The Nature of Business: Raising the Standard of Living

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  • 0:06 Profit & Risk
  • 1:18 Your Costs, My Profit
  • 2:24 Snowball Effect
  • 3:36 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley

Shawn has a masters of public administration, JD, and a BA in political science.

Businesses not only have the ability to create wealth and prosperity for their owners, but also for their employees and society at large. In this lesson, you'll learn about how the nature of business can increase the standard of living for all.

Business: Profit and Risk

Meet Phillip. He's just started a business, which is the activities of an individual or organization involving the exchange of goods or services for money. Phillip is certainly not alone in starting a business. However, many people don't decide to start a business because of the risk. Risk is the chance of incurring a type of loss or harm. What's Phillip risking?

You see, Phillip had to invest a significant amount of his personal savings to start his business. He also had to take out a substantial loan from his community bank. Additionally, starting a business is usually a full-time job. Phillip doesn't have the time for another job; he will have to rely upon the income his business produces - and what is left of his savings - to survive. If his business fails, he will lose most of his personal wealth. Most people are unwilling to take the risk. So why does Phillip?

One word: profit. Profit is the economic gain Phillip generates from his business after he pays for all of the costs. Phillip hopes to make more money through his business profits than he ever could working for someone else. Some of the wealthiest people in the world, such as Bill Gates and Warren Buffet, started their own companies, and Phillip hopes to make a fortune, too. And if Phillip is successful, he will also create wealth for other people as well. Here's how.

Your Costs, My Profit

Nearly every business has expenses, which are goods and services needed in order for the business to produce and sell its own goods and services. Let's say that Phillip produces furniture. His expenses include the cost of labor to make the furniture and paying the salespersons to sell it. Additionally, he needs to employ managers and retain the services of lawyers and accountants.

He also has to buy raw materials, such as lumber, metal and fabric, as well as the necessary tools and equipment for manufacturing the furniture. Phillip must pay for freight for the delivery of raw materials and the shipment of his finished products. He must also pay for insurance, water, electricity and other utilities.

Of course, what's an expense to Phillip is someone else's income. Phillip's labor costs are the wages and salaries he pays to his employees. The costs of raw materials are sales for the producers or wholesalers of the raw materials. The freight expenses means revenue for the trucking and rail companies that Phillip uses. And of course, Phillip's sales revenue is someone else's costs, such as businesses and homeowners that decide to purchase furniture from him.

Snowball Effect

Now, let's leave Phillip and take a look at the entire economy to see how business can improve the standard of living for everyone. You can think of standard of living as the level of wealth, material goods, services and comforts available to members of a society.

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