DEMO

THE NATURE AND PURPOSE OF ECONOMIC ACTIVITY 

By The End Of This Subtopic Learners Should Be Able To;
  1. Describe the development of economic activity
  2. Explain in detail the concept of economic problem
  3. Define and describe production
  4. State three economic system and its characteristics

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.
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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.

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FACTORS OF PRODUCTION

  • These are inputs needed to produce goods and services.
  • They are resources used in the production of other goods.
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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.
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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.