Toll free : 118
Try our Demo
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
It is defined as the production of goods and services to satisfy human needs and wants.
It involves the
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.
it is the transfer of goods and services from the producer up-to the final user - the consumer.
the utilisation of produced goods by the customer.
these are tangible items that people purchase, for example bread, car, clothes, food, etc.
these are intangible activities that people provide for one another in exchange for money, for example, haircuts, teaching, nursing,
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.
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
and consumers are forced to make a
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 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.
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.
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.
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.
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.
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.
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
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.
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.
includes teaching, entertainment, tourism, security and hairdressing.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Not Registered? Register Now