What exactly is a business? Both Pinterest and the Changs’ Chinese restaurant are businesses—entities that offer products to their customers to earn a profit. A profit is earned when a company’s revenue (the money it brings in) is greater than its expenses (the money it pays out). When expenses exceed revenue, the company posts a loss.

What kinds of products do businesses offer? A product can be either a good or a service. Goods are physical products a business sells. A roast beef sandwich at Arby’s, a 42-inch television at Best Buy, and a Honda Fit at your local car dealership are all considered goods because they are tangible items. Conveyer belts, pumps, and parts sold to other businesses are also goods, even though they are not sold directly to consumers.

A service is an intangible product that is bought or sold. Services include haircuts, health care, car insurance, and theatrical productions. Unlike a polo shirt on a rack at Hollister Co., services cannot be physically handled.

Some companies offer products that are both goods and services. Take, for example, restaurant franchises like T.G.I. Fridays. When you order a sirloin steak at T.G.I. Fridays, you’re paying for the good (a fire-grilled sirloin) as well as the service of preparing, cooking, and serving the steak.

Countries change over time in whether goods or services dominate their economic system. Historically, the United States was primarily agricultural based but then moved to a strong manufacturing base that centered on producing goods. Today, that has diminished, and the service sector dominates. Other countries are following different trajectories; for example, in China, the manufacturing of goods is now the dominant business model.

What do businesses do with their profits? More often than not, profits are the driving force behind a business’s growth. As more profits are generated, a company can reward its employees, increase its productivity, or expand its business into new areas.

The proprietor of a business is not the only one who benefits from the profits it generates. A successful business benefits society by providing the goods and the services consumers need and want. Businesses also provide employment ­opportunities for members of the community. Because they offer desired goods and services, provide employment, and generate income and spending in the economy, successful businesses contribute to the quality of people’s lives by creating higher standards of living for society.

What about not-for-profits? Not-for-profit organizations do not go into business to pursue profits for their owners. Instead, a not-for-profit organization seeks to service its community through social, educational, or political means. Organizations such as universities, hospitals, environmental groups, and charities are examples of not-for-profit organizations. Any profits they generate are used to further the organizations’ causes by expanding the services they provide.

What do businesses use to create the products they sell? To fully understand how a business operates, you have to consider its factors of production, or the resources it uses to produce goods and services. For years, businesses focused on the traditional factors of production: labor, natural resources, capital, entrepreneurial talent, intellectual property, and technology.

• Labor. Needless to say, businesses need people to produce goods and provide services. Labor is a human resource that refers to any physical work or intellectual work (ideas and knowledge) people contribute to a business’s production.

• Natural resources. Natural resources are the raw materials provided by nature that are used to produce goods and services. Soil used in agricultural production; trees used for lumber to build houses; and coal, oil, and natural gas used to create energy are all examples of natural resources.

• Capital. There are two types of capital: real capital and financial capital. Real capital refers to the physical facilities used to produce goods and services, such as office buildings and factories. Financial capital refers to money used to facilitate a business enterprise. Financial capital can be acquired via business loans, from investors, through other forms of fund-raising, or by tapping into one’s personal savings.

• Entrepreneurial talent. An entrepreneur is someone who assumes the risk of creating, organizing, and operating a business and directs all of a business’s resources. Entrepreneurs are a human resource, just like labor, but what sets them apart from labor is not only their willingness to bear risks but also their ability to effectively manage businesses. For successfully doing so, entrepreneurs are rewarded with profits from the businesses.

• Intellectual property. Intellectual property consists of privately owned, intangible assets developed as a result of people’s intellect and creativity. Drug patents held by pharmaceutical companies, copyrights to songs, and trademarks for products such as Coca-Cola are examples. Holding a patent on a drug, for example, means that no other company can compete with your product while the patent is in force.

• Technology. In our twenty-first-century economy, an additional factor of production has become increasingly important: technology. Technology refers to goods and services such as computers, smartphones, software, and digital broadcasting that make businesses more efficient and productive. Successful companies are able to keep pace with technological progress and harness new knowledge, information, and strategies. Unsuccessful companies often fail because they have not kept pace with the latest technology.

You will learn more about labor (Chapter 9), capital (Chapter 15), entrepreneurs (Chapter 5), and technology and knowledge factors (Chapter 10) as you continue reading this text.