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When one's demand is backed up by the necessary ability which is money and
willingness to pay, it is said to be effective demand. On the other hand, Ineffective
demand is mere want or desire that is not backed up by the required money to pay
for lt. Want or desire can only be called effective demand, if it is backed up with the
ability and willingness to pay at that material time, It must be made clear here that
one may want or desire something backed up with the necessary ability but without
the willingness to pay. This is also an example of ineffective demand. For instance,
everybody likes to own a car, but not all that want or desire to own cars have the
necessary wherewithal to have them. Also, not all that want or desire cars backed up
with the necessary ability to pay are willing to pay for the cars. These are good
examples of ineffective demand.
The market prices of commodities play great role in determining whether
demand will be effective or ineffective. If the market prices of commodities are high
the effective demand of many people may change to ineffective demand and vice
versa. For instance, if a tin of milk costs 50k and one leaves one's house with 50k
with the intention of buying the milk, one's demand for milk is effective in one's
house. But if on reaching the market, the price of that same tin of milk changes from
50k to 70k, one's demand will automatically change from effective to interactive
demand.
LAWS OF DEMAND
Basically, demand laws are divided into two categories and they are as
follows:
1. Normal Demand Law: This is also known as first law of demand. It states that:
"The higher the price of a commodity, the lower the quantity demanded, and the
lower the price, the higher the quantity demanded, ceteris paribus "Normal demand
law is usually based on the assumption that quantity demanded is inversely related
to the price of the commodity. The term “ceteris paribus” is a Latin word which
means “other things being equal”
2. Abnormal Demand Law: This is usually the second law of demand and it is also
called exceptional demand law. It states that: the higher the price of a commodity,
the higher the quantity demanded and the lower the price, the lower the quantity
demanded. Abnormal demand law is usually based on the assumption that quantity
demanded is directly related to price of the commodity. Both the normal and
abnormal demand laws are usually demonstrated by preparing a demand schedule,
which shows the relationship between price and the quantity demanded.
DEMAND FUNCTION
The relationship between quantity demanded and the factors that affect it are usually
expressed in a mathematical equation as shown below:
Qd =F (P, Po, Ps, l, T...........)
F = Function
Po = Population
I= Income
T= Taste
The demand schedule shows the relationship between the quantity of goods
demanded at a particular time and the given market price of the same goods at the
same time. It shows the quantity that can be purchased as the prices change. Let us
draw an individual's hypothetical demand schedule for Mrs. Obi's demand for tins
of milk.
90 10
80 20
70 25
60 30
50 35
40 40
30 45
20 50
10 55
Table above shows Mrs. Obi's demand schedule for tins of milk in the market.
The schedule shows the relationship between the market price of tins of milk and
the quantity that Mrs. Obi would demand for. It can be clearly observed in the
schedule that the quantity of tins of milk bought (demanded) by Mrs. Obi increases
in opposite direction with the market price per tin. The lesser the price per tin, the
greater the quantity demanded. For instance, when a tin of milk was sold for 90k,
Mrs. Obi bought only 10 tins of milk, while she bought 55 tins of milk when the
price was 10k per tin.
Abnormal Demand
(k) (Tins)
90 55
80 50
70 45
60 40
50 35
40 30
30 25
20 20
10 10
The table above shows that lkenna bought more milk when the price was high
than when it was low. This is an exceptional case with a rational consumer.
Demand curves are usually divided into two namely normal and abnormal curves
respectively.Normal demand curve illustrates. normal demand law and it slopes
downward, while abnormal demand curves do not have the same shape as that of
normal demand curve.
We can go further to draw Mrs. Obi's demand curve. Fig. 17.1 below shows
Mrs.Obi's demand curve for tins of milk. From the curve, we can clearly observe
that the curve slopes downwards and moves from left to right.The reason for this, is
that Mrs. Obi bought more tins of milk at lower prices than at higher prices.The
demand curve therefore shows the relationship between the price of tins of milk and
the quantity demanded by Mrs. Obi.
Price
50 --------------------------------------------------
-----------------------------------------------------------------------------
0 10 35 55
Quantity Demanded
TYPES OF DEMAND
1. Derived Demand: This is a situation in which a commodity is wanted not for its
immediate satisfaction of want but because of the demand for another commodity.
That is it means that the demand for one commodity will necessitate the demand for
another commodity. For instance, the demand for goods and services will necessitate
the demand for labor. Here, labor is wanted not because of its direct satisfaction of
want but to produce goods and services.
1. Price: Demand moves in opposite direction with price; the higher the price, the
lower the demand and vice versa.
2. The Price of Other Commodities: This applies to commodities that have close
substitutes; if the price of such commodity is high, consumers may demand for the
close substitutes and vice versa.
3.Income of The Consumer: The more income a consumer eams, the more
commodities that he will demand for and vice versa.
area determines the extent to which goods and services will be demanded.
7.The Invention of New Commodities: New commodities replace old ones and
therefore, the demand for new commodities is higher than old ones because, they are
believed to be better.
8. The Age Distribution: If a particular age group that uses a particular commodity
is favored by the age distribution, the demand for that commodity will be high.
9. The Extent of Credit Facilities Allowed: The more credit facilities sellers allow
buyers the higher the demand and vice versa.
13. Period of Festival: People demand for more commodities during festivals like
Christmas, Eid-El-Kabir and other similar ones.
14. Expectation of Changes in Prices: If people expect that there will be high prices
of goods in future, demand will increase and - vice versa.
15. Changes in the Distribution Of Income: The demand of the income group which
the income distribution changes favor will be high at the expense of the group the
distribution does not favor.
PRODUCTION
It can equally be said that production is the creation of utility, while utility is the
ability of any commodity or service to satisfy human wants. Production is said to be
completed when the goods and services produced reach the final users or consumers.
Raw materials on the other hand are the unfinished goods or those materials put
together in order to get a commodity. These raw materials are put together into
finished goods through human efforts with or without the help of machines.
TYPES OF GOODS
(i) Consumer Goods: These are goods and services that can satisfy the consumer's
immediate wants. These goods do not need further process of production for their
use by the consumer. Examples of consumer goods are beer, milk, bread, radio,
television, the services of a teacher, lawyer, barber, etc.
(ii) Capital Goods: These are goods and services meant for the production of further
goods and services. They are for instance; machines, cars and lorries used in carrying
out productive activities, etc.
TYPES OF PRODUCTION
Production can be divided into two forms namely direct and indirect production.
Direct Production: Direct production takes place when a family unit produces goods
and services mainly to satisfy all its needs and not for sale. This type of production
is very common in a subsistence economy where subsistence farming is
predominant. Such subsistence farmers produce not for exchange but for
consumption by them and their families.
STAGES OF PRODUCTION
The economic activities involved in production are so vast that production is
divided into three broad categories viz:
Primary Production: This type of production involves the extractive industry where
the occupation of people is directed to the process of extracting raw materials from
the soil or sea. The goods and services produced at this first stage of production are
known as raw materials. Examples of this type of production are farming, fishing,
mining, quarrying etc.
Secondary Production: This is a stage where the raw materials extracted from the
soil and sea are processed and transformed into finished goods. That is, utility is
added to the raw materials of the primary production. The manufacturing and
constructive industries are involved in this stage of production.
Tertiary Production: This is the stage of production where the goods and services
produced at the above two stages are taken to those who need them. This stage
completes the production processes since production is not complete until the goods
and services produced reach the final consumers.
1. The quantity and quality of factors of production (i.e. land, labor, capital and
entrepreneur). The above factors determine the volume of production in a lot of ways
e.g. the amount of capital determines the labor to be hired and raw materials to be
bought. The quality and quantity of land available determines the agricultural
products or output and the size of factory to be built. The efficiency of labor
determines to a large extent the amount of goods to be consumed.
Generally, the availability and the efficiency or inefficiency of the factors of
production determine the volume of production.
2. The Size of Market: The size of market here talks about the extent the products
produced are in demand. This is because production is tailored according to demand.
3. The Nature of the Product: If the goods are durable in nature, more can be
produced and stored. On the other hand, perishable goods have to be produced based
on the ones that can be sold at that time since they cannot be stored for a long time.
4. Availability of Raw Materials: The raw materials available will determine the
quantity of goods that will be produced. If the raw materials available are not
enough, production will be adversely affected.
6. The Attitude of the Workers: The attitude of the workers of a firm to work has a
lot of influence in determining the volume of production. If workers show negative
attitude to work, it will affect the volume of goods to be produced.
10. Government Policy: This has to do with the nature of economic policy of the
government. The more favorable the government economic policy, the more the
volume of goods to be produced and vice versa.
Factors or agents of production refer to the resources which are used to produce
goods and services. They form the material input into production. There are four
factors or agents of production. They are land, capital, labour and entrepreneur.
These four factors or agents must be combined before production can take place.
LAND
Land as a factor of production is a free gift of nature and is fixed. It is the oldest
factor of production in the sense that it had been on earth before man started working
on it. Land in Economics, does not include only hard surface of the earth but all other
free gifts of nature like water, forest, mineral resources, etc. Unlike other factors of
production, the supply of land is limited. The reward for land is rent.
2. Land is a free gift of nature. The free gift of nature of land is an indication of
having no cost of production. i.e. its availability or existence costs human being
nothing, although its quality may be increased by the efforts of human being.
3.Land has no cost of production i.e. no cost was involved in bringing land into
existence.
4. The quality and value of land vary from one place to another. That is, some areas
of land are more fertile than others, while others are in good business sites hence
their value being higher than others. e.g. A plot of land in Lagos is costlier than a
plot of land in Ibadan and a plot of land is costlier in Abuja than in Ogun State.
CAPITAL
Definition: Capital may be defined as wealth reserved or set aside for the production
of further wealth. Capital means different things to different people. To a trader,
money and his wares may mean his capital. A farmer's hoes,matchets, other farming
implements and seeds and seedlings may mean his capital, while for a hunter, his
arrows, spear, bow, traps etc, may constitute his capital etc. However, capital as a
man-made factor of production includes physical cash, building, machineries, semi-
finished goods and other equipment and tools used in production. Just like other
factors of production, capital plays a crucial role in production of goods and services.
2.It takes different forms like money, building, machinery, semi-finished goods, etc.
3. Some forms of capital like building, machinery, etc., may be fixed and their
reward may be rent.
TYPES OF CAPITAL
1. Fixed Capital: These are those durable assets of a business or productive unit that
can last for a very long time. These forms of capital do not change their form in the
process of production, for instance, buildings, machinery, furniture, etc.
2.Circulating Capital or Working Capital: This refers to those materials that change
their form in the process of production into finished products. They are needed for
everyday productive purposes, for example raw materials.
3.Current Capital: This refers to those things needed for day to day running of the
business. They also change from one form to another. For instance, finished goods
change to cash and cash also changes to finished goods. Current capital is also known
as liquid capital. Example: money used to buy raw materials, money used in paying
wages and salaries, money used in buying newspapers e.t.c.
4. Social Capital: This includes those forms of capital provided by the government
that aid production. They are also called social amenities such as electricity, roads,
railways, sea and airports, etc. These amenities are essential for the production and
distribution of goods and services.
THE ENTREPRENEUR
It is still a topic of debate why the entrepreneur which is also a human factor of
production like labor should be made the fourth factor of production instead of being
classified as labor. Those with myopic views still look at it as dissipation of energy,
money and time, separating the entrepreneur from labor. Based on the crucial
functions performed by the entrepreneur which labor does not perform, he is
separated from labor. These functions are as follows:
1. Provision of Capital: This is one of the most crucial functions performed by the
entrepreneur. He provides the initial capital used in the formation of the business
and carrying out productive activities. It is from this capital provided by the
entrepreneur that other factors of production including labor are hired.
2.Risks Bearing: The entrepreneur bears all types of risks that occur in business. As
a result of his position in business, if the business fails, he will bear the loss all alone,
hence, his reward is either loss or profit as the case may be.
3.He takes Decisions: This is another vital function performed by the entrepreneur.
He takes decisions as to the type of business to embark on; what to produce; the
quantity to be supplied to the market by who and how. As a result of this crucial
function of decision taking, the success or failure of the business depends greatly on
the good or bad decisions taken by the entrepreneur.
TRADE BY BARTER
Maybe define as the direct system and practice of exchanging goods for goods
and services for services.
2. It Wastes Time and Energy: This is because, a person may use all his time
going about in the market looking for someone who has what he wants and at the
same time needs what he has.
8. It Does Not Encourage Division of Labor: People were forced to become Jack
of all trades and masters of none because, everybody tried to produce all his
needs in order not to taste the bitter experience of trade by barter.
9.There Is No Lending And Borrowing: This is as a result of the fact that under
the system of trade by barter, there is no generally accepted commodity for
lending and borrowing.
10. It Discourages Large Scale Production: This was caused by the fact that
people lost interest in the system of exchange and therefore, resorted to
producing goods and services for the satisfaction of their own wants and that of
their families only.
11. Miscellaneous Problems: These difficulties include: the non-durability,
portability, divisibility, homogeneity, cognizability etc; of the commodities that
were used in exchange under trade by barter.
Money and bank have common ancestor-goldsmith. The paper money presently
in use, originated from the receipts the goldsmiths issued to people who kept gold
and other valuables with them. In the olden days when there were no banks, people
kept their gold and other valuables with the goldsmith. As the name indicates, the
goldsmith deals with gold which is a very valuable and rare commodity. Because of
the costly nature of gold, the goldsmith had a place called strong-room where gold
and other valuable commodities and documents were kept for safe custody.
With his strong-room, the goldsmith started receiving valuable commodities from
people for safe-keeping. Receipts were issued to those who deposited their valuables
as an evidence and they paid the goldsmith for his services. As time went on, people
started using the receipts issued by the goldsmith for the exchange of goods and
services since they will be honored by the goldsmith on presentation. When the
goldsmith discovered that some people who deposited valuables with him do not
come for them in a short period of time, he started enticing other people in form of
interest to deposit their gold and other valuables with him. He (goldsmith) also
started lending these valuable commodities out to other people on short term basis
on interest rate. This exchange of goods and services with the receipts issued by the
goldsmith continued, until the receipts were modernized and re-named money.
Today, money has another form other than the paper money, called coin. We also
have other forms and representative or token money. The origin of money really
came as the aftermath of the difficulties or problems of trade by barter discussed
above. People were forced to fashion out a generally acceptable means of exchange
through a long process of trial and error.
Today, money has come to replace that cumbersome means of exchange called
trade by barter. It does not mean that money drove in the final nail on the coffin of
trade by barter because the trade of exchange of goods for goods and services for
services, has been baptized and called counter-trade. Such play on words is in perfect
character with the improbable science called economics.
2. Absolute Homogeneity: The article used as money must be the same in all parts
of the country where it is being accepted as a medium of exchange.
3. Easily Recognizable: It is this quality that makes people to detect which is the real
and the counterfeit money.
4. Divisibility: It must be capable of being divided into smaller units which facilitates
exchange of goods and services.
5.Portability: Money must be something that can be easily carried about from one
place to another.
6. Relatively Scarce: Money should not be excess or too much in circulation or easy
to come by otherwise, it will lose its value.
7. Durability: Any article that serves as money must be something that can stand the
test of time and not something that will suffer from wear and tear.
8. Stability: This stability in value of money makes business to be predictable and
encourages lending and borrowing of money.
9. Storability: It must be something that can be stored for a long time, without losing
its value.
10.Malleability: Anything that will serve as money must be something that can be
stamped and designed to show its value and origin. The present metals or alloy used
as coins are malleable.
11. No Intrinsic Value: The commodity that will serve as money should have little
or no value in itself as opposed to its value of exchange. Money therefore, should be
wanted not because of its value but because of its value as a medium of exchange.
13. Controllable Supply: Money must have controllable supply which will make it
easy for the sole authority - central bank to monitor the quantity in circulation so
that it is not excess which can make it to lose its value.
TYPES OF MONEY
1. Coins: A coin is a metal money with definite amount and weight issued and
stamped by the central authority responsible for the issuance of money in a country.
In Nigeria for instance, the coins in use are kobo, which are in different
denominations.
2. Paper Money: As the name indicates, it is in form of paper note which originated
from the receipts the goldsmiths issued to people who kept gold and other valuables
with them.
3.Bank Money: This is the money one keeps in one's bank account for safe-keeping,
also called bank deposit which can be given back to the owner on demand.
4.Foreign Money: It is the money of other countries of the world which serves as
money in the foreign exchange market Some of the most popular foreign exchange
are: Dollar, Pounds sterling, Deutschmark, etc., and they enable one from one
country to buy things from other countries.
5. Token Money: This is money whose intrinsic worth is less than its nominal or
face value. That is, its value as a piece of metal or note is not identical with its value
as piece of money. Britain's silver coins were replaced with coins of curpo-nickel
because their value rose above their face value or purchasing power value as a result
of high rise in the value of silver during the two world wars. As a result of the rise
in value of silver, there was danger that the silver coins might be illegally melted.
7. Gold-Backed Money: This is money that can easily be converted or changed into
gold by the central authority that issues money if its holder so desires. This system
of exchanging paper notes or coins for gold originated from the goldsmiths who
assured people that the receipts they issued to them can easily be exchanged for gold.
Nigerian currency before it was decimalized was tied to gold and it was clearly
expressed on its face.
8. Legal Tender: A legal tender is money which is backed with the force of law in a
country which makes it generally acceptable as a medium of exchange. It is an
offence for anybody in a country to reject a legal tender. However, some forms of
legal tender have limit in their legality; for instance, in Nigeria, Naira and Kobo
serve as legal tender. Kobo which are in form of coins serve as legal tender to some
extent. A car seller for example may not agree to be paid for a car that costs
N500,000.00 with only coins. Acceptance and rejection of coins of some amount are
done for convenience sake. This means that money car still be backed by the force
of law and people of the country may reject it. People's faith in money determines
its acceptability or rejection. Paper money and coins are collectively called cash.
9.Fiduciary Note Issue: This is the type of money that is not backed by either gold
or any foreign currency. Acceptance of fiduciary note issue is based on faith and not
because it is backed by gold or any strong currency like dollar or pounds sterling.
FUNCTIONS OF MONEY
1. A Medium of Exchange: With money, you no longer need to look for somebody
who has what you want-and who at the same time wants what you have. Instead,
money is used as a means of payment for goods and services and for the settlement
of debt.
2. It Measures Value of Goods and Services: Money is therefore a parameter for
determining the worth of goods and services.
3. A Store of Value: Money is now used in storing wealth, unless there is inflation,
money stored or saved retains its value for many years.
5.A Unit of Account: Money makes accounting possible because the worth of goods
and services as measured in money.
8. Money Encourages Division of Labor: With the existence of money, people tend
to concentrate on certain occupations and aspects of production processes, leaving
other aspects to other people, with the hope of buying the commodities with money
they will earn as the reward for their services.
Money has also helped to overcome the problem of time and energy wasting
which trade by barter created. With money, a person no longer has to waste all his
time going about in the market looking for someone who has what he wants and at
the same time needs what he has.
According to Lord Keynes, people demand for money for the following reasons
1. Transactions Motive: People desire to keep or hold money for the day-to day
transactions such as buying of foodstuffs and other daily family needs. Since many
people receive their salaries at the end of the month, they keep part of them in order
to meet up with their daily needs till when the next income will be received. The
amount to be kept is determined by the amount that is received as income and the
extent of one's needs.
3. Speculative Motive: People also keep money with the hope of using such money
in making quick money. For instance, money may be held with the hope of giving it
out in form of loan if the rate of interest is high and at a short period of time, buying
goods like cars at lower prices and re-selling at higher prices, purchasing shares at
lower prices and re-selling at higher prices, etc. Therefore, it is the demand for
money for investment purpose.
Economic growth leads to economic development. For this to exist, all the
sectors of the economy must be growing and this must be sustainable. Therefore, a
developed economy must have been highly diversified. Simply put, a developed
economy is a matured and highly dependable economy.
The countries of the world have been divided into three main groups based on their
economies viz: the first, second and third world nations. The first world refers
mainly to the capitalist economically advanced countries of West European and
North American nations of Britain, France, Federal Republic of Germany, Canada,
Sweden, USA and other nations like Japan, New Zealand, etc. The second world
includes mostly the socialist economically advanced nations of Eastern Europe like
Czechoslovakia, Poland, Yugoslavia, the Democratic Republic of Germany,
Hungary, Romania and their leader, the Soviet Union. Finally, the third world refers
to the economically backward or under-developed or developing countries of Asia,
Africa, the Middle East and Latin America. Majority of the countries of the world
(up to 143 of them) are classified as the third world.
2. Rural Base: Majority of those living in under-developed countries are in the rural
areas.
3. Low Agricultural Productivity: In spite of the fact that majority of the population
of under-developed or developing countries are engaged in agriculture, their
productivity is still low as a result of some of the factors discussed in chapter 13.
6.High Death Rate: This does not even have any impact on the population of
developing nations.
7.Low Rate of Economic Growth: This is in comparison with that of the advanced
nations of the world.
9. Low Per Capita Income: This is caused by high population, low productivity, low
gross national product among other factors.
10. Low Standard of Living: Majority of the people in developing nations are
subjected to low standard of living.
11. Rising Unemployment: The unemployment rate in the developing countries rises
in pari passu with their population.
12.High Degree of Illiteracy: Majority of the people in developing nations cannot
read or write.
13. High Dependency: The proportion of the population of the developing nations
that are dependents is high.
14.Low Savings and Investment: This low level of GNP and per capita income are
some of the contributory factors to these.
15. The Use of Crude Technology: Developing countries have not developed their
own modern technology, they hope to transfer the modern technology from
developed nations of the world.
16. Low Level of Industrialization: Developing nations have few industries that
cannot lead them to industrialization.
17: High Rate of Importation: These countries are more of importing nations than
exporters which leads them to deficit balance of payments.
18. Dual Economy: The economy of developing nations possesses sharp contrasts
and wider gap between the rich and the poor, the old and the young, literates and the
illiterates, public and private sectors, etc.
19. Low Calorie Intake: The calorie intake in developing nations is relatively low.
Calorie intake include food nutrient, such as protein, carbohydrates and fats which
supply energy.