MODULE 1 TITLE OF MODULE: Economics and Resource Allocation

NUMBER OF INSTRUCTIONAL (Teaching/ Learning) PERIODS: 13

PRESENTATION OF THE MODULE: This module introduces learners to Economics as a discipline.
It equally introduces them to the diverse ways resources are allocated in an Economy.
CONTRIBUTION OF THE MODULE TO THE AIMS AND GOALS OF THE CURRICULUM:
This module enables the learner to have a clear understanding of basic economic concepts and principles
as well as the basic economic problem of allocating resources.
CONTRIBUTION OF THE MODULE TO THE PROGRAM OF STUDY AND TO THE AREAS-
OF-LIVING: It helps the learner to adopt a rational behavior in the allocation of his/her resources to
various uses.

1.0 Economics and resource allocation

Introduction:
The term economics is derived from two Greek words “oikou” meaning “a house” and
“nomos” meaning “to manage”. Thus, according to the Greeks, economics means the
managing of the household. Economics explains how individuals are able to use their
scarce resources to manage their households in order to earn a living. Many works have
been published on the subject economics and as such there are many definitions as
regards the subject economics. Some of these definitions, given by different economists
are presented below:

Some definitions of economics

1 ADAM SMITH [1723-1790]: He defined economics as “an inquiry into the nature and
causes of the wealth of nations”.
2 JOHN STUART MILLS [1806-1873]: He defined economics as “the practical science
of production and distribution of wealth”.
3 ALFRED MARSHALL [1842-1924]: He looked at economics as “the study of
mankind in the ordinary business of life”.
4 HERBERT J. DAVENSPORT [1861-1931]: He defined economics as “ the science
that treats the phenomena from the view point of price”.
5 ARTHUR CECIL PIGOU: He defined economics as “a means of studying how to
increase total production in order to raise the standard of living”.
6 PROF.BARON LIONEL ROBBINS: economics with respect to Robbins is “a science
which studies human behavior as a relationship between earns and scarce means which
have alternative uses”. This definition is very important and highly or wildly accepted
because of the following important aspects or elements that it brings out;
A] economics is a science: it is a science in its study however it is different from the
pure sciences which deals with matter. Economics deals with the study of human
behavior which is based on observation.
 B] Ends: ends refers to wants [aims, objectives or goals to be satisfied]. Wants are
simply desires not backed by the ability and willingness to pay for them at a given
period of time. These wants include commodities that people desire. Example of human
wants include food, shelter, clothing, radio, cell phone, tv set,,bicycle etc.

Characteristics of ends or wants

a] they are unlimited ie they are numerous or countless etc
b] ends are insatiable ie nobody can satisfy all his or her needs
c] ends are recurrent ie the very want maybe needed many times
d] human wants varies from person to person
e] ends varies from time to time
f] ends can be substituted for one another at a given time
g] wants posses utility

C] Means: it refers to the economic resources of the earth and human resources that are
used to satisfy wants of economic agents . examples of means are factors of production
(land, labour, capital and entrepreneur)

Characteristics or features of means

a] means are scarce ie there are sufficient or enough to satisfy mans unlimited wants
b] they have alternative uses ie they can be used in one way or the other
c] they do satisfy wants directly (they posses utility)
d] they command or have a price
e] they have opportunity cost.

D] alternative uses: it means that the scarce means available can be put into different
uses. for example, a price of land can be used in constructing a house it can be used as a
playing ground or a farm land. If it is used for any particular purpose then, it prevents it
from being used in another use.

Reasons for studying economics

Economics is an interesting social science subject and people study it for various reasons
1] the study of economics enables us to understand how various economics are
organized how they function and how successful they achieve macroeconomics
objectives such as full employment price stability economic growth and equitable
distribution of income amongst others
2] it provides a good guide to the study of the behavior of business unit and government
in the allocation of science resources
3] economics provides knowledge which enables economic operators to make proper
use of their scarce resources.
4] economics increases peoples skills in making rational economic choices under the
conditions of relative security.
5] the subject helps people to understand how prices and output are determine in
different market structure.
6] economics enables people to understand how government policies affects the
behavior of economic agents and, hence, the economic as a whole giving us a critical
idea of government actions.
7] economics enables us to understand how the economy of a country is linked to the
economies of another countries through trade.
8] it provides the basic skills for studying and solving economic problems.
9] it provides basis for a good career and employment in areas such as banking,
accounting, business administration, management, law and finance amongst others

Economics as a social science

Economics is a social science which studies human behavior or man’s activities in
relationship to production, exchange, distribution and consumption. A study of these
activities which are aimed at satisfying human wants comes within the framework of
economics. The framework of economics includes: production, distribution, exchange
and consumption

Why economics is not a pure science like physics (differences between

economics as a social science and pure science)
Economics is not a pure or hard science like physics because of the following reason:
a) Economics studies human behavior while the pure science studies man himself and
the components of his environment
b) Economics experiments are based on observation but with pure science experiments
are conducted in the laboratory
c) In economics we always assume “other things being equal” (ceteris paribus) because
human behavior is very complex and subject to constant changes. On the other hand,
with pure science other things are held constant when items are isolated in the test
tube for laboratory experiments.
d) Economics deals with facts that concerns people. These facts are at times difficult to
assess.

Distinction between micro and macro economics

Microeconomics: microeconomics deals with the economic behavior of individual
decision-making units or sectors of an economy. Its concerned with the analysis of
the basic decision-making components of household, individuals, firms, and
government.
Macroeconomics: it refers to that branch of economics which deals with the
behavior of collections of decision making units. It considers the behavior of the
economy. In summary it deals with the broad aggregates in the economy.
 Basic economics concepts
A] wants and needs: wants refers to desires not backed by the purchasing power of
money or the ability. Wants do not go with price or income and are unlimited. On
the other hand, needs refers to then basic requirements for survival. These are the
necessities of life which include food clothing and shelter. Needs arises because of
wants and are backed by the ability to pay.
B] Scarcity and shortage:
i] Scarcity: scarcity means permanently limited in supply relative to demand ie
resources are permanently insufficient to satisfy the unlimited human wants. Scarcity
is a permanent situation.
ii] shortage: shortage means temporarily limited in supply related to demand ie
goods and services may sometimes be insufficient in the market. For example, there
can be shortage of rice in the market today and tomorrow rice will be found in
abundance.

Differences scarcity and shortage

1] scarcity means limited in supply relative to wants but shortage denotes a condition
when the quantity demanded exceeds the quantity supplied at a particular price and time.
2] scarcity is a permanent situation while shortage is a temporal condition.
3] Shortage can be solved by increasing quantity supplied while scarcity cannot be
solved.
4] Scarcity is common to all societies, but shortage is common to developing economies.

C] choice: choice refers to the act of selecting amongst alternative in other to satisfy
human wants. We choose because our wants are insatiable, unlimited whereas the means
to satisfy them are scarce. It is because of scarcity that people are forced to choose only
the most pressing needs and satisfy them first.

D] Scale of preference: this is a list of unsatisfied wants arranged in order of

importance with the most important wants at the top and the less pressing wants at the
bottom because there is no means to satisfy all the wants. The items found at the top of
the scale will give the individual, firm or government the maximum satisfaction. For
example two students who are about to start the new academic year may have their scale
of preference as follows;

John Mary
Registration fees Uniform
Exercise books and pens Shoes
Text books Pocket money
Uniforms Wrist watch
School bag Registration fees
 Pocket money/ allowance Exercise books and pens

E] Opportunity cost (True Cost, real cost or alternative cost): it refers to the “next best
desired alternative forgone” in order to consume or produce something. Opportunity cost
is measured in terms of forgone alternatives or physical terms ie the physical value of
what is forgone. For example a student may have 100frs and need a pen and a bread. If
he or she decides to buy a pen then the true cost of the pen is the pen forgone.

F] Utility: it is defined as the amount of satisfaction to be derived from a consumption

of a particular good or service at a particular time and place. Utility varies from person
to person, from place to place and from time to time.
A good may posses utility but not useful and vice versa. Alcohol and ciggerates
gives satisfaction to some individuals but it is not useful. Utility is measured in units
called Utils.

Characteristics of utility
a] Utility varies from person to person, from place to place and from time to time.
b] It cannot be measured in absolute terms ie it is subjective in nature.
c] it is invisible ie it cannot be seen or touched with the eyes or hands respectively.
d] it diminishes as more of a given commodity or service is consumed.

Types of utility
There are two types of utility namely; total utility and marginal utility
1] Total utility (T.U): It is defined as the entire or total satisfaction derived from the
consumption of a given unit of a commodity at a particular place and time. total utility
increases at a decreasing rate as more of a commodity is consumed. This means that
each additional (extra) unit taken add less to the total satisfaction derived from the
consumption of the commodity than the one taken before.it can be measured using the
formula : MU1 + MU2 = TU2 OR
MU1 + MU2 + MU3 +MU4 = T
2] Marginal Utility( M.U): this is the additional or extra satisfaction derived from the
Consumption of an additional unit of a good or service at a particular place and time. it
decreases as more of the units are consumed. It can be measured thus
Marginal utility = change in Total Utility
Change in units consumed

OR

MUN=TUN – TUN-1 where change in n=1

Where TU = total utility

N = number of unit consumed
 MU = marginal utility
Example: assume that a student from could eat five places of rice and beans and has different levels of
satisfaction as shown on the utility schedule below:

Number of plates of rice and Total utility TU ( utils ) Marginal utility MU ( utils )
beans
1 150 150
2 250 100
3 300 50
4 300 0
5 250 -50

Using the utility schedule above the TU and MU curves can be plotted graphically as follows:

From the above utility schedule and curves, it can be observed that MU decreases as more plates of rice
and beans are consumed up to zero with the increase in consumption from the 3th to the 4 th plate. This is
the point if satiety or maximum satisfaction. After this point if the student continues to increase his
consumption of rice and beans he will obtain negative satisfaction (dissatisfaction) and TU will start to
fall after the consumption of the 4th plate of rice and beans.
Note:
-When total utility is highest, marginal utility equals zero
-The total utility curve slopes upward and after the consumption of the 4 th plate of rice and beans, the
curve starts falling. The marginal utility curve slopes from the left to the right (negative sloped )
- The above situation brings out the idea or concept of the “ law of diminishing marginal utility” which
states that “ as more and more units of a commodity is consumed, marginal utility keeps on falling down
to the point zero and even negative since total utility increases at a diminishing rate”.

Basic economic problems

Every societies whether developed or underdeveloped face four fundamental economic problem
which are; what to produce, where to produce, how to produce and for whom to produce.
1) What to produce: the first major problem faced by any society is that of what to produce
given the scares resources. For example a government with a limited budget will have to
decide whether to provide roads, schools or hospitals to its citizens. This question is
always referred to as the “output question “
2) Where to produce: after having decided on what to produce, the next major problem is
that of where to produce the good or service. For example, if the government decides to
create more schools the next major problem will be where to locate these schools. If the
aim of the government is to reduce illiteracy rate in rural areas, then these schools should
be located in rural areas where they are no school.
3) How to produce: the next major problem any economy faces is that of how to produce ie
the method of production to use. Should it be labour or capital-intensive method. For
example, if an entrepreneur decides to open a bakery in a place, his next major problem
will be that of the method of production to use. He can decide to use more machine and
less human labour or he can use more human labour and less machine. This question is
known as the “input question” or “combination question”.
4) For whom to produce: the last problem any economy face is that of for whom to
produce. This refers to how the goods and service (output) should be distributed among
the members of the society. Ie should the goods or services be unevenly distributed so
that only a few rich individuals will benefit from the goods or services while the majority
of the population live in misery, or evenly distributed so that everybody whether rich or
poor should have a fair share of these goods or services. This question is sometime
referred to as the “distribution question” or the “problem of distribution”.

Nature of goods and services (types of goods and services)

Output (goods and services or commodities) could be classified according to the
following categories;
a) Free goods: these are goods that are so plentiful or are found in abundances in supply
and have no price. A free good has no opportunity cost. Examples of free goods are;
air in the atmosphere, sea water, sand in the desert, sunlight etc.

features of free goods

i) They have no cost of production and factors of production are not combined to
produce free goods.
ii) They are free gifts of nature.
iii) They do not command a price.
iv) They are unlimited to supply.
v) They possess utility
vi) They have no opportunity cost.

b) Economic goods: they are goods which are scarce, have money value and yield
satisfaction. Examples include; car, sugar, tv set, shoe,cloths etc.

Features of economic goods

- They are scarce
- They have a cost of production
- They command a price.
- They have an opportunity cost.
- They have an exchange (money) value.

c) Public goods: these are goods and services collectively provided by the state to its
citizens and citizens pay no price for consuming or using these goods or services. The
finance or capital used in providing this goods and services is from general taxation.
Examples of public goods include; roads streetlights, national and public security,
public taps, public libraries etc.

Features of public goods

- Non- exclusion: this means that all the citizens have equal rights in using these
goods and services no citizen is excluded from using these goods.
- Non-rival or non-diminishability: this means that if an additional person or
group of persons use these goods. The quantity available cannot reduce or finish.

d) Merit goods: these are goods supplied by the state almost free of charge to its
citizens because the social benefits of their consumption outweigh private benefit to
an individual. That is goods or services which are very important for the welfare of
individuals and the community as a whole examples of merit goods include;
education health care, electricity supply and portable water supply.

Features of merit goods

- They command a price.
- They are exhaustive.
- They possess utility.
- Social benefit from consumption is greater than private benefits.
- They are sufficiently supplied by the public than by private individuals.
 BASIC TOOLS OF ECONOMIC ANALYSES
Basic statistical and mathematical concepts
there are three main tools or languages used in analyzing economics. They include
Prose: people use propose in expressing ideas in literary form. It is disadvantageous in that it is
uneconomical ie it occupies a lot of space and waste time.
Graph: people use graphs to represent information it is good because it is clear and easily
understood. It is limited in that it cannot be use when there are more than two variables eg
histogram, bar chart amongst others.
Mathematics: people use their expression in literary form in mathematical form. E.g. price is a
function of quantity demanded, mathematically QD=f(p).
STATISTICS:
Definition: statistics refers to the scientific method of data or information collection in
numerical form for analysis and interpretation.
Measures of central tendency (mean, median and mode)
The measures of central tendency are the ways in which the average of a data set is
calculated.
a) Mean: mean is referred to as average. It is the summation of the values of the data
divided by the number of the values making the total. It gives information about the
nature of the data. Thus, mean of a set of numbers X1, X2, X3………Xn is their sum
divided by their number
Mean(X)= ∑xi
n
where; ∑xi = X1+X2+X3+X4…….+ XN
n = the number of values in the set or data.
Example: consider the score of six students offering economics in G.H.S Bamunka rural Ndop in
form three as follows 12, 10, 15, 8, 9 and 7. Calculate the mean score for the six students.
Solution
Mean score = sum of score
Number of students
Sum of score= 12+10+15+8+9+7= 61
Number of students = 6
Therefore the mean score ( x ) = 61 = 10.17
6
Hence, the mean score for the six students is 10.17

Example 2: the following is a list of gross monthly salary of six teachers in G.H.S. Bamunka
rural: 33000frs, 45000frs, 35000frs ,50000frs, 30000frs and 59000frs. Calculate the mean wage.
Solution
Mean wage: ( x ) = sum of wages
Number of workers
 ECONOMIC SYSTEMS AND ECONOMY
A) An economy: An economy refers to an area or place where productive activities are
carried out by a given population. Examples of an economy include a village, town or
country. The three main activities carried out in``11qqqqqqqqa any economy are;
production distribution and consumption.
B) An economic system: an economic system refers to set of rules, and regulation, laws and
customs that governs the production, distribution and consumption of goods and services
in a particular place or area. In the simplest terms an economic system tries to look at the
way, the economy can resolve the problem of what to produce, where to produce, how to
produce and for whom to produce. We have four types of economic system which are;
the traditional, market, planned and mixed economic system.

A) THE TRADITIONAL ECONOMIC SYSTEM

This type of economic system is also known as subsistence economic system. This is an
ancient and primitive economic system where production is based on trial and error. In
this economic system the problem of choice of what, where, how, and for whom to
produce is solved by tradition and custom habit of the society where there is also of
superstition. Resource in this economy are own and controlled by family members. The
goods produced by the family is meant only for consumption.

Characteristics of a traditional economic system

1) There is a strong belief in custom and habits
2) Resources are owned and controlled by family members
3) There is no financial exchange in this economy
4) The basic economic problems here are solved by tradition, custom, habit and
superstition and religious believe.
5) There is very little adaption to changes in the methods of production, distribution
and exchange.
6) There is no excess production ie all what is produced is consumed.
Advantages of a traditional economic system

1) There is no over exploitation of economic resources: the needs of the people

are small and very small amount of goods and services are produced.
2) The economy is not sophisticated: the problems associated with advance
economy are absent in this economy
3) There is an even distribution of income and wealth: the people work as a
community and share the wealth freely with each other.
4) There is less consumer expenditure.
Disadvantages of a traditional economic system
1) The people are very conservative: they do not want to accept any modern and new
method of production. They believe that any modern idea of production is the
consultation of the gods of the land.
2) There is lack of variety of goods and service for consumers to make choices
3) The standard of living of the people is very low: this is because of low output and lack of
varieties of goods and services.
4) The method of production is very primitive: the people use but crude tool such as hoes
and cutlasses to carry out production. This usually leads to very low output of goods and
services.
5) The level of economic development and growth in this economy is usually very low: this
is because the basic economic problems are solved by tradition, customs and habit of the
society where there is a lot of superstition.
B. THE MARKET ECONOMIC SYSTEM
Definition: a market economic system is any economic system where by resources are owned
and controlled by private individuals who are working to maximize profits. In this economic
system the basic economic problems of allocating scares resources among competing uses is
solved by the price mechanism (the forces of demand and supply ). This economic system is also
known as the decentralized economy, free enterprise, capitalist or laissez faire economy. There is
no ideal market economy existing in the world. Near practical examples of this type of economy
include USA, Australia, Hong Kong, Italy, Canada, etc.

Characteristics of a capitalist economic system

a) There is little or no government intervention in this economic system
b) There is private ownership of resources: economic resources are owned and controlled by
private individuals.
c) There is consumer’s sovereignty: this means that consumers determine what goods or
services to be produced.
d) There is producer sovereignty: this means that producers are free to enter any line of
production of their choice
 e) The is reliance on the price mechanism: this is the most important characteristics of a
market economy. Prices of goods and services are determined by the forces of demand
and supply.
f) There is self-interest: this means that the aim of every individuals is to maximize personal
satisfaction ie consumers maximizes consumption, and producers maximizes profits.
g) There is competition: there is a lot of competition among the private individual
producers. This leads to low prices and the production of high quality goods.
h) There is no production of public and merit goods. This is because they are not profitable.

Advantages of the market economic system

i) Better quality goods are produced: in the market economic system, there are many
competing firms and each firm will struggle to be efficient and produce better quality
goods in order to capture the market.
ii) There is consumer’s sovereignty: the consumers are regarded as “kings”. This means that
the consumers choice determines why the producers should produce.
iii) The is freedom of enterprise: in the market economic system, producers are free to invest
in any business that will give more profits.
iv) There is self-interest: there is a lot of self-interest since resources are own and controlled
by private individuals. Self-interest pushes individuals to work very hard.
v) Consumers enjoy a great variety of goods and services: this is because many firms are
engaged in the production of goods and services and as a result of this consumers enjoy a
wide variety of goods and services.
vi) There is efficiency: there is efficiency in production since there are many firms who
engage in production and tend to compete with each other in the production of goods and
services.
vii) Consumers enjoy low prices for goods and services: consumers are able to buy goods
and services at lower prices because of competition.
viii) There is innovation and invention: due to the desire to produce better quality
goods and services, there will always be a lot of innovation and invention.

Disadvantages of market economic system

a) Neglect of external cost: firms tend to neglect external cost or the negative effect of
production to the society such as pollution, noise, congestion etc
b) Neglect of the provision of public and merit goods: in the market economic system,
private individuals tend to neglect the provision of public and merit goods since these
goods are not profitable.
c) There is uneven distribution of income and wealth: this makes the rich to get richer and
the poor to get poorer. This widen the gap between the rich and the poor.
 d) There is the development of monopolies: in the market economic system, some firms
tend to grow very large in size, dominate the market and become monopolist and charge
high prices for their goods.
e) There is the production of harmful goods: since private individuals are out to make
profits, they may tend to produce harmful goods such as expired drugs, cocaine, Indian
hemp etc.
f) There is a lot of wastage of resources: this is due to competition amongst the producers.
g) There is imbalance development: this is become of no government intervention.

C. THE PLANNED ECONOMIC SYSTEM

Definition: this is the economic system where all resources are owned and controlled by the
state. Here the basic economic problem of what, where, how and for whom to produce is solved
by a central planning authority. The planned economic system is also known as the command,
socialist, communist, centralized state or collective economy. Examples of such economies
included; former Soviet Union, north Korea, Cuba, china, etc.

Characteristics of a command economic system

1) All resources in this economy are owned and controlled by the state.
2) The basic economic decisions are left to be decided by the government (a central
planning authority.
3) There is no consumer’s sovereignty: consumers have no freedom of choice because they
have to consume only what the government decide to produce.
4) There is no producer’s sovereignty: here only the government is involved in the
production of goods and services.
5) There is even distribution of wealth and income: everyone in this economy gets a faire
share of what is produced by the government and therefore there is equality in the
distribution of wealth.
6) There is little or no competition
7) There is the provision of merit and public goods by the government since private
individual see it as being unprofitable to produce them.
Advantages of the command economic system
a) There is even distribution of income and wealth: the state is the sole producer of goods
and services and ensures that everyone receives a faire share of what is produced.
Consequently, there will be no rich or poor persons in this economy
b) There is no consumer exploitation: in the command economic system, the aim of the
production is not for profit making but to ensure that the citizens have enough for
consumption and consequently the citizens are not exploited
c) There is no waste of resources: this is because there is no competition that will lead to the
wasteful use of resources.
 d) There is the provision of public and merit goods: in the planned economic system, the
aim of the government is to ensure the welfare of the citizens and not to make profits.
Therefore, the state will ensure the provision of public and merit goods.
e) There is the control of social cost: since the aim of the government is to ensure the
welfare of its citizens, it always ensure the control of social cost (negative externalities)
such as pollution, congestion, prostitution etc.
f) There is no production of harmful goods: this is simply because production is controlled
by the government.
Disadvantages of the command economic system

1) Low quality goods are produced: this is because resources are owned by the state and
there is no competition. All these will lead to lack of self-interest, inefficiency and
therefore poor-quality goods and services.
2) There is no freedom of choice: in the planned economic system, the state is the sole
producer and it decides what to produce for the citizens and consequently, there is no
consumer sovereignty.
3) There is no producer’s sovereignty: since the state is the sole producer in this economy,
there is no freedom of enterprise and no competition and consequently, low quality goods
are produced and lack of variety of goods and services.
4) Planification problems: in the planned economic system, the task of planification is
always difficult because the government may not efficiently estimate the needs of the
citizens. There could be underestimation or overestimation due to the absence of the price
mechanism.
5) The consumers pays for all the cost of production: the do so through the payment of
direct and indirect taxes.
6) There is inefficiency in the allocation and management of resources: this is because of the
absence of competition in the command economy.

D. THE MIXED ECONOMIC SYSTEM

Definition: this is an economic system where economic resources are owned and controlled both
by the government and private individual. Production decision are taken both by the government
and private individuals. The mixed economic system is there a marriage between the market and
the planned economic system which tries to reconcile the shortcomings of the market and the
command economic systems. Examples of mixed economies include; Cameroon, Nigeria, ghana,
etc

Characteristics of the mixed economic system

- Economic resources are own and controlled by both the government and private
individuals.
- There is the provision of essential goods (public and merit goods and other important
private goods)
- The government regulates the private sector
 - The government tries to redistribute income with the help of the progressive tax system

Advantages of the mixed economic system

a) There is the control of social cost: the presence of the government in this economy
ensures the control of social cost which could have been neglected by the private
individuals because it is very costly to control.
b) There is the provision of public and merit goods: the presence of the government in the
mixed economic system ensures the provision of public and merit goods which could
have been neglected by private individuals because they are not profitable.
c) There is economic stability: in the mixed economic system, the government intervenes to
stabilize the economy especially price stability. Ie they ensure the control of inflation
such that the general price level should not be too high in the economy.
d) There is equitable distribution of income and wealth: in the mixed economic system, the
government attempts to redistribute income through the progressive tax system, where
high income earner pay high proportion of their income as tax and the low income
earners pay low proportion of their income as tax. This narrows the gap between the rich
and the poor.
e) Better quality goods are produced: the presence of the private sector in this economic
system leads to competition and self interest and consequently the production of better
quality goods and services.
f) There is freedom of choice: the presence of the private sector in this economy leads to
competition and the production of a wide variety of goods and services and consequently
there is consumers freedom of choice.

Disadvantages of the mixed economic system

i. Poor management of state enterprises: in the mixed economic system, state own
enterprises are usually poorly managed. This is because recruitments are usually based on
friendship and politics rather than competence.
ii. Taxation problems: the government in this economy usually introduces taxes in order to
redistribute income. High taxes could act as a disincentive to hard word
iii. There is inefficiency: government intervention in the mixed economic system will lead to
inefficiency since he disturbs the perfect functioning of competition

The role of the government in the mixed economic system

1) Creating a frame work of rules: in the mixed economic system, the government usually
create rules and regulations that will protect consumers and produces. For example the
property right law, consumers protection law, laws governing the working conditions of
workers etc.
2) Redistribution of income: in the mixed economic system, the government tried to
redistribute income or reduce the gap between the rich and the poor through the
progressive tax system
 3) Provision of public and merit goods: public and merit goods are very essential for the
welfare of the citizens and since they are not profitable, private individuals will not like
to provide them. The government tries to intervene to ensure that this public and merit
goods are provided.
4) Control of social cost: private individuals are more interested in their profits and will not
care to control the negative effects of production such as pollution, congestion etc.
consequently, the government tries to intervene such that these social costs are control
5) Stabilizing the economy: market economies are characterized by instability especially in
prices and therefore government intervention is always necessary to stabilize the
economy by using his monetary and fiscal policy
6) Achieve a faster rate of economic growth: government intervention in an economy is also
to ensure a faster rate of economic growth. This will be achieved when the government
devotes more resources to produce capital goods than consumers goods.
7) Carry out production: the government also intervenes in the economy, in order to open up
its enterprises or firms. Government enterprises are called public corporation,
nationalized industries or public enterprises.

Revision questions.
MODULE 2

TITLE OF MODULE: Contribution of resources in the process of production

NUMBER OF INSTRUCTIONAL (Teaching/ Learning) PERIODS: 24

PRESENTATION OF THE MODULE: This module presents the various factors of

production as well as the relationship between the different combination of factors and output.

CONTRIBUTION OF THE MODULE TO THE AIMS AND GOALS OF THE

CURRICULUM: This module enables the learner to have an understanding of the different
factors of production and effects of the different combinations of these factors and output.

CONTRIBUTION OF THE MODULE TO THE PROGRAM OF STUDY AND TO THE

AREAS-OF-LIVING: This module permits the learner to participate actively in the process of
production.

PRODUCTION
Definition: production is defined as “the creation of goods and services to satisfy human wants”.
It could also be defined as “ the transformation of resources ( inputs or factors of production ) in
to goods and services to satisfy human wants”. It refers to all those activities which provide
goods and services which people want and for which the are prepared to pay a price. The main
aim of production is to satisfy human wants. The following are examples of production; driving,
preaching, teaching, pounding of achu ( cooking of achu ) nursing, creation of palm oil,
cultivation and milling of rice, creation of furniture, building of a house, manufacture of cars,
motor bikes, phones etc. Production is said to be complete when the goods or services has reach
the final consumer.

Types of production

There are two types of production namely; direct and indirect production.

A) Direct production: it is the creation of goods and services that satisfy human wants
immediately. Here, the producer produces for himself all he wants. Direct production is
common in subsistence economies. Examples of direct production include; a house wife
who cooks food for her family, a tailor who sews her own dress, a woman to washes her
own dresses, a builder who build his own house etc.
B) Indirect production: it is the creation of goods and service that satisfy human wants
indirectly ie the production of goods that are to be used for the creation of other goods.
Here, the producer produces in order to satisfy other peoples wants. Ie he produces for
the market. Indirect production is mostly practiced in the market economies. Examples of
 indirect production include; production of capital goods (raw materials, machines etc), a
baker producing bread for sale, etc

Stages of production

Given that production is a process and given that it is complete only when the final goods
reach the final consumer, it implies that production undergoes various stages. These stages
also known as structure of production are the primary, secondary and the tertiary stage.

a) Primary production (the extractive stage): this stage involves the extraction of natural
resources or raw materials from the earth surface or crust. Extractive occupations can be
found mostly in farming, mining, fishing, cattle rearing, forestry, hunting, quarrying, etc.
for example, the exploitation of timber, mining of gold, the cultivation of cocoa, coffee,
rice, rubber, etc. primary production means the first stage of production. The output
produced at this stage by the extractive industries form raw materials for the secondary
stage.
b) Secondary production (manufacturing stage): this stage refers to the transformation or
changing or processing of raw materials in to semi-finished or finished goods. For
example the transformation of timber in to planks and then in to furniture by a carpenter,
the transformation of cocoa beans in to chocolate by CHOCOCAM, the transformation of
sugar cane in to sugar by SOSUCAM, building of houses or roads (by contractive
industries)
c) Tertiary production (distributive stage): this stage is concerned with the provision of all
kind of services, distribution and exchange. These services enable the goods produced in
the primary and secondary stages to reach the final consumer. The distribution channels
will include wholesaling, retailing and transportation etc. other services will include
insurances services, banking, etc. other personal services are offered by tailors, hair
dressers, medical doctors, lawyers, accountants etc.

Type of goods

The production process ends up with the creation of a wide variety of goods and services
known as output. Output can be classified into consumer goods, producer goods and services.

1) Consumer goods: these are goods created for immediate consumption. These are goods
which are meant to satisfy human wants directly. For example; bread, garri, yams,
chocolate, tv set etc. these goods are grouped in to two categories namely; durable and
non-durable goods
a) Durable consumer goods: these are goods which are created for immediate consumption
and which satisfy a consumer for a long time but depreciate with time and use. For
example, TV set, radio set, fridge, cars, motor bikes, houses etc.
b) Non-durable consumer goods: these are goods with are created for immediate
consumption and which are destroyed in the process of using them. For example, food,
drinks, cigarette, chalk, soup etc
 2) Producer goods (capital goods): these are goods that are created to be used in the
production of other goods. Ie goods used for further production. For example; factory
building, sewing machine, raw materials, machinery etc

Apart from the two main types above, other types of outputs have also been distinguished
namely tangible and intangible goods.

a) Tangible goods(physical goods): these are goods which are since and touched. For
example, rice, corn, garri, biscuit, cell phone, motor bike, house, cloths, shoes, etc.
b) Intangible goods (services): these are goods that cannot be seen or touched. For example,
teaching, nursing, driving, banking, accounting, retailing, warehousing, services of a
lawyer etc.

WEALTH

Definition: wealth could be defined as the total stock of goods (consumer and capital goods)
existing at a particular time in a country which as money value.

Wealth is the stock of all salable assets of individuals and the state existing at a particular
period of time. it can be health in various forms such as in money, shares in companies, land,
vehicles, individual skills and talents, etc.

Characteristics of wealth

- Wealth possesses utility (yield satisfaction)

- It is scares (limited in supply)
- It must have money value
- It must be easily transferable ie it can be transferred from one person to another.

Types of wealth

1) Personal wealth: this refers to the personal belongings of an individual. This include but
goods and services. For example, cars, personal house, a tv set, personal skills or talents,
cloths, shoes, cell phone, etc.
2) Private wealth: this refers to the stock of all assets or property owned by group of
individuals. For example, private schools, hospitals, transport car, etc
3) Business wealth: this is wealth that is owned by companies and businessmen. For
example, factory building, machinery, office equipment’s, raw materials, vehicles etc.
4) Social wealth: this is the stock of all goods owned collectively by the community. For
example, town halls, municipal stadia, council libraries, church facilities, etc
5) National wealth: it refers to the total stock of all goods or services existing in a particular
country. It include goods owned by individuals and goods jointly owned by the
community and the state such as roads, hospitals, government offices, defense services
etc
Money and wealth

Money should not be confused with wealth. Money is a medium of exchange and is
considered as a claim to wealth owned by people. Money is part of an individual’s private
wealth because he can use it to acquire the wealth of others. Money is only a claim to wealth
for a country ie it can be used to exchange for goods and services. Note that the stock of
money in circulation in an economy is not considered as wealth.

Welfare and wealth

Welfare refers to the state of wellbeing of the citizen in a society. There exists a direct
relationship between wealth and welfare. An increase in wealth would mean an increase in
welfare of the people, all things being equal and vice versa.

FACTORS OF PRODUCTION

Definition: it refers to all the economic resources both natural and man made that are used in
the production of goods and services at a particular time. Factors of production are also
known as inputs or agents of production or economic resources. There are four types of
factors of production namely; land, labour, capital and entrepreneur.

A) LAND

Definition: land refers to all the natural resources or gifts of nature found beneath the
surface of the earth, above the surface of the earth and on the surface of then earth available
for the production of goods and services eg the surface of the earth itself has the soil,
minerals, forest, petroleum, resources, moon, sunshine etc. the reward for land is rent.

Characteristics of land

1) Land is strictly limited in supply: this means that the total amount of natural resource
inherent in land are fixed.
2) Land is a free gift of nature: this means that man did nothing to bring land into
existence as it has no cost of production.
3) The reward for land is rent.
4) Land is geographically immobile: this means that land cannot be taken from one place
to anotrhe reg fertile land cannot be taken from fumbot the far north region.
5) Land is subject to diminishing returns: this means that land is more and more variable
factor of production, there will come a time when the marginal product of return to land
will start falling.
6) Land varies in quality: this means that land is not uniformly distributed. The quality of
land changes from one place to another eg some areas are fertile while others are not,
some are fruitful while others are not, some have minerals while others don’t have.
 B) LABOUR

Definition: labour refers to all human efforts both physicaland mental directed towards the
production of goods and services for a reward known as wages or salaries.

Types of labour

There re two types of labour namely productive and unproductive labour.

a) Productive labour: this is a type of labour which earns a reward during the process of
production. For example an accountant in a bank earns a salary at the end of the month.
b) Unproductive labour: this refers to labour which does not earn a reward during the
process of production. For example a housefile washing her own dresses, a shoe maker
making his own shoe etc.

Characteristics of labour

 Labour is scarce or limited in supply.

 The reward to labour is wages or salaries.
 Labour is geographically and occupationally mobile.
 Labour cannot be separated from its owner.
 Labour is a human resource ie it is provided by human beings.
 Labour cannot be stored.
 Labour consumes what it produce.

Work

Definition: work refers to all human effort both mental and physical directed towards the
production of goods and servicesthat may not be or may receive a reward.

Therefore all labour is work but not all work is labour.

THE SUPPLY OF LABOUR

Definition : it refers to the number of hours a worker is willing to offer at a particular wage rate
and at a particular time.

Factors influencing the supply of labour

The supply of labour is usually influenced by a number of factors which include the following.

1) The size of the total population: a country with a large population size will have a large
supply of labour while a country with a small population will have a small supply of
labour eg the supply of labour in Nigeria is very high because of the large population size
of about 200million inhabitants while the supply of labour in Cameroon is low because of
the small population size of about 20million inhabitants.
 2) Age composition of the population: the age composition has a great influence in the
supply of labour. A country that has the greater portion of the population made up of the
working age group, the supply of labour will be higher. But if the country has a greater
proportion of the population of the old age group, the supply of labour will fall.
3) Wage rate: the supply of labour is very sensitive to changes in the wage rate. In the
country where higher wages are offered to the workers, supply of labour will increase.
That is why many try to obtain jobs in the U.S.A where high wages are offered to
workers in a country supply of labour will be very low.
4) Size of the working population: if the number of the people who are able to work and
offer themselves for employment is high, the supply of labour will be high. On the other
hand if the number of people who are able to work and offer themselves for employment
is low, the supply of labour will be low.
5) The age of entry into active service: if the age at which people are officially supposed
to enter into active service is high the supply of labour will be low. For example if in a
country the age of entry into active service is 40years then the supply of labour in that
country will be low and vice versa.
6) Age of retirement: if the age of retirement is very early, the supply of labour will be
reduced. On ther other hand, if the age of retirement is very late, supply of labour will be
increased. For example if the retirement age is 70years in a country, many people will be
obliged to work at the age of 70years and thus will lead to an increase in the supply of
labour.
7) Attitude of women towards work: when women are prepared to take up paid jobs the
supply of labour will increase. On the other hand when women refuse to take up paid jobs
the supply of labour will be low.
8) Migration: if many people have the tendency of going out of the country the supply of
laabour will reduce. On the other hand if many people have the tendency of coming into
the country the supply of labour will increase.

EFFICIENCY OF LABOUR

Definition: efficiency of labour, refers to the ability of labour to produce a higher output within
a shorter period of time without a fall in the quality of output. Ie when production is very high
with out a fall in output. In this case if a worker produces a greater output of high quality within
a short period, he is efficient but when a lower output is produced with a longer period, the
worker is inefficient.

Factors influencing the efficiency of labour

 The following factors affectsthe efficiency of labour which include;

level of motivation: motivation refers to an encouragement given to labour. If the
level of motivation to workers is high especially when prizes gifts and promotion at
jobsite are given to hard working workers, efficiency of labour will increase as the
output of the work will increase.
  Level of education and training: labour which receives adeaquate training and
education tend to be more efficient than labour which is not well trained.this is
because modern and efficient method of production requires skills which can be used
to obtain through education and training eg a well trained typist can type many words
per minute than a typist who is not well trained.
 Renumeration(level of wages): the level of wages offered has a great effect in
efficiency of labour. Labour which receives high wageshas all the incentive to put in
as much time and energy needed to his work thus an increase in efficiency of labour.
On the other hand, labour which receives low wages is not motivated and this will
reduce efficiency of labour.
 Working conditions: the conditions under which people work has a great effect on
their efficiency. If the working conditions are good in a well ventilated and spacious
work environment with good temperature and lighting labour will be more efficient.
But if the working condition are very poor labour will be less efficient.
 Availability of welfare services: in an industry where welfare services are provided to
the labourers eg free medical attention, cantines, family and transport allowances,
sickness benefits accidents allowancesetc efficiency of labour will increase.
Whereas,where these facilities are absent efficiency of labour will decrease.
 Job satisfaction: when a worker is carrying out a piece of job thatmakes him or her
happy it is more likely that he or she will be more efficient ceteris paribus. On the
other hand if a worker is working in a particular area out of frustration or obligation,
his or her efficiency will be low.

MOBILITY OF LABOUR

Definition: mobility of labour refers to the case at which labour can move from one geographical
region to another or one change from one occupation to another. For example a person moving
from awing to Bamenda or a teacher becoming a lawyer. We therefore have geographical and
occupational mobility of labour respectively.

A) GEOGRAPHICAL MOBILITY OF LABOUR

It refers to the ease at which labour can move from one place or geographical region to
another. For example labour moving from Bamenda to douala.

Barriers to geographical mobility of labour

Labour maybe willing to move from one geographical region to another but maybe
disturbed or hindered by the following factors;

 High transport cost: the cost of transporting ones family and property to a place could
be very high and this high cost acts as a barrier to labour moving from one place to
another. A person could be hindered from moving from awing to mora because of very
high transport cost.
 Social and family ties: when aperson settle in one place for a long time, he will have
intimate friendsand belong to a social group. As such he will not be willing to go to a
new place where he will start work in a new environment even if the job is better paid.
 Language problem: labour maybe disturbed to move from one place to another because
of language problem. This is because the language spoken in a particular region is not the
same as the language spoken in another thus a worker may not understand the language
of the new area or region where he will be working. For example a Cameroonian can be
disturbed to go to japan because he cannot speak the Japanese language the mobility of
labour will decrease.
 Fear of disrupting childrens education: people could be reluctant to move from one
place to another with their children for the fear that the education of their children could
be disrupted especially if the movement is between areas with different educational
system.
 Lack of information: most often people are hindered frommoving from one place to
another because of lack of information about the existence of job opportunities in the
other place. They therefore, remain unemployed in a particular region while job
opportunities are elsewhere.
 Housing cost: some workers prefernot to move from rural areas where cost of living is
high for example cost of living in douala is higher than the cost of living in santa.
 Climatic problems: some people find it very difficult to move from one region to
another because of the differences in climatic conditions. In Cameroon people who
dislike hot areas will not like to move tmaroua, Garoua or douala whereas, people who
dislike cold areas will not like to move to santa, ndu and tole.

B) OCCUPATIONAL MOBILITY OF LABOUR

Definition : it refers to the ease at which labour can move from one occupation to another.
For example a lawyer becoming a truck driver. We have two types of occupational mobility
of labour.

a) Horizontal mobility of labour: this involves the movement of labour from one category of
occupation to anotherin one firm to the same category in another firm. For example an
accountant in the awing cooperative credit union moving to the bafut cooperative credit
union.
b) Vertical mobility of labour: this refers to the movement of labour from one occupation to
another within the same industry or in a different industry. For example a lawyer
becoming a teacher or a mechanic becoming an accountant.

Barriers to occupational mobility of labour.

 Labour may be willing to change from one occupation to another but maybe hindered
because of the following reasons out this minimum qualification cannot join such an occupation.
For example

1) Natural ability: some jobs can only be perform by specialist or people with natural talents
or abilities. A person without this natural talent cannot join such occupation. For example
to become a star footballer or a star musician one needs to be naturally gifted and without
this natural gift one cannot join such professions.
2) Length and cost of living: a person may want to join a certain occupation but maybe
disturbed by the fact that the cost of training is very expensive and it takes a very long
time to to undergo the training. For example to be a doctor or a pilot it is very expensive
and it takes a long time to become a qualified doctor or pilot.
3) Inadequate capital: A person may like to join a certain occupation or job but may not
have there quired capital and this will act as a barrier for entry to such an occupation.
4) Level of education: to join a certain occupation one may be required to have a certain
minimum level of education. A person with To become a university lecturer you must be
a holder of at least a master degree.
5) Present wage rate: if a worker is paid well and provided with the best welfare services he
will be very reluctant to leave his job and move to another. Thus a barrier to
occupational mobility of labour.
6) Discrimination : in some countries people are hindered to move from one occupation to
another because of discrimination which is based on race, sex, and colour. For example
apartheid in south Africa some years ago.

Government policies to assist the mobility of labour

A) Geographical mobility of labour

 Transport cost: transport allowances maybe given to workers by the government

to assist them to move from one region to another.thus encouraging the workers to
move from one place to another with ease.
 Provision of low cost of houses: government may provide houses to transfer
workers at a subsidized rate to encouragethem to live in the area with no fear of
paying high rents. Thus encouraging the movement of labour from one region to
another.
 Provision of public utilities: the government may provide public utilities such as
electricity pipe borne water in areas in need of labour especially in the rural areas.
The provision of these utilities will greatly encourage geographical mobility of
labour.
 Education: the government should harmonize the educational system so that the
workers can move from one region to another without fear of disturbing
 children’s education. For example construction of bilingual schools in the
country.
 Provision of information: the government may provide information about the
existence of job opportunities in other parts of the country. This is done by the
National Employment Fund Newspapers, radios, labour offices CRTV etc.
 Promotion and transfer: the government can encourage people to willfully
transfer by promoting them on transfer ie lifting them to higher places as they
move to their new post.
B) Occupational mobility of labour

 Provision of employment information: the government can try to inform people

of job opportunities through the media and radio.
 Opening of training and retraining centers: these are centers where workers
undergo training to acquire new and better skills which will help them move from
one occupation to another.
 Higher wages: government may raise wages in some occupation to encourage
labour to move from one occupation to another. The government may encourage
technical education by increasing the salaries of teachers in technical schools and
thus encouraging vocational training and self employment.
 Provision of capital: the government may grant subsidies and preferential loans
to business men or entrepreneurs. This will encourage them to move to any new
occupation.
 The provision of educational guidance: a guidance course is provided to help
students to determine thgeir choice of career. In Cameroon orientation teams test
students to determine the best field of endeavor.

THE DEMAND FOR LABOUR

Definition : the demand for labour is when the number of employees, employers are
willing to employ at a particular time. the demand for labour depends on the following factors;

 Demand for goods and services: the quantity of goods demanded can influence
the demand for labour. If the demand for goods and services is high more workers
will will be demanded and consequently the demand for labour will increase and
vice versa.
 Possibility of replacing labour with other factors: if labour can easily be
substituted or replaced with other factors such as machines, the demand for labour
will fall. But in the case where labour cannot be replaced with other factors the
demand for labour will increase.
 Government policy: the government can then decide to solve the problem of
unemployment by recruiting many workers in various sectors into the economy.
In such a situation, the demand for labour will increase.
  Quantity of other factors: if the other factors of production are in abundance,
then more labour will be required to combine with these factors and thus the
demand for labour will increase.

DIVISION OF LABOUR

Definition: this is the breaking down of a production process into smaller and specialized
units and processes so that each person specializes in a single process. For example in the textile
industry the planting of cotton, picking, cleaning, and spinning into thread, weaving, dyeing,
printing and marking are separate processes.

Advantages of division of labour

1) Acquisition of greater skills by workers: when a given task is done by a person for a
long time, he becomes an expert in it. This means that the individuals will gain greater
skill by doing the job everyday, thus he becomes very efficient. Hence the saying
“practice makes perfect”.
2) Saves time: when a worker concentrates on a single tool or activity, he saves a lot of time
moving from one activity or process to another.
3) Full use of machines: division of labour makes it possible for machines to be used in
the production process. The use of machine increases productivity and relieves workers
of tedious tasks.
4) Less fatigue: when production is done with the use of machines, little effort is required
to perform a task and the workers do not quickly get tired. Hence energy is not waste land
it leads to an increase in efficiency.
5) Lower per unit cost of production: since division of labour leads to increase in output
per worker and subsequently large-scale production, per unit cost of production to the
firms falls.
6) Increase use of specialist: division of labour enables workers to specialize in the work
that they eenjoy doing and for which they have the greatest ability there is need to
empoloy only specialist in those processes.
7) Fall in price: division of labour leads to an increase in output. An increase in output
results in lower cost per unit output leading to a fall in prices.
8) Increase in quality of goods: division of labour leads to an increase in the quality of
goods produced by the workers.

Disadvantages of division of labour

 1) Monotony of work: division of labour leads to monotony of work which arises from
constant repetition of a particular operation. Workers are always bored with the idea of
doing the same thing day in day out.
2) The loss of craftmanship: division of labour equally leads to loss of craftmanship. This
is caused by increase in the use of machines or automation. People cease being creative
as they tend to depend mostly on machines.
3) Greater risk of unemployment: when a worker becomes more specialized, the risk
being redundant when his skills become absolute due to changes in demand conditions.
Also when machines are used less labour will be employed leading to unemployment.
4) Fall in the demand for labour: since machines are used in production the demand for
labour may drop thus leading to structural unemployment.
5) Industrial unrest: there is the danger of industrial unrest in an economy as a result of
division of labour since there is always the fear that most of the workers are to be
displaced because of mechanization and automation.
6) Danger of interdependence: with division of work into processes, particularly in
manufacturing most workers make only a small contribution to the final product. The
absence of a worker means a complete breakdown in the production process.
7) Limited variety: division of labour is possible when the good is standardized. Hence,
there is a limity to variety available to consumers.
8) Low quality goods: division of labour may equally lead to the production of low quality
goods as a result of mass production.

Limitation of division of labour

These are factors which make it difficult for division of labour to take place. Such
limitation include;

1) The extent of the market: division of labour leads to large scale production. The large
output requires a big market if the market is small, it would be needless to produce in
large quantities, hence limiting division of labour.
2) The size of labour force: division of labour is possible where there are many persons to
take up the different production processes. If the size of then working population is small
the practice of division of labour will be affected negatively ceteris parisbus and vice
versa.
3) The desire for self-sufficiency: division of labour makes people dependent on others. To
overcome dependence, people tend to produce most of the thinghs they desire. This limits
4) Nature of the product: some product need special personal training for example an
artist, a hair dresser, lawyer etc. it has very little or no division of labour in their
production. It is not easy to divide such activities into smaller units to be performed by
separate persons.
 5) Technological advancements: technological advancement may limit division of labour.
If the production process is automated or computerized and production is undertaken by
robots the practice of division of labour and specialisation will be seriously hampered.
6) Poor transport facilities: production is only complete when goods and services reach
the final consumer thus, there is need for good transport and communication system to
enable the goods reach their users. The absence of good means of transport will therefore
limit the division of labour.
7) The system of exchange: specialization requires the use of money as a medium of
exchange. When the means of exchange is inadeaquate, it is difficult to produce in large
quantities. This limits the division of labour.

CAPITAL

DEFINITION: capital is defined as any “man-made” resource used for the production of goods
and services or it can be defined as wealth set aside fore the production of further. The reward
for capital is known as “interest”.

Characteristics of capital

 It earns interest as a reward.

 It is a manmade factor of production.
 Capital is a product of land and labour.
 It assist in further production.
 It has a market price.
 Its ownership is transferable.
 It is limited in supply (scarce).

Types of capital

1. Fixed capital: this is capital, which does not change its form in the process of
production. ie it is not used up in the course of production. ie it is not used up in the
course of production. it is made up of assets of a business used in production over a long
period. Fixed capital suffers from wear or tear called depreciation or capital consumption.
Examples of fixed capital include factory building, motor vehicles, machine, furnitures,
land, equipment railways etc.
2. Specific (sunk) capital: this is a form of fixed capital which is very specific and has no
resale value. This type of capital cannot be used for any purpose except the task it was
meant for. For example type writer, photocopier, blast furnace.
3. Social capital: this refers to the goods collectively or publicly owned by the people in
society. Example include public goods public taps public libraries public hospitals etc.
 4. Circulating (working or floating)capital: this is capital required for the daily running
of the business. It constantly changes its form in the process of production from cash to
raw materials, and semi finished and finished goods. With money, we can buy raw
materials, convert the raw materials into semi- finished and finished product and sellthe
goods to get money with which we can be able to buy raw materials again. This process
can be illustrated below.
Circulating capital

Money

Semi finished and finished products Raw materials

Capital formation (Accumulation)

Definition : it refers to the increase in a country’s stock or real capital. Capital can be created through
savings and diversion of resources. This capital must be in excess of the amount required to replace
worn out or obsolete capital.

Types of capital formation or accumulation

1) Capital widening: this is the increase in the quantity capital without the increase into proportion,
with the other factors of production ie the capital labour ratio remains the same. For example, one
unit of capital per unit of labour in one period or four units of capital per four units of labour in
period four. Etc.
2) Capital deepening: this is when production becomes more capital intensive ie, when the stock of
capital is increased with the number of workers employed falling or remaining constant. For
example two units of capital per unit of labourin period 2,3 units of capital per unit of labour in
period 3 etc.

Capital consumption
This is also known as depreciation. It refers to the wearing out of capital due to constant
usage. It is therefore the replacement value of capital used up in the process of production. depreciation is
the sum of the worn out part of capital plus the obsolete part.
Capital maintenance
This is a situation where there is the replacement of worn out capital. Capital maintenance
must come before capital formation.
 Mobility of capital
This refers to the ease with which capital can be transferred from one form of employment
to another or from one geographical region to another. Some capital is very flexible and moves from one
occupation to another. Fixed capitals such as machines , vehicles etc can be moved such as buildings can
be used for many purposes (occupational mobility of capital).
Capital and wealth
Capital is wealth set aside for the production of further wealth. Wealth on the other hand
refers to the stock of goods and services existing in a particular country which has money value with in a
given period of time. it should be noted that “ all capital is wealth but not all wealth is capital” this is
because consumer goods are wealth but it cannot be used for the production of further wealth.

ENTREPRENEUR
DEFINITION: An entrepreneur can be defined as “ the owner of a business who organizes the business,
take decisions and contribute to the capital of the business and bears the risk”. It is the factor of
production that organizes and coordinates the other factors of production to produce and sell goods and
services in other to make profits. Therefore the reward to entrepreneur is “profit”. The entrepreneur may
also be referred to as enterprise. This is because the entrepreneur is a risk bearer.

Characteristics of an entrepreneur
 The reward to an entrepreneur is profit.
 The entrepreneur is the most active factor of production.
 Entrepreneur is both occupationally and geographically mobile.
 He bears the risk of uncertainty.
 His functions regarding how, where, for whom to produce are unique.

Functions of an entrepreneur
1) Decision taking (maker) : the entrepreneur decides what, how, where,and for whom to produce
and the success of the business depends on the type of decision he takes.
2) Coordination (organization): the entrepreneur coordinates and combines the other factors of
production such as labour, land , capital in required quantities for the production of goods and
services.
3) Management : it is the entrepreneur who manages the business daily. Hje supervises the worker
and makes sure the activities of the business are going smoothly.
4) Finance : the required finance or capital needed in the production of goods and services is always
provided by the entrepreneur.
5) Risk and uncertainty bearing: most production take place in anticipation that there will be high
demand for the product but the entrepreneur is not always sure of the following that may affect
the demand of the product.
a) he is not sure whether what he is producing is what consumers like.
 b) He is equally not sure whether consumers will be able to pay a price that will cover his cost
of production and give his profits.
c) He is not sure about the quantity of the same good that other producers may produce. Risk
arises because of the above mention uncertainties.

SPECIFIC AND NON SPECIFIC FACTORS OF PRODUCTION

A) SPECIFIC FACTORS OF PRODUCTION specific factors of production refers to those
factors that can be used for one and only one purpose in the production process for which they
were designed or trained. For example skilled labour (medical doctors, pilots, lawyers,
accountants), saving machines, corn mill, railway, a photocopy machines, a computer, a printer
etc.
B) NON SPECIFIC FACTYORS OF PRODUCTION These are factors of production that can be
used for more than one purpose in the production process. For example unskilled labour (plantain
labourers, night or day watchmen, cleaners) raw materials, factor buildings piece of virgin land,
ordinary tools such as hoes, cutlasses, knives etc

REWARDS TO THE FACTORS OF PRODUCTIONS.

Meaning: the rewards to factors of production refers to the various incomes or returns earn by the factors
when their services are used up in the processes of production. there are four types of rewards to factors
production namely;
 Rents
 Wages
 Interest
 Profits.

TYPES OF REWARDS TO FACTORS OF PRODUCTION

A) RENT:
Definition: Rent is the reward to land it refers to the price paid for the use of land and other
natural resources which are completely fixed in supply.

Characteristics of rent
1) Rent is a surplus earning
2) Rent is determined by the demand for land since land is fixed in supply in the economy.
3) Rent is a cost to the individual or firm

Types of rents
1) Economic rent: it refers to any surplus earnings made to the factor of production above or over
what is necessary to keep the factor of production in its present line of production. Economic rent
is a surplus earning and is more applicable to land since land is completely fixed in supply. For
 example if a labourers who works on an farm land is prepared to receive 20000frs but finally is
paid 50000frs after finishing the work has an economic rent of 30000frs while his transfer earning
is 20000frs. Transfer earnings here refers to the minimum payment made to a factor of
production necessary to keep the factor of production in its present line of production. hence;
Economic rents = present earnings – transfer earnings.
2) Quasi rent: it is a short run economic rent or rents earned only for the time required for the
supply to increase.
3) Commercial rent : this is a payment made by business men for the use of buildings factories
machines and other form of property. For example a farmer paying a tractor for 20000frs for
tilling his land for the cultivation of crops.

B) WAGES:
Definition: wage are the reward to labour. It can be defined as payment made under contract to a
worker by an employer for services he has rendered in the production process. The services
rendered by labour maybe skilled or unskilled.
Distinction Between Money Wage And Real Wage
A) Money wage (nominal wage)
Definition : it refers to the actual amount of money received by labour for the services it has
rendered. For example a teacher earning 50,000frs a month.
B) Real wage:
Definition: it refers to the quantity of goods and services which money wage can buy within a
given period of time or it is the actual purchasing power of money received by a worker as a
wage. For example, the quantity of goods and services that 50,000frs can buy to a worker.
METHODS OF WAGE PAYMENT
There are principally three different method of wage payment namely standard, time and
piece rate.
A) Time rate
Definition : These are payments for labour services according to the period of the time spend on
the job such wages may be hourly, weekly or on monthly basis. For example, 40 hours at
40000frs. An hour will be 1
40000 = 1000frs
40

In Cameroon, civil servants are usually paid using the time rate method of payment as the are
paid on monthly basis.
Advantages Of Time Rate
 It is used in jobs where the output of the worker cannot be determined eg teaching, driving,
services of a medical doctor etc.
 It encourages high quality work.
 It does not encourage haste in work
 Workers are sure of regular payments
 It gives room for the payment of overtime hours worked or work done on holidays.
 The calculation of wages is simple.
Disadvantages Of Time Rate
 There is lack of incentive for hard working workers since all workers earn the same wage.
 With time rate, there exist difficulty of selecting the best worker out of a number of workers
 Time rate requires extra expenditure to be ensured on the supervision of workers.
 Absenteeism is a common feature of time rate.

B) Piece Rate:
Definition: this is the payment for labour services according to the amount of work done. Here,
the worker is paid according not his/her output ie the number of units of output produced.

Advantages Of Piece Rate

 The more hardworking the worker the greater his wages.
 With piece rate greater output can be achieved within a given period of time.
 Hard workers are often distinguished from lazy ones.
 There is a reduction in the need for supervision since people are paid according to amount of
work done
 It is easy to determine the cost of labour per unit of output.
 Quality and quantity of production can easily be compared bn workers.

Disadvantages Of Piece Rate

 Piece rate reduces the quality of work needed from the worker.
 Workers who are slow but efficient suffer.
 In an attempt to to earn more money, workers may tend to over to over strain and stress.
 It is not a useful method of payment where piece rates have to be changed in relation to changes
in method of production.
 Corruption is likely to occur because lazy workers who need high wages may tend to bribe the
supervisors.

C) Standard Rate:
Definition: this method of payment takes the form of a fixed rate of wage paid to all the workers
engaged in a similar job. Ie workers with the same qualification in a job are paid wage. For
example in Cameroon all teachers of the grade PLEG are paid the same wages.

Advantages Of Standard Rate

 Workers having the same qualification and doing the same work are paid the same wages.
  The worker knows the exact wage he will receive before or at the time of employment.
 With standard rate employers can not exploit employees by paying lower wages than the standard
wages fixed by the government.

Disadvantages Of Standard Rate

 It does not motivate hard working employees over the lazy workers.
 Hard working workers cannot earn higherwages over the lazy workers.

WAGE DIFFERENTIALS
DEFINITION: