Role of Business in the Economy

• Firms


  An organisation involved in using entrepreneurial skills to produce goods/services
• Industry


  Firms involved in creating a similar range of products that usually compete with eachother
• Goals of a Firm

  • maximising profits
  • maximise growth
  • increase market share
  • satisficing
  • meeting shareholder expectations
• The Law of Diminishing Returns


  Suggests that as quantities of a variable factor are added to a fixed FoP, total output will decrease in the short run
• Total Physical Product


  Total output of goods using the sum of fixed and variable FoP
• Average Physical Product


  TTP/units of labour
• Marginal Physical Product


  Change in total product that occurs with the addition with one or more units of labour
• Economies of Scale


  Reductions in cost per unit of output as output increases
• Diseconomies of Scale


  Increase in cost per unit of output as output increases
• Returns to Scale


  Refers to the relationship between inputs and outputs. As a firm alters its plant, the ratio of inputs to outputs will also change.
• Increasing returns to scale


  when inputs are doubled and outputs more than double
• Constant returns to scale

  When both inputs and outputs are doubled
• Decreasing returns to scale

  When inputs are doubled and outputs are less than doubled
• What to Produce?

  Several factors may influence a business operator's decision

  • The skills and experience of the business operator
  • Specific business opportunities
  • Industries where there is strong consumer demand
  • The amount of capital required to start the business