Unit 1 Economics Basics

Class # 1
What is economics?
Economics is a social science that studies human behavior that how a consumer satisfies his/ her needs and wants
with the help of limited resources. It is actually about how we can make best use of our available resources
(optimum utilization). Resources are used to satisfy needs (essentials for survivals) and wants (desires).
Basic economic problem
Human wants are unlimited because they are multiple and arise again and again on the other hand resources
available to satisfy these wants are limited as they have alternative uses. We have to choose between alternatives
which mean satisfaction of all the wants is not possible so we have to sacrifice; this sacrifice is known as
opportunity cost (the next best alternative foregone). Limitation of resources and unlimited want create basic
economic problem of scarcity.
Factors of production
To produce goods and services we require resources. We call these the factor inputs available in the
production process. Economic resources are scarce relative to the infinite needs and wants of people and
businesses operating in the economy. It is important to use these resources efficiently in order to maximize
the output that can be produced from them.
Economists make a distinction between four types of resources land, labour, capital, and entrepreneurs.
LAND (natural resources)
Land includes all the natural resources available for production. Some nations are endowed with natural
resources and exploit this by specializing in the extraction and production of these resources. Only one
major resource is for the most part free - the air we breathe. The rest are scarce, because natural resources
have alternative uses and it is not possible to satisfy the demands of consumers and producers. Air is
classified as a free good since consumption by one person does not reduce the air available for others - a
free good does not have an opportunity cost
LABOUR (human resource)
Labour is the human input into the production process and it involves mental and physical activity to earn
some monetary reward.
Two important points need to be remembered about labour as a resource:
A housewife and a keen gardener both produce goods and services, but they do not get paid
for them. They are producing non-marketed output and the output of these people is not
included in Gross Domestic Product
An insight to Economics
1
AZAR ANJUM RIAZ (0321-4455386)
Not all labour is of the same quality. Some workers are more productive than others because
of the education, training and experience they have received
Human capital refers to the quality of labour resources, which can be improved through investments in
education, training, and health
CAPITAL (man made resources)
To an economist, capital has several meanings - including the finance raised to operate a business. But
normally the term capital means investment in goods that can produce other goods in the future. Capital
refers to the machines, roads, factories, schools and office blocks which human beings have produced in
order to produce other goods and services. A modern industrialized economy possesses a large amount of
capital, and it is continually increasing. Increases to the capital stock of a nation are called investment.
Investment is important if the economy is to achieve economic growth in the long run.
FIXED CAPITAL:Fixed capital includes machinery, plant and equipment, new technology, factories and
buildings - all goods designed to increase the productive potential of the economy in future years. We also
include the social capital created from Government investment spending, i.e. the building of new schools,
universities, hospitals and spending on expanding the national road network.
WORKING CAPITAL: Working capital includes stocks of finished and semi-finished goods
(components) that will be either consumed in the near or will be made into finished consumer goods.
ENTREPRENEURS
Entrepreneurs are people who organize other productive resources to make goods and services. Some
economists regard entrepreneurs as a specialist form of labour input. Others believe that they deserve
recognition as a separate factor of production in their own right. The success and/or failure of a business
often depend critically on the quality of entrepreneurship.
Example: What resources go into making a car?
Focus on the main factor inputs:
Labour: Workers employed directly in the car industry; engineers, designers, paint sprayers, testers,
management staff, transport & distribution workers etc
Land: Natural resources used in manufacturer, land for plant and equipment
Capital: Fixed capital: machinery, technology, buildings + Working capital: i.e. stocks of raw materials and
components
Entrepreneurship (sometimes seen as a separate factor): management, risk-taker
Choices and opportunity cost

There is a famous saying in economics that "there is no such thing as a free lunch". Even if we are not asked
to pay for consuming a good or a service, scarce resources are used up in the production of it and there must
be some opportunity cost involved - the next best alternative that might have been produced using those
resources. Opportunity cost measures the cost of any economic choice in terms of the next best alternative
foregone
Point to remember
When we are considering the opportunity costs of decisions we make, we must use the highest-valued
alternative that has had to be sacrificed for the option we have chosen. Many choices involve more than one
alternative.
Practice MCQs
1
A water pump has been invented which is operated when people play on a roundabout in the village. The roundabout
provides the power to pump water from the well.
Of what is this an example?
A
B
C
D
conserving labour and conserving natural resources

conserving labour and using natural resources
using labour and conserving natural resources
using labour and using natural resources
2 What is not included in a persons stock of wealth?

A
B
C
D
3
a gold watch
annual income
an oil painting
company shares
An entrepreneur can use either capital or labour in the production process. The actual combination changes as the
prices of the factors alter.
When is capital most likely to replace labour?
price of capital
A
constant
price of labour
falling
B
C
D
4
rising
constant
falling
In a market economy, what does the entrepreneur decide?

A
B
C
D
falling
rising
falling
the combination of resources used

the demand for the product
the equilibrium price of the product
the level of profits
A factory working at full capacity is producing tennis racquets and golf clubs. The management decides to produce fewer
racquets and more clubs because of an increase in demand for golf clubs.
What is the opportunity cost of producing more golf clubs?
A
B
C
D
the cost of retraining some workers to make golf clubs

the cost of transporting and selling the extra golf clubs produced
the materials bought to make extra golf clubs
the tennis racquets that will not now be produced
A woman playing a quiz game starts with no money, but correctly answers the question that is worth $4000. The next
question is worth $10 000 but if she answers incorrectly she will leave the game with no money.
What is her opportunity cost of choosing to answer the $10 000 question if her answer is incorrect?
A
nothing
$4000
$6000
$10 000
Class # 2
Approaches to the fundamental economic problem
BASIC ECONOMIC DECISIONS
1. What to produce?
2. How should production be organized?
3. For whom should production take place?
Economics systems
FREE MARKET ECONOMIES
A free market economy is one where economic decisions are made through the free market mechanism. The forces of market
demand and supply, without any government intervention, determine how resources are allocated. This is known as the working of
the price mechanism. The basics of this are covered in the theories of demand and supply later on in this revision guide.
What to produce is decided upon by the profitability for a particular product.
When demand for a product is high, the price rises and this raises the profitability of selling in the market
High prices and high profits provide the signal for firms to expand production.
Supply from producers responds to consumer wants and needs expressed through the price mechanism
The consumer is said to be sovereign - their "economic votes" determine how resources are allocated
Advantages of free market economy
Disadvantages of free market economy
COMMAND ECONOMIES
A command economy is one where all key economic decisions are made by the government (or state). The government decides
what to produce, how it is to be produced, and how it is to be allocated to consumers. This involves a great deal of economy
planning by the state.
The price mechanism has no active role in a pure command economy since market prices are rarely used. By state planning, goods
and services can be produced to satisfy the needs of all the citizens of a country, not just those who have the money to pay for
goods. Over the last decade, many former planned economies have attempted to bring market forces into their economy.
Advantages
Disadvantages
MIXED ECONOMIES
A mixed economy is a mixture of a pure free-enterprise market economy and a command economy. Nearly every country in the
world operates a mixed economy although the "mix" can change. There is a private sector and a public sector in the economy
In recent years many command economies have become mixed economies. Examples include countries that were part of the
former Soviet Union. To become a mixed economy, the role of the market and the private sector of the economy must be
increased. This can be done in a variety of ways - listed below:
Privatization of state industries

De-regulation of markets promoting increased competition through the entry of new firms
A gradual ending of state subsidies
Encouraging foreign investment into the economy
Advantages
Disadvantages
Practice MCQs
Which pair of economic institutions would be found in a command economy?
A central bank and public companies
B public corporations and central bank
C public corporations and stock exchange
D stock exchange and public companies
In a market economy, what does the entrepreneur decide?
A
B
C
D
3
the combination of resources used

the demand for the product
the equilibrium price of the product
the level of profits
China is changing from a centrally planned economy towards a market economy.

How will the influence of consumers and the government change?
consumers
government
decrease
decrease
decrease
increase
increase
decrease
increase
increase
What is always a feature of a mixed economy?

A
B
All capital goods are produced in the public sector.

Resources are used in the public and the private sector.
C
D
The allocation of all resources is determined by the price mechanism.

The public sector is larger than the private sector.
5 What is found in a market economy but not a command economy?

A
B
C
D
6
division of labour
economies of scale
money as a store of value
the profit motive
A free market economy is more likely than a planned economy to encourage development because
A
B
C
D
7
equality of income is encouraged.

factors of production would be employed efficiently.
government intervention uses taxes and subsidies.
social costs are taken into consideration.
Each country of Southern Africa has a mixed economy.

Which statement about a mixed economy is correct?
A The government employs most primary sector workers.
B The government owns all major secondary sector industries.
C The government owns the transport network.
D The government provides public and merit goods.
If a planned economy became a mixed economy, which industry would be most likely to remain under government
control?
A
agriculture
coal mining
defence
motor car production
Class # 3
LEGAL STRUCTURE OF BUSINESS ORGANIZATIONS
Sole Trader
A sole trader is a one-person business, commonly found in trades where only small amounts of finance are required to set up and where
there are very few advantages to the existence of larger organizations (e.g. hairdressing, newsagents, and market traders).
Sole traders often employ waged employees, but they alone have to provide all the finance (often savings and bank loans) and bear all
the risks of the business venture. In return, they have full control of the business and enjoy all the profits. A sole trader faces unlimited
liability for his/her debts and it is referred to as an unincorporated business this means that there is no legal difference between the
business and the owner.
Advantages of being sole trader:
Disadvantages of being sole trader:
Partnership
To overcome many of the problems of a sole trader, a partnership may be formed. A partnership is an association of individuals and
generally there will be between 2 and 20 partners. Each partner is responsible for the debts of the partnership and therefore you would
need to choose your partners carefully and draw up an agreement on the responsibilities and rights of each partner (known as a Deed of
Partnership or The Articles of Partnership). The most common examples of a partnership are doctors surgeries, veterinarians,
accountants, solicitors and dentists.
As stated earlier, most partners in a partnership face unlimited liability for their debts. The only exception is in a Limited Partnership.
This is where a partnership may wish to raise additional finance, but does not wish to take on any new active partners. To overcome this
problem, the partnership may take on as many Sleeping (or Silent) Partners as they wish these people will provide finance for the
business to use, but will not have any input into how the business is run. In other words, they have purely put the money into the
business as an investment. These Sleeping Partners face limited liability for the debts of the partnership. A partnership, just like a sole
trader, is an unincorporated business.
Advantages of partnership:
10
Disadvantages of partnership:
Private Limited Company
This is a type of joint-stock company (that is, it is an incorporated business where the business has a separate legal identity from the
owners). Often private limited companies are small, family run businesses which are owned by shareholders.
Each shareholder in a private limited company MUST be a part of the business and under no circumstances can any shares be sold to
members of the general public. Each share entitles the owner to 1 vote at the companys Annual General Meeting (AGM.) and also to a
share of the companys profit at the end of the financial year (a dividend). Each shareholder has limited liability for the companys
debts and can, therefore, only lose the value of their investment in the company.
A company is run by a Board of Directors (who are elected by the shareholders) and a Chairman Heads this. Before a company can be
formed, a number of legal documents must be completed most important are the Memorandum of association and the Articles of
Association. These cover details such as:
The objectives of the business
Its headquarters and registered office
The amount of capital to be raised from the sale of shares
Details concerning meetings within the business
11
The arrangements for auditing the accounts of the business.
When these are completed, they are sent to the Registrar of Companies, who will then issue the business with a Certificate of
Incorporation, which allows the business to trade as a Private Limited Company. The companys name must finish with the word
Limited and it must raise less than 50,000 of share capital.
It can be very difficult for a shareholder in a private limited company to sell their shares, since a buyer must be found within the
framework of the company.
Public Limited Company (PLC)
This is the other, much larger, type of joint-stock company and, just like a private limited company; a PLC is an incorporated business, is
run by the Board of Directors on behalf of the shareholders and has an AGM. At which shareholders vote on certain key issues relating
to the company.
The main difference between a PLC and a private limited company is that a PLC can sell its shares on the Stock Exchange to members
of the general public and can, therefore, raise significantly more finance than a private limited company. If a private limited company
wishes to become a PLC, then it must change its Memorandum and Articles of Association and re-submit them to the Registrar of
Companies.
If the company is considered to have acted legally and for the best interests of its shareholders, then it will be issued with a new
Certificate of Incorporation and also with a Certificate of Trading, which will allow it to sell its shares on the Stock Exchange. The price
of the shares will then fluctuate according to investors perceptions of the PLC. It is often the case with a PLC that the owners of the
company (shareholders) will wish the PLC to make as much profit as possible, so that the shareholders will receive a very handsome
dividend per share.
However, the Board of Directors and the management will often wish to devote some of the PLCs resources to growth and
diversification (such as the introduction of new products) and this will clash with the shareholders desire for maximum profits. This is
known as the divorce of ownership and control. The PLC has to publish its annual accounts (known as disclosure of accounts) and
therefore is extremely vulnerable to investors and bankers perceptions about its progress and success. Following on from this, a PLC is
also at risk from a takeover from an outside body, if they manage to accumulate over 50% of the shares in the PLC.
Difference between private limited and public limited company:
12
Similarities between private limited and public limited company:
Practice MCQs
1
Shares in the Japanese part of the American fast-food giant McDonald's hit an all-time low in
August 2002. Sales at McDonald's 3800 restaurants in Japan fell dramatically despite the
assurance that the company used only imported beef, which was free from a disease affecting
Japanese cows.
From the above statement what is true about McDonald's?
A
B
C
D
It is a multi-national because it has 3800 restaurants.

It is a multi-national because it imports raw materials.
It is a public company because it issues shares on the stock exchange.
It is a public company because it operates in America and Japan.
A French company employs French people, is located only in France, sells shares on the stock
exchange but uses other firms to transport its products to other countries.
What type of company is this?
A a co-operative
B a private company
a public company
a multi-national
The table gives information about four business organizations.

Which organization is most likely to be described as a public limited company?
Owners have
limited liability
owned by its
members
no
yes
no
no
yes
yes
yes
no
What makes Barclays Bank a public limited company?

A
It experiences economies of scale.
It has more than two directors.
13
It is quoted on the London Stock Exchange.
It operates in more than one country.
Which disadvantage is likely to arise when a private company grows and becomes a public
company?
A
Banks may have less confidence in its financial stability.
Customers may expect a reduced range of products.
Suppliers may be more uncertain about receiving payment for materials.
Workers may feel less motivated within a larger organisation.
Day 5
Growth (integration)
In long term each and every business tries to expand its business activity. Sometimes by diversifying their operations and sometimes by
growing in size. The basic purpose of growth is to achieve economies of scales so that risk of failure can e reduced.
Internal growth
(Often referred to as organic growth) refers to a situation where a business increases its size through investing in its existing product
range, or by developing new products. This will normally be financed through the use of retained profits (from previous trading years),
bank loans or, if the business is a PLC, through the issue of shares. This is a slower and safer method of expansion than external growth.
External growth
Involves much greater sums of money and takes place through the use of mergers and takeovers (often known as growth through
amalgamation, or simply integration).
Regardless of the method of growth, there are several reasons why firms wish to grow:
To achieve economies of scale and see the average cost of production decline.
To achieve a greater market share.
To satisfy the ego of the businessman.
To achieve security through becoming more diversified.
- To survive in an increasingly competitive market
How to Growth
Merges
Takeovers
Franchise
Joint ventures
14
Mergers
Where two or more than two businesses merge into one entity and start their operations under new name, eliminating the previous entity
e.g. standard chartered, ANZ Gridleys (when they are merged so they are known as standard chartered Grind leys)
Why to merge?
To achieve economies of scale.

To avoid extra operational cost
To compete
To increase market share
Disadvantages
Established entity will be eliminated and this can hurt grand loyalty.
Conflict of interest between the managements of merged businesses.
Diseconomies of scales
Take Over
A growth technique where a business buys out more than 50% shares of any other business. It means now all the decision making
powers are divorced to the business which has bought the other one e.g. standard chartered taking over union bank
A
C
B
25%
51%
Company A has buried 51% shares of B and 25 % share of C. Here A is known as Holding or Parent Company. B is known as
subsidiary company. C is known as associated company
Why to takeover?
To achieve economies of scales
To eliminate competition
To control the management of related industry or business so that core business can be supported more efficiently.
Disadvantages
Diseconomies of scale
It can create private monopolies which can be harmful for the society because they can exploit the consumer by
charging very high prices.
Joint Ventures
A growth technique where two or more business join hands together for a specific project or specific period of time under their own
entities and after the completion of that project they will disperse and will resume their own activities e.g. Bata and Hush puppies, Silt
route.
Advantages of Joint Venture
Small business can take large investment projects by shaking hands
Risk can be shared and chances of failure reduce.
More capital can be generated and cost will also split on more than one business.
Pooling of expertise which can provide competition edge.
Disadvantages of Joint Venture
Conflict of interest may arise between different stake holders.
It can be to manage because each and every business has its unique way of operating.
Less profit can be there because profits will divide on more businesses.
Franchise
It is growth technique where an established business sells license to some one that his name can be used. The basic idea of Franchise is
to grow your brand name without further investment.
Franchise can sell his name to franchisee for:
To sell
(Nike)
To produce
(SAGA sports, they can only produce and can not sale)
To produce and sell
(Mc Donald)
Advantages to Franchiser
More revenue without any further investments.
15
Increase bargaining power with every next new unit.

Economies of scales
Disadvantages to Franchiser
Bad repute or negative good will can be there if franchise will not be able to maintain the quality.
Very high training and R&D cost.
Loss of revenues
Advantages to Franchisee
Less risk of failure because franchisee is operation with an established brand name.
More profits because of economies of scales.
Advertisement and Training cost is very low.
Disadvantages to Franchisee
Low of revenue has to give a limited amount of percentage to franchiser.
Very high initial cost.
Dependency on franchisee because no flexibility of policies or innovation is there.
INTEGRATION (Growth)
HORIZONTAL
Same product and same stage
(Polka has been taken over by walls)
VERTICAL
same product
Different stage
Vertical forward
1
Integration with the user
Vertical Backward
1
integration with supplier
of product or raw material
(Shoe manufacturer integrating

with shoe retailer)
(shoe manufacturer integrating with

leather processing business)
Advantages of growth: (Economies of scale)
As a business grows in size and produces more units of output, then it will aim to experience falling average costs of production (i.e. on
average, each unit of output costs less to produce). This is known as benefiting from economies of scale. In other words, the business is
becoming more efficient in its use of its inputs to produce a given level of output.
Internal economies of scale
16
Technical This refers to the fact that the use of automated equipment and machinery to produce output is far more cost-effective than
using labour, since the machinery can be used 24 hours a day, with no breaks and with a constant level of output per hour.
Purchasing Larger businesses are more likely to be able to bulk-buy their supplies and their raw materials, and therefore secure their
supplies at a far lower cost per unit than a smaller business.
Financial Banks and other financial institutions are more likely to offer a lower rate of interest on a loan repayment to a larger business
than to a smaller business, since the larger business represents less of a risk because it is more financially secure.
Managerial Larger businesses are more likely to be able to afford to employ managers who are specialists in a particular field. These
managers can therefore devote all their time to specializing in one particular field (resulting in higher levels of efficiency and hopefully
falling average costs). Smaller businesses will often employ managers who have to perform a variety of tasks and therefore cannot
specialize in a single area of the business.
External economies of scale
Labour A large pool of available labour in a particular area of the country which has been trained at a local college, or even at a rival
business, will possess specialized skills which will be useful to the whole industry, rather than simply to just one business.
Joint ventures Two or more businesses may decide to join forces (perhaps for R&D) in order to spread the costs and the risks of
developing a new product or manufacturing process.
Support services A wide range of commercial and support services often cluster together in a certain area near a number of rival
businesses (e.g. waste disposal, cleaning, component suppliers, distribution, etc). Clearly this benefits all the businesses in the area,
rather than just one of them.
Problems of Growth (disadvantages)
However, it is also possible that as a business grows in size and produces more units of output, then it will actually experience rising
average costs of production (i.e. on average, each unit of output costs more to produce). Rapid and unexpected growth can lead to a host
of problems for businesses.
Probably the most common problem is the effect that the growth has on the companys finances - specifically upon the liquidity and
gearing of the company. Extra expenses and increased long-term liabilities (such as loans and mortgages) may reduce the liquidity and
increase the gearing levels of the company and leave it dangerously close to insolvency.
17
It may simply be the case that the managers cannot cope with the extra responsibilities and workloads that they are faced with this
could lead to a rapidly expanding workforce, with the problems of recruitment, training and lengthy communication channels that this
will inevitably lead to. It is also possible that the company may become inefficient and it may experience diseconomies of scale (rising
average costs). This could lead to a significant fall in profits, which in turn could persuade shareholders to sell their shares this would
result in a falling share price.
A major problem that a PLC can experience as it grows is the divorce of ownership and control. This refers to the fact that the owners
of a PLC (shareholders) are usually interested in maximizing the companys profits and, therefore, their own dividend payments.
However, the control of the company is in the hands of the management and the Directors. They too want the company to be profitable,
but would also like some of the companys resources and money to be invested into new products and new markets. This, clearly,
reduces the short-term profits of the company and, therefore, also reduces the dividend payments to shareholders.
PRATICE MCQs
1 What is an example of backward vertical integration?

A
B
C
D
An aircraft manufacturer takes over an airline.

A bank takes over another bank.
A plastics manufacturer takes over a drinks firm.
A tyre manufacturer takes over a rubber plantation.
2 A large clothing manufacturer expanded by acquiring retail clothing outlets.

Of what is this example?
A
B
C
D
3
diversification
external economies of scale
horizontal integration
vertical integration
Wal-Mart, the worlds biggest food retailer, has acquired a large number of supermarkets.
What type of integration is this?

A
B
C
D
4
conglomerate
horizon tal
vertical backward
vertical forward
A motor car manufacturer buys a chain of showrooms where the new cars are sold to the public.
Of what is this an example?

A
conglomerate integration
horizontal integration
vertical integration backwards
18
vertical integration forwards
Day 6
Size of the business
Small scale
Medium size
Large size
How to measure the size of Business?
1
2
3
4
5
Capital employed (The total resources invested in to the business from all the sources)
Number of workers employed
Market share (Number of customer using a product of a specific business out of the total market is known as
is expressed in percentage)
Turnover /revenue/sales
Profits ( TR TC )
market share and it
Why small scale businesses remain small?

Lack of resources because small scale business is normally owned by a sole owner and the main source of finance is
personal savings or informal loans.
Lack of visions, ambitions, or targets.
Lack of promotional activities (advertisement, free samples)
Lack of research and development activities.
Lack of personality trait, not confident enough to expand business or open new branches.
How small scale businesses can compete large scale businesses?
Niche Market (A small segment of specialized market which is ignored by the large scale businesses or
large scale
businesses is not aware of the overall potential of that market. But the
problem
with niche market is that
large scale businesses can exploit and take over the
market any time. Because they have huge brand following.)
Personal services can be provided to the customers so that satisfaction level can be maximized.
Diversification of activities: (variety of products)
Why large scale businesses are more successful?
More resources are available as they can attract new investor and can also borrow from financial institutions.
Economies of scales bring the average cost very low so their profit margins are very high.
They can afford to conduct research and development which fives these businesses competitive edge.
Due to excessive resources they can eliminate competition from the market by taking over the other businesses.
They can have favorable lows by the Government by using their international, political influence.
19
How Multi National companies are beneficial for any country?
MNCs bring huge amount FDI (foreign direct investment) which can be used to improve BOP and country can import
machinery which is essential for economic growth.
Transfer of skills and technology because normally MNCs use local work force and to make them more efficient and
productive they provide them training which is of international standards.
Due to competition quality goods can be available at low or competitive prices which will increase the standard of
living.
Domestic producers will also become more efficient s now they have to compete international standards and quality.
So domestic producers will also plough back the puffers and try to increase their productivity.
As MNCs operate on very large scale so job opportunities will be available which will reduce unemployment level
and increase standard of living.
MNCs can also increase in economic growth level. As there will be an increase in economic activity in that specific
country.
How MNCs can be harmful for any country?
Discouragement to domestic producers because they cannot afford to produce higher quality goods due to lack of
finance and modern machinery and equipment.
In long term, MNCs can form monopolies by taking over domestic producers or by kicking them out of the business.
In long run MNCs can cause very high unemployment rate as small scale domestic producers will go out of the
business.
Adverse BOP can be there because in long term there will be an out flow of profit from the country.
Political influence can be there so that they can have favorable legislation.
Specialization
Specialisation is occurs when an economic agent chooses to concentrate on producing a particular good or service and then trade
with others in order to survive. Existence of money makes specialization easy, without money specialization is not possible.
Nations can specialise, e.g.:
Regional specialisation can also occur, e.g.:
Firms specialise in certain goods or services, e.g.:
Specialisation by individuals is called the division of Labour. Adam Smith described the effects of the division of labour on pin
workers in 1776. He stated that one worker might be able to make 20 pins a day, but if division of labour occurred and 10 workers
each specialised in a different task he estimated they could make 48,000 pins.
This increase in labour productivity occurs for a number of reasons:
Specialisation allows workers to gain skills in a narrow range of tasks. This means workers are far more productive then
if they were a jack of all trades.
It makes it cost effective to provide workers with specialist tools, e.g., it wouldn't make sense to give every farm worker
a tractor, but it's possible to provide a group of workers a tractor they can share.
Time is saved as workers don't constantly have to change tasks, e.g. moving from one workstation to another.
Workers are able to specialise in tasks they are best suited to.
The division of labour does have limitations. Jobs that are very narrow can become tedious and boring. Workers will do
everything possible to avoid work, e.g. calling in sick, long break, frequent visits to the toilet. This will result in a drop in
productivity as output per worker falls.
The size of the market might limit the degree of specialisation. A chemist or post office might open in a small village, but finds
that he has to sell other products in order to survive. Over specialisation have disadvantages. African countries are often dependant
on only one crop. If the price falls or crop fails, it can be a disaster for the economy and workforce.
20
Economies of scale
As a business grows in size and produces more units of output, then it will aim to experience falling average costs of production (i.e. on
average, each unit of output costs less to produce). This is known as benefiting from economies of scale. In other words, the business is
becoming more efficient in its use of its inputs to produce a given level of output.
Internal economies of scale
Technical This refers to the fact that the use of automated equipment and machinery to produce output is far more cost-effective than
using labour, since the machinery can be used 24 hours a day, with no breaks and with a constant level of output per hour.
Purchasing Larger businesses are more likely to be able to bulk-buy their supplies and their raw materials, and therefore secure their
supplies at a far lower cost per unit than a smaller business.
Financial Banks and other financial institutions are more likely to offer a lower rate of interest on a loan repayment to a larger business
than to a smaller business, since the larger business represents less of a risk because it is more financially secure.
Managerial Larger businesses are more likely to be able to afford to employ managers who are specialists in a particular field. These
managers can therefore devote all their time to specializing in one particular field (resulting in higher levels of efficiency and hopefully
falling average costs). Smaller businesses will often employ managers who have to perform a variety of tasks and therefore cannot
specialize in a single area of the business.
External economies of scale
Labour A large pool of available labour in a particular area of the country which has been trained at a local college, or even at a rival
business, will possess specialized skills which will be useful to the whole industry, rather than simply to just one business.
Joint ventures Two or more businesses may decide to join forces (perhaps for R&D) in order to spread the costs and the risks of
developing a new product or manufacturing process.
Support services A wide range of commercial and support services often cluster together in a certain area near a number of rival
businesses (e.g. waste disposal, cleaning, component suppliers, distribution, etc). Clearly this benefits all the businesses in the area,
rather than just one of them.
However, it is also possible that as a business grows in size and produces more units of output, then it will actually experience rising
average costs of production (i.e. on average, each unit of output costs more to produce).
21
Diseconomies of scale
It is also possible that as a business grows in size and produces more units of output, then it will actually experience rising average costs
of production (i.e. on average, each unit of output costs more to produce). This is known as experiencing diseconomies of scale. In other
words, the business is becoming less efficient in its use of its inputs to produce a given level of output.
Internal diseconomies of scale
Communication This refers to the fact that as a business grows in size, the channels of communication lengthen and are more prone to
delay and distortion. This can result in inefficiency in terms of the time taken to perform a task and, therefore, this can lead to higher
costs.
Co-ordination As a business grows in terms of the number of employees, the number of departments and the number of different plants,
then the overall co-ordination of all these can become very difficult. More and more meetings will be required and this all costs both time
and money.
Motivation As the number of workers increases in a business, each worker will be seen to be making only a very small contribution to
the finished product. This can result in falling levels of job satisfaction and motivation, which in turn can result in falling levels of
productivity and, therefore, higher costs.
External diseconomies of scale
External diseconomies of scale often result from the overcrowding of businesses in a particular area and the resulting congestion, the late
arrivals of supplies and raw materials, the late deliveries of finished goods to customers or warehouses, and the late arrival of employees
to work. All these factors will affect all the businesses in a particular area and therefore push up their costs of production and distribution.
Practice MCQs:
1
What will increase the level of specialization in an economy?

A A computer manufacturer takes over an advertising company.
B A retail store issues its own credit card.
C A travel agent provides transport to the airport.
D A vehicle assembler reduces its range of vehicles.
What makes specialization easier?

A the imposition of taxation
B the protection of trade
C the system of barter
D the use of money
What is the most likely outcome of increased specialisation in a water bottling plant?
A higher costs per bottle
B higher wage rates
22
C
D
increased job satisfaction

increased output of bottles of water
4 Which of the following increases specialisation?

A A farmer decides to convert some of his farm buildings into holiday cottages for rent.
B A government decides that a country should be more self-sufficient in food production.
C A restaurant owner decides to have only vegetarian meals on his menu.
D A taxi driver decides to train for an additional licence to drive a bus.
5
The table shows the units of factors of production that a firm needs to employ for two different levels of output.
land
labour
capital
output
10
10
300
A
B
C
D
What is the firm experiencing?

constant returns to scale
economies of scale
external diseconomies of scale
external economies
A
B
C
D
What is happening when a firm is experiencing diseconomies of scale?

It has rising long-run average costs.
It is operating in the short run.
Its fixed costs are less than variable costs.
Its output is increasing faster than its inputs.
A
B
C
D
What is happening when a firm is experiencing economies of scale?

It has rising long-run average costs.
It is operating in the short run.
Its fixed costs are less than variable costs.
Its output is increasing faster than its inputs.
A
B
C
D
Which is a diseconomy of scale?

Bulk buying reduces costs.
Communications deteriorate.
Employees are more motivated.
Technological improvements take place.
23
Day 7
Business Sectors
Public sector
Private sector
Where all the productive resources are owned and

controlled by Government and the basic purpose of public
sector is not to earn profit but to provide social services to
every member of the society without any discrimination.
Where all the productive resources are owned and

controlled by private individuals and there is no
Government interventions accept the legislative process.
Corporations
(Wapda, wasa)
Nationalised Industries
(UBL ,HBL in 1972)
Incorporated
(Limited)
- Private limited
- Public limited
Unincorporated
(Unlimited)
- Sole traders
- Partnership
Why Public Sector is important/ what is the significance of public sector?

Public sector basically represents public and protects interest of the public and it is the responsibility of the public sector to provide the
basic utilities and social services to each and every member of the society without any discrimination.
Public sector produces public and merit goods which is essential for the community as a whole.
Public goods are those which are provided free of cost to each and every one. Public goods carry three features
a Non excludability
b Non exhaustibility (existence)
c Non rivalry
E.g., defense, street lights, public parks, roads.
Merits goods are those goods which are provided at subsidized rates and the basic purpose is to provide the society equal opportunities
so that every member can become more efficient and productive e.g. health and education.
Public sector is also responsible for the protection of society so that private sector can not exploit the society by producing demerit or
illegal goods. Public sector also works as a watch dog and monitors the activities of private sector so public interests can be protected
(Demerit goods are not illegal but harmful for the society)
Significance of Private Sector
Private sector works for profits and to maximize their profits private sectors firm try to produce variety of high quality goods. It is
responsible for the improvement in living standards a consumers sovereignty. Private sector produces only those items where profits are
available but in search of profit research and development is conducted which can be beneficial for the society.
It also provides job opportunities and is also responsible foreign exchange through exports so private sector is the main element quality,
variety, and innovations.
Private and public sector objectives
Private sector
24
Private sector objectives will often differ considerably from objectives set in the public sector. Profit maximisation is often quoted as the
over-riding objective for businesses in the private sector. This will involve trying to produce at the point where there is the maximum
difference between the firms total revenue and its total cost - resulting in large dividend payments for the shareholders. However, it is
far more likely that businesses will aim to profit satisfy rather than profit maximise (that is, they will aim to earn a satisfactory level of
profits to keep shareholders content, and then use the remaining resources to pursue other objectives such as diversification and growth).
Another objective in the private sector, for a rapidly growing business, may well be to maximise sales (or sales revenue) and so increase
their market share in order to gain a competitive advantage.Many businesses set objectives to improve their image and to appear more
socially responsible and environmentally friendly this is often achieved through strategies of recycling materials, sponsoring local
events and strictly adhering to all employee legislation (e.g. pay levels, Health & Safety, discrimination, etc.).
Public sector
Public sector objectives have, traditionally, been centered on providing a public service, rather than make a profit. This regularly led to
loss-making organisations being subsidized by the government, and complacency crept in with regards to customer service, quality
levels, and response times.
The remaining public sector organisations were told to run in a more cost-efficient manner and to improve the quality of their services to
c consumers. Performance targets were set for many Local Health Authorities, Local Education Authorities, and council services in an
attempt to make them more accountable, to reduce their costs, and to improve the quality of their output.
Short-term and long-term objectives
Short-term objectives will often differ from long-term objectives, especially if the business is experiencing poor financial performance
at present. A short-term objective may be to consolidate, or even simply to survive the difficult trading conditions that it is experiencing.
Once this has been achieved and the business has stabilised its performance, then it may well look to achieve its long-term objective of
diversification into new products and new markets, or growth through amalgamation.
25

Unit 1 Economics Basics

Uploaded by

Copyright:

Available Formats

Unit 1 Economics Basics

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Unit 1 Economics Basics

Uploaded by

Copyright:

Available Formats

Class # 1

LAND (natural resources)

LABOUR (human resource)

CAPITAL (man made resources)

Choices and opportunity cost

conserving labour and conserving natural resources

2 What is not included in a persons stock of wealth?

In a market economy, what does the entrepreneur decide?

the combination of resources used

the cost of retraining some workers to make golf clubs

BASIC ECONOMIC DECISIONS

2. How should production be organized?

3. For whom should production take place?

FREE MARKET ECONOMIES

What to produce is decided upon by the profitability for a particular product.

Advantages of free market economy

Disadvantages of free market economy

Privatization of state industries

the combination of resources used

China is changing from a centrally planned economy towards a market economy.

What is always a feature of a mixed economy?

All capital goods are produced in the public sector.

The allocation of all resources is determined by the price mechanism.

5 What is found in a market economy but not a command economy?

equality of income is encouraged.

Each country of Southern Africa has a mixed economy.

motor car production

Advantages of being sole trader:

Disadvantages of being sole trader:

Private Limited Company

The objectives of the business

Its headquarters and registered office

The amount of capital to be raised from the sale of shares

Details concerning meetings within the business

The arrangements for auditing the accounts of the business.

Public Limited Company (PLC)

Difference between private limited and public limited company:

Similarities between private limited and public limited company:

It is a multi-national because it has 3800 restaurants.

The table gives information about four business organizations.

What makes Barclays Bank a public limited company?

It experiences economies of scale.

It has more than two directors.

It is quoted on the London Stock Exchange.

It operates in more than one country.

Banks may have less confidence in its financial stability.

Customers may expect a reduced range of products.

Suppliers may be more uncertain about receiving payment for materials.

Workers may feel less motivated within a larger organisation.

To achieve a greater market share.

To satisfy the ego of the businessman.

To achieve security through becoming more diversified.

- To survive in an increasingly competitive market

To achieve economies of scale.

Increase bargaining power with every next new unit.

Integration with the user

integration with supplier

of product or raw material

(Shoe manufacturer integrating