Economics O level

Session: 2020-21
 Syllabus Aims
The aims describe the purposes of a course based on this syllabus. They are not listed in order of
priority.
The aims are to enable students to:

•• know and understand economic terminology, concepts and theories

•• use basic economic numeracy and interpret economic data

•• use the tools of economic analysis

•• express economic ideas logically and clearly in a written form

•• apply economic understanding to current economic issues.

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Assessment overview

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 Assessment objectives
The assessment objectives (AOs) are:
AO1 Knowledge and understanding
Candidates should be able to:
•• show knowledge and understanding of economic definitions, formulas, concepts and
theories
•• use economic terminology.
AO2 Analysis
Candidates should be able to:
•• select, organise and interpret data
•• use economic information and data to recognise patterns and to deduce relationships
•• apply economic analysis to written, numerical, diagrammatic and graphical data
•• analyse economic issues and situations, identifying and developing links.
AO3 Evaluation
Candidates should be able to:
•• evaluate economic information and data
•• distinguish between economic analysis and unreasoned statements
•• recognise the uncertainties of the outcomes of economic decisions and events
•• communicate economic thinking in a logical manner.
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Weighting for assessment objectives
The approximate weightings allocated to each of the assessment objectives (AOs) are summarised below

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1 The basic
economic problem
1.1 The nature of the economic problem,
1.2 The factors of production
1.1 The nature of the economic problem
Scarcity: The world’s resources are limited, but human wants and needs are unlimited. Therefore scarcity
exists. Scarcity is the basic economic problem; because scarcity exists, resources have to be allocated. To the
economist, all goods and services that have a price are considered to be scarce relative to people’s demand for
them.
Opportunity cost: Choices have to be made because scarcity exists, and people do not have infinite income,.
When a choice is made, something is inevitably sacrificed.
That which is sacrificed is called the opportunity cost. Opportunity cost is the value of something in terms of
the next best alternative that was given up.
Free goods: A free good is unlimited in supply. When a free good is consumed, there is no opportunity cost.
Free goods have no price.
Utility: Utility is an economics term that refers to the value of something to consumers. Utility reflects the
satisfaction that a good brings to a consumer.

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 The basic economic problem

The choices that have to be made in economics about rationing scarce resources are often expressed in terms of
three questions and are known as the basic economic problem.
1. What should be produced (and in what quantities)?
2. How should things be produced?
3. Who should things be produced for?
The problems all relate to the allocation of resources. Resources are also known as factors of production.

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consumers; workers; producers; and governments.
consumer :The consumer is an individual who pays some amount of money for the thing required to
consume goods and services. As such, consumers play a vital role in the economic system of a
nation. Without consumer demand, producers would lack one of the key motivations to produce: to sell
to consumers
Workers: Physical and mental service provider. Labour economics looks at the suppliers of labour
services (workers) and the demanders of labour services (employers), and attempts to understand the
resulting pattern of wages, employment, and income. ... Labour is a measure of the work done by
human beings.
Producers: Producers are people who make goods or provide services. In
the production process, producers combine natural, human, and capital resources. Because these
productive resources are limited, producers must choose which goods or services to produce. Most
adults work as producers
Government: A government is the system or group of people governing an organized community,
often a state, but also other entities like for example companies, especially in the case of colonial
companies. In the case of its broad associative definition, government normally consists of legislature,
executive, and judiciary.

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 Economic and free goods
An economic good is a good or service that has a benefit (utility) to society. Also, economic goods
have a degree of scarcity and therefore an opportunity cost.

In contrast to a free good (like air, sea, water) where there is no opportunity cost – but
abundance. Free goods cannot be traded because nobody living by the sea would buy seawater –
there is no point.
An economic good will have some degree of scarcity in relation to demand. It is the scarcity that
creates a value people become willing to pay for. It is the scarcity which creates opportunity cost. –
For example, if we pick apples from a tree, it means that other people will not be able to enjoy
them. If we devote resources to mining gold, the opportunity cost is that we can’t devote this time
and effort to growing corn.

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 Examples

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1.2 The factors of production
Land: the gifts of nature available for production
Capital: human-made goods used in production.
Labour: human’s mental and physical effort.
Enterprise: risk bearing and decision making in business

The factors of production required in the production process are as follows:

• Capital: machinery, tools, a factory building and trucks to transport the drinks.
• Enterprise: the skills necessary to organise the production process successfully and to motivate
workers so that they work to the best of their ability.
• Labour: people to work on the production line, perform administrative tasks and manage the
company.
• Land: the natural resources required to make Coca-Cola (such as sugar, water and caffeine) .

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Mobility of Factors of Production
Factors of production are potentially mobile in three distinct ways:
• Between firms within the same industry
• Between industries within the same country
• Between firms or industries across countries

Mobility of Factors
Production

Occupational Mobility- Geographical Mobility-

One occupation to another On place to another

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 Land

‘Land’ does not refer only land. It refers to all resources found in the land or sea. The natural resources has
influence on the capability of the economy to produce different goods and services.

Land includes-
Raw Material- copper, rubber, etc.
Landscape – mountain, valley, hills, etc.
Port- Natural Harbour
Climate Condition- four seasons, six seasons, etc.
Geographic location – Continents, Islands, etc.

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Characteristics of land
• Mostly Immobile
• Limited in supply
• Gift of nature
• Land is subjected to the law of diminishing returns

Law of diminishing returns

The law of diminishing returns (Law of variables proportions) states that given a fixed factor, variable
factors added to it will eventually lead to a fall in marginal product.

Initially, when the variable factors are added to the fixed factor, the total product will increase at an
increasing rate. However, if the number of variable factors added continuous to increase , the total
output will increase at a decreasing rate, which means average product and marginal will begin to fall.

The law of diminishing returns starts to operate after marginal product reaches the maximum. If
production is carried on until total product reaches the maximum, marginal product will reach zero.
Most producer stop production at this stage.

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 Labour
Labour includes the skills of those who work and the number of people who work. According to British
Economist, Alfred marshal, Labour can be defined as any exertion that the mind or body has undergone, either
partly or totally, with the view of earning some other good other than the pleasure derived from the work
itself. Thus, we can define labour-the physical and mental effort of human.

Characteristics of labour:

• A labour sells his service only.

• Labour services cannot be separated from the worker
• Labour service cannot be kept or stored like goods.
• Labour is provided by human beings. They are not machines and must be treated with dignity
and respect.
• Labour has greater mobility than land as it is easy to import labour from another country
• Labour is not a homogeneous product as each person is unique and different people have
different skills and attitudes.

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 Labour….
Mobility of labour
There are two types of mobility of labour: Occupational Mobility and Geographical mobility of
labour
Occupational Mobility of labour
This refers to the transfer of labour resources from one occupationto another, either horizontally or
vertically.
Horizontal Mobility would involve a change of job involving a change of duties
Vertical mobility would involve a change of job involving a change in the level responsibility.

Obstacle to Occupational mobility of labour:

• Lack of necessary skills and qualification
• The age factor
• Sentimental reasons
• Insufficient information about job availability
• Unwillingness to take risks by changing job or environment
• Entry requirement and restriction for some certain occupations
• Contractual obligation

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 Labour….
Geographical mobility of labour:
This refers to movement of labour from one place to another, either locally, regionally,
or crossing national boundaries.

Obstacle to geographical mobility of labour:

• Financial Constraint
• Political instability
• Sense of belonging to one’s country

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 Division of labour (DOL)
In primitive society, man was self-sufficient . He produced and consumed the goods and services
that he wanted. However, this not possible in the present. In our modern society , we are inter -
dependent on one another. There is division of labour or specialization in almost every task today.
So, it can be said that DOL refers to divide the work and bring it to the worker.

There are three basic types of DOL:

1. Geographical specialization of labour
2. Regional division of labour
3. Occupational division of labour

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Advantages and disadvantages of DOL

Advantages of DOL: Disadvantages of DOL:

• Increase in output
• Requirement of Specialists
• Use of machinery
• Increase I productivity
• Saving of time
• Diversification of employment
• Doing repetitive work might be boring and monotonous
• Lack of ownership
• Retards Creativity
• Causes immobility of labour

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Labour productivity and ways to increase it

Productivity of labour or efficiency of labour is defined as output per man hour without fall in
quality . Some ways to raise labour productivity are:
• Increasing wages of the workers
• Improving working conditions
• Offering promotion opportunities to workers
• Providing sufficient education and proper training opportunities
• Injecting new blood into the organization
• Ensuring good management
• Provision of social services by the government

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 capital
Capital refers to an investment in goods that can produce other goods and services in the
future. Capital is wealth used for production. The different types of capital are explained
below:

Types of capital:
• Working Capital
• Fixed Capital
• Social Capital

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 Capital Formation
To have capital formation , there must have savings. The public must forego
present consumption in order to save. Hence, opportunity cost is involved. capital
formation will eventually add to the productive capacity of the country and hence
increase the wealth of the nation with more goods and services being produced.

Reasons for low capital formation in developing countries:

• Loans
• Aids and grants
• Foreign investment
• Provision of better infrastructure

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 Enterprise
The person who has enterprise is called the entrepreneur. He is usually the organizer in his
business. The entrepreneur is responsible for arranging how production should take place. He is
also responsible for his subordinates and their welfare. The entrepreneur will be responsible for
making the following decision: what, how and how much and for whom to produce.
The entrepreneur is unique as he co-ordinates all the factors of production to produce goods and
services. Some economists regard management as the entrepreneur.

Functions of an entrepreneur:
• An entrepreneur undertakes risks and is responsible for all decision that need to be taken
• He co-ordinates the factors of production (Land, labour, Capital)
• The decision to recruit or retrench workers will be made by him, depending on market
conditions.
• The entrepreneur is also responsible for marketing his product
• The entrepreneur will undertake research and development.

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 Key terms
The basic economic problem is how to allocate scarce resources to satisfy unlimited needs and wants.
The chain of production describes how businesses from the primary, secondary and tertiary sectors
work interdependently to make a product and sell it to the final customer.
Economic agents are households (private individuals in society), firms that operate in the private
sector of an economy and the government (the public sector of an economy).
Economic goods are those which are limited in supply.
Free goods are goods which are unlimited in supply, such as air or sea water.
Goods are physical items such as tables, cars, toothpaste and pencils.
Inter dependence means that the three sectors of industry are dependent upon each other and can not
operate independently to produce goods and services.
Needs are goods that are essential for survival.
Opportunity cost is the cost of the next best opportunity foregone when making a decision.
The production possibility curve (PPC) represents the maximum amount of goods and services which
can be produced in an economy, i.e. the productive capacity of the economy.
Services are non-physical items such as haircuts, busjourneys, telephonecalls, and internet
Wants are goods and services that are not necessary for survival but are demanded by economic
agents.

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