S4 : Entrepreneurship

    Key unit competence: To apply the basic economic concepts in daily entrepreneurial activities

    Introductory activity

Case study: Kagabo’s Shopping Experience 

One day, Mr. Kagabo went to shopping with FRW 50,000. From home to the supermarket, he had no idea of what to buy first, second, and third. All he knew was that once he reached the market, he would buy whatever items his family needed. When he reached Mutoni’s Supermarket, he found a variety of interesting goods and Kagabo felt he could buy them all, but his budget wouldn’t allow it!                        

After selecting a few items and adding them to his shopping cart, he contacted Mutoni for an invoice. Mutoni billed Kagabo FRW 185,000. Out of sheer shame and frustration, Kagabo did not comment on whether he would pay for the packaged items or send them back and only take those that he could afford. Mutoni, after observing Kagabo’s consumption patterns, happened to pack only a few items that correspond to Kagabo’s purchasing power. 

She also advised Kagabo to: 

1. Make a scale of preference every time he thinks about going shopping, 

2. Allocate a reasonable budget for the required items and/or substitute some goods in case of a price conflict. Kagabo paid the FRW50,000 and went back home. At home, Ms. Kagabo was not happy at all when she found out that her husband had brought unnecessary things. After observing all of them, Ms. Kagabo took him into the room to have a serious conversation about her future consumption. 

The following was an excerpt from the statements Ms. Kagabo gave to her husband. Human needs and desires are unlimited, but the resources to meet them are limited. Therefore, we must use our limited resources properly. Dear, we live in a world of scarcity. If we need to be economically stable, we should learn to make appropriate choices for our wants and needs. Read the case study above and answer the following questions: 

1. What do you understand by the following economic terms?

 – Needs and wants 

– Choice 

– Scale of preference 

– Complementary goods 

– Substitute goods 

2. What do you think is the relationship between scarcity, choice, and opportunity cost?

3. Why did Mutoni advise Kagabo to replace some of the goods? 

4. What impact do you think it would have if Kagabo had sets priorities when shopping? 86 Experimental version

 5. Using vivid examples, explain the importance of creating a scale of preference for Kagabo’s family.

 6. In your opinion, did Ms. Kagabo study economics? 

7. Do you really have to study Economics to know that resources are scarce? Justify your answer. 

 8. If you were Kagabo, what would you do when Mutoni unpacks and packs your things?

5.1. Meaning, origin, and branches of economics

        Learning activity 5.1.

i) Define the term economics. 

 ii) Discuss the origins and branches of economics

5.1.1. Meaning and origin of Economics 

Etymologically the word “economics” is derived from the Greek word “oikos” meaning household and “nomos” meaning rules and the two words were combined into oikonomos to literally mean “rules of household management”. 

Several economists have defined Economics differently. Those definitions vary depending on what aspect the Economist emphasizes. Some of them emphasize wealth or resources while others emphasize either welfare or scarcity.

 – According to Jean Baptiste Say, Economics is the science of production, distribution, and consumption of wealth.

– Adam Smith defined Economics as the study of the causes of wealth of nations and nature of wealth and the means through which we can increase production. 

– Economics is the study of mankind in ordinary business life. (Alfred Marshall) 

– According to Lionel Robbins, Economics is a science which studies human behavior as a relationship between ends and scarce means which have alternative uses. Experimental version 87 Robbins’ definition emphasizes scarcity as a foundation of Economics, otherwise without scarcity, there would be no Economics. 

Even though many definitions of economics have been given, all modern economists agree with Lionel Robbins’ definition that implies that Economics is concerned with efficient allocation of resources so as to attain maximum satisfaction from the limited resources. 

In brief, economics is defined as a social science that studies how scarce resources are allocated in order to satisfy the human competing needs. 

5.1.2. Branches of Economics 

 Economics is divided into two broad branches:

• Microeconomics

 • Macroeconomics

i) Microeconomics: Microeconomics refers to that branch of economics which studies individual units such as a consumer, household, firm, industry, and price of a product. Microeconomics examines how the scarce resources are to be allocated among people efficiently. 

It covers: Product pricing, Consumer behavior, Factor pricing, Firm’s behavior, Industry location. 

ii) Macroeconomics: Macroeconomics is a branch of economics that studies the overall behavior of all individuals in the economy. With macroeconomics we determine a nation’s overall performance, aggregate demand and supply, national income, international trade, inflation, unemployment.

 Macroeconomics covers: 

– National income 

– General price level

 – Employment level 

– Level of saving and investment 

– Balance of trade and Balance of payment

               . Difference between micro and macroeconomics

           Application Activity 5.1.

  Use suitable economic term(s) to fill the blanks. Choose from the list provided in brackets. 

  (Microeconomics, Macroeconomics, Scarce resources, Economics) 

i) ……… is a social science concerned with the production, distribution, and consumption of goods and services. 

ii) Economics can generally be broken down into ………, which concentrates on the behavior of the economy as a whole, and ………., which focuses on individual people and businesses.

 iii) Economics is the study of how people allocate ………. for production, distribution, and consumption, both individually and collectively.

 iv) Monetary and fiscal policies, international trade is part of the scope of…………

            5.2. Importance of Economics

             Learning activity 5.2.

             Based on the knowledge acquired from the previous lesson, describe the importance of Economics in                                             everyday life.

  – Dealing with a shortage of raw materials: Economics provides a mechanism for looking at possible consequences as we run short of raw materials such as wheat, sugarcane. 

– Distribution of resources in society: To what extent should we redistribute income in society? It helps to reduce the income gap between the rich and the poor.

 – To what extent should the government intervene in the economy? A critical divide in economics is the extent to which the government should intervene in the economy. Free market economists, like Hayek and Friedman, argue for limited government intervention and free markets. Other economists, like Stieglitz or Krugman, argue government intervention can overcome inequality and the under provision of public goods. For example, should the government provide free health care or is it more efficient to encourage private health care?

– The principle of opportunity cost: Opportunity cost is the alternative forgone. To properly evaluate OC, the benefits and costs of every option must be weighed against the others. It helps individuals and organizations to make profitable decisions in business. 

– Knowledge and understanding: One of the principal jobs for economists is to understand what is happening in the economy and investigate causes of poverty, unemployment and low economic growth. For example, in a political debate such as the advantages of joining the EAC. Economic studies can try and evaluate the costs and benefits of free trade and free movement of labour. Economic studies can try to examine the economic effects of immigration. This can help people decide about political issues.

 – Forecasts: Economic forecasts are more difficult than understanding the current situation. However, although forecasts are not always reliable, they can help give decision-makers an idea of possible outcomes. 

– Dealing with an economic crisis: In the 1930s, the Wall Street Crash precipitated a significant rise in unemployment. There was a debate on how to respond. Many western governments increased taxes, tariffs, and benefits. This response caused John M. Keynes to develop a new branch of economics – focused on dealing with a persistent recession. 

– Evaluation: Economics is not a definitive science like Mathematics. Because of many unknown variables, it is impossible to be definitive about outcomes, but a good economist will be aware that the result depends on different variables, and there are different potential outcomes. This should help avoid an overly ideological approach. For example, a government may have the philosophy ‘free markets are always best’, but an economist would be aware of a more nuanced view that in some markets, like health care, transport, government intervention can overcome market failure and improve welfare. But, at the same time, it doesn’t mean state intervention is always best.

 – Intellectual value: The study of economics increases a person’s intellectual value. It helps to realize that s/he depends on others to meet her/his daily needs. The thought of dependency develops the cooperative attitude in society. People think in a balanced way; it further improves an individual’s ability to make decisions. 

– Practical purpose: An individual becomes a better and more efficient consumer, manufacturer, and trader with improved decision-making ability. Economics helps a consumer to control the expenditure in view of his income. Such control brings maximum satisfaction to the consumer.

 It helps producers to choose a perfect option from the available resources and optimize the use of the available resources to generate profits. An economy is also very important for business. A good operations manager would need to know how to conduct production analysis so that products can be manufactured at the lowest possible cost and with the highest efficiency. In order to maximize profit, companies must analyze consumer demand and adjust product prices appropriately.

 Example: Prices were high for watches when they were on-trend but had dropped when                                                        the demand slowly decreased. Economics helps the sellers and traders to determine the correct price for their goods.

 – Government bodies: Economics is essential for a government to generate revenue for building, maintaining, and developing a nation’s economy. Economics helps governments to design appropriate monetary and fiscal policies as well as tax policies. It is a very supportive factor for the government to make the right decision to ensure stable economic growth with low inflation and the highest possible level of employment.

Example: With the help of fiscal policy, the government can put its spending and taxes in order to stabilize the economy. 

In summary, economics is the study of social behavior that guides the allocation of scarce resources to satisfy the unlimited needs and desires of individual members of a given society. Economics seeks to understand how these individuals interact within the social structure to answer key questions about the production and exchange of goods and services. This is particularly important in Developing Countries (DCs).

In DCs where there are scarce resources, income inequality, low life expectancy, inflation, high population pressures, unemployment, etc.; the aim of teaching economics is to give students a grasp on issues and problems poor countries are faced with so that they can be able to formulate appropriate economic policies designed to achieve rapid economic growth and development.     

            Application Activity 5.2.

   Developing countries are faced with scarce resources, income inequality and high unemployment levels.                                       As an entrepreneurship student how can you help the nation to reduce these economic problems in everyday life?

           5.3. Basic economic concepts

             Learning activity 5.3.

    Scan the environment in which your family is located, then respond to the following questions: 

1. What do you understand by the following economic terms: a) Economic environment b) Economic activity c) Price d)             Wealth e) Demand and supply 

2. Identify any three economic agents.

3. Identify any economic activities undertaken in your area.

     5.3.1. Economic environment

       This refers to various economic activities affecting the business of a nation, that is to say all economic factors                               that influence the consumer’s behavior and institutions such as employment, inflation, interest rate, income …

           5.3.2. Economic activity

 Economic activity for an economy is the outcome of the various decisions taken by consumers(households), firms at home and abroad and government. For instance, we use the term economic activities in order to refer to the activities that involve the production, distribution and consumption of goods and services at all levels within the economy

            5.3.3. Economic agents

 Economic agents are decision making units in an economy. They are generally classified as follows:

 i. Household: This refers to people who live together and who take, or are subject to others taking for them joint financial decisions e.g., A family. They are the owners of factors of production and users (consumers) of goods and services. Household members are not necessarily related. Also, people who stay together but do not take joint consumption decisions may be classified as different households.

ii. Firms (Businesses): A firm is a unit that employs factors of production to produce goods and services to sell to households, other firms, central authorities and foreign sectors (exports). 

iii. Central authorities (the government): this includes public agencies, bodies and organizations belonging to or owing their existence to the government. They have legal or political power to control firms and households e.g.: The police, the central bank, the civil service etc. stabilize, regulate, and control firms and households.

 iv. Foreign sector: the foreign sector is made up of transactions that take place with other entities outside the country. These include: 

• Foreign firms that export to the local economy. 

• Domestic firms and individuals exporting to other countries 

• International financial institutions such as the World Bank, International Monetary Funds.

 • International aid agencies. The above categorization of economic agents is generalized. For example, in Africa, most farms are both businesses (because they produce commodities from factors of production) and household units (because they consume commodities). Also, when a government invests, it acts as a firm. 5.3.4. Wealth Wealth refers to the stock of assets and personal skills (human capital) held by an individual, a firm, an organization or a country, at any particular period of time.

 • Characteristics of wealth

 i) Utility: The owner of wealth gets satisfaction from using it.

 ii) Money value: Wealth can be expressed in monetary terms.

 iii) Scarcity: Wealth is rare. 

iv)Transfer: Wealth can change its ownership

      5.3.5. Resources 

This refers to all factors used to produce goods and services. They include land, labour and entrepreneur, capital and technology. 

       5.3.6. Commodities 

These are produced by factors of production to be sold so that they can be consumed by human beings to satisfy their needs or wants. The persons that carry out the activity of creating or making the commodities are called the producers and the activity or the process of making those commodities is called production. The person who uses the commodities to satisfy his/her needs/ wants is called consumer. The act of using commodities to satisfy human needs/wants is called consumption. 

      5.3.7. Demand and supply 

• Demand is the amount of goods or services that a consumer is willing and able to purchase                                                            at various price levels per period (per day, per week, etc.)

 • Supply refers to the amount of commodity which the producers are willing to offer to the market for sale at a given price over a specified period. 

  5.3.8. Economic growth and Economic development 

• Economic growth is the persistent quantitative increase in the volume of goods services                                                                         produced in the country in a period.

 • Economic development is the process involving quantitative and qualitative change in an economy leading to increase in real per capita income, better standard of living and economic transformation over a long period. 

   5.3.9. Price 

Price is the monetary value of goods and services per period. In broad sense, we talk about price to mean what we must give to get what we want but in a monetary economy where we use money to buy whatever we want. Therefore, we must make a difference between absolute price and relative price

Absolute price is the value of something expressed in units of a currency. 

Relative price is the price of a commodity in terms of other commodities. Relative value is a ratio of two prices;                    for example, “The price of sweet potatoes is half that of Irish potatoes’’ while absolute price is the price of a good or service expressed in monetary unit. 

 • Classification of price 

– Market price: A market price is the ruling price for a given commodity in the market at a given time.

 – Normal price (Equilibrium price): This is a price at which a quantity supplied is equal to quantity demanded.

 – Reserve price: This is a price below which a seller is not willing to sell his product or the least possible acceptable price, that is to say, the lowest price the seller can accept for the commodity.

 • Methods of price determination in the market In the market, prices may be determined by the following methods:

 i) Bargaining/Haggling: This is where a prospective buyer and seller approach each other and decide a price between two stated limits. The seller keeps on reducing the price and the buyer keeps on increasing the amount he is willing to pay. The process of bargaining continues until the buyer and the seller agree on the same price.

 ii) Fixing by treaties: Here, buyers and sellers come together to fix the price of a commodity. The price agreed upon can later be revised by amending the treaty. For example: the price of coffee used to be fixed by the International Coffee Agreement

 iii) Sales auctioning: This takes place when there is one seller and many buyers. Buyers compete for the commodity by offering higher prices. This commodity is taken by one who pays the highest price. The government can fix prices at which goods are sold and bought either above equilibrium price (price floor or minimum price) or below the equilibrium price (price ceiling or maximum price). 

iv)Offering at fixed prices: Prices are fixed by the seller and there is no bargaining. 

v) Collusion: Concerning collusion, firms may come into an arrangement and fix the price of a commodity to avoid underselling each other..

 vi)Resale price maintenance: Setting of prices by manufacturers for retailers to the consumer. For example, airtime cards, newspapers etc. 

vii) Forces of demand and supply: In a free economy, prices are determined by the force of demand and supply. With graphical illustration, the price is determined at the point where demand and supply curves meet.

 5.3.10. Economic Goods and Needs /Wants 

 Goods are tangible things which satisfy human needs/wants e.g.: food, clothing, vehicles, and tables. The goods can be classified into different categories according to: 

 i) Their stage of production

 – Raw materials: these are the goods kept by a manufacturing firm to be utilized in the production process. 

– Semi-finished products/goods in process or intermediate goods are the goods which are used in the process of production such as raw materials.

 – Final goods: These are goods which are ready for use by consumers. 

ii) Their destination 

– Capital goods (producer goods): these are goods that have been produced for use in the production of other goods. That is why they are also called producer goods.

 – Consumer goods: these are commodities purchased by households to satisfy their needs or wants. They may be durable or non-durable. 

iii) Their origin 

– Material good: These are goods you can touch and see (tangible goods) For example: clothes, car, TV – Immaterial goods: These are intangible goods i.e., invisible goods (services). For example: All kinds of services such as education, transport, medical treatment, etc.

 iv) Their duration

 – Durable goods: goods that last for a very long period. For example: a car

– Non-durable goods: goods that last a short period (perishable goods). For example: Fresh tomatoes, Bread – Semi-durable goods are tangible goods that are normally used in one or short period. Example: food 

v) Their relationship

 – Substitutes goods: These are goods which can be used alternatively. for example: Peas and beans.

  – Complement goods: These are the types of goods that are used together. To get the full utility of one good, the other complementary good must be used along with it. For example: a car and petrol are two complementary goods.         

The goods may be also categorized in the following ways:

                      Figure 5.3: Complementary goods like a notebook and pen are used together

            i) Economic goods and free goods 

 – Economic goods are tangible things which satisfy human needs/ wants. These arise out of scarcity and choice and can only be obtained at cost.

 – Free goods are the goods which exist in abundant amounts such that one’s desire can be satisfied at zero price.                    • Characteristics of economic goods 

– They provide satisfaction to the consumer.

 – They must be relatively scarce. 

– They must be marketable. 

– They have opportunity cost 

– They must have ownership and be able to change ownership

 • Characteristics of free goods

 – They are gifts of nature

 – They exist in natural abundance

 – They possess utility 

– They are consumed at zero price 

– They must have value 

ii) Public goods and Private goods 

– Private goods or services are goods enjoyed exclusively by a single individual. In other words, they are commodities whose consumption by an individual does reduce the supply available to others. These goods that belong to private individuals. For example, private cars, personal houses, etc.

 – Public goods: they are commodities whose consumption does not reduce its availability to others in society. They are owned by the government on behalf of citizens and enjoyed collectively.

            Examples include public roads, bridges, streetlights etc.

      iii) Mixed goods and Quasi-public goods 

• Mixed goods are commodities which have both private and public content. e.g., a television (a private property) has some public good content because neighbors and friends may also be invited to watch.

 • Quasi-public goods: These are goods whose consumption is open to all limited or restricted by certain conditions like merit, cost or circumstances i.e., they are goods whose consumption depends upon the ability to meet the condition or standards for their consumption and when they are consumed by individuals, the whole society benefits. E.g. Education.

iv) Merit goods and Demerit goods 

 • Merit goods are commodities for which the social benefits of their consumption to the community, exceed the private benefits to the consumer. They can be in the private hands, but they are controlled by the government because of their social benefit. E.g.: Education, Public health, etc. 

• Demerit goods: These are goods/commodities which are viewed as socially harmful. e.g.: alcoholic drinking, tobacco etc. 100 Experimental version The government can discourage their consumption by imposing taxes on them or introducing a law banning their consumption.

 v) Services: These are intangible things which satisfy immaterial needs/wants. 

They include: 

– Personal services: these are provided personally by doctors, teachers, musicians etc. 

– Commercial services: these are related to trade and aids to trade. They are provided by institutions like advertising agencies, insurances, banks etc. Needs and wants An economic need is any desire for goods and/or services for human beings to survive. The attempt to satisfy them forms the basis of all economic activities (production, exchange, distribution and consumption).

 • Wants: These are the desires for goods and /or services for human beings. You wish to satisfy them but even if you do not get satisfaction, your life is not at stake. There are two categories of wants. 

 – Material wants. Are those that can be satisfied by consumption of goods e.g., car, TV, watch etc.

 – Immaterial wants. Are those that can be satisfied by services, e.g.: transport, tourism, entertainment, telecommunication etc. Wants can also be classified as private and public wants. 

– Private wants are the desires of individual persons 

– Public wants are collective desires of society which are satisfied by public goods like roads etc. 

 Characteristics of needs the needs are characterized by the following features. 

 i) Needs are variable: Human needs are dynamic and change with time, place, climate and individuals.

 ii) Needs are unlimited in number: A satisfaction of one need creates another need. No human being is satisfied with all kinds of needs.

 iii) Needs may be ordered according to a scale of preference.

 iv) Needs are substitutable: Some needs are mutually exclusive according to the law of needs substitution.

 v) Needs are complements: Some needs are interrelated or jointly expressed so that a presence of one creates another. vi) Needs are also capable of being satisfied once the consumer has got what he/she needed              

Abraham H. Maslow, an American, has developed a theory of motivation on the basis of human needs and he classified needs into a sequential priority from the lower to higher level. 

According to him the needs are classified into five types or categories: 

i) Biological/Physiological needs/basic needs: These are necessary needs to human life, and they include Food, drinks, air, sex, sleep, clothing, shelter, sleep, etc.

 ii) Safety needs/security needs: After satisfying the basic needs, safety needs are felt next, they involve economic security and protection from physical danger and provision of a safe and secure environment. In other words, need for security consists of physical safety or protection against murder, fire, accident etc. and economic security against unemployment, theft, old age, disability etc. 

 iii) Economic security is provided through pension plans, job security, insurance plans, safe and healthy working conditions. 

 iv) Psychological / Love/Social needs: These are concerned with an individual’s need for love, friendship and affection or belongingness. They involve a need for recognition and acceptance by other people (relationship and sense of belonging)

 v) Esteem/ Ego needs: Ego or esteem needs are of two types 

 – Self-esteem: This implies needs for self-respect, self-confidence, feeling of personal worth and independence. 

– Esteem of other: This refers to needs for recognition, status, power, prestige, achievement etc. The organization can help in satisfying such needs through job title, praise, promotion etc. 

 vi) Self-actualization: This need is also called for self-fulfillment or self realization. It is concerned with an individual’s personal development and creativity, i.e. the ability to achieve one’s full potential to meet the needs of the community.

         Exercise about needs and wants

 On a monthly basis, Mr. Munana has a list of items that he must satisfy with his monthly earnings. From his income, he must pay rent, food, school fees for his children, medication, and transport to and from work. He also wishes to buy a smartphone, go out for a picnic with his family, buy jewelries for his wife and plait his daughter’s hair.

 Required: 

a) Based on the above scenario, identify Mr. Munana’s needs and 

b) wants. 

c) Which of the two is basic and which is not? Support your answer. 

d) Suppose you are the one, which ones (from (a) above) would you satisfy first? Justify your answer.                            

     5.3.11. Economic systems Economic system or socio- economic organization refers to the organization of ownership and allocation of resources in an economy. 

 The major types of economic systems are as follows: 

 • Free enterprise economy/Capitalist economy: This is also called unplanned or a competitive economy or capitalism. The French called it Laissez faire which means leave us alone implying no government intervention. The theory of free enterprise economy was first explained by Adam Smith in 1776 in his book, the nature and causes of wealthy Nations”. In such an economy, most of the resources are owned by the private sector (companies and individuals) which is free to take all the economic decisions like how to produce, when to produce, for whom to produce, etc. with no government intervention. 

A free enterprise economy is characterized by the following features: 

i) There is private ownership of property and factors of production

 ii) There is no government intervention in economic decisions. This implies that the major economic decisions such as what, when where and how to produce are made by market forces of demand and supply, through price mechanism 

iii) There is profit motivation in the production process. People engaged in the production process do so with the main aim of getting profit out of the business. 

iv) There is a lot of competition in the economy. This is because production is profit oriented 

v) There is freedom of choice and enterprise in the economy, since the government has limited control 

vi) There is the presence of social class (The rich) own factors of production. The low social classes (The poor) are the majority. They are the workers who do not own factors of production.

 vii)The market forces of demand and supply determine prices. 

Advantages of a free enterprise economy 

i) In a free enterprise economy, there is competition thus improving efficiency in production of goods of better-quality production 104 Experimental version

 ii) Free enterprise economy promotes consumer sovereignty. Consumers influence the production process.

 iii) It encourages people to work hard for better living and resource accumulation

 iv) There is increased output since producers produce and supply more goods and services to earn more profits. 

v) Efficiency of firms in a free enterprise economy increase the level of employment because of increased employment

 vi) There is optimum allocation of resources. Resources are allocated where they are highly demanded. As a result, inefficiency firms are driven out of the industry. 

vii)It reduces the burden of government participation in resource allocation. 

Disadvantages of a free enterprise economy

 i) It creates income inequalities in society. This is because the few who own the means of production will become richer as majority becomes poor 

ii) Free enterprise economy tends to encourage capital intensive technology. This leads to technological unemployment

 iii) It leads to creation of monopoly power because of inefficiency firms being driven out of production, due to competition iv) It reads to misallocation of resources. It may encourage production of luxurious products that are demanded by the rich. 

v) Production in a free enterprise economy is profit motivated which leads to exploitation of consumers in the form of high prices. 

vi) Due to absence of government intervention, there is a high degree of duplication of goods and services.

 • Centrally planned /Command / Planned economy/Socialist Economy: This is an economic system where resources are owned, allocated and distributed by the central planning authority (government) on behalf of the citizens. The government, on behalf of the citizens, takes all economic decisions. In such an economy, most of the resources (except labour) are owned by the state on behalf of its citizens. Economic decisions on what to produce, Experimental version 105 when. how, for whom etc. are taken by the state (government or central authorities). The extreme case of socialism is communism, the society of plenty and equality.

 A planned economy is characterized by the following features: 

i) There is public ownership of all productive resources such as land.

 ii) A central planning authority carries out all decisions on production resource allocation and distribution. 

iii) There is no freedom of individuals to operate their own enterprises. 

 iv) The major economic activities in the economy aim at offering services to the citizens 

v) The state owns and operates the means of production in the economy. 

Advantages of a planned economy 

• It is easy to implement government policies, as the government is in direct control of production. 

• It reduces income inequalities. A planned economy eliminated private ownership of property and completion.

 • It can lead to efficiency in production. This is because production is directed by the state in order to achieve social objectives. 

• It promotes social welfare. The objective of production is not profit maximization but achieving the best for the community.

 • It promotes economic stability. All economic decisions are carried out by the central planning 

• Consumers are protected from exploitation. Essential services are cheaply provided by the state.

   Disadvantages of a planned economy

 • Planned economy is characterized by production of poor-quality products. This is due to absence of competition from the private sector and failure to respond to consumers’ demand. A planning authority set out production targets.

 • There is a lack of motivation and individual initiative. This leads to limited innovation in the production process. 

• Central planning under planned economy results in bureaucracy. This leads to delays in decision making, thereby wasting time and promoting inefficiency. 106 Experimental version 

• There is a lack of consumer sovereignty in a planned economy. The right of a consumer to determine the process of resource allocation does not exist in a planned economy. Freedom of choice is also limited. 

• it increases administrative costs on the part of the government. Government agencies will be actively involved in allocation and distribution, all of which increases costs to the government. This system tends to be characterized by mismanagement of resources. This is because corruption and nepotism are always rampant. In reality there is no pure capitalist economy or pure socialist economy. Briefly speaking, all economies are mixed. The given classification to either capitalist economy or socialist economy depends on the degree of government intervention in making economic decisions. France and United State of America are capitalist economies because of low degree of government intervention, China is a socialist economy because high degree of government intervention

 • Mixed economic system: This is an economic system in which both the state and private sector own resources and participate in resource allocation. Both the government and the private sector participate in making economic decisions. 

  A mixed economic system is characterized by the following features:

 – There is co-existence of the private sector and the public sector. Thus, both the government and the private sector own resources. 

– There is an existence of both the planning authority and price mechanism in resource allocation. 

– There is equal existence of social welfare objectives and profit maximization objectives. In the public sectors, production aims at the wellbeing of the society. In the private sector, production aims at profit maximization.

 – In a mixed economy, the government sets guidelines for the private to flow as they engage in the production process.

 – There is freedom for enterprise, with some minimal level of government interference. Experimental version 107 Advantages of a mixed economy A mixed economy offers more employment opportunities from both the government and private sector

 – A mixed economy promotes fair distribution of resources due to government intervention in allocation resources 

– It promotes regional balance in development since government intervention reduces the influence of price mechanism in resource allocation.

 – There is control of monopoly tendencies in the economy by the anti-monopoly policies set by the government 

 – It promotes stability in price because of the price control measures that the government puts in place in a mixed economy.

 – There is increased investment in mixed economies because the private sector is promoted 

– There is proper allocation of resources due to the existence of the central planning authority. This body ensures that resources are allocated in the most efficient manner. 

– Under a mixed economy, the government provides public goods and services, which would not be provided by the private sector alone.

              Application Activity 5.3

 1. Categorize the following products into goods and services, with supporting reasons: Cars, education, healthcare, houses, communication, chairs, beds, refrigerators, flasks, textbook, pens, tourism, entertainment, banking, research. 

2. Examine the contribution of each economic agent towards the development of the economy. 

3. Identify, with vivid examples, the economic system to which your country belongs.

                                                          Skills Lab 5

             Using typical examples, defend the various methods of fixing commodity prices in your local markets.                      

                                                        End of unit 

  1. a) Economics was defined by many economists differently, which one do you think is most appropriate and why.

     b) Explain why you would put more strength in studying Economics. 

 2. a) Distinguish between wealth and welfare. Show the relationship between the two. 

    b) How does individual and business wealth affect society wealth? 

3. a) Explain the role of the various economic agents in the development process of any economy. 

    b) Describe how the various economic agents are organized to allocate resources in an economy.

 –