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Business and Strategy

The Role of Business in Society and the Economy

Updated on · By Ahmad Nasrudin Tag: ,

The Role of Business in Society and the Economy
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Business plays a vital role in our lives. First, they create goods and services to satisfy our needs and wants. Then, they also recruit households as labor and provide them with compensation, such as wages, salaries, and benefits. Thus, it becomes a source of their income, which can be used to sustain their life.

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Where does the business come into play and operate? Business is everywhere. They can operate in the primary sector to extract natural resources such as mining. Or they harvest various agricultural commodities. They usually produce raw materials, which are inputs for other businesses in the secondary sector.

Others operate in the secondary sector. They process raw materials into intermediate products or final products. Intermediate products are sold to other businesses to be further processed into final products and then sold to consumers. Meanwhile, the final products are for final consumption without going through further processing to obtain their benefits.

Then, some businesses operate in the tertiary sector. They offer services. Their activities range from providing trading services (retail and wholesale), tourism services to financial services such as banking and insurance. Apart from providing services to businesses in the primary and secondary sectors, they also provide them to households.

How does business play a role?

Businesses buy inputs such as raw materials from suppliers. They then process it into output, which they can sell at a higher price than the dollars they pay suppliers. This process we call value-adding wherein, they convert lower-priced inputs into higher-priced outputs.

The output then we use to fulfill our needs and wants. What are needs and wants?
  • Needs are something we need because they are essential for our survival. Without fulfilling it, it could pose significant risks such as death. An example is our need for food, drink, clothing, and shelter.
  • Wants are something we need but are less essential for our survival. For example, we want a vacation and a smartphone, although, without both, we’d be fine too. Likewise, standard clothing is a necessity, but we may want luxury clothes if we have enough money.

What output does the business produce?

Business output falls into two main categories: goods and services. We call them both products.

  • Goods represent tangible products. We can see or touch them. We can also save them for later use. Examples are clothes, food, smartphone cars.
  • Services are intangible products. We can only feel their benefits without being able to see or touch them. Banking services, hotels, consultants, barbershops are examples. We can interact with the people who gave them but can’t see what they gave us like when we receive the goods from the seller.

What inputs are used?

In a broad definition, inputs include not only raw materials. For a business to operate, it requires the following four resources – we refer to as factors of production:

  • Land – such as land for factory and office locations and natural resources for raw materials.
  • Labor – includes the physical and mental effort of a worker.
  • Capital – includes man-made to assist production such as machinery and equipment.
  • Entrepreneurship – our attempt, by taking risks, to establish a business by bringing together and organizing land, labor, and capital.

What are the role of business in society and the economy?

As with the opening sentence, the role of business is vital to our society and economy. Businesses don’t just satisfy our needs and wants through the products they produce. But, they also create jobs and income in the economy. In addition, competition between them encourages innovation and efficiency, making goods and services cheaper and of higher quality.

Satisfying our needs and wants

Businesses sell goods and services to satisfy our needs and desires for profit. So, without them, we would have to produce everything ourselves, including our food and clothes.

Then, businesses also have to compete with each other. To keep the money flowing, they must deliver higher satisfaction than competitors do. Competition forces them to be more efficient and innovative, leading to lower prices and better quality.

Creating added value

Businesses create wealth in the economy by adding value to the inputs they use. It makes the output more valuable than the input used. Finally, added value makes their products more attractive, and customers will usually be willing to pay more.

Value creation or value addition can be done in several ways. For example, businesses transform inputs into more valuable forms, such as converting bauxite into aluminum slabs and processing them into car bodies.

Another example is offering convenience, such as saving customers time as fast food businesses offer. Quality also contributes to added value, such as embedding 4G technology in smartphones instead of 3G.

Creating jobs

Business creates jobs in the economy. Therefore, the more businesses there are, the more manpower is needed. Likewise, as their size grows, they also require more manpower.

When starting a business, employers hire workers to support operations. They work in several functional areas such as accounting and finance, human resources, marketing, and production.

Then, as businesses grow, employers also need more workers. The larger business size makes operations more complex and requires more staff to handle tasks and jobs.

Income creation

Entrepreneurs set up businesses for profit. If the business is successful, their income and wealth increase.

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Likewise, by working, individuals earn income. The money they get they can use to fulfill their needs and wants.

Thus, growing business activity creates more income in the economy. More people work for income. Higher incomes drive more demand for goods and services.

Then, with high demand, entrepreneurs see more opportunities to grow their business and introduce new businesses.

Economic development

The business contributes to promoting economic development. In addition, business activity creates a ripple effect, encouraging other businesses to emerge, creating more income and jobs in a region.

Business growth in the region does not only contribute to job creation. But, it will also lead to improvements to infrastructure such as roads and railways in the region. In addition, health facilities, education, shopping centers, and other public and private services are also developing. Eventually, the economy in the region grew.

Living standard improvement

Business activities contribute to improving people’s living standards. It can go through several channels.

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First, from the goods and services produced by the business, we can fulfill our needs and wants. Second, from the jobs created, we get income. We can use the money to buy various goods and services to satisfy our needs and wants. We can also invest it to support future needs, for example, during retirement. Then, we can also use it to buy insurance to minimize the losses we may experience.

Third, competition leads to lower prices and higher quality goods and services. Businesses must outperform their competitors in satisfying their customers, forcing them to be more efficient and innovative. It ultimately makes our lives more comfortable and better because we can get lower prices and higher quality products.

For example, we can capture and photograph our best moments with mobile phones without buying a camera. In the past, we couldn’t do it. This is because manufacturers don’t embed high-resolution cameras into phones.

Community empowerment

Some business organizations seek to strike a balance between profit, social and environmental. They do not pursue maximum profit and wealth for the owner. But, they reinvest the profits for social and environmental causes.

For example, microfinance providers raise money through crowdfunding and lend it to small entrepreneurs on flexible terms and low-interest rates. It allows small businesses to thrive, creating more jobs and income for the neighborhood. Then, microfinance providers use the profits to expand the reach of their services to communities elsewhere.

In other cases, social enterprises empower a community by training people in entrepreneurial skills. They then help the community market the product and use the sales money to provide more training and build public facilities such as education and health.

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