Economics

Key unit competence: By the end of the unit, you should be able to:
   (a) Use the basic concepts of Economics appropriately.
  (b) Appreciate the role of Economics in the society.

Activity 1.1
In groups of five, do the following.
(a) Read through the sentences below.
  (i) Fewer farmers raising cattle can result in inadequate supply of milk and cheese.
 (ii) After poor weather, corn crops failed to grow, resulting in inadequate supply of food for people and animals, and ethanol for fuel.
 (iii) Those without access to water experience a shortage of water.
 (iv) Depletion of forests in Thailand has led to limited supply of wood. This has forced individuals to take wood from demolished buildings in order to build new ones.
 (v) Waste of water through long showers or allowing water to run while brushing one’s teeth can contribute to shortage of water.
 (b) Identify a major economic problem raised by each of the above sentences.
 (c) Discuss the field of study you would put the economic problem you have identified.

From the activity above, it is evident that Economics is about choices and impact of those choices. It is connected to our lives, from the decisions we make as individuals, families, firms and governments.

Activity 1.2
In groups of five, go to the library and research on the following:
(a) Origin of Economics
(b) Importance of Economics
(c) Basic terms used in Economics.
Note down your findings on a piece of paper, flip chart or powerpoint. Make your presentations to the whole class.
N/B: The following websites may also be useful: www.wikipedia.org and www.economicsnetwork.ac.uk.

1.1 MEANING, ORIGIN AND SCOPE OF ECONOMICS
1.1.1 Meaning of Economics

Activity 1.3
(a) Form groups of five. Let each one of you write down on a piece of paper at least three sentences explaining what you understand by the term Economics. Exchange the pieces of paper amongst your groups and compare what you have written. Thereafter, read out the agreed definition to the whole class.
(b) In a class discussion, select any three definitions you would consider appropriate.

     Give reasons for your answer.
(c) Read through the definition of Economics from the teaching resources provided by the teacher and compare it with what you had selected as the appropriate definition.

Several economists have defined Economics differently. Here are some of their definitions:
  1. Economics is the study of mankind in the ordinary business life. (Alfred Marshall)
  2. Economics refers to the study of nature and causes of wealth of nations. (Adam Smith)
  3. Economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses. (Robbins)

From the above definitions, many economists consider Robbins’ definition the most appropriate.

This is because:
   • It gives the fundamental causes of the economic problems such as unlimited human needs,

   limited means to satisfy man’s needs, the alternative uses for the resources and the different importance 

    of wants.
   • Robbins’ definition emphasises scarcity as a foundation of Economics, otherwise without scarcity,

  there would be no Economics.
  • Man’s problem is not accumulating wealth, but satisfaction of human needs.

1.1.2 Origin and scope of Economics
The modern word “Economics” has its origin in the Greek word “Oikonomos” meaning a steward. This word can be decomposed into two parts, “Oikos”, meaning a house and “nomos”, meaning a manager.
The sum up of the two words is what economics is all about. Literally, Oikonomos means house manager.

There is an economic aspect to almost any topic we mention – education, employment, housing, transport, defence. Economics has developed into a comprehensive theory of how the society works. But as such, it is difficult to define. Economics developed as a separate discipline from moral philosophy in an attempt to understand how man undertook decisions on production and consumption so as to maximise profits and utility respectively. In the 17th century, Economics was referred to as study of political economy and lacked its own unique methods of analysis.

The classical economists, especially Alfred Marshal defined economics as the “Study of man in the ordinary business life”. This definition appears too vague based on what Economics is concerned with. Any definition should take account of the guiding idea in Economics, which is scarcity. The great American economist Paul Samuelson thus defined it as: “The study of how people and society choose to employ scarce resources that could have alternative uses, in order to produce various commodities and to distribute them for consumption, now or in future amongst various persons and groups in society.

The study of Economics basically revolved and still revolves around the problem of scarcity. All resources are scarce. The resources are not enough to fill everyone’s wants to the point of satiety. Therefore, the concern of Economics is on how man can utilise the scarce resources to meet his unlimited needs.

We therefore have limited resources and the economist’s job is to evaluate the choices that exist for the use of these resources. Thus we have another characteristic of Economics; choice.

The study of Economics begins with the understanding of human “wants”. Scarcity forces us to economise. We weigh up the various alternatives and select those particular bundles of goods which yield the highest return from our limited resources. Modern economists use this idea to define the scope of their studies.

Although Economics is closely connected with social sciences such as ethics, politics, sociology, psychology and anthropology, it is distinguished from them by its concentration on one particular aspect of human behaviour, choosing between alternatives in order to obtain the maximum satisfaction from limited resources.

Economics is thus based on four fundamental characteristics of human existence and investigating what happens when they all exist together. First, the needs of human beings are without limit. Second, those needs vary in value or importance. Third, the resources available for satisfying those needs are limited. Fourth, the resources have alternative uses. As a result, a decision has to be made on what goods to produce and which needs to satisfy and which ones to forego.

1.2 IMPORTANCE OF STUDYING ECONOMICS

Activity 1.4
In groups of five, attempt the following:
  (a) Identify the possible professions you would pursue after your Economics course in high school.
  (b) Explain how Economics prepares you to pursue those professions in future.
  (c) Identify the major economic events that have taken place in your country.
  (d) Explain how studying Economics helps you to interpret the effects such events have

      on you and your country.
  (e) Identify the major economic problems existing in your country.
  (f) Explain how studying Economics helps you to identify those problems.
  (g) Discuss how you can find solutions to the problems identified above.

It is noted that Economics,
• Is a career subject. It prepares students for further academic and professional qualifications in fields like Commerce, Statistics, Mathematics and Environmental Sciences, among others.
• Equips learners with the knowledge regarding what takes place in the world of business.
• Makes it possible for learners to understand and appreciate economic problems existing in their countries, regions and the world, thereby finding solutions to those problems.
• Equips learners with the knowledge and skills required for them to fully participate in the economic activities aimed at developing their economies.
• Enables students understand the scarcity of resources and get knowledge on how the available resources can be utilised maximumly.
• Enables students to understand the basic economic concepts and principles of Economics and how to apply them in daily life.
• Prepares students for employment in various fields such as policy makers and economic planners, hence improving their livelihoods.

1.3 BASIC TERMS USED IN ECONOMICS

Activity 1.5
In groups of five, go to the library and undertake research on the following:
  (a) Meaning and types of price, commodities and goods.
 (b) Meaning, forms and characteristics of services and wealth.
 (c) Welfare needs and wants.
 (d) Resources
 (e) Household, firms government and foreign sector economic agents.
 (f) Economic activities.
 (g) Meaning, roles, types, characteristics, advantages and disadvantages of economic systems.
Write down your research findings.
Present your findings to the whole class.

1.3.1 Wealth
Wealth refers to the stock of assets held by an individual, a firm, an organisation or a country, at any particular moment of time.

Characteristics of wealth
  (a) It has value: Wealth can be expressed in monetary terms.
  (b) It is relatively scarce: Wealth is not found easily.
  (c) It is transferable: Wealth can change ownership and possession from time to time.
  (d) It possesses utility: Wealth gives satisfaction to the owner.

Forms of wealth
  (a) Social wealth: This refers to all public assets such as public roads, public libraries and public hospitals.
  (b) Business wealth: This refers to the wealth of business organisations at any particular time.
  (c) Individual wealth: This refers to the assets or wealth held privately by an individual.
1.3.2 Resources
This refers to all productive inputs used to create or produce goods and services. Resources are divided into natural resources, manmade resources, human resources, renewable resources and non-renewable resources.

a) Natural resources
These are resources that occur naturally within the environment. We cannot produce natural resources. They are used by human beings to produce goods and services. Examples include air, land, mineral resources, water and sunlight.

b) Human-made resources
These are resources created through the action of human beings. They include equipment and machinery such as computers, cars, houses and all forms of machines and tools used in the production process.

c) Human resources
This is a set of individuals who make up the workforce of an organisation, business sector or the economy. They help in the production of goods and provision of services. They include organisational managers, supervisors and other employees. Some of these people are employed on permanent and pensionable terms, some are employed on contract and some are employed as casuals. Others work on internship programmes.

Recall
Most companies prefer employing staff on contract than on permanent basis. Discuss.

d) Renewable resources
These are resources that can be used over and over without being depleted. They are unlimited in supply. They can be replaced as fast as they are used up. Examples include solar energy, biomass energy, wind energy, geothermal energy and hydropower energy.

e) Non-renewable resources
These are resources that once used they cannot be replaced. Their quantities are limited. This is because they get depleted. Examples include coal, petroleum, natural gas and minerals such as gold and diamond.

                                                                Remember!
Since natural resources exist within the environment, they should be used properly and sparingly. Overexploitation of resources has negative effects on the environment. It is therefore advisable and a necessity to carry out environmental impact assessment in the area before any activity. This helps to ensure proper use of resources for sustainable development and protection of the environment.

1.3.3 Price
Price refers to the rate at which a commodity is exchanged in the market. It can also be defined as the relative value of a commodity expressed in monetary terms.

Types of prices
(a) Market price: This refers to any price existing in the market at a particular period of time, regardless of how it is determined.
(b) Equilibrium price: This is the price established in the market when quantity demanded is equal to quantity supplied. Such prices change from time to time as determined by the market forces of demand and supply.
(c) Normal price: This refers to the long run established price after a long period of price fluctuations.
(d) Reserve price: This refers to a minimum price acceptable to a producer or a seller in order to part with a commodity.

1.3.4 Economic agents
Economic agents are the major decision making units in an economy. They include:
(a) The household: This refers to a group of individuals under one roof who take joint decisions on their own economic ventures.
(b) The firm: A firm is the smallest unit of production which employs factors of production to produce goods and services.
(c) The state: This refers to an institution that has both political and economic powers to influence resource allocation and distribution. It is this agent that regulates the activities of the households and firms.
(d) Foreign sector (X - M): This comprises of exports and imports. It includes everything outside the political boundaries of the economy. It is responsible for the expenditures on gross domestic product.

1.4: DIFFERENCE BETWEEN NEEDS AND WANTS AND BETWEEN GOODS AND SERVICES

Activity 1.6
Case study
Mr. Gato has a list of desires that he wants to satisfy with his monthly earning. His monthly income is 100,000 Rwf. From his income, he wants to pay rent, food, school fees for his kids, medication and a bank loan. He wishes to buy a car. He is also planning to fly out with his family during the school holidays.
  (a) Based on this scenario, identify Mr. Gato’s needs and wants.
  (b) Which ones (from (a) above) should he satisfy first?

1.4.1 Needs
Needs are those human desires whose satisfaction is necessary to sustain life. They are also called basic needs. They include food, shelter and clothing.

Recall
1. Identify the various types of food that human beings need.
2. Explain why human beings must eat a balanced diet daily.
3. Why do people fall sick?
4. Discuss why many people want to live in permanent houses.
5. Identify the various types of clothes.

Which ones are specifically for ladies and which ones are for men? Why do you think so?

1.4.2 Wants
Wants are those human desires whose satisfaction makes life more comfortable, enjoyable, relaxed and pleasant. They are also called luxuries. They are not necessary for sustaining life.

NOTE: Some of these wants are derived from the basic needs. They include luxurious vehicles, expensive suits and clothing, personal airplanes and mansion buildings.

Note also that some of these wants are no longer luxuries, but part of the basic needs. Many people for instance, now own vehicles to enable them carry out their daily duties faster and with ease. People also own television sets to be aware of what takes place elsewhere, to be informed, educated and entertained.

Characteristics of wants
1. They are re-current in nature.
2. They are unlimited.
3. They are complementary.
4. They have different degrees of urgency.

                                                          Remember!

Given that human wants are unlimited, yet the resources to satisfy them are limited, there arises the need for proper use of resources. This requires us to make budgets when making financial decisions; it also requires us to learn a culture of saving as well as prioritising in order to make use of money properly.

1.4.3 Welfare
Welfare is the provision of minimal level of wellbeing and social support for all citizens. The level of individuals’ welfare is indicated by the quantity and quality of goods and services they can access.

1.4.4 Commodities
These are products that are produced or created by use of factors of production. People use these commodities to satisfy their desires. Commodities are categorised as either goods or services.

1.4.4.1. Services
Services are intangible items or things that satisfy non-material wants.

Forms of services
a) Direct services
These are services that directly benefit the individual person. Examples include education, medical care and sports and games.

b) Indirect services
These are services the individual benefits from indirectly or commercially. Such services facilitate business activities. They include banking, insurance, advertising, transport and communication.

Characteristics of services
  (i) They are intangible. Services can neither be seen, felt nor touched.
  (ii) Provision of services requires use of the service providers such as teachers and doctors,

        physical tools   such as textbooks or equipment such as communication masts or boosters.
  (iii) They are consumed as they are provided. Services cannot be stored for future use.
  (iv) Services cannot be transported from one place to another.

       Only the service providers can move or be transported to other areas or places.

1.4.4.2 Goods
These are tangible items that satisfy human desires. For example food, clothing, vehicles and furniture.

Types of goods

Activity 1.7
In groups of five, carry out research on types of goods.
(a) From your research findings, discuss types of goods and make presentations.
(b) Discuss the characteristics of the different types of goods identified above.

(a) Free goods: These are goods which are abundant in supply. People use these goods without paying for them. Most of these goods are provided freely by nature. Examples of such goods include air, water and land.

Recall
If water and land are free goods, why do people sell land and bottled water?

(b) Economic goods/commercial goods: These are goods which are scarce in supply, require payment and yield satisfaction to the consumer. Examples include manufactured goods.

Characteristics of economic goods
  (i) They are relatively scarce.
  (ii) They have monetary value.

  (iii) They have opportunity cost, consuming economic goods necessitates sacrificing others.
  (iv) They yield satisfaction or utility to the consumer.
  (v) They are marketable.

(c) Public goods: These are goods that are owned and enjoyed collectively. Examples include public roads, public hospitals and public schools.

Characteristics of public goods
  (i) They are provided by the state or government.
  (ii) They are owned collectively. One’s consumption of a public good does not exclude others.
  (iii) They cannot be exhausted.
  (iv) They involve indirect payment. 

         Payment for public goods is made collectively and indirectly through taxation.

(d) Private goods: These are goods which are owned and enjoyed individually. One’s consumption of these goods excludes others. These goods involve direct payment. An example is buying a car for personal use.

(e) Merit goods: These are goods which are considered to be essential to the society. Examples include education, health and water.
(f) Economic bads: These are goods which are harmful and dangerous to the society. The government must (g) Producer goods: These are goods used in the production of other goodscontrol their production. Such goods include alcohol and drugs.

Recall
List examples of producer goods.

(h) Final goods: These are goods ready for consumption by the final user. Examples include manufactured goods such as foodstuffs and clothes.
(i) Complimentary goods: These are the type 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, car and petro are two complementary goods.

(j) Substitute goods: These are goods which can be used as alternatives. One good can be used as an alternative to the other. Examples of substitute goods include, LG and Samsung TVs, Coca-Cola and Pepsi sodas.

(k) Inferior goods: These are goods whose demand falls with an increase in the consumer’s level lf income. It is a type of good that people do not consume when their income increase, because they shift their consumption to more prestigious goods. A good example is a second-hand cloth. When the income of people increases, people avoid buying second-hand clothes and shift to more expensive clothes.

(l) Luxury goods: These are types of goods whose demand and consumption increases as type income of the consumers increase. a good example of a luxury good is the HD Television sets. When the incomes of people increase, the demand for such TV sets increases, because people can afford to buy them.

(m) Giffen goods: These are goods whose increase in price tends to increase their demand and consumption by consumers. This happens when consumers cannot afford the alternative goods, therefore stick on these types of goods. For example, low quality rice is a good example of a giffen good. As the price of the low quality rises, the peasant consumers cannot afford other alternatives because all their income is depleted on the low quality rice. Therefore, they consume more of the rice rather than buy alternatives like meat.

1.5 ECONOMIC ACTIVITIES AND ECONOMIC SYSTEMS

1.5.1 Economic activities

Activity 1.8
In groups of five,
(a) Discuss and make presentations on the definition of economic activities.
(b) Identify and discuss the major economic activities in the country.

Economic activities are the activities that involve the production, distribution and consumption of goods and services at all levels within the economy. Economic activities exist in the following major production sectors of the economy:

1. Primary level of production
2. Secondary level of production
3. Tertiary level of production

1. Primary level of production
Primary production involves extraction of raw materials from their natural source. The major economic activities under primary production include farming, mining, fishing, forestry and lumbering.

2. Secondary level of production
Secondary level involves transforming raw materials into finished goods that can satisfy human wants. It comprises of all the activities in the construction, processing and manufacturing industries.

3. Tertiary level of production
Tertiary level involves provision of services. Examples of economic activities under tertiary sector include transport, banking, insurance, tourism, advertising and communication.

1.5.2 Economic systems

Case study
In different countries, the way resources are owned, controlled, allocated and the general distribution of goods and services is different. In U.S.A for example, resources are owned and controlled by individuals with limited government intervention. In China, resources are owned, controlled and distributed by the government. Rwanda and Kenya have a mixed economy. In other countries, both the private individuals and the government own resources and participate in resource allocation.
In groups of five,
(a) Explain the meaning of an economic system, using the above case study.
(b) Identify the major economic systems that exist in the world.
(c) In small groups discuss the characteristics of the economic systems discussed above and identify the economic system in which your country belongs.
(d) Discuss the advantages and disadvantages of the above economic systems.

An economic system refers to the general organisation and structure of an economy. It deals with the ownership of resources, control and allocation of resources and the general distribution of goods and services. There are three major economic systems:
  (a) The free enterprise/laissez-faire/capitalist economy.
  (b) The command/planned/socialist economy.
  (c) The mixed economy.

(a) The free enterprise/capitalist economy
This is an economic system where producers engage in economic activities with a high degree of freedom. In this economy, prices are determined by forces of demand and supply with no or limited government intervention.

Features of a free enterprise economy
1. There is private ownership of property and factors of production.
2. There is no government intervention in the 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.
3. 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.
4. There is a lot of competition in the economy. This is because production is profit oriented.
5. There is freedom of choice and enterprise in the economy, since the government has limited control.
6. There is presence of social classes in the economy. The high social class (the rich) own factors of production. The low social class (the poor) are the majority. They are the workers who do not own factors of production.
7. The market forces of demand and supply determine prices.

Advantages of a free enterprise economy
1. In a free enterprise economy, there is competition. This improves efficiency in production of goods. This in turn leads to production of better quality products.
2. Free enterprise economy promotes consumer sovereignty. Consumers influence the production process.

3. It encourages people to work hard for a better living and resource accumulation.
4. There is increased output since producers produce and supply more goods and services in order to earn more profits.
5. Efficient firms in a free enterprise economy increase the level of employment because of increased investment.
6. There is optimum allocation of resources. Resources are allocated where they are highly demanded. As a result, inefficient firms are driven out of the industry.
7. It reduces the burden of government participation in resource allocation.

Disadvantages of a free enterprise economy
1. It creates income inequalities in a society. This is because the few who own the means of production will become richer as the majority becomes poorer.
2. Free enterprise economy tends to encourage capital intensive technology. This leads to unemployment.
3. It leads to creation of monopoly as a result of inefficient firms being driven out of production, due to competition.
4. It leads to misallocation of resources. It may encourage production of luxurious products that are demanded by the rich.
5. Production in a free enterprise economy is profit motivated which lead to exploitation of consumers in form of high prices.
6. Due to absence of government intervention, there is a high degree of duplication of goods and services.

(b) Command/planned economy
This is an economic system where resources are owned, allocated and distributed by a central planning authority (government) on behalf of the citizens. The government, on behalf of the citizens, takes all economic decisions.
Features of a planned economy
1. There is public ownership of all productive resources such as land.
2. A central planning authority carries out all decisions on production, resource allocation and distribution.

3. There is no freedom of individuals to operate their own enterprises.
4. The major economic activities in the economy aim at offering services to the citizens.
5. The state owns and operates the means of production in the economy.

Advantages of a planned economy
1. It is easy to implement government policies, as the government is in direct control of production.
2. It reduces income inequalities. A planned economy eliminates private ownership of property and competition.
3. It can lead to efficiency in production. This is because production is directed by the state in order to achieve social objectives.
4. It promotes social welfare. The objective of production is not profit maximisation, but achieving the best for the community.
5. It promotes economic stability. All economic decisions are carried out by the central planning authority.
6. Consumers are protected from exploitation. Essential services are cheaply provided by the state

Disadvantages of a planned economy
1. Planned economy is characterised by production of poor quality products. This is due to absence of competition from the private sector and failure to respond to consumers’ demands. A planning authority sets out production targets.
2. There is lack of motivation and individual initiative. This leads to limited innovation in the production process.
3. Central planning under a planned economy results into bureaucracy. This leads to delays in decision making, thereby wasting time and promoting inefficiency.
4. There is 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.
5. It increases administrative costs on the part of the government. Government agencies will be actively involved in resource allocation and distribution, all of which increases costs to the government.
6. This system tends to be characterised by mismanagement of resources. This is because corruption and nepotism are always rampant.

(c) Mixed economic system
This is an economic system in which both the state and the private sector own resources and participate in resource allocation.

Features of a mixed economy
1. There is co-existence of the private sector and the public sector. Thus both the government and the private sector own resources.
2. There is existence of both the planning authority and price mechanism in resource allocation.
3. There is equal existence of social welfare objectives and profit maximisation objectives. In the public sector, production aims at the wellbeing of the society. In the private sector, production aims at profit maximisation.
4. In a mixed economy, the government sets guidelines for the private to follow as they engage in the production process.
5. There is freedom of enterprise, with some minimal level of government interference.

Advantages of a mixed economy
1. A mixed economy offers more employment opportunities from both the government and the private sector.
2. A mixed economy promotes fair distribution of resources due to government intervention in the allocation of resources.
3. It promotes regional balance in development since government intervention reduces the influence of price mechanism in resource allocation

4. There is control of monopoly tendencies in the economy by the anti- monopoly policies set by the government.
5. It promotes stability in prices because of the price control measures that governments put in place in mixed economies.
6. There is increased investment in mixed economies because the private sector is promoted.
7. There is proper allocation of resources due existence of the central planning authority. This body ensures that resources are allocated in the most efficient manner.
8. Under a mixed economy, the government provides public goods and services, which would not be provided by the private sector alone.

Disadvantages of a mixed economy
1. Government interference may undermine the private sector.
2. Government participation in production may result into state monopolies.
3. The participation of both the private sector and the state may lead to duplication of services.
4. Due to the participation of the government and the private sector in the production process, there may be over exploitation of resources.

Unit Summary

Unit Assessment 1

1. (a) Economics was defined by many economists differently. Outline their definitions and suggest which one is more appropriate and why.
(b) Explain the reasons why studying Economics is important.
2. (a) Explain the following concepts as used in Economics: price, wealth, wants, goods, commodities and economic agents.
(b) What is an economic system? List the major economic systems that you know indicating their characteristics.
3. Explain the advantages and the disadvantages of the following economic systems:
  (a) Free enterprise economy
  (b) Command economy
  (c) Mixed economy