UPPER LEVEL EDUCATIONAL INSTITUTE

TOPIC: SCARCITY AND CHOICE HAND OUT # 1

WHAT IS BUSINESS ACTIVITY?

Business activity involves the creation of goods and services to satisfy the needs and wants
of customers and consumers.

Satisfying Needs and Wants -

❖ Man has certain economic needs and wants which he must satisfy. Man’s wants are
divided into:
a) Goods
b) services

GOODS are defined as TANGIBLE or PHYSICAL COMMODITIES. A good can be felt, touched
and seen. For example, foodstuff, clothing, furniture, etc.
SERVICES are defined as INTANGIBLE or NON-PHYSICAL COMMODITIES. Doctors,
lawyers, hairdressers, mechanics, tattoo artists, health, education etc. are typical common
examples.

NEEDS are necessities for survival. All consumers have basic needs that must be satisfied.
These include food, clothing and shelter.

WANTS are desirables; those items you seek to acquire/ purchase but can live without.
These include brand name/ high- end commodities, etc.

CUSTOMERS are defined as those persons who PURCHASE goods and services, whereas,

CONSUMERS are defined as the FINAL USERS of goods and services.

How do businesses use economic resources to produce goods and services?

• The types of economic resources used are:

 Natural resources are raw materials  Human resources are the people who
produced by nature. Many natural contribute physical and mental energy
resources are non-renewable. to the
production process
 Capital resources are the tools,
equipment,
and buildings that are used to produce
goods
and services.
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SCARCITY AND CHOICE.

SCARCITY is defined as that situation whereby man's wants are unlimited, whereas resources
are limited. This means that there is not enough of some resource to satisfy all of man's wants.
This creates SCARCITY, which leads to the concept of choice.

The basic economic problem exists due to limited resources for satisfying unlimited needs
and wants.
Scarcity is not having enough resources to satisfy the unlimited needs and
wants.

All economies face the problem of scarcity; which is the central problem of economics.
Scarcity exists not only because resources are limited but also because the world’s resources
are unevenly distributed. As a result, no country is capable of producing all that they need,
thus choices are necessary and every choice incurs a sacrifice.
In economic terms this is known as an opportunity cost. The benefits attached to the product
that is sacrificed or foregone is known as your OPPORTUNITY COST.

Resources

(Limited)

Wants
(Unlimited
) Land includes all natural resources e.g. soil, seas, rivers, forests etc
Scarcity Labour Human resources: skilled; semi-skilled; unskilled and
professional workers.
Capital assets e.g. machinery, equipment, vehicles, raw materials,
cash in hand/bank
Entrepreneur owner and risk taker

Choice Choices are based on what gives the most satisfaction - utility

Opportunity Alternative forgone . . . (this is the sacrifice made or choice given up)
Cost

❖ Wants can be satisfied directly or indirectly. Man as an economic animal means that he
must provide for the basic needs and wants of the family. He must purchase or produce
what he wants to satisfy his needs, also as an economic animal, man provides goods and
services for others to consume.
❖ Man can satisfy his needs and wants in the following ways:

1. Direct production – this is the simplest form of production, it means producing what you
need to satisfy your-self and your family on your own. Subsistence farming which is the
production of crops for one-self, stems from direct production and can be found in early
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economies. This occurred amongst early humans whose basic needs and wants were food
shelter and clothing. These are called our primary needs. The needs of a village were
satisfied from nature only providing for themselves.

2. Indirect production occurs when you have purchased what others have produced.

BARTER: This is typically known as the TRADITIONAL ECONOMY and identifies the old
fashioned approach involving the exchange of goods and services for other goods and
services, without the use of money. Barter simply means TRADE WITHOUT MONEY.

❖ Barter is the exchange of goods for goods and this was the first type of
trade. An example of barter: the exchange of a bag of yams for a goat.

BENEFITS ASSOCIATED WITH BARTER:

- Simple form of trade.
- made use of agricultural surplus.
- promoted community relationships and teamworking abilities with neighbours and
community residents.

The Problems Of Barter

1. Double coincidence of wants – This is where a person first has to find someone who had
some-thing that he wanted and is willing to accept what he had to offer. Thus one person
must have what the other wants and be prepared to exchange, only then exchange is
possible.

2. Deciding on a common value or the rate of exchange i.e. the right quantity that was
acceptable in exchange for another item, e.g. how many yams will be equal to 1 goat?
Remember all products are not homogeneous (The Same).

3. Indivisibility of certain items – for example you could not exchange part of the goat for
some yams because there was no means of storing the unused portion. Thus the whole
goat had to be traded or none at all.

4. Store of wealth and store of value- some items lose value with the passing of time,
example perishable goods; animals which may die after a long journey.

5. Transport difficulties- especially for large bulky items such as livestock and heavy
provisions from home to market places, for barter to occur.
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The advantages of Barter

1. It facilitates trade without the use of money.
2. It allows a person to get what they want and what they could not have produced.
3. It makes use of surplus products.

❖ Specialization refers to the division of a task into a number of related parts where
different persons do different jobs and they do that job for which they are best suited to
do.

❖ Division of Labour – The further sub division of the production process whereby a
large project is further sub-divided into a number of smaller, simpler and different
parts. Subsequently different persons will be assigned to the different tasks.

BOTH SPECIALIZATION AND DIVISION OF LABOUR share the same

advantages and disadvantages.

The advantages of specialization or division of labour:

1. Higher output: Total production of goods and services increases/ productivity increases.
2. Improvement in skills: Workers develop their ability/skills to their highest ability since
they are doing the same tasks every day. This will allow the worker to get a higher wage
based on skills.
3. Improvement in Quality: Improved skill results in a higher quality product/service as
Specialized workers ae experts at what they do.
4. Variety: Customers have access to a greater variety of goods.
5. Working hours may become shorter: as workers work faster since they are familiar with
their tasks.
6. Fewer Errors: There are less errors since workers become efficient and make fewer
mistakes.
7. Larger Markets: More output means the business can supply more consumers.
8. Cost per unit is reduced or lowered as we buy in bulk.
9. Better methods of Production: Businesses can develop newer and better methods of
production and there is greater opportunity to use automation.

The disadvantages of division of labour:

1. Unrewarding, repetitive work that requires little skill, this lowers motivation and
productivity. Workers take less pride in their work and quality suffers. Dissatisfied workers
become less punctual at work and the rate of absenteeism increases.
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2. It can lead to distant and impersonal relationship between employer and employee.
3. Many people may choose to move to less boring jobs creating a problem of high worker
turnover for businesses. This means that a business will be forced to constantly find and
hire new workers to replace older workers.
4. Workers may become too specialised in one field and may become incapable of
adapting to change. Some workers who are highly skilled in one field may not be able to
do other duties because they get accustomed at doing the same thing over and over again.
New duties may overly challenge and scare those workers.

Limits to the division of labour:

1. Extent or size of the market– If demand for the product were small then there would be
very little need for the firm to produce in bulk. Thus, less specialization and division of
labour is needed.

2. The use of capital equipment – Capital equipment might be too expensive for a firm to
utilize in its production process. Automation, which is the use of heavy machinery and
equipment in the production process.

3. Nature of the product – Some products by their very nature require special skill and
attention, e.g. an artist, a surgeon or the creation of antiques. As a result, it cannot be
mass-produced but must get the attention of one person.