CENTRE OF EXCELLENCE IN ECONOMY AND FINANCE

Individual Study №. 1
on „Business system today”

Submitted by: Russu Larisa, FIN1506 G

Submitted to: Coropcean Svetlana

CHIȘINĂU 2018

Summary:
I. What is a “BUSINESS”…………………………………………………………3
II. Our business system today....................................................................................3
III. The circular flow of system……………………………………………………..3
1. Households…………………………………………………………………..4
2. Businesses…………………………………………………………………...4
3. Governments………………………………………………………………...4

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 I. What is a “BUSINESS” ?

A business is an organization or enterprising entity engaged in commercial, industrial or

professional activities. A company transacts business activities through the production of a good,
offering of a service or retailing of already manufactured products. A business can also be described
as the organized effort of individuals to produce and sell for a profit goods and services to satisfy
society’s needs. It can be a for-profit entity or a non-profit organization that operates to fulfill a
charitable mission. There are four kinds of resources- material, human, financial and informational-
that must be combined to start and operate a business.

II. Our business system today

An economic system is a mean of deciding what goods and services will be produced, how they
will be produced, and for whom they will be produced. Business system’s theoretical basis is the
laissez-faire economic system of Adam Smith in which these decisions are made by individuals and
businesses and they pursue their own self-interests. In a laissez-faire capitalist system, the factors of
production are owned by private individuals, and all individuals are free to use their resources as they
see fit; prices are determined by the workings of supply and demand in competitive markets; and the
economic role of government is limited to protecting competition.
However, our real-world economy is more of a mixed economy, one that exhibits elements of both
capitalism and socialism. Our present business system is called modified capitalism; it is essentially
capitalist in nature, but government takes part in it along with households and businesses.
In the development of our business system, the government started to participate during the Great
Depression of the 1930s and generally increased since those years, for a variety of economic and
social reasons. Since then our business system has been guided by the interplay of buyers and sellers,
but obviously the role of government must also be taken into account.

III. The circular flow of system

In today’s economy the three basic economic questions (what, how and for whom) are answered by
three groups:
1. Households, made up of consumers who seek the best value for their money and the best
prices for the economic resources they own.
2. Businesses, which seek to maximize their long-term profits.
3. Federal, state and local governments, which seek to promote public safety and welfare and to
serve the public interest.

The interaction among these three groups are shown in the figure below.

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1. Households
Households are both consumers of goods and owners of the productive resources of land, labor,
and capital. As resource owners, the members of households provide businesses with the means
of production. In return, businesses pay rent, wages, and interest, which households receive as
income. As consumers, households members use this income to purchase the goods and services
produced by business.
2. Businesses
Like households, businesses are engaged in two exchanges. They exchange money for the
factors of production, and they use the resources to produce goods and services. Then they
exchange their products for sales revenue. This sales revenue, in return, is exchanged for additional
resources, which are used to produce and sell more products. So the circular flow is continuous:
Business pays wages, rent and interest which become household income which becomes
consumer spending which becomes sales revenue which again becomes wages, rent, and interest.
And so on.
3. Governments
Governments are deeply involved in business life. To pay for all these services, governments
collect a variety of taxes from households (such as personal income taxes and sales taxes) and
from businesses (corporate income taxes). The figure shows this exchange of taxes for government
services. It also shows governments spending for resources and products required to provide these
services. In other words, government, too, return their income to the business system through the
resources and product markets. The circular flow of business activity, including government, is
thus complete and self-contained. That is, the system works.
Actually, with government included, our so-called circular flow looks more like a combination of
several flows. And it really is. The important point is that, together, the various flows make up a
single unit- a complete system that effectively provides answers to the basic economic questions.