growing, a fall shows that the economy is
declining. The rate of economic growth or decline is the annual percentage
change in GDP.
The regular rise and fall of GDP over time is called the economic cycle. It
follows a pattern like a series of waves: GDP rises, reaches a peak and then
drops before beginning to rise again. A period when GDP is rising strongly is
called a boom: companies produce more goods and services and create more
profit; people have more money to spend and buy more. A period when GDP is
falling fast is called a recession: people spend less, demand goes down and so
businesses produce less; some companies even close down and workers lose
their jobs.
Inflation
Governments try to encourage economic growth because it creates more profit
for business and more jobs for workers. This means that people have more
money to spend on food, clothes, holidays etc. and the government collects
more money, through taxes, to spend on schools, hospitals, roads etc. The
general standard of living rises.
However, if the economy grows too quickly there is a danger of excessive
inflation. Inflation is a rise in the prices of goods and services. It happens
when there are too many consumers, and too much money available, for the
goods and services on offer: their prices will naturally tend to go up. A low rate
of annual inflation of about 2-3%, as we have experienced in recent years, is a
positive thing. But the inflation rate can rise quickly, especially in boom
periods, and get out of control. In the 1980s many EU countries had inflation
of over 20%. This is bad for business and society since it creates instability,
uncertainty and fear. There are numerous negative effects: it is difficult to
make plans for the future; people stop saving money; workers continually
demand pay rises; pensioners on fixed incomes cannot afford essential goods.
GOVERNMENT POLICIES
The economy is changeable and unpredictable. It goes through cycles of
growth and decline but nobody knows how long each phase will last or how
high or low the rises and falls will be. In addition there are innumerable
external factors that can suddenly affect economic performance: wars,
revolutions, natural disasters, new inventions and discoveries etc.
Governments do what they can to influence the economy and keep a balance
between encouraging growth and restraining inflation. There are three main
areas where they can exercise control.
Taxation
A government can raise or lower taxes. Lowering taxes leaves people with
more money to spend and should therefore stimulate the economy. Raising
taxes takes money out of the economy and should help to bring down inflation.
Government spending
Increased spending by the government pumps more money into the economy
and should help to create economic growth and jobs. The government can, for
example, build new roads and hospitals and provide funds for new
development projects. It may even decide to borrow money and go into debt
to provide this financial support. Reduced spending by the government has the
opposite effect: it takes money out of the economy and brings down inflation.
A government may be forced to reduce spending because the national debt is
too high.
Interest rates
The government and the central bank can take action to raise or lower the
interest rate that people pay when they borrow money from the bank (and the
interest that they receive when they save money). If the interest rate goes
down, it is cheaper to borrow money and there is also less incentive to save.
People are therefore encouraged to spend more and companies to invest more
in their business; this should be a stimulus for economic growth. If the interest
rate goes up, it costs more to borrow and there is also more incentive to save.
People therefore tend to borrow and spend less and this should help to reduce
inflation.
One or the criticism that economists make about the euro is that the interest
rate is decided by the European Central Bank and is the same for all euro
countries. Individual governments cannot intervene to adjust the rate to suit
their own countries.
MARKETS
A market is a meeting place where suppliers sell their goods to customers.
Customers may try to bargain and prices can go up or down depending on
supply and demand. In financial markets people buy and sell, for example,
shares in companies (the stock market) or national currencies (the money
market). In this case trading is usually done through computers instead of face
to face.
The word “market” is also used, in a rather different way, to refer to all the
potential customers for a product. For example, a company may design a new
product for the teenage market (young people between the ages of 13 and 19)
or for the Canadian market (all the potential customers in Canada). A “mass
market” means a very large number of potential customers of all types; a
“niche market” refers to a small group restricted to a particular type of
customer.

MARKETING: THE “FOUR Ps”

Marketing involves not only advertising and selling a product. It covers a much
wider range of activities, in particular:
• finding out what people want through market research;

• designing and developing a suitable product that will satisfy customer’s

needs;

• making sure that the product is available for customers at the right place
so that is easy to buy;

• deciding on a price that will be both acceptable to customers and create a

profit for the firm;

• telling people about the product through promotion activities. The main
activities of marketing are sometimes called the “four Ps” (Product, Place,
Price, Promotion), also known as the “marketing mix”. If all four are carried
out well, the business should be a success. But id just one of them goes
wrong, the result will probably be failure.
PRODUCT
Developing the right product is the basis on which everything else depends
and it requires careful attention to the following aspects.
Design: the product must look attractive and, at the same rime, it must work
properly and be reliable.
Name: this must be easy to remember and it must also sound right for the
product. Successful companies build a brand for their range of product: a
legally registered name or symbol (also known as a trademark) which is
instantly recognizable and can only be used by that company. It is seen as a
guarantee of quality and prestige and can allow the company to charge a
higher price.
Packaging: this not only protects the product, it can also help to make it look
attractive and different from competing goods.
Range: for certain products it is important to allow customers to choose
between several options in terms of price, design, complexity etc. Distinctive
quality: there are thousands of competing products on the market. To be
successful a product needs to have a feature which differentiates it from all the
others. This is called the product’s USP, unique selling point.

Product life cycle

All products go though a similar life cycle from the time of their initial launch
(birth) to the moment when the company finally stops making and selling
them (death). The time period varies from product to product (perhaps just a
few months for a computer chip compared to several years for a car) but the
phases are always the same. During the phases of maturity and decline the
company may try to extend the product’s life by introducing changes to design
or cutting the price.
PLACE
This aspect of marketing involves deciding where products are sold to
consumers (in specialist shop, in supermarkets etc.) and how products reach
these outlets (the channel of distribution). Producers have to make sure that
their products are available to customers in the right place at the right time.
They chan choose to distribute goods through wholesaler and/or retailers or to
sell them directly to the public.
Distribution system
With the traditional distribution system the producer sells goods to a limited
number of wholesaler strategically located around the country. The wholesaler
stores the goods in large warehouses where local retailers (shops,
supermarkets etc.) can come and buy the quantities that they need. The
retailers then sell the products individually to their customers.
This system is convenient for consumers because they can buy products in
their local shops. The disadvantages are that small local shops do not have a
wide selection of products, distribution is slow and goods tend to be more
expensive because the price goes up each time they change hands.
Improvements in transport and communications have made it possible to
simplify this traditional distribution network in two important ways. •
Eliminating the wholesaler. Big retailers, usually chain stores with branches in
many towns, are able to buy large quantities of goods directly from the
producer. They can do this because consumers nowadays are more mobile and
drive long distances to shop in large retail stores like hypermarkets and giant
superstores.
• Eliminating both wholesaler and retailer. Some producers are able to sell
directly to consumers. This can be done through mail-order catalogues,
telephone sales and, above all, the Internet, which has made it much
easier and more common, especially for certain types of products such
as books, DVDs, flights and hotel accommodation.
PRICE
In a free market prices go up and down depending on supply and demand. The
supply is the total quantity of a product that all the producers put on sale. The
demand is the quantity of a product that consumers are ready to buy. If
demand goes up in proportion to supply, there are fewer products available
and so prices tend to rise. If supply grows faster than demand, there are too
many products on the market and prices tend to fall.
A business always has to take into account these basic market forces when it
decides what prices to charge for its products. However, there are different
pricing policies that companies may choose to follow.
• “Cost plus” pricing: the company calculates how much it costs to
produce something and then adds on a certain percentage as its profit
margin (also called a “mark-up”. This is logical and should guarantee a
reasonable price and reasonable profit. However it does not take into
account how much other firms are charging or what customers are
 prepared to pay.
• Competition based pricing: the company looks at the prices charged by
rival firms and fixes its prices at the average for the market or a little
lower. This is a common and fairly safe policy.
• Penetration pricing: the firm charges a very low initial price to launch a
product and “penetrate” the market. The price may increase later when
the product is established. Promotional pricing, offering discounts and
other incentives, may also be used to stimulate sales of mature
products.
• Premium pricing: also called “price skimming”, a firm can charge a high
price initially for a new product because of its novelty value or prestige.
This is common with technological products and also many luxury goods.
The price may fall later to encourage mass market sales.
• Predatory pricing: a firm charges artificially low prices, even making
losses, for a period of time in order to destroy the competition. It can
then raise prices. This policy is widely regarded as unfair competition
and is illegal in many countries.

PROMOTION
Promotion is the activity of informing the public about a company’s products
and persuading people to buy them. It is mainly done through advertising. The
principal objectives are to:
• launch new products on the market;

• create a positive image of the company and the brand;

• remind people about existing products;

• expand the company’s market.

Companies can choose from a wide range of advertising media, each with their
own particular characteristics and advantages. Many advertising campaigns
use several different types of media.
The choice depends on:
• the amount of money available (some media are very expensive TV); → •
the size of the target market (some media are more suitable for mass
market products national newspapers, others can be directed at much →
more specific targets specialist magazines); →
• the geographical area (some media are more suitable for a limited area,
others for the entire country local radio stations). →