1. Factors of Production and Sectors of the Economy

Factors of Production:

These are the resources used to produce goods and services:
• Land: Natural resources used in production (e.g., water, minerals, forests).
• Labour: Human effort, including workers' skills and expertise.
• Capital: Man-made resources used to produce goods and services (e.g., machinery, tools, buildings).
• Enterprise: The person responsible to organize the other factors of production and take risks to create goods and services. They are the face of the business.

Sectors of the Economy:

• Primary Sector: Involves the extraction of natural resources (e.g., farming, fishing, mining).
• Secondary Sector: Focuses on processing raw materials into finished goods (e.g., manufacturing, construction).
• Tertiary Sector: Provides services rather than goods (e.g., retail, healthcare, education).
• Quaternary Sector: Involves knowledge-based services (e.g., IT, research, financial planning).

2. Productivity and Division of Labour

Productivity:

Definition: The amount of output produced per unit of input (e.g., per worker or per hour).

Formula:

Productivity = Total Output / Total Input

Factors Affecting Productivity:

• Technology and machinery.
• Skills and training of workers.
• Efficient management and organization.

Division of Labour:

Definition: Splitting the production process into specialized tasks to increase efficiency.

Advantages:

• Increases efficiency and productivity.
• Workers become skilled in specific tasks, improving quality.

Disadvantages:

• Work may become monotonous and boring.
• Over-reliance on specific workers can disrupt production if they leave.

3. Business Costs, Revenues, and Profit

Costs:

• Fixed Costs: Do not change with output (e.g., rent, salaries).
• Variable Costs: Change with output (e.g., raw materials, wages).

Total Costs Formula:

Total Costs = Fixed Costs + Variable Costs

Revenues:

Total Revenue Formula:

Total Revenue = Price × Quantity Sold

Average Revenue Formula:

Average Revenue = Total Revenue / Quantity Sold

Marginal Revenue: The additional revenue gained from selling one more unit.

Profit:

Profit Formula:

Profit = Total Revenue - Total Costs

Types of Profit:

• Normal Profit: Minimum profit needed to keep a firm operating.
• Supernormal Profit: Profit above the normal level, often due to competitive advantage.

4. Economies and Diseconomies of Scale

Economies of Scale:

Definition: The cost benefits gained from expansion and growing of a firm or industry.

Types of Economies of Scale:

Internal Economies of Scale: Cost benefits within a firm. These include:

• Technical: Cost advantages due to the use of large-scale production techniques.
• Managerial: Improved efficiency from specialized management.
• Purchasing: Bulk buying discounts on materials.
• Risk Bearing: Firms can spread risks over a large volume of production. If one product fails, they can rely on others.

External Economies of Scale: Cost benefits from industry growth, such as development of supplier networks and improvements in infrastructure.

Diseconomies of Scale:

Definition: Cost disadvantages when a firm grows too large.

Examples:

• Poor communication in large firms.
• Bureaucracy leading to inefficiency.
• Coordination problems in managing large operations.

5. Competitive Markets

Characteristics:

• Many buyers and sellers.
• Firms try to persuade consumers that their product is different from those of rivals. This is known as product differentiation.
• Easy entry and exit from the market.
• Lots of information available to buyers and sellers.

Outcomes:

Advantages:

• Lower prices: In a competitive market, firms cannot overcharge consumers.
• More choice: Competition means there are many alternative suppliers to choose from.
• Better quality: Firms that offer poor goods or services in a competitive market will lose business.

6. Advantages and Disadvantages of Large and Small Firms

Large Firms:

Advantages:

• Benefit from economies of scale, reducing costs.
• Greater market power and influence.
• Better opportunities to increase profit.

Disadvantages:

• Diseconomies of scale may arise.
• Bureaucracy can slow down decision-making.

Small Firms:

Advantages:

• More flexible and adaptable to changes.
• Personal customer service leads to higher customer satisfaction.
• Some small firms may still make a lot of money due to operating in a niche market.
• Small firms may be used just as a lifestyle for some business owners.

Disadvantages:

• Limited access to capital for growth.
• Higher costs due to lack of economies of scale.

7. Monopoly

Characteristics:

• Single seller controls the market.
• High barriers to entry prevent competition.
• Price maker, meaning the firm sets the price.

Advantages:

• Potential for innovation due to high profits.
• Benefits from economies of scale, reducing costs.
• Sometimes it is more efficient or beneficial when one firm supplies all of one type of good rather than many smaller firms. This is known as a natural monopoly.

Disadvantages:

• Higher prices for consumers due to lack of competition, which can lead to exploitation.
• Being the only seller, the firm can reduce quality.
• Reduced efficiency as the firm lacks competitive pressure.

8. Oligopoly

Characteristics:

• Few dominant firms control the market.
• Interdependence – Firms consider competitors’ actions when making decisions.
• High barriers to entry prevent new firms from entering easily.

Behavior:

• Price wars or collusion (firms may agree to fix prices).
• Non-price competition, such as advertising, branding, and loyalty schemes.

9. The Labour Market

Demand for Labour:

The amount of labour that an economy or firm is willing to employ at a given point in time.

• Derived demand: Firms hire workers based on demand for goods and services.
• Depends on productivity and wage rates.

Supply of Labour:

• Depends on population size, skills, and wage rates.
• Higher wages attract more workers, increasing supply.

Wage Determination:

Equilibrium Wage: The wage rate where the demand for labour and supply of labour intersect.

10. The Impact of Changes in the Supply and Demand for Labour and Trade Union Activity

Changes in Supply and Demand for Labour:

The amount of people that are able and willing to work at a given point in time.

• Increased Demand for Labour → Higher wages and employment.
• Decreased Demand for Labour → Lower wages and unemployment.
• Increased Supply of Labour → Lower wages and higher employment.
• Decreased Supply of Labour → Higher wages and lower employment.

Trade Unions:

Role: Protect workers by negotiating wages and working conditions.

Impact:

• Can increase wages for members.
• May cause unemployment if wages are pushed above market equilibrium.

11. Government Intervention

Reasons for Intervention:

To correct market failures (Market failure is the result of inefficient allocation of resources).

Promote equity and fairness in the economy.

Types of Government Intervention:

Taxes and Subsidies:

• Taxes: Reduce negative externalities (e.g., carbon tax to reduce pollution).
• Subsidies: Encourage positive externalities (e.g., renewable energy subsidies).

Price Controls:

• Price Ceilings: Maximum prices set by the government (e.g., rent controls).
• Price Floors: Minimum prices (e.g., minimum wage).

Regulation:

Government-imposed rules to control firm behavior (e.g., anti-monopoly laws).

Public Provision:

The government provides essential goods and services (e.g., healthcare, education).