The Division of Labour

Posted by Abd. Ghafar Arif RM

With the technical advances of the last few hundred years, production of goods and services has taken place on a much bigger scale. The concentration of large numbers of workers within very large production units allowed the process of production to be broken down into a series of tasks. this called the division of labour. For example, Adam Smith, writing at the end of the eighteenth century, showed how the production of pins would benefit from the application of the division of labour in a factory. He suggested that pin-making could be divided into 18 distinct operations and that, if each employee undertook only one of the operation, production would rise to 5,000 pins per employee per day. This was compared to his estimate that each employee would be able to produce only a few dozen each day if they produced pins individually.

Although the division of labour raised output, it often created dissatisfaction in the work force, who became bored with the monotonous nature of their task. The process was taken a stage further in the 1920s when conveyor belt production was introduced in the United State car industry by Henry Ford. Ford's method of car production provided the model for much of manufacturing production in the twentieth century. In more recent times the de-humanising impact of production techniques, such as those using a conveyor belt, have been recognized and alternatives methods of production have been introduced.

Resource: As Level and A Level Economics, Colin Bamford, Keith Brunskill, Gordon Cain, Sue Grant, Stephen Munday, Stephen Walton, University of Cambridge, Cambridge University Press, 2002.

Specialization and Exchange

Posted by Abd. Ghafar Arif RM

One of the ways in which more goods and services can be produced is the economy is through the process of specialization. This refers to a situation where individuals and firms, regions and nations concentrate upon producing some goods and services rather than others. This can be clearly illustrated at the individual level. Within the family there may be some specialization in the performance of household tasks, with one person doing the ironing and gardening while another does the shopping and cooking. At the workplace, of course, the fact that some people are labourers or lorry drivers while others have office jobs is also a reflection of specialization. At this level, specialization allows individuals to concentrate upon what they are best at and thus more goods and services will be produced. With such specialization, however, although more is produced no-one is self-sufficent. It becomes necessary to exchange goods and services. As an individual specializes they will produce a surplus beyond their needs, which they can exchange for the surpluses of others.

With the expansion of trade and the development of markets, the benefits of region and national specialization became apparent. Surpluses produces by regions and countries were bought and sold, allowing world living standards to rise. Just as individuals concentrated on what they were best at, so did regions and countries.

Specialization has clearly resulted in a massive expansion in world living standard, but there are dangers in specialization. given the pace of technological change in modern society, there is always the possibility that the specialist skills and accumulated experience, which any individual has acquired, may become redundant as the economy develops. Individuals need to be flexible and multi-skilled and be able to move between occupations. At regional and national levels, changes, in  consumers' wants can sometimes mean that the goods and services produced in a region or country are no longer required in the same quantity and unemployment can result. Policies then have to be adopted to deal with the economic and social problems that will arise. 

The division of labour

With the technical advances of the last few hundred years, production of goods and services has taken place on a much bigger scale. The concentration of large numbers of workers within very large production units allowed the process of production to be broken down into a series of tasks. This is called the division of labour. For example, Adam Smith, showed how the production of pins would benefit from the application of the division of labour in a factory. He suggested that pin-making could be divided into 18 distinct operations and that, if each employee undertook only one of the operations, production would rise to 5,000 pins per employee per day. This was compared to this estimate that each employee would be able to produce only a few dozen each day if they produced pins individually.

Although the division of labour raised output, it often created dissatisfaction  in the work force, who became bored with the monotonous nature of their task. The process was taken a stage further in the 1920s when conveyor belt production was introduced in the United State car industry by Henry Ford. Ford's method of car production provided the model for much of manufacturing production in the twentieth century. In more recent times the de-humanizing impact of production techniques, such as those using a conveyor belt, have been recognized and alternative methods of production have been introduced.

 

Source: As Level and A Level Economics, Colin Bamford, Keith Brunskill, Gordon Cain, Sue Grant, Stephen Munday, Stephen Walton, University of Cambridge, Cambridge University Press, 2002

Unlimited Wants

Posted by Abd. Ghafar Arif RM

If we were asked, we could all identify certain basic wants which must be satisfied if we are to stay alive. These include the obvious essentials of food, shelter and clothing. We might also identify those wants which are clearly less essential but which we think improve our quality of life. Some might include television sets, cars, trips to the cinema and so on. These are sometimes called luxuries but it is important to remember that what might be a luxury for one individual may be considered an essential for others. This is because we all have a scale of preference with our more urgent wants at the top and the less urgent ones at the bottom. Each individual's scale of preference is a product of a complex set of influences, involving our culture, upbringing and life experiences. These together influence our likes and dislikes. Unsurprisingly, since we all have different experiences, there is bound to be great variation between any two individual's scales of preferences. You may find it interesting to conduct a class exercise in which everyone makes a list of ten wants in descending order or priority. When you compare results you may be surprised to find that, although there may be broad agreement on the first few choices, there is likely to be considerable variation as you compare people's choices over the full list. You may also consider how your list would compare to lists compiled by others with very different life experiences, such as your teachers, your grandparents or even a student of economics in another city. A further point to consider is whether you could imagine any end to your list if you were not limited to ten choices. It is important to remember that our wants are continually expanding, developing and changing.

Some wants expend as we grow up, marry and raise a family. Imagine how our housing needs change as we go through this process or how we change from wanting a small car with two doors to wanting a large family saloon with four doors. Some of our wants develop and expand when we see others around us enjoying goods and services and we feel the need to keep up.

Sometimes, our wants change as we have new experiences, for example we might become vegetarian because we have seen a TV programme on the health risks of eating meat.

All of this points to the fact that we can never imagine a time when all our wants are satisfied. Our wants are continually expanding and changing. Despite the fact that we are continually finding new, more efficient ways to produce more and more goods and services with the resources available to us, we are still faced with the basic economic problem that we have limited resources and unlimited wants. This is sometimes called the problem of scarcity. As a result we have to make choices.

Source: As Level and A Level Economics, Colin Bamford, Keith Brunskill, Gordon Cain, Sue Grant, Stephen Munday, Stephen Walton, University of Cambridge, Cambridge University Press, 2002

Limited Resources

Posted by Abd. Ghafar Arif RM

In economic we categorize the resources available to us into four types. These are known as factors of production:

1.      Land

This is the natural resource. It includes the surface of the earth, lakes, rivers and forests. It also includes mineral deposits below the earth and the climate above.

2.      Labour

This is the human resources, the basic determinant of which is the nation's  to satisfy population. Not all of the population are available to work however, because some are above or below the working population age and some choose not to work.

3.      Capital goods

These are any man-made aids to production. In this category we would include a simple spade and a complex car assembly plant. Capital goods help land and labour produce more units of output. They improve the output from land and labour.

These three factors are organized into units of production by firms.

4.      Enterprise

This factor carries out two functions. Firstly, the factor enterprise organizes the other three factors of production. Secondly, enterprise involves taking the risk of production, which exists in a free enterprise economy. Some firms are small with few resources. The functions of enterprise are under taken by a single individual. In large, more complex firms the functions are divided, with salaried managers organizing the other factors and shareholders taking the risk.

Some economies have a large quantity of high-quality factors of production at their disposal. They can create lots of goods and services to satisfy the wants of their population. They are said to have a good factor endowment. Some economies lack sufficient quantities of one or more of the factors. Developing countries, for example, might have large quantities of land and labour but lack sufficient capital and enterprise. The former planned economies of Eastern Europe, such as Poland, have found it difficult to develop because they have few people with entrepreneurial experience.

Production and consumption

Resources are combined in the process of production to create goods and services. Goods and services have the capacity to satisfy wants. The process through which individuals use up goods and services to satisfy wants is known as consumption. Some goods, such as a chocolate bar, are quickly used up to satisfy our wants. Others satisfy wants over a longer period of time. These are called consumer durables. Examples of consumer durables include television sets, refrigerators and vehicles.

 
Source:

Colin Bamford, Keith Brunskill, Gordon Cain, Sue Grant, Stephen Munday, Stephen Walton, Economics As Level and A Level, Cambridge University Press, 2002

 

ECONOMIC PROBLEM

Posted by Abd. Ghafar Arif RM

We have to deal with a whole range of economic problem. You may have seen TV programmes about the misery of unemployment and poverty; you may have read about the difficulties caused by inflation or heard politicians discuss exchange rate crises on the breaking news. Despite this extensive range of issues, which economist are trained to consider, they often talk about the economic problem. This is the fundamental problem from which all others arise. This is the fact that we have scarce resources to satisfy our limited wants. As a result of this problem, which is sometimes called the problem of scarcity,  we have to make choices, and it is the task of the economist to explain and analyze the nature of choice facing economic agents, such as consumers, producers and governments.

INDICATORS OF COMPARATIVE DEVELOPMENT

Classification according to levels of income
Posted by Abd. Ghafar Arif RM

The simplest way in which economics can be classified is according to the value of their Gross National Product (GNP) per capita. Every economy can be classified as low income, middle income, (subdivided into lower and upper middle), or high income. Low-income and middle-income economies are sometimes known as developing economies. Classifying economies in this way is convenient, but as we have seen the level of development of a country goes beyond relative levels of income. It can also be misleading if it is assumed that all countries classed as 'developing' are at the same stage of development. In fact economies grouped together in terms of income may well be at completely different stages of development. Nevertheless, categorizing economies according to their levels of income provides a simple and measurable way of grouping economies.

The income groups were categorized as follows in 2000:

LOW INCOME                  $755 or less

MIDDLE INCOME            $756 to $2,995 (lower middle)

                                            $2,996 to 9,265 (upper middle)

HIGH INCOME                 $9,266 or above

The thresholds between the categories are updated each year to account for international rates of inflation. As a result the thresholds are constant in real terms overtime.

Classification according to levels of indebtedness

Sometimes it is useful to classify developing economies according to the degree of their indebtedness. These categories are: severely (or highly) indebted, moderately indebted and less indebted. The categorization depends upon a number of measures of international indebtedness, the most important of which is the proportion of GNP which is devoted to servicing the debt. The fact that such a categorization is used is a reflection of the extent to which international indebtedness is an obstacle to economic development.

Source: Colin Bamford, Keith Brunskill, Gordon Cain, Sue Grant, Stephen Munday, Stephen Walton, As Level and A Level Economics, University of Cambridge, 2002

ECONOMIC GROWTH and DEVELOPMENT

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Economic Growth

In strictly economic terms, economic growth occurs when an economy achieves an increase in its national income, measured by Gross National Product (GNP), in excess of its rate of population growth. This will lead to an increase in GNP per capita. For many years it was assumed that the existence of poverty in many of the world's poorer economies could be eradicated if these countries managed to sustain economic growth over a period of time. As a result of economic growth was seen as synonymous with economic development. If economies grew they would also experience development. It was assumed that increased availability of goods and services in an economy would lead to a 'trickle down' effect which would have an impact upon all, including the poorer members of society, in terms of jobs and other economic benefits. In reality however, despite the fact that in recent years many developing countries have achieved quite high growth rates, it has been observed that, although economic growth has resulted in benefits for poorer members of society in some countries, in others the levels of living of the mass of the population remained unchanged. In some cases this level may even have deteriorated. As a result a wider perception of economic development is now accepted which is related to, but distinct from, economic growth.

Privatization

Posted by Abd. Ghafar Arif RM

In a simple sense, privatization refers to a change in ownership of an activity from the public sector to the private sector. In many instances, as in the UK, privatization has returned activities that had been nationalized to new private owners. In a modern sense privatization means more than this and is now recognized to include:

• The direct sale of government-owned and operated activities to the private sector. The nature of the sale can be diverse and includes offering shares to the public, management and worker buyouts, the direct sale to new owners and, in some cases, a partial sale with the government retaining some share in the new business.
• Deregulation through the removal of barriers to entry which had protected the public sector from outside competition. Through this action, a constable market can be created.
• Franchising. This can give a new private sector owner the right to operate a particular service or activity for a given length of time. In some cases, the franchise might be an exclusive one; in other cases, some competition may be experienced.
• Contracting out of service previously provided in-house by public sector organization. Normally, this involves activities that are demanded not to be core to those organization, In some cases, contracting out allows public sector-based organizations to openly compete with private sector businesses for a particular contract

Why Privatization?

There are various reasons for the extensive privatization. Some are economic, others much more concerned with political motivation. For example:

• In the early phase of privatization, there is little argument that was a deliberate commitment to reduce government involvement in the economy. A return to market forces was seen as necessary for many nationalized industries to achieve an efficient allocation of resources. Public ownership was believed to be a serious obstacle to these industries meeting their particular objectives.
• There was also a deliberate policy to widen share ownership amongst the population and amongst the employees of the privatized companies. In this way, people who previously had no opportunity to own shares could purchase small quantities of shares in businesses where they were consumers. From an employees standpoint, share ownership was seen as a way of enhancing motivation and improving labour relations in a company.
• Privatization can generate benefits for consumers  in the form of lower prices, wider choice and a better quality product or service. 
• It is further believed that privatized companies can be successful in raising capital, lowering prices and cutting out waste. In other words they are more efficient, with managers able to operate in a market-led way, without the restriction of trying to satisfy government objectives for their companies. Managerial freedom and a highly motivated workforce become the means by which economic efficiency is realized. 

Resource: Colin Bamford, Keith Brunskill, Gordon Cain, Sue Grant, Stephen Munday, Stephen Walton, AS Level and A Level ECONOMICS, University of Cambridge, 2002.

The Effectiveness of Government Policies

Posted by ABD. GHAFAR ARIF RM

In principle, government policies to reduce market failure make economic sense. They increase the level of economic efficiency in markets and thus must be judged to be economically desirable. However, in practice, all may not work out as planned. Governments may themselves fail. There are reasons why government intervention may in fact create further inefficiencies and thus not improve the use of scarce resources in a society.

Government Policies to Redistribute Income and Wealth

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If there are concerns that the free market leads to inequity then there are policies that the government can try to use to reduce inequality in wealth and income. There are three main types of policies that are available:

Government Regulation

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Regulation is the use of legal intervention to force consumers and producers to behave in certain ways. It is the use of government legislation in order to produce a more desirable economic outcome than that achieved by the free market.

Economists generally do not favour the use of government regulation. It is seen as a 'blunt' instrument. It forces consumers and producers to do (or not to do) certain things rather than to provide incentives. It can be seen as working against the market rather than with the market. However, governments may judge that regulation is sometimes required if a more desirable outcome is to be achieved.

Government Intervention

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When the market did not appear to work well (there was obviously market failure present) the the government intervened in order to try to improve the situation. Specifically, the following forms of government intervention were identified: