changes: These might enable more people to provide computer services and enter the market.
■ Changes in resource prices: If the costs for offering the service decreased but prices for the services stayed the same, more providers would be willing to enter the market.
■ Price expectations: If providers think that prices in the computer market could fall, they will probably think of some other field of business to work in and reduce their supply in their original field of business.
[16] Supply and demand for money
Please note that the laws of supply and demand also help to understand one of the main causes of inflation. If the quantity of money within a country is increased (in order to stimulate the economy), people and businesses are able to buy more and to invest, so demand for goods and services usually rises. If the quantity of available goods and services in this country remains the same and does not increase accordingly, then the prices for goods and services will rise. “Too many dollars chasing too few goods” expresses very well what inflation is about. It is by increasing the price for money, i.e. the interest rates, that inflation can be fought. If it is more expensive to borrow money, people and businesses tend to spend less, demand for goods and services decreases again and so do their prices.
2.7 Competition in the market
The level of competition in a market is mainly influenced by the number of suppliers and the availability of substitute goods. If there is just one supplier, the market situation is called a monopoly. Monopolies are rare in a market economy but there might be goods and services that are only provided by one business (like the railway in some countries).
Some businesses might not be the sole suppliers in the whole market, but they might be the only supplier within a certain area, which also makes them a kind of monopolist. The owners of a ski hut might be in a monopoly-like situation if they are the only ones to offer food and beverages on a particular mountain. A theatre bar is in a similar situation. Tina and Steve could find themselves in such a situation if they are the only ones that offer such a service within a radius of 50 km for example.
If there are a few suppliers, the market form is called an oligopoly. Each supplier has a relatively large share of the market (e.g. telecom companies, car manufacturers). Competition can be strong, because as soon as one supplier changes the product or the price, its competitors are very likely to react in order to maintain their share of the market. Alternatively, suppliers could try to negotiate their terms of sale in order to prevent such harmful competition. Such agreements – also called a cartel – are usually not considered legal. In general, laws support competition in a market because it is considered beneficial for customers.
Perfect competition can (theoretically) be found in markets with so many suppliers and buyers that no single individual or business can possibly influence the price. Considering perfect competition, in economics we also assume the following (theoretical) prerequisites:
■ All market players (buyers and sellers) must have access to all information at all times.
■ There must not be any barriers to enter or exit the market.
■ There must not be any (personal) preferences – i.e. goods, as mentioned, must be replaceable.
In real life, perfect competition is rarely found but, nevertheless, some markets come close to the concept of perfect competition. These are markets for goods and/or services that are almost identical (regardless of the supplier), e.g. agricultural markets, or that can be standardised. Even if the number of suppliers is not so high, competition can be almost “perfect” if competition among suppliers is especially fierce.
3 Focus on different types of businesses
[17]Private households come in many different forms – large families, singles, couples, with or without children – and so do businesses. The large variety of businesses is due to the fact that they differ in the factors of production that they combine, in the sector(s) they operate in and in size. But they all need to consider their stakeholders around them and the environment.
3.1 Businesses combine different factors of production
As mentioned earlier in the introduction, a business is an entity that offers goods and/or services to customers. In order to do so, it combines different factors of production, the resources used to create goods and services. The most important factors are
■ labour (all human resources),
■ land (all natural resources),
■ capital (resources like machinery, plant, vehicles, financial resources), and
■ entrepreneurship (which brings land, labour and capital together) as well as
■ knowledge and technology.
Depending on the factors that are dominant for the production process, a wide range of businesses can be found. Tina and Steve are mainly combining their own knowledge and skills, labour, technology and some capital as well as entrepreneurship. AT&S combines all factors of production. A winemaker with large vineyards combines land, labour, capital and entrepreneurship, but his business might also be dependent on his knowledge, experience and some technology.
3.2 Businesses operate in the primary, secondary and/or tertiary sector
Depending on what a business does, it contributes to one (or more) of three sectors of the economy. The three-sector model differentiates between three sectors of activity:
The primary sector refers to the extraction of raw materials from the earth. It mainly comprises farming, fishing, mining and forestry. Emerging countries (which are economically less developed) usually depend largely on the primary sector.
Businesses of the secondary sector transform raw materials into goods (manufacturing). Such businesses produce cars, ships, machinery, printed circuit boards and IC substrates (like AT&S), computers, clothes etc.
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The tertiary sector comprises the service industry, like distribution, banking, insurance, coaching etc. Tina and Steve offer services: they trade goods, develop software and provide technical support.
The more the economic development of a country advances, the more important the third sector becomes. In economically highly developed countries, like EU countries with a high gross domestic product (GDP) per capita (indicating a high standard of living), the tertiary sector usually accounts for more than 70% of the output of the economy, while the primary
