1.

5 Need-Satisfying Institutions

In a market economy, need-satisfying institutions extend beyond business organizations. While

businesses primarily satisfy consumer needs, there are other critical institutions, such as government and
non-profit organizations, that address needs which cannot be profitably handled by private enterprises.
These institutions collectively play an important role in fulfilling the diverse needs of society.

1. Business Organizations (Private Sector)

• Role in the Market Economy:

o Business organizations are private institutions that satisfy the needs of the community by
producing goods and services.
o Their primary aim is profit, which can only be achieved by meeting consumer demand
and thus solving the fundamental economic questions: what to produce, how to produce,
and for whom.
• How Businesses Operate:
o Consumer Demand: The demand for goods and services from consumers drives
businesses. Businesses analyze consumer preferences to determine which products and
services should be produced.
o Resource Mobilization: Businesses acquire resources like labor, raw materials, and capital
from the factor market. In return, they pay wages and salaries to workers, which
consumers use to purchase goods and services.
o Competition and Profit: Businesses operate in a competitive environment, where market
dynamics determine the production processes to ensure profitability.
• Business Risk and Initiative:
o To make a profit, business owners must take risks, mobilize resources, and invest in
infrastructure (e.g., building facilities, acquiring machinery, hiring staff).
o Entrepreneurs take initiative and assume risks to produce goods and services that satisfy
the needs of consumers.
• Types of Business Organizations:
o Businesses can take many forms, including sole proprietorships, partnerships,
corporations, and public companies.
o While these organizations are privately owned, they operate within the larger economic
system that includes both government and non-profit organizations.

2. Government Organizations (Public Sector)

• Role in the Market Economy:

o Government organizations exist to provide services that are essential but not profitable
for private businesses to deliver. These services typically include healthcare, education,
justice, and defense.
o Governments intervene in the market to ensure these services are available to the public,
despite the absence of profit motives.
 • Public Enterprises and State-Owned Organizations:
o Government-run businesses, known as state-owned enterprises (SOEs), offer services
and products to the public, often in sectors critical for national development (e.g.,
transportation, energy).
o These organizations may operate for profit, but their focus is more on meeting national
needs, such as self-sufficiency in energy, defense, and infrastructure.
• Challenges of Government Organizations:
o Government-run organizations often face inefficiency compared to private businesses, as
they are not driven by profit motives.
o There are challenges related to effectiveness, and state-run enterprises often require
government bailouts or funding due to poor performance.
o Despite some efforts at privatization, many public enterprises still struggle with issues
like poor service delivery and high costs.

3. Non-Profit-Seeking Organizations (Third Sector)

• Role in Society:
o Non-profit organizations serve to address community needs that neither business
organizations nor government entities fulfill. These include welfare services, cultural
activities, and amateur sports.
o Unlike businesses, non-profit organizations do not seek profit but aim to provide services
to specific groups in society.
• Funding and Financial Sustainability:
o These organizations rely on donations, charitable contributions, and membership fees to
fund their activities.
o While they do not aim for profit, many non-profit organizations seek to maintain a
balance between income and expenditure, operating similarly to business organizations
to ensure sustainability.
• Management Practices in Non-Profits:
o Non-profit organizations often employ business management principles to efficiently
deliver services and maintain financial stability.

6.1 Economics as a Social Science:

o Economics studies how humans use scarce resources to produce goods and services.It
focuses on solving the economic problem of resource allocation to improve the well-
being of society.Key economic variables include prices, income, taxes, productivity,
government intervention, and economic growth.
• Business Management as an Applied Science:
o Business management is concerned with studying institutions (like private businesses,
public corporations, and non-profits) within an economic system that aim to satisfy
community needs.In a mixed-market economy, private businesses are the primary focus
of business management.
• Difference Between Economics and Business Management:
o Economics looks at the broader economic system of a country, addressing issues like
inflation on a national scale.
 o Business Management focuses on the impact of these economic factors (e.g., inflation)
on individual organizations or businesses.

6.2 Purpose of Business Management:

o Business management focuses on determining how organizations can achieve the

highest level of productivity with minimal costs, thereby increasing efficiency and
effectiveness.
o The approach considers stakeholder interests (e.g., employees, customers,
society), not just profitability.
• Profit and Sustainability:
o Businesses aim to maximize profits through efficient management practices while
balancing their responsibilities to society, employees, and the environment.

6.3 Business as independent science

Larger non-profit organizations adopt strategies that resemble those of businesses, utilizing financial
management and resource allocation techniques to support their Here’s a more detailed summary
with bullet points:

• Business Management as a Young Science:

o Business management is a relatively new and evolving field. The scientific basis of the
discipline is still debated among scholars.
o There is no unanimous agreement on whether business management qualifies as an
independent science, as there are various perspectives on what defines a science.
• Key Characteristics of a Science:
1. Clear Subject of Study:
▪ Business management has a clearly identifiable subject of study—business
organizations within the market economy. This satisfies the condition of having a
defined focus.
2. Independence from Other Sciences:
▪ Business management can be considered a science because it has its own
focus—guiding businesses towards financial and non-financial objectives.
▪ However, business organizations are also studied by other fields such as
sociology, psychology, and economics, which examine the social and behavioral
aspects of business.
▪ The primary distinction is that business management focuses on maximizing
sustainability and organizational effectiveness, whereas other disciplines study
business from different angles.
3. Systematised Knowledge and Tested Principles:
▪ Business management draws on a large body of knowledge and established
principles that have been tested and applied globally.
 ▪ While these principles are useful, they are not as precise or universally applicable
as those in the natural sciences.
▪ Management is considered a normative science, meaning it seeks to establish
guidelines or norms to improve organizational outcomes and sustainability.
• Challenges in Defining Business Management as a Science:
o A major characteristic of science is the ability to create a universally accepted theory.
o However, business management doesn’t yet meet this criterion. The rapidly changing
business environment, combined with human variables (such as employee behavior and
market fluctuations), makes it difficult to develop a single, unifying theory for all business
contexts.

6.4 interface between management and other sciences

• Business management is a young, developing science that studies how to help businesses achieve
their goals efficiently.
• It draws on knowledge from other disciplines, even though those disciplines may not focus on
profitability.
• Key concepts in business management, like strategy, sociological principles, engineering
methods, and mathematical models, originate from other fields.
• Advertising in business uses psychology, arts, and communication principles to drive profitability.

1.4 Economic Systems & the Economic Problem

1. The Economic Problem

• Scarcity forces societies to decide what, how, and for whom to produce.
• This challenge is addressed through an economic system: the framework by which production
and distribution are organized.
• Three main types:
o Market Economy
o Command Economy
o Socialism
• While shaped by political factors, these systems are not political ideologies.

2. Market Economy (Free-Market / Free-Enterprise System)

Main Features:

• Private ownership of resources and production.

• Driven by the profit motive and supply & demand.
• Freedom of choice for both producers and consumers.
• Minimal government interference—only to maintain law, order, and basic regulation.
Property & Mechanisms:

• Individuals can own property and earn income from it.

• Competition and price signals guide production and improve efficiency.

Criticisms:

• 2008 Financial Crisis: showed risk of unregulated markets.

• Income inequality and social unrest (e.g., Occupy Wall Street).
• Corruption/state capture: in countries like South Africa (e.g., Gupta family, Bosasa, SAA
scandals).

3. Command Economy (Centrally Directed Economy / Communism)

Main Features:

• State owns all means of production.

• Government controls all economic decisions (what, how, for whom).
• No profit motive, no competition, no consumer choice.

Weaknesses:

• Lack of initiative and innovation.

• Leads to inefficiency and poverty.
• Historic failures: Soviet Union, Eastern Europe.

Modern Examples:

• Cuba, North Korea

4. Socialism (Mixed Economy)

Definition:

• A hybrid between market and command economies.

Key Features:

• State controls strategic sectors (health, energy, transport).

• Private businesses allowed in non-strategic areas.
• Assumes resources belong to everyone, aims for equity.

Consumer Choice:
 • Greater than in command economies, less than in free markets.

Mixed Economic Systems

• No country practices a purely free-market, command, or socialist system; most are mixed
economies combining features of each.
• China officially has a command economy, but allows private enterprise.
• USA, often seen as a free-market icon, is actually a mixed economy with substantial government
intervention.
• Post-2008, even traditionally free-market economies increased state intervention.

2. Economic Freedom and Wealth Creation

• High-income countries (e.g., Singapore, Switzerland, USA, Sweden, UK) often have well-
functioning market or mixed economies.
• Low-income countries (e.g., North Korea, Ethiopia, Mozambique) typically lack economic freedom
or are emerging from command economies.
• Mid-level economies like South Africa, China, Brazil reflect mixed or transitioning systems.
• Although other factors (education, culture, work ethic) impact wealth, market economies
generally outperform command economies in generating wealth.
• Figure 1.7 (2021 GNI/capita) supports the notion that economic freedom correlates with national
prosperity.

3. Role of the State in Economic Systems

• State intervention occurs in all systems—market and socialist—though the extent varies.
• Conservative View:
o Advocates for limited state involvement.
o Criticisms:
▪ Fails to address economic fluctuations (e.g., inflation, unemployment).
▪ Allows income inequality and market imperfections (monopolies).
▪ Poorly handles public goods (e.g., defense) and externalities (e.g., pollution).
• Liberal View:
o Supports active state intervention to:
▪ Regulate markets.
▪ Protect natural resources.
▪ Enforce consumer rights.
▪ Prevent monopolies.
▪ Stimulate economic growth, support SMEs, and fund research.

4. Government as Entrepreneur

• In countries like South Africa, the state directly owns and runs businesses in:
o Transport, electricity, arms, media.
• Justifications:
o Private sector uninterested or unable due to scale or risk.
o Strategic importance of certain sectors.
 • Risks:
o Excessive state control leads to bureaucracy, reduces competition, and lowers
productivity.

5. Public–Private Partnerships (PPPs)

• A hybrid model where governments and private firms co-invest in major projects.
• Examples: Toll roads, Gautrain (rapid rail in Gauteng, SA).
• Combines public oversight with private sector efficiency.

1.3.1 The Multiplicity of Human Needs

• Human Survival & Needs: The basic premise of human existence revolves around the continuous
satisfaction of physical and psychological needs. Every individual’s work contributes directly or
indirectly to satisfying these needs.
• Variety of Needs: Needs range from the most basic survival necessities (food, water, shelter) to
complex psychological needs such as luxury items and entertainment. These needs differ greatly
between rural and industrialized communities.
• Basic vs. Psychological Needs:
o Physical Needs: Essential for survival, such as food and clothing.
o Psychological Needs: Non-essential for survival but contribute to comfort and pleasure
(e.g., entertainment, travel, and luxury items).
• Maslow’s Hierarchy of Needs:
o Hierarchy: From basic survival needs to higher psychological needs, as per Abraham
Maslow’s theory.
o Order of Importance: Basic needs must be satisfied first before progressing to
psychological ones.
o Overlapping Needs: Certain needs overlap (e.g., clothing for both warmth and fashion).
o Changing Needs: As society satisfies one need, newer and more complex needs emerge
(e.g., the shift from cell phones to smartphones, smartwatches, etc.).
• Example: COVID-19 Impact:
o The pandemic caused economic hardship in South Africa, impacting household spending.
o Lower-income groups spent a higher proportion of income on basic needs (food), while
higher-income groups allocated more to transportation and luxury goods.

1.3.2 Society’s Limited Resources

• Scarcity of Resources:
o Despite advances in industrialized societies, resources remain limited, preventing all
human needs from being met.
o Examples of Scarcity:
▪ Water: A vital resource, facing scarcity issues, especially in countries like South
Africa.
▪ Electricity: South Africa’s energy crises, such as power shortages from Eskom,
impacting businesses and households.
 • Types of Resources:
1. Natural Resources:
▪ Includes agricultural land, minerals, forests, and water.
▪ Natural resources are finite and cannot be increased. Once depleted, they are
not easily replenished.
▪ Example: Forests transformed into timber for construction, or oil refined for
aviation fuel.
2. Human Resources:
▪ The skills and labor of individuals.
▪ The workforce’s size and skill levels determine how effectively products and
services are produced.
▪ Training and Skill: Skilled labor, like that of pilots, requires more extensive
training compared to less skilled jobs, like flight attendants.
▪ In South Africa, there’s an oversupply of unskilled labor but a shortage of highly
skilled workers.
3. Capital:
▪ Refers to physical assets like buildings, machinery, and technology used in
production.
▪ Capital goods have long working lives and play a significant role in production
processes (e.g., factories, machinery).
▪ Scarcity of Capital: Capital is difficult to accumulate, requiring years of
investment. For instance, the costs of setting up a factory or building
infrastructure like roads or bridges.
4. Entrepreneurship:
▪ Entrepreneurs take the risk of using their capital and skills to create new
businesses.
▪ Entrepreneurs like Lekau Sehoana exemplify how individuals risk their capital to
offer new products or services with the hope of gaining profits.
▪ Entrepreneurship is a scarce resource because not everyone is willing to take
risks, nor does everyone have the capacity to manage successful ventures.

1.3.2.4 Entrepreneurship as a Factor of Production

• Entrepreneurial Risk: Entrepreneurs often face high risks, as starting a business involves
uncertainty. They may invest significant time, energy, and capital but face the possibility of
failure.
• Role of Entrepreneurs in the Economy: Entrepreneurs drive innovation, create jobs, and lead the
creation of new products and services, thereby fostering economic development.
• Entrepreneurship in Business: While often associated with small businesses, entrepreneurship is
critical even in large corporations. Innovation, change, and the ability to adapt are necessary for
businesses to succeed in a competitive environment.

1.3.2 Economic Issues Arising from Scarcity

Given the scarcity of resources and the infinite number of human needs, society must solve the economic
problem of how to allocate limited resources in the most efficient way possible to satisfy as many needs
as possible. This includes addressing the following core economic questions:
 • What to Produce and in What Quantities?
o What types of goods and services should be produced?
o Should the focus be on capital goods or consumer goods? How many should be
produced, and in what proportion? Examples include decisions about building houses or
flats, or whether to invest in railways or trucks.
• Who Should Produce These Products?
o Who should take responsibility for the production of goods: government or private
individuals?
o In some cases, production might be shared, as seen in South Africa’s health sector, where
both public and private enterprises contribute.
• How Should These Products Be Produced?
o What resources should be used, and what methods of production should be employed?
o Should labor-intensive or capital-intensive production be used? For example, should
products be made via a production-line method or through more individualized labor?
• For Whom Should These Products Be Produced?
o Should products cater to wealthy consumers or those in poverty?
o Who are the intended consumers for goods and services: businesses, or households?

1.3.2.5 Role of the Community in Economic Decision Making

• Community Decisions: The community, through political processes, determines which institutions
will manage the production and distribution of goods and services.
• Nationalisation vs. Privatisation:
o Nationalisation: Some sectors, like mines and banks, are suggested to be controlled by
the government for strategic reasons.
o Privatisation: Other services, like Eskom, may be more efficient if controlled by private
investors.
• Examples of Economic Change:
o The adoption of extended shopping hours in South Africa in 1965 was a response to
changing societal needs, particularly the participation of women in the workforce.

1.3.3 The Economic System

• Market Economy: In a market economy, need-satisfying institutions, such as businesses and

government entities, produce and exchange goods and services for profit.
• Adaptation to Community Needs: If a community is dissatisfied with how its needs are met, it can
alter the economic system. The disappearance of old businesses and the emergence of new ones
are examples of this adaptive process

2.9 Small Business Definition:

A small business can be defined in various ways based on the economic conditions of a country and the
purpose of the definition. South Africa, like many other countries, has a mixture of small businesses
operating both formally and informally. In the informal economy, businesses such as food takeaway
outlets (kota, vetkoeks, shisa nyama, etc.) are prevalent, with some having a turnover of up to R50,000
per day. Informal businesses contribute significantly to the economy, with informal stores in South Africa
making up 20% of consumer spending, growing at a rate of 7% per year compared to formal stores at 4%.
Key Characteristics of Small Businesses:

1. Independently Owned: Small businesses are independently owned, financed, and managed.
2. Flat Management Structures: Typically, small businesses do not have multiple layers of
management.
3. Market Share: Small businesses are small in terms of market share and operate independently of
large corporations.
4. Size Relative to Context: A business may be small in one context but large in another. For
instance, a local supermarket might be considered large in a small town but could be small
compared to larger retail chains like Pick n Pay.

Quantitative Criteria:
To classify small businesses, several quantitative criteria are used, including:

• Number of Employees: Fewer than 200 employees.

• Annual Turnover: Less than R64 million.
• Capital Assets: Less than R23 million.
• Managerial Involvement: Direct managerial involvement by the owners.

The Role of Small Businesses in the Economy

Small businesses play a strategic role in the economy, contributing in multiple areas, including innovation,
production, aiding large businesses, and creating jobs. They not only serve local communities but also
promote local economic development.

1. Production of Products and Services

Small businesses efficiently combine societal resources to produce goods and services. They are flexible
and less burdened by bureaucratic decision-making structures, which allows them to be more productive
than larger corporations. Small businesses contribute significantly to the production of goods and services
and employ a large portion of the workforce in developed economies.

2. Innovation

Small businesses are the primary source of innovation globally. Many scientific and technological
breakthroughs have come from small organizations, not large corporations. Examples include the
invention of photocopiers, jet engines, insulin, ballpoint pens, personal computers, and more. In South
Africa, an example is Sihle’s Brew, a black-owned coffee brand, which has successfully introduced South
African-produced coffee to major retail chains like Pick n Pay and Spar.

3. Aiding Big Business

Small businesses support large corporations by providing necessary supplies and services. This
relationship is crucial for the competitiveness of large corporations in the global market. While mega-
corporations can bring in significant foreign currency, small businesses are key to their efficiency and
ability to compete internationally.
4. Job Creation

Small businesses are essential for job creation. As large corporations tend to shed jobs, small businesses
continue to provide new job opportunities, especially in a growing economy. Their entrepreneurial nature
drives economic growth and stimulates competition, which in turn improves productivity.