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SECTION 1

SECTION

1 The Business Environment

Learning GoalIn this chapter you will learn about:

• the concepts of wants, choice, resources, scarcity, economy and globalisation

• the way businesses interact with other sectors in the Australian economy

• the nature of, and trends in globalisation.

Success CriteriaBy the end of this chapter you should be able to:

• distinguish between wants, choice, resources, and scarcity• explain economic activity• analyse the interdependence between the five

sectors in the economy• discuss the impact of globalisation on business• analyse statistics relating to the economy.

You and millions of other Australian consumers are at the centre of the world of business and enterprise. Businesses thrive on selling a wide range of goods and services to consumers to satisfy their needs and wants. Today, consumers have an enormous choice of goods and services whilst businesses face immense challenges as they compete to take advantage of opportunities in a dynamic and complex global business environment.

Many of the items we buy from businesses are goods or physical products such as food, computers, cars, and mobile phones. We also rely on individuals and businesses to sell us services – these are non-physical products such as teachers providing education, doctors providing medical care or businesses supplying internet services or a home security surveillance service. Product is the collective term for goods and services.

• business• goods• enterprise• profit• revenue• expenses• servisec• products• essential wants• non-essential wants• individual wants• collective wants• global business environment• economic factors• economic problem• interdependence• international sector• Government sector• household sector• financial sector• capital

Aa word focus

The Tour Down Under organisers provide a variety of goods and services.

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SACE 2 BUSINESS & ENTERPRISE

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TOPIC 3 THE BUSINESS ENTERPRISE

1.1 Understanding Needs and Wants

Independent WantsGoods and services satisfy needs and wants in our daily lives. Whilst food, clothing and shelter are traditionally referred to as basic needs required for survival, access to health and education services are considered essential wants in most societies today. However, for many households durable goods such as washing machines or dishwashers are necessities. Technological gadgets including smart phones and laptops, along with internet service are also increasingly seen as essential wants.

Non-essential wants are the material desires that allow individuals to have a higher standard of living. As society becomes more affluent, an increasing number of consumers buy luxury goods and services. Overseas holidays, fashion brand clothes and accessories, a gym membership or a personal trainer are common examples. Businesses respond to, and often drive, consumer demand for such products.

For many households, durable goods like a washing machine, refrigerator, computer, car and mobile phone are also products that satisfy essential wants. However, as society becomes more affluent, an increasing number of consumers want luxury goods and services that satisfy non-essential wants. These can include new technologies that many desire such as a smartphone, an iPad and a wireless network. Other non-essential wants include restaurant meals, overseas holidays, designer clothes and accessories, a gym membership or a personal trainer. Businesses respond to, and often drive, consumer demand for such products.

Characteristics of WantsUnlimited – wants are never fully satisfied; as soon as one want is satisfied, it is common to seek to satisfy another. In this context it is often stated that humans have an insatiable appetite for goods and services.

Recurring - The basic need for food is obviously a recurring want but so is the non-essential want for fashionable clothes or gym membership as well as computer ink cartridges and printing paper.

Complementary – numerous wants are complementary in nature: for example, car and fuel, computers and software, a ticket to attend your School Formal and a formal dress or suit to wear to that function.

Competitive – this means most individuals need to prioritise their wants as they compete with one another.

Varied - different people have different wants. Essentially, one’s level of income and their values will influence what products will be purchased to satisfy essential and non-essential wants.

Planned Obsolescence

Planned obsolescence is a commonly-used term for products designed to break easily or quickly go out of style. This concept gained popularity in the 1950’s and became so widely recognised that in 1959 Volkswagen mocked it in a now-legendary advertising campaign.

While acknowledging the widespread use of planned obsolescence among car manufacturers, Volkswagen pitched itself as an alternative.

“We do not believe in planned obsolescence,” the advertisement suggested.

“We don’t change a car for the sake of change”. http://books.google.com.au/books

Today, when protecting the environment is a high priority, the question of product life and durability has resurfaced. Clearly the rate at which consumers in modern societies replace their cars, mobile phones, computers and other electronic goods has negative consequences: excess resource use, waste and pollution, and, in some cases increasing debt.

Yet is seems that the health of our economy relies on the consumption resulting from this constant replacement of goods.

Discuss this issue with fellow class members

in focus

An essential want in most societies.

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Collective WantsSome wants cannot be satisfied individually; for example, roads to travel on to get to school. Such wants need to be satisfied collectively for the whole community. Collective wants are commonly satisfied by goods and services provided by the Government. In Australia, the Local Government provides collective goods and services of a local nature; rubbish collection, parks, local sporting and playground facilities. State

Governments tend to provide goods and services for the wider community such as hospitals, education, arts and culture (Art Gallery, Museum), police force, while the Commonwealth (or Federal) Government provides collective goods and services to satisfy the wants of the entire nation, such as our defence forces, roads and public hospitals.

Governments raise revenue, called taxation, from various sources to provide goods and services to satisfy collective wants. Pay As You Go (PAYG) income tax is paid by employees and the Goods and Services Tax (GST) is paid by consumers on most products they buy.

When a new Government is elected they introduce new policies which often impact on consumer and business behaviour. The 2016 Turnbull Government proposed cuts to the tax rate paid by companies and some changes to superannuation.

Economic conditions and Government Policy have a significant influence on how the Government spends our taxes. These, and the influence from various pressure groups, will largely determine the priority given to satisfying the community’s various collective wants.

Review questions

1. Define the following words: business, enterprise, profit, revenue, expenses.

business

enterprise

revenue

expenses

Budget deficit implications

The mid-year budget update, will show total budget revenue forecast for this financial year has been downgraded by $7 billion since the May budget as plunging commodity prices feed the biggest fall in the terms of trade since records began in 1959. Treasurer Joe Hockey stated that falling prices for iron ore and other commodities were overwhelmingly responsible for total Government revenue for

2014-15 falling from $386 billion to a new forecast of $379 billion.

Mr Hockey reaffirmed the Government would not try to recoup the plunging revenues through severe budget cuts because that would damage the economy.

“If we don’t use the budget as a shock absorber, then Australians will lose jobs and we will lose our prosperity,” he said.

However, there will be significant cuts to the Foreign Aid budget. “Our priority is to grow the Australian Economy and put in place structural changes that pay down debt over time.’’ Another factor contributing to the decline in revenue is the flattening in wages growth.

The Government’s inability to pass budget cuts through the Senate is forcing them to delay the goal of achieving a budget surplus by 2017-18.

Adapted from www.afr.com.au, 15 December 2014

1. How much is the Budget shortfall in predicted revenue?

2. Why would falling commodity prices and flat wages affect the Government’s revenue?

3. Distinguish between a budget deficit and a budget surplus.

4. What is the impact of a budget deficit on business and consumers?

5. Compare the situation in this article with the Federal Government’s current debt level.

in focus

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SACE 2 BUSINESS & ENTERPRISE

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TOPIC 3 THE BUSINESS ENTERPRISE

profit

2. Use the above words in a sentence to show your understanding of the difference between profit and revenue.

3. Identify two alternative terms that can be used instead of business.

4. Distinguish between a good and a service. Give examples.

5. Distinguish between a need, essential and non-essential want. Give examples.

6. Identify two key factors that will influence which wants an individual decides to satisfy.

7. Discuss the concept of collective wants and explain how they are satisfied in Australia.

Consumers make choices every day about how to satisfy their needs and wants.

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The daily media makes regular reference to the state of the economy.

The strength of any economy depends on the level of economic activity.

1.2 The EconomyEconomics is often referred to as the study of choice. It involves decisions being made about the production, distribution and consumption of goods and services in a given society. Essentially, the related term, economy, refers to the web of interlocking activities that take place in a community to enable resources to be combined to produce goods and services that satisfy consumer demand. Economic activity happens at various levels. We can refer to the regional or local economy, to the state economy, the national or domestic economy and the global economy

A basic understanding of how our economy is structured will enhance your understanding of the operation of business in the domestic and global environment. Economic factors in the external environment have a strong impact on business activity. This is reflected in the daily headlines in the media that constantly refer to economic and business activity. Business and economic activity are intertwined. Business activity is the process of transforming resources into output by value-adding. For example, the production of bread involves a number of businesses adding value at each stage of production. Chapter 2 will illustrate why it is often stated that businesses are the heartbeat of the economy.

source: www.rba.gov.au, 2016.

Australia’s Economy – Snapshot

The Snapshot of the Australian economy illustrates the various ways we measure and report on the performance of the economy.

In small groups, research each of the following indicators and report back to the class on how these economic indicators influence consumer and business spending.

• Economic growth• Inflation• Official cash rate• Exchange rate• Unemployment rate.

Refer to www.rba.gov.au. Compare the latest monthly figures with those in the Australia Economy Snapshot on this page.

in focus

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TOPIC 3 THE BUSINESS ENTERPRISE

1.3 ResourcesThe general meaning of the word resource is any item that can be used to accomplish a goal. In a business context, resources are items that can be used to produce goods or services. Alternative terms for resources are factors of production or inputs.

The quality and quantity of resources available in Australia determines our productive capacity. The way available resources are used will determine the wealth of Australia as a whole today and in the future. Businesses play a central role in this process and can significantly influence decisions about resource use.

Resources can be grouped into four categories: Land, Labour, Capital and Entrepreneurship.

Australia’s Natural Resources

A number of large multinational mining companies such as BHP Billiton Limited (Ltd) and Rio Tinto Alcan Ltd have significant interests in Australia’s mineral wealth. In 2008 BHP Billiton proposed to expand Olympic Dam in Roxby Downs, 560 km north of Adelaide, South Australia. Olympic Dam hosts an underground mine as well as an integrated metallurgical processing plant, producing copper, uranium, gold and silver. It has the fourth largest copper deposit and largest known single deposit of uranium in the world.

The expansion plan envisaged increased production of the natural resources and capital expenditure on infrastructure including a railway line and an airport. However, in August, 2012 the plan to expand Olympic Dam was axed due to tough economic conditions, subdued commodity prices and the need to find more cost-effective methods to extract the natural resources from the Earth.

Evaluate the economic, social, and environment implications and consequences on the local and SA economy of the decision by BHP Billiton to discontinue plans to expand Olympic Dam mining.

Find a current article about BHP activity at Olympic Dam in Roxby Downs in South Australia and answer the question below:

Is BHP Billiton planning to expand mining in the Olympic Dam in the future?

case study

Land

Capital

Labour

Enterprise Andrew Forrest, WA Mining Entrepreneur

LandThe ‘gifts of nature’ that we use to produce products are called land in Economics although in business we often use the term, natural resources. Although ‘land’ refers to land surface in the everyday sense, it has a broader meaning that includes living things such as fish and wheat, minerals, iron ore, oil, gas, water, wind, sun and air.

Whilst our land surface and water resources are renewable, some of the resources used to create energy like coal are non-renewable – they can only be used once. However, alternative forms of energy such as solar and wind are renewable. Businesses in the Primary Industry including mining, fishing, sheep, grain and dairy farms are heavily reliant on Australia’s natural resources.

(Shown right) The Olympic Dam open cut mine development was put on hold in 2012 as BHP Billiton investigate more cost-effective extraction methods using capital intensive, rather than labour intensive methods.

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