Summary
Economics can be defined as the study how scarce resources can be used to satisfy human wants or needs. Economics is a discipline which studies man’s endeavor to satisfy his unlimited wants out of the given scarce resources. Economics deals with how people allocate finite resources. There is a tendency to act by fulfilling their own interests that result into selfishness, greed among other undesirable traits. In a bid to satisfy his needs, man tries to allocate resources in an efficient manner.
Excerpt
Table Of Contents
Dedication
Agatha, Daisy, Esther and Mummy.
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CHAPTER ONE.
Introduction.
Economics can be defined as the study how scarce resources can be
used to satisfy human wants or needs. Economics is a discipline
which studies man's endeavor to satisfy his unlimited wants out of
the given scarce resources. Economics deals with how people allocate
finite resources. There is a tendency to act by fulfilling their own
interests that result into selfishness, greed among other undesirable
traits. In a bid to satisfy his needs, man tries to allocate resources in
an efficient manner.
Scarce resources are such things like raw materials, labor and ener-
gy used to produce goods and services to satisfy human wants hu-
man wants and needs. Economics attempts to answer the questions
of what to produce, how to produce, for whom to produce, when to
produce, and where to produce. In society, human wants have a
bearing on human effort and activities. Man seeks to be progressive
so as to have a better life.
In his endeavors to satisfy these wants, interdependence is vital so
that he produces what is in his means so that through exchange he
is able to get what he cannot produce. Out of this three fundamental
problems in economics arise. And these are;
1)
Scarcity. This simply means the universe contains resource en-
dowments but limited in supply and therefore unable to satisfy all
man's wants. There is a fundamental economic problem of relative
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scarcity of resources (production factors) of labor, capital, entre-
preneurship and capital that is needed to produce goods and ser-
vices required to satisfy man's unlimited and insatiable wants or
bars the supply of the commodities needed relative to the people's
desire for them.
2)
Choice. This also arises out of relative scarcity of factors since all
human wants can't be satisfied at once due to scarcity of re-
sources to produce all goods and services man desires. Therefore a
decision has to be made so as to determine which wants should be
satisfied first and which ones later. These calls for order of prefer-
ence in a given period of time depending on what needs are a pri-
ority at present. Preference will be given to the most pressing
needs as compared to others.
3)
Opportunity cost. Since it is impossible to satisfy all human
wants at the same time, given the fundamental problem of scarci-
ty, a choice has to be made as regards which wants should be sat-
isfied and which ones given up. The alternative that is given up or
foregone is the opportunity cost. It is important to note that when-
ever choice is made, alternative is foregone. The alternative fore-
gone is the opportunity cost.
The solutions to the above problems are given differently depending
on the type of economic system, that is, whether capitalist, socialist,
or mixed economy.
Economics is divided into two major parts which include micro-
economics and macro-economics. Micro-economics involves the
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study of economic actions of individuals and small groups such as
customers, consumers, producers among others. It looks at the func-
tioning of the small economic units such as resource owners, and
business firms. It is mainly concerned with the analysis of price
determination which is an emphasis of a market.
Macro-economics looks at the economy as a whole. It aggregates all
the economic agents such as the consumers and producers on busi-
ness firms. It addresses four major problems an economy which
include; economic growth, unemployment, inflation and balance of
payments problem.
Economics is further divided into normative and positive economics.
Positive economics involves issues which can be observed. It deals
with scientific explanations of operation of the economy. It looks at
the world as it is and different from what it should be. Positive eco-
nomics refer to the objective economic statements that explain that,
if certain conditions fall, then certain things can be expected to hap-
pen for example, a statement like income inequality can be reduced
through a system of income taxes. This is a positive statement be-
cause it can be subjected to research.
Normative statements. This offers recommendations based on per-
sonal value judgments. It tries to explain how the world should be, it
does not involve scientific proof or research and they are subjective
in nature for example a statement like an income tax system is a
good thing; here the goodness depends on individuals.
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1.1 Scarcity, Choice and Opportunity Cost.
Resources and commodities are always scarce in nature. In order to
get something of value, another good has to be given out, so scarcity
gives rise to price. A good is said to be an economic good if it is
scarce. Because of scarcity of resources, priorities are listed down
starting with the most pressing to the least. A list of priorities is what
is referred to as the scale of preference.
Water scarcity is prevalent in every continent. Water scarcity is one
of the problems that is faced in many societies. Approximately 1.2
billion people are affected by water scarcity and respective govern-
ments lack the necessary infrastructure to take water from rivers
and aquifers.
Choice arises out of scarcity and it is simply making the right deci-
sions. When a consumer selects the first item, then the second and
so on from the scale of preference is said to be making choice.
Opportunity cost is the alternative forgone whenever choice is made.
When a consumer selects item X from the scale of preference and
leaves item Y, he would have forgone some benefit in item Y. so the
opportunity cost is the real cost and it arises out of scarcity and
choice.
1.2. Production possibility curve.
This is a curve that joins the together different various combinations
of two goods or services that can be produced by a country or any
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other economic entity such as a firm when all its resources are fully
and efficiently utilized. The PPF is explained using the following as-
sumptions.
· Two commodities are produced for example capital goods and
consumer goods.
· Resources are fixed or given.
· Technology is efficiently used.
Diagrammatically it can be shown.
Food production (in tones)
200,000 A
B .F
.E
C
0 Clothes pdn (
1
000 metres)
400,000
Points along the PPF such as B and C shows maximum physical
combination of Food and Cloth production which can be produced
when all resources and technology are fully utilized.
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An increase in production in production of one commodity such
as food production can be done at a cost of another commodity
that is, moving from point B to C. Points B and C are attainable
and known as efficient points. Production efficiency refers to
achieving as much output as possible from a given amount of
input resources.
Point E is referred to as inefficient point and on this point the
resources are under utilized. It is believed most of the develop-
ing countries are producing inside their PPFs because;
1-
A lot of their natural resources such as minerals are under
exploited.
2- They have poor production techniques.
3- They are always involved in political instability which dis-
courages production.
Point F is unattainable position in production given the availa-
ble technology, resources and labor. Point F is desirable by the
every economy or firm but unachievable with the available cir-
cumstances. However this production position (point F) can be
achieved through any or a combination of these factors;
· Discovery of new technology.
· Discovery of new resources such as new minerals.
· Getting aid and donation.
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A movement of the PPF outward shows that economic growth has
taken place. On the other hand a shift of the PPF inwards is unfavor-
able for the economy or the firm.
Opportunity cost.
This involves the alternative forgone whenever choice is made. This
aspect is important since man must make choice out of alternatives.
Therefore in economics opportunity cost involves the real cost of an
item or service that you have to give up in order to get it. For example
the opportunity cost of doing an economic enterprise is another ac-
tivity you could have potentially done.
Opportunity cost involves what the entrepreneur could have earned
in alternative use of resources. These are returns from the second
best alternative from the available best use of resources. For example
for a farmer who intends to produce tea and cotton using the same
resources, the opportunity cost of producing tea is the amount of
output of cotton given up.
The opportunity cost or alternative of a good can be given a money
value. Producing a good requires employing various factors of pro-
duction which deserve monetary rewards and these factors have
alternative uses.
1.3.The Equi-Marginal Principle
The equi-marginal principle states that the optimum operating point
is at the level where marginal cost equals, or is lower than, the mar-
ginal benefit. The word marginal in economics means incremental.
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Costs and benefits are measured on a marginal basis as expressed as
per unit or per 100 units depending on the desired convenience. In
profit maximization, there are two important aspects that must be
considered; firstly one that increases the objective function. The
other is one that reduces the value of the objective function as the
small increment is being made in the values of the variables. Exam-
ples of the objective function include profit and utility and the value
of such will be maximum when the impact on the objective function
due to a small increase in the two opposing variables are equal. This
is where marginal cost equals marginal revenue. This implies that
marginal product of labor equals the wage rate .
Diminishing returns.
The principle of marginal diminishing returns involves increasing one
input of production while keeping the other factors constant that will
result in the overall production output, which will increase at a de-
creasing rate. This principle states that if one input during the pro-
duction process is increased while other inputs are held constant, a
point is reached where the additional input will yield out put that will
increase at a decreasing rate and eventually falls. The number of
workers meant to work on an acre of land to give maximum total
product should not be exceeded. If more workers are hired then the
proportion of income from overall production will be less than the
increased cost of the new workers.
The possibility of use of scientific and technical progress to improve
of production was however ignored by early economists. The law of
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diminishing returns was used to predict that as population expanded
world wide, would make output per head to fall, up to the point
where the level of misery increased, would force the population to
stop increasing. Noted with concern is that in stagnant economies
where techniques of production have not improved for long periods
the effect of increasing population has grown beyond imaginable
proportions. However in progressive economies technical advances
have succeeded in more than offsetting this factor and in raising the
standard of living in spite of rising populations.
The Spillover Principle
This principle states that at times, planners and entrepreneurs will
not get all of the benefits or bear all the costs of their decisions. For
example a runoff from a manufacturing plant can negatively effect
the people living downstream or affecting the fish that live in water.
The Reality Principle
The reality principle assumes that purchasing power and income is
what really matters to people, rather than face value of money and
goods. This principle is about the real versus the nominal value of
something. Nominal value is the monetary value of something. For
example, a car is $10,000. Real value is the value of that product
relative to other goods. That same $10,000 could also pay rent for
the year.
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Macroeconomics analyses the structure and performance of the
economy. Economic theory states that we live in a world of scarcity
there are no enough natural resources or time to fulfill the man's
unlimited wants. Economics provides measures how scarce re-
sources can be allocated.
Incentives and Value
Macroeconomic theory assumes that people are rational. They try
maximize their benefits out of the available opportunities. People
react predictably in accordance to the incentives and value, for ex-
ample, people are less attracted to buy cigarettes when there are
heavy taxes on such items because they receive less utility per dollar
spent. The value of a commodity however varies depending on per-
sonal preferences.
Trade
Countries need to get what they cannot produce due to lack of tech-
nology, manpower and other resources. Trade therefore allows the
surplus produced to be disposed off through trade. It helps in the
utilization of the resources which helps to achieve economic growth
and development. Trade is however limited due to trade barriers such
as tariffs, and heavy transaction costs, such as shipping.
Specialization and division of labor form a basis of trade. Most people
concentrate on a particular aspect of production which allows ex-
change for the products that they do not produce. Different regions
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have a comparative advantage of production enterprise and this
promotes efficiency and effectiveness in trade. At market prices,
different regions benefit from each others specialized production
items.
Government
There is government interference in the free market by levying taxes,
price controls and influencing the international trade through subsi-
dies and barriers. Through taxation, governments protect the people
against the dangerous commodities. It also enables them to provide
public goods such as roads and other infrastructure which enhances
production.
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CHAPTER TWO.
FACTORS OF PRODUCTION.
Factors of production are land, labor, capital and entrepreneurship.
These are resource inputs and include
· the gifts of nature such as minerals, water, and forests re-
sources.
· human capacity and man made aids that is both mental and
physical.
2.1. Land (natural resources).
Land to economists generally means soil, climate, air, rivers, rocks
flora and fauna which are directly or indirectly employed by man to
produce goods and services.
Land entails anything provided by nature on, under or over the sur-
face of the earth. Land is fixed in supply and is always at the risk of
being degraded if appropriate measures are not put forward to pro-
tect land and the natural resources therein. AEObone ( 1984 pp13)
puts it that although land revitalizes itself naturally through the
rotting of plants and dead animals, there is still a danger of land
exhaustion, soil erosion, exposure to the strong heat of the sun
through man's misuse of this basic and original factor of production.
Land (natural resources) can lead to development in several ways;
a)
Soils and climate are important for agriculture production enhanc-
ing food security and incomes.
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b)
Land is a prime asset where all buildings, factories, are erected.
c)
Land contains all minerals and water. It is therefore a source of all
raw materials such as forest products, agricultural raw materials
which are used in industries.
2.2. Capital (Man made resources).
This is a stock of assets which are accumulated through savings
out of past incomes meant for production of other assets or com-
modities. Capital can be distinguished into;
a)
Real capital or money capital. Real capital refers to the stock of
physical assets which are capable to produce commodities or
other assets that ultimately lead to capital accumulation. Ex-
amples of real capital include buildings, factories, roads, and
railways. Money capital or financial capital is the money saved
to use as a method of payment for real capital. Money capital
can be either be borrowed or saved from past incomes.
b)
Private capital and social capital. This is a classification of capi-
tal based on ownership. Whereas private capital is owned by
private individuals or companies social or public capital is
owned by the state on behalf of the citizens. Examples of social
capital are railways, airways, roads, telephones harbors and
other social infrastructure such as public educational and med-
ical institutions, electricity and water supply. Social infrastruc-
ture is meant to improve the quality of the nation's workforce
through education and training and health promotion through
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preventive and curative primary health care. Capital improves
the country's capacity to increase productivity hence economic
development through capital accumulation and technological
progress.
2.2.1.Capital accumulation.
AEObone (1984, p16) takes capital accumulation as a basis of eco-
nomic and technological progress in any society. This refers to the
increase in capital stock which improves the nation's capacity to
produce goods and services, leading to increase in stock of capital
assets. These increase productivity of labor which makes it possible
to break the `viscious cycle' of poverty that many communities have
been plunged in. The process of capital accumulation involves: the
increase and mobilization of savings through the financial system,
and the conversion of savings into investments. The development of
the financial system has been shown to be an important factor in
determining the growth performance of countries (Levine, 1977). The
level of capital accumulation of a nation is heavily dependant on
savings, profit level, labor productivity, institutional framework and
the number of entrepreneurs in the economy.
The capital accumulation ratio. (CAR)
The capital accumulation ratio is defined as the proportion of net
worth held in investment assets. This proportion is intended to in-
crease the share of assets held basically for future consumption.
Many financial planning texts and articles today use the CAR to
assess financial strength over time (Garman & Forgue, 2000), relative
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household financial well-being (DeVaney, 1993), and retirement
adequacy (DeVaney, 1995; Yao, Hanna & Montalto, 2003). Invest-
ment asset is an important holding for a financial strength of house-
holds as well as retirement adequacy. The capital accumulation ratio
has also been used as an indicator of how well a household is achiev-
ing the goal of wealth accumulation (Garman & Forgue, 2000; Yao et
al., 2003) and as a reflection of proper asset allocation (Moon, Yuh, &
Hanna, 2002). This can therefore support the intended aim of attain-
ing the planned growth of respective economies. Much as the CAR is
frequently used in financial planning research and practice it has a
loophole of lacking detailed longitudinal wealth data. This has dis-
couraged studies that test the implications of these recommended
practices on households in different areas. The lack of empirical
support has not affected reliance on the CAR by practitioners and in
the popular financial press. One financial news television program
noted that "the recommended [CAR] ratio is at least 50% and should
get higher as retirement approaches" (Jung & Ng, 2007). Others
recommend the CAR "ratio should increase over time" (Marcinko,
2002) and that "as one approaches retirement, this ratio should
increase and should approach 70% to 90% (lower for homeowners)"
(Burns & Forgue, 2003). While greater investment in financial assets,
rather than tangible and liquid asset categories, will lead to greater
expected wealth in later years, these specific recommendations have
not been established empirically.
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2.2.2. Capital (or Technological) progress.
Technological progress entails the improvement of quality of quality
of capital through inventions and innovations. Whereas Invention
refers to the discovery of new methods of production, innovation
refers to the using of new methods of production. Therefore through
research and development capital progress leads to new and better
methods of production which results into increased output and re-
duced costs. This paves way for competition leading to economic
growth.
2.3. Labor.
The labor force entails the working population of a country. Labor
refers to any human effort that is able and willing to work at the
prevailing wage rate. Labor that is devoted to the production process
may be mental or physical, acquired for instance through training or
inherited. The status of health, nutrition, education, technology and
working conditions affect the efficiency of labor. In the factor market,
the monetary reward for labor is a wage or salary as its price.
2.3.1. Productivity and efficiency of labor.
The productivity of labor is the measure of output per unit input
(labor). It is the quantity of any commodity that a unit of labor can
produce in a given period of time. The efficiency of labor is the quality
and quantity of a commodity that a unit of labor can produce in a
given period of time.
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The productivity and efficiency of labor depend on the following fac-
tors:
a)
The nature of the working conditions. Pleasant working condi-
tions increase labor productivity and efficiency while poor working
conditions de-motivate workers thus low productivity and effi-
ciency of labor.
b)
The level of wages or incentives offered to workers. Better pay and
incentives increase labor productivity and efficiency but poor re-
muneration and limited incentives reduce productivity and effi-
ciency of labor. AEObone (1984: pp14) emphasizes that the gen-
eral level of wages should be acceptable, and the minimum wage
should be legally set.
c)
The level of health, mental abilities and physical strength of labor.
A healthy, mentally sound and or physically strong laborer tends
to be more productive and efficient than unhealthy mentally re-
tarded and weaker laborer.
d)
The state of social environment. Good social environment charac-
terized by availability of social amenities such as recreational,
better health facilities, and educational facilities motivates and at-
tracts skilled labor in a given locality hence high productivity and
efficiency.
e)
Proper supply equipment and tools or the amount and quality of
capital available make labor more productive and efficient.
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f)
Working hours for laborers should be well regulated. The working
hours including overtime should be within the acceptable stand-
ards, possibly not more than ten hours a day. Overworking labor
leads to stress and poor quality output. Very short working time
may lead to low output thus limiting labor productivity.
g)
Attitude to work has an impact on the productivity of labor. Posi-
tive attitude increases labor productivity but negative attitude
tends to reduce labor effort and thus low labor productivity.
h)
The nature Quality management. The higher quality management
encourages higher productivity and efficiency of labor while poor
quality management leads to lower efficiency and productivity of
labor.
2.3.2. Mobility of labor.
This defines the ease with which labor moves from one location to
another (geographical mobility) or from one job/ occupation to an-
other (occupational mobility).
Geographical mobility of labor.
This refers to the movement of labor from place to another. It can
be from one region to another, from one country to another, from
one area to another within the same geographical area.
Geographical mobility of labor is attributed to a number of factors
which include: variation in wages,
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· Differences in climatic conditions. Labor may prefer to move
from areas with harsh climatic conditions to areas with good
climate.
· Differences in working conditions such as fringe benefits better
pay and job security.
· Differences in availability of opportunities such as promotion,
social services and joining friends.
It has been noted that there is an increased geographical mobility of
labor from one region to another in the developing world in the recent
years because of the following factors;
· Improved transport facilities that enables the population to move
from rural areas to urban areas.
· Wage differentials especially to towns and cities where higher
wages are paid.
· Rising need to improve on skills through education makes the
populace migrate and work where there are opportunities of fur-
thering their education.
Occupational mobility of labor.
This refers to the movement of labor from one occupation to an-
other. This may be caused by rapid industrialization which brings
about movement of labor from the agricultural sector to industrial
sector and expansion of education and training facilities since the
more educated/ trained persons join highly paid occupations.
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Occupational labor mobility can either be vertical or horizontal.
Vertical labor mobility refers to the change of the occupation from
a low grade to a high and this change the status of the workers.
Horizontal mobility on the other hand, is the change of occupation
in same grade.
Advantages of Mobility of Labor.
a)
Geographical mobility is helpful in creating perfect competi-
tion in the labor market both locally and internationally.
b)
Greater output is realized since labor is able to relocate to
where it is optimally utilized.
c)
Higher wage level and favorable working conditions are en-
joyed by workers.
d)
Higher employment opportunities are guaranteed since labor
can freely move to where it can be employed. Surplus labor is
therefore employed where it is needed.
e)
It avoids the social unrest by the redundant youth and thus
improved productivity.
f)
It helps in income distribution. Labor is able to find jobs,
earn and improve the social status of their families.
Barriers to mobility of labor.
a)
Insecurity in some parts of the world act as a barrier to geo-
graphical mobility of labor. These constitute those areas where
there is always tribal conflict and civil wars.
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b)
Imperfect knowledge of the available employment opportunities.
Workers many times fail to find jobs due to ignorance of the ex-
isting opportunities in those areas.
c)
Natural ability, level of education, training and experience affect
mobility of labor. Some occupations require high level of intelli-
gence, or particular natural aptitudes and training and experi-
ence that are only possessed by a certain proportion of the
population.
d)
Social ties and apathy. Many workers have low interest in taking
up jobs at the expense of leaving behind their friends and rela-
tives and face the prospects of establishing new social relation-
ships in a strange locality.
e)
Long training and apprenticeship. Many professions require very
long period of education and training for example doctors and
engineers. Such extended training periods demand considerable
resources and time to produce adequate workers as per society
requirements.
f)
Housing shortages at the places of work. Housing shortage is a
challenge that faces most countries since the world wars and is
still a reigning barrier to geographical mobility.
g)
Possibility of promotions at the current or new jobs which tends
to keep workers on their jobs.
h)
Age, sex and some social factors. The aging population has little
interest in movements. Likewise there are jobs that are socially
