THE NATURE AND PURPOSE OF ECONOMIC ACTIVITY
| By The End Of This Subtopic Learners Should Be Able To; |
- Describe the development of economic activity
- Explain in detail the concept of economic problem
- Define and describe production
- State three economic system and its characteristics
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Economic activity
- It is defined as the production of goods and services to satisfy human needs and wants.
- It involves the production, distribution and consumption of goods and services.
Purpose of economic activity
- To produce goods and services so as to satisfy needs and wants of customers.
- To ensure that resources are properly allocated in the economy.
- To make sure that all the resources are put to optimum use, that is no input should be kept idle.
- Individuals engage in economic activity for the purpose of earning income/profits.
Distribution — it is the transfer of goods and services from the producer up-to the final user - the consumer.
Consumption- the utilisation of produced goods by the customer.
Goods- these are tangible items that people purchase, for example bread, car, clothes, food, etc.
Services - these are intangible activities that people provide for one another in exchange for money, for example, haircuts, teaching, nursing,
Needs
- These are goods and services which are necessary for human survival.
- They are necessities needed for one to live.
- Examples include food, shelter, clothes, water, and air.
Wants
- These are goods and services, which people desire to have but not necessary for survival.
- One can live without such goods.
- Also known as luxury goods.
- Examples include entertainment, car, phones, holidays, etc.
THE ECONOMIC PROBLEM
- Since needs and wants of individual differ and are unlimited, this causes a rise to economic problem.
- The economic problem arises in the lack of resources to meet unlimited needs and wants.
- This shortage of resources causes scarcity and consumers are forced to make a choice.
- Scarcity refers to having limited factors of production to satisfy unlimited needs and wants.
- Consumers need to make a choice on which wants are to be satisfied and not, this leads to opportunity cost.
- Opportunity cost refers to the next best alternative forgone when one makes a choice.
- For example, choosing Victoria Falls as a holiday resort rather than Great Zimbabwe, therefore Great Zimbabwe becomes the opportunity cost.
PRODUCTION
- It is the provision of goods and services to satisfy human needs and wants.
- It involves turning raw materials (natural resources) into tangible (goods) and non-tangible products (services).
- Production can be direct or indirect.
Direct production- It is when individuals produce for their own consumption and not for sale; examples include subsistence farming, building your own house or making your own dress.
Indirect production - It is where by individuals and organisations produce surplus for sale, examples includes commercial farming or mining.
FACTORS OF PRODUCTION
- These are inputs needed to produce goods and services.
- They are resources used in the production of other goods.
1. Land
- Covers all resources provided by the nature.
- They include things found above and below the soil.
- Examples include water, minerals and vegetation.
- The reward for land is rent.
2. Capital
- Anything used to start the business.
- It can be in form of finance, machinery and equipment needed in the manufacturing of products.
- The reward for capital is interest.
3. Labour
- It refers to the number of people involved in the production process.
- Also refers to the human effort and expertise used in the production process.
- The reward for labour is salaries and wages.
4. Enterprise
- It is the ability and skill of the humans to combine resources together to produce products.
- People who take the risk are called Entrepreneurs.
- The reward for enterprise is profit.
Classification of economic activities
- These are levels of activities in which the economy is divided into.
- It is divided into three levels which are primary, secondary and tertiary level.
1. Primary sector
- It is the first stage of production.
- It involves the extraction of raw materials from nature (Land and sea).
- Examples include fishing, mining, farming, forestry and quarrying.
2. Secondary sector
- It is the second stage of production.
- Involves processing of raw materials into products.
- It deals with the conversion of raw material into semi-finished and finished products.
- Examples are constructive industries, car assembly, dressmaking, carpentry, distilling, shipbuilding, bridge construction and baking.
3. Tertiary Sector
- It is the third stage of production.
- It does not involve production but provides service.
- It involves the provision of service to support secondary and primary production.
- The service include :
- Indirect services - which include communication, insurance, and transport, warehousing and banking.
- Direct service includes teaching, entertainment, tourism, security and hairdressing.
NB; these sectors are interdependent meaning that one sector depends on another sector for the purpose of fulfilling the economic activities.
Specialisation And Division of Labour
- Since resources are limited, firms have to find the best way of utilising these resources.
- Specialisation and division of labour can improve the efficiency of the business.
Specialisation
- It refers to division of task according to individual skills.
- Individuals concentrate on what they are good at, for example specialising in welding, mechanic, carpentry, etc.
- Businesses can also concentrate on producing one product, for example Willowvale car assembly assembles Mazda cars.
- Specialisation assists businesses to use limited resource efficiently.
Advantages of Specialisation
- It saves time; there is no time wasted moving from one job to another since workers concentrate on doing one task.
- Workers become very skilled and efficient at the tasks they work most.
- Workers can concentrate in areas of their interest.
- Mechanisation and automation are enhanced.
Disadvantages of Specialisation
- Re-training of specialist workers is expensive.
- Automation leads to unemployment.
- Workers risk losing their jobs if their skills becomes obsolete.
- Specialisation can lead to boredom.
Division of labour
- It is the process of splitting jobs into simpler task or skills that individuals are best at.
- It originated from the division of employees in different occupations.
- It is necessary where the production is on large scale with the aid of heavy-duty machines.
- Division of labour leads to specialisation as workers tend to focus on one task and gain skills.
- It is also necessary when a product passes through different stages.
- Division of labour raises the productivity and efficiency of economy and business.
Advantages of division of labour
- Increase in production and efficiency of labour.
- Increase in skill and mobility of labour.
- Reduction in the cost of production, therefore cheap goods are produced.
- Saves time and expenses in training workers.
- Spirit of cooperation among workers is developed.
- It aids development of international trade.
Disadvantages of Division of labour
- It leads to interdependence of workers hence affects the process of production.
- Task becomes boring and repetitive result in lack of job satisfaction.
- Kills the creativity instinct of task.
- There is risk of unemployment due to mechanisation and automation.
- Retard development of personality.
- There is loss of sense of responsibility.
THE ECONOMIC SYSTEM
- It defines how an economy distributes its resources and products in a country.
- It shows how a country controls all the factors of production.
- This determine what to produce, how to produce and who to produce for.
- It tries to explain the economic problem of having limited resources to meet the unlimited needs and wants.
- They are three economic systems namely free market, command and mixed market economies.
Market Economy
- Also known as the free market economy.
- It is an economic system in which economic decision and the pricing of goods and service is guided solely by demand of country's citizens.
Characteristics
- There is free entry and exit of businesses, anyone is free to start a business or leave the market.
- It works on the assumption that demand and supply are market forces that determine what to produce and for whom.
- Private individuals own factors of production (resources).
- The main motive of business is profit maximisation.
- There is no or little government intervention in business activities.
- Market mechanism of supply and demand determines price to be charged, the government has no power on price.
- Consumers are free to choose between different brands of the same product.
Advantages
- Resources are utilised efficiently and effectively.
- A variety of goods are produced which allows consumers to have a wide choice to choose from.
- Needs and wants of a consumer are quickly observed and provided.
- Due to competition, products are of high quality.
Disadvantages
- There is duplication of resources, for example many companies producing the same product.
- Factors of production are not equaly distributed.
- Environmental hazards are ignored such as pollution (social cost), since business tends to focus on making profits.
- Unemployment may result because only those with skills that are in demand are employed.
- Provision of social needs such as health, education and social amenities can be limited because they are not profitable.
- Businesses might be encouraged to create monopolies because there is no government control over resources.
COMMAND ECONOMY
- In this economy the government control all the factors of production.
- Decision on what to produce, how much to produce and to whom to produce is planned by the government.
Characteristic
- The government controls ownership and management of resources.
- What to produce, how much to produce and for whom to produce is determined by government.
- The main motive is to provide goods and services rather than profit making.
- The government controls price.
- There is no private property ownership.
Advantages
- Prices are controlled which means people can afford to purchase goods at an affordable price..
- Factors of productions are equally distributed (equitable distribution of wealth).
- There is no duplication of good therefore there is reduction of wastage.
- Basic goods and essential goods are provided.
- Unemployment is reduced since the government provides jobs for everyone.
Disadvantages
- Consumers are limited on what to buy since there will be production of one single brand.
- Takes time to respond to changes in consumer needs and wants.
- They lack profit motive, which causes inefficient utilisation of resources.
- Poor quality goods can be produced due to lack of competition in the market.
MIXED ECONOMY
- It combines features of market and planned economy.
- It consists of private and public companies.
- The government controls important sectors of industries such as healthy, water, education, electricity supply and army.
i. Private sector
- Entities owned and controlled by individuals.
- Their main objective is to make profit.
- Examples include sole trader businesses, partnership and companies.
ii. Public sector
- It consists of organisation owned and controlled by the government.
- Their main aim is to provide services to the society.
- They are non-profit making business.
- Example include health sector, education, defence, water and electricity supply.
Advantages of mixed economy
- Consumer chooses products they want freely.
- All types of products are produced for example, public goods.
- Taxes are imposed to internalise social cost.
- The government intervention can prevent the existence of monopolies.
- Existence of private companies reduces the control of the government in the economy.
