Chapter 14: THE FACTORS OF PRODUCTION AND SECTORS OF THE ECONOMY
What is production?
Production
This is the process that involves converting resources into goods and services. These goods and services are
provided to satisfy the needs and wants of people. These resources used during the production process are called
Factors of production. They are divided into four namely;
a) Land. These are natural resources which provide raw materials to production process. Examples include
sunlight, oceans, lakes, climate, minerals, and forests e.t.c. They can be divided into two
i) Non- renewable resources. This means that once they have been used they cannot be replaced. Examples
are; coal, oil, diamonds and limestone.
ii) Renewable resources. These cannot get finished as the nature replaces them automatically. Examples are;
land resources like fish, forests and water.
b) Labour. This is the workforce used during production. It involves both mental (brains) and physical
(muscles). Both are combined for an efficient production process. Human capital is the value of an individual
worker to a business. It is possible to increase the value of human capital through training and education. This
will help to make workers more productive.
c) Capital. These are man- made resources that help labour in production. These include; buildings, roads,
vehicles, machines, airports e.t.c. Capital can be of two types,
i) Working capital or circulating capital which refers to stocks of raw materials and components that will be
used in production. Also included are the stocks of finished goods that are waiting to be sold.
ii) Fixed capital. Factories, offices, shops, machines e.t.c. These are ones that help in furthering production and
not for sale.
d) Enterprise. This refers to the ability to organize other factors for an efficient production. Entrepreneurs are
people with this qualities to
i) Come up with a business idea. This might involve the production of a completely new product.
ii) Are business owners. They usually provide some money to help set up a business and are responsible for its
direction.
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iii) Are risk- takers. They are likely to risk their own money in the venture. If the business collapses, they may
lose some or all of their money. However, if the business is successful they may make a lot of profit.
iv) Entrepreneurs are responsible for organizing the other three factors of production. They have to buy
and hires of the three factors of production.
Labour and capital intensive production
In a production unit a firm may use either more workers or capital. When a firm used more of workers than the
machine then this is referred to as labour intensive technique. The one using more machine than workers will
then be referred as capital intensive technique.
Productivity
This is the amount of output that can be produced with a given quantity of resources. Labour productivity is the
output per worker. It can be calculated by dividing total output by the number of workers employed. If a car
manufacturer produced 24,000 cars in a year with a workforce of 2,000, labour productivity would be 12 cars
per worker (24,000/2,000). Productivity can be increased in a number of ways
i)
Introducing new working practices.
ii)
Introducing incentive schemes to encourage people to work harder.
iii)
Use new and more efficient machinery.
iv)
Retraining workers to become more skilled.
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SECTORS OF THE ECONOMY
In most economies people are employed in different industrial sectors. In developed countries a large proportion
of people work providing services. They may be fitness instructors, insurance clerks, shop workers or providing
services for businesses such as market research or it support. In less developed countries a large proportion of
people will be employed in the provision of food. They will work in farms or in the fishing industry. Some
countries like China employ large number of people in manufacturing.
a) Primary sector
This involves extraction of raw materials from earth. Production activities rely on this sector for their raw
materials. Some activities in this sector are:
i) Agriculture: involves a range of farming activities
ii) Mining and quarrying. Raw materials such as coal, tin, salt, limestone as well as agricultural activities like
farming are in this sector.
iii) Fishing by use of techniques like netting, trapping, angling and trawling. Also catching other seafood such
as mussels, prawns, lobsters, crabs, scallops and oysters.
iv) Forestry: Involves managing forests and tree planting to provide timber as a raw material for wood products.
b) Secondary sector
In this sector raw materials are converted to finished products. This is in (i) manufacturing where activities like
food processing, chemical and textile manufacturing, (ii) constructing of houses, roads, airports and railway
lines. Secondary sector activities also include metal working and smelting, automobile production e.t.c.
c) Tertiary sector
This sector involves the provision of services. There is a wide variety of services like
i) Professional services such as accountancy, legal advice and medical care.
ii) Transport such as train, taxi, bus and air services.
iii) Household services such as plumbing, decorating, gardening and house maintenance.
iv) Leisure services such as television, tourism, swimming pools and libraries
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v) Financial services such as banking, insurance, investment advice and pensions.
vi) Commercial services such as freight delivery, debt collection, printing and employment agencies.
De-industrialization
The number of people employed in each sector of the economy does not remain constant. Different sectors grow
and decline over time .In UK before the industrial revolution began, most of nation’s resources were used in the
production of primary goods. During nineteenth century secondary production started to expand rapidly as the
industrial revolution resulted in more resources being employed in manufacturing. In the last 60 years, the
tertiary sector has started to expand at the expense of manufacturing. De- industrialization is the decline in
manufacturing.
A number of reasons have been suggested to explain why the manufacturing sector declines in developed
countries while the tertiary sector grows.
i) There may be changes in consumer demand. People may prefer to spend more of their income on services
than manufactured goods. There has also been a decline in demand for the goods produced by some of the
traditional industries in manufacturing such as textiles.
ii) Recently there has been some fierce competition in the production of manufactured goods from developing
countries such as India, China and Brazil.
iii) As countries become more developed the public sector tends to grow rapidly. Since the public sector mainly
provides services, this adds to the growth of the tertiary sector.
iv) Advances in technology mean that employment in manufacturing falls because machines replace people.
Developed and developing countries
There are some significant differences in the structure of economies in developed and developing countries. In
most developed countries the primary sector has no relevance as is the tertiary sector. Only a small number of
workforce is employed in the primary sector. In many developing countries the secondary sector is now
growing with some expansion of the tertiary sector. For example many developing countries in Asia are
beginning to manufacture goods on a large scale and to export them to developed countries. In very
undeveloped countries, such as some African states, most people are still employed in the primary sector with
little growth in manufacturing and services sectors.
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Chapter 15: PRODUCTIVITY AND DIVISION OF LABOUR
The performance of an economy will improve if efficiency increases. Productivity is the amount of output that
can be produced with a given quantity of resources (rate at which goods are produced and the amount produced
in relation to the work, time and money needed to produce them). Firms can increase productivity by making
better use for land, labour and capital. Raising productivity in an economy is desirable because more goods can
be produced with the same, or fewer resources.
Productivity and wealth creation.
If an economy can improve productivity the country will become wealthier. This can be shown using a
production possibility curve.
The above figure shows that improvements in productivity will shift the ppc out to the right from ppc1 to ppc2.
This means that the economy can produce more of both capital and consumer goods with its given level of
resource. Improvement in productivity means that a country is making better use of its resource.
a) Improving the productivity of land
Land as one factor of production can be increased its productivity using following ways,
1) Fertilizers and pesticides. Fertilizers are chemicals given to plants to improve their health and appearance,
and raise crop yields. Pesticides are used to kill pests.
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2) Irrigation. This involves diverting water from natural sources such as rivers, lakes or streams, to land which
needs more water to become more productive. In crop production it is mainly used in dry areas and in periods of
rainfall shortage.
3) Drainage. Some areas of land are unproductive because they are flooded. Drainage can be used to make such
land more productive.
4) Genetically modified crops. Producing GM plants involves transferring genes and DNA from one organism
to another. This results in plants that are more resistant to disease and in some areas more attractive to
consumers.
5) Reclamation: In some circumstances, it is possible to create new land from oceans, riverbeds or lakebeds. If
more fertile land can be found to grow crops, the productivity of the earth’s land will rise.
b) Labour productivity
Labour productivity is defined as output per worker. It can be calculated by:
Labour productivity = total output/No. of workers
How to improve labour productivity
1) Education and training. This helps to improve quality of human capital by investing in the education
system. This might involve providing more equipment for schools and improving the quality of teaching. The
government can invest more in vocational education while firms can improve the productivity of their workers
by providing their own training.
2) Improving the motivation of workers. A motivated worker is always more productive. This motivation
may be financial or non – financial. Either way end result is a motivated worker. Some non – financial are,
i) Job rotation. An employee changing tasks from time to time. If people are trained to do different jobs, their
time at work may be more interesting because there is more variety. They may be less bored and therefore better
motivated.
ii) Team working. Organizing workers into small groups. People often work better in teams because they can
support and encourage each other.
iii) Empowerment. Giving workers the power to make decisions and solve problems. This helps to raise selfconfidence, makes the job more interesting and suggests to workers that they important.
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Others are promotions, recognition, medical schemes, soft loans, houses and annual trips for the workers.
3) Improved working practices. The way labour is organized and managed can affect productivity. Working
practices are the methods and systems of work that employees are expected to adopt when taking on a job. This
can be improved by adopting new practices, for example:
i) Changing factory layout. It may be possible to change the factory layout by repositioning work stations or
reorganizing the flow of production. This will improve productivity as workers may not have to move around as
much.
ii) Increasing labour flexibility. If workers are trained to do different jobs and can switch at short notice, then
this will improve labour productivity.
iii) Adopting lean production. This involves reducing waste in production. Workers may learn a variety of new
working practices when this system is adopted.
4) Migration: It might be possible to improve the quality of human capital by attracting skilled workers
from overseas. If immigrants are well trained and highly skilled then an economy is likely to become more
productive as a result of their presence in the labour market.
C) Capital and productivity
Improvements in productivity often arise because of the introduction of new technology. Improvements may
arise because more capital is employed, possibly at the expense of labour, or because new technology is more
efficient than existing technology. Each sector has ways to improve productivity.
1) Primary sector. In agriculture – use of tractors, combine harvesters, lifting equipment and irrigation
systems have helped to increase output, reduce waste and improve working conditions. Agrochemicals and
pesticides have raised crop yields and biological research has developed plants that are disease resistant.
2) Secondary sector. Many factories and production lines employ complex plants and equipments. This has
led to huge increases in productivity.
i) Robots. Robots have reduced the need to employ people in jobs that were boring and demotivating.
ii) Computer numerically controlled (CNC) machines. They are involved in cutting, pressing,
moulding, and sewing and welding.
iii) Computer integrated manufacturing (CIM). Computers are used to guide and control the production
of a good from start to finish.
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3) Tertiary sector. The provision of services has tended to be more labour intensive but the use of
technology is becoming more widespread.
a) Retailing. There is growth of more internets shopping in the last few years. The packaging used today is
lighter, stronger and more attractive.
b) Financial services. People carry out banking transactions online. Firms selling financial services can match
customers with the most appropriate product by feeding client information into a computer programme.
c) Health care. Developments in new vaccines and drugs have reduced suffering and cured serious diseases.
Surgeons can carry surgery using lasers, viewing the operation on a screen with the use of fibre optics.
The Division of Labour
This is where the production process is broken down into small parts/stages and each part done by a different
worker or group of workers. For instance in the manufacturing process, the finished product is the result of the
combined efforts of many specialized workers.
Specialization
Specialization is the production of a limited range of goods by individuals, firms, regions or countries e.g.
FORD manufactures cars, McDonalds is into fast food, DELL into computer; Kenya produces tea and Japan is
an exporter of manufactured goods.
Thus in specialization, people/firms/countries concentrate on particular task at which they are best and
exchange their surplus for other goods and services.
Advantages of Division of Labour for the Firm
I.
II.
III.
IV.
V.
VI.
‘Practice makes perfect’ people who perform the same tasks everyday become very skilled at
performing them and are able to do them faster (specialist workers become quicker at producing goods).
Saves time: There is no time wasted in switching of jobs and thus the momentum of production can be
maintained which leads to less wastage of time.
A greater use of specialist tools, machines and equipment is possible when workers are specialize. For
example, specialist CAD (Computer aided design) software is available for production designers, which
they can use to improve efficiency.
There is saving in tools and implements. When a worker has to perform only a part of a job, he does not
need to be supplied with a complete set of tools.
Efficiency is improved because, through specialization, workers can perform tasks more quickly and
more accurately. There are fewer mistakes and productivity (output per worker) will rise.
It has to led to enormous increases in the productivity of labour. This generates additional revenue for
firms.
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Advantages of Division of Labour for the individual worker
I.
II.
III.
IV.
V.
VI.
By creating a very large number of different jobs, the division of labour makes it easier for people to
find jobs which are well suited to their particular abilities and interest.
Higher pay for specialized work.
Workers can also learn new skills or enhance their existing ones.
Workers may enjoy more job satisfaction if they are highly specialized in a particular task.
Workers can enjoy a much shorter working week, since a larger output can be produced in a shorter
time.
People are able to enjoy higher living standards because mass production is often associated with lower
production costs and lower prices.
Disadvantages of Division of Labour for the individual Worker
I.
II.
III.
Boredom: Performing the same task over and over again may lead to boredom for the workers.
Greater risk of unemployment: in modern economies, the demands of the consumers are constantly
changing. New products become available and demand for older products declines. Where workers have
trained in only one skill, it might be difficult for them to find alternative employment if demand for the
product they produce falls.
Loss of craftsmanship: specialization has resulted to greater use of machinery in the production
process. Basic skills have been transferred from the hands of the worker to the machine. A worker does
not have the satisfaction of being able to say, ‘I made this’.
IV.
Lack of variety: Though the number of goods produced increases but they are identical or standardized.
V.
Low motivation for worker: Repeatedly performing the same task may lead to low motivation level for
the worker. The worker might not have the sense of fulfilling a complete task as he is performing only a
part of the job.
VI.
Lack of mobility: Due to specialization workers might find it difficult to switch between occupations.
Disadvantages of division of labour for the firm
I.
II.
III.
Worker interdependence: since each worker performs only a single task or a small group of tasks,
industrial action, such as a strike by one group of workers can stop production creating greater losses for
the firm.
Loss of profit: the boredom and monotony that results from repeating tasks may lead to production of
poor quality goods. These may not be able to be sold at sufficiently high prices thereby making the firm
go into a loss.
Greater cost of training workers.
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Chapter 16: BUSINESS COSTS, REVENUES AND PROFIT
Firms incur expenses when they produce goods and services. These expenses are called costs and are classified
by economists according to how they behave when output changes. For example, when output rises some costs
also rise. However, there are other costs which stay the same when output rises.
COSTS.
The following are the different types of costs that a firm may incur,
a) Fixed costs/overheads. These are costs that remain the same if when the business is not operating and
must be met. For example; Rent, Advertising, insurance premiums and interest payments.
b) Variable costs. These are the ones that will change with output. If output increases or reduces, then these
costs changes hence are called variable costs. For example, raw materials, packaging, fuel and wage for
casual workers.
c) Total costs. This is the sum total of all costs that the firm will have incurred at the end of production
process. This then means adding up the fixed and variable costs.
TC (total costs) = FC (fixed costs) + VC (variable costs)
d) Average costs. This is the cost of producing a single unit of output. This is calculated by using following
formula
Average cost =Total cost/quantity produced
e) The average cost curve. The curve for a business can be presented graphically as shown below. From the
diagram, it can be seen that up to a certain level, the costs are falling, an indication that the firm is doing
well. However at a certain amount the curve is seen rising again, an indication that the costs of
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producing a single product are increasing. At this level the firm is advised to stop more production of the
product to avoid more costs.
f) Total revenue. This is amount of money that a firm receives from selling its output. It is calculated by
multiplying the price of each unit by number of units sold.
Total revenue = Price x Quantity sold.
g) Profit and loss. One of the main reasons why firms calculate their costs and revenue is to work out the
profit or loss made. Profit is the difference between total revenue and total costs.
Profit = Total revenue - Total costs
Loss is also total revenue minus total costs, but at this point the total revenue will be less than total costs,
leading to the business’ expenses being higher than its total revenue
Loss = total revenue – total costs (the answer will bear a negative sign to show loss)
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Chapter 17: ECONOMIES AND DISECONOMIES OF SCALE
Setting up a business is very challenging. However, once a business is established the owners often want it to
grow. They want to increase the scale of the business. This means that they want to increase its size. One of the
benefits of increasing the scale of operation is that certain costs start to fall. Depending with the size, a business
can operate in a large scale or small scale. Small scale is when the business has
i.
Small market hence its production is said to be small
ii.
Has les capital to invest in its operation
iii.
Uses more of labour technique hence production is slow and costly.
Economies of scale
Big firms can usually produce goods more cheaply than small firms. The size of a firm has an important effect
on the average costs of production. To start with, as a firm increases its size, average costs start to fall. This is
due to economies of scale. Economies of scale is the fall of average costs of a firm due to its increase
(expansion) in its size. In other words economies of scale are the advantages of operating in large scale.
However, as the firm continues with its operation; it reaches a point whereby more expansion will have a
negative effect on its average costs. Here the firm will start experiencing diseconomies of scale as the average
costs are higher.
Economies of scale for a firm can either internal as well as external.
Internal Economies of Scale
These are the advantages that a particular firm will experience due to its large operations. Hence being referred
to as internal as are for the firm only. They include:
a) Purchasing economies. Big firms that buy large amounts of resources can get cheaper rates. Suppliers offer
discounts to firms that buy raw materials and components in bulk. This is similar to consumers buying multipacks in supermarkets. They are better value of money. Bulk buying in this way is a purchasing economy.
b) Marketing economies. A large firm will enjoy this economy as is able to sell its products easily due to the
fact that its known, hence can introduce a new product and make big sale. At the same time a very large firm
may find it cost effective to operate its own fleet of delivery vehicles, which would be cheaper than paying a
distributor.
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c) Technical economies. Large firms are said to enjoy this economy as will be effective and also make use of
machinery unlike small firms. Introduction of CCTV, CAD (computer aided design) are examples of advanced
technology that large firms will benefit from but not small firms. All these will help large firms cut their costs
of operation.
d) Financial economies. Large firms enjoy advantages when they raise money. They have a large variety of
sources to choose from. They can borrow from banks, government institutions unlike small firms which may
not get such advantage easily.
e) Managerial economies. As firms expand they can afford specialists managers. A small business may employ
a general manager responsible for finance, human resources, finance, marketing and production. The manager
may find this role demanding and may be weak in some fields. A large firm can employ specialists in these
fields. As a result efficiency is likely to improve and average costs fall.
f) Risk – Bearing economies. Larger firms are likely to have wider product ranges and sell into a wider variety
of markets. This reduces the risk in business. For example, a large firm sells variety of products in different
markets such that if one product or a market fails the others will help the affected unlike a small which has
invested in only one product or focuses in one market.
External Economies of Scale
These are the benefits that all firms in an industry enjoy because of their large size. They are,
1) Skilled labour. If firms concentrate in a particular area, there is likely to be a buildup of labour with the skills
and work experience required by that industry. As a result training costs will be lower when workers are
recruited from the pool.
2) Infrastructure. If a particular industry dominates a region the roads, railways, ports, buildings and other such
facilities will be shaped to suit that industry’s needs.
3) Ancillary and commercial services (access to suppliers). An established industry in a region will encourage
supplier in that industry to set up close by. Specialist marketing, cleaning, banking, insurance, waste disposal
and distribution are likely to be attracted to that area. All firms in the industry will be able to benefit from their
services.
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4) Co-operation (Similar businesses in the area). When firms in the same industry are located close to each
other they are likely to co-o operate so that they can all gain. For example, they might join forces to share the
cost and benefits of research and development centre.
Diseconomies of scale
If a firm expands beyond the minimum efficient scale average costs start to rise. This is because the firm suffers
from diseconomies of scale. Average costs start to rise because aspects of production become inefficient. A firm
may experience this type for diseconomies of scale,
1) Bureaucracy. In a large firm things are done in accordance of set structure. This means any step taken must
be with consultation to the entire administration. In most cases, this affects the operation because of many
people to be consulted even in areas which need faster decision. This is because of too many managers to be
communicated to. This is a disadvantage.
2) Labour relations. If a firm becomes too big relations between workers and managers may worsen. There may
be lack of empathy for workers and they may become demotivated. As a result there may be conflicts and
resources may be wasted resolving them.
3) Lack of Control. A very large business may be difficult to control and co-ordinate. Thousands of employees,
billions of pounds and dozens of plants all over the world can make running a very large organization
demanding. There may be a need for more supervision which will raise costs.
4) Communication problems: Large organisations employ many people. Workers in different countries speak
different languages and have different cultures. There are also time differences between different global
operations. This can make communication in an organization challenging.
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Chapter 18: COMPETITIVE MARKETS
Not all markets are the same. In some markets lots of firms compete with each other to sell their goods to
customers. They use a variety of methods such as advertising, promotions and special offers to encourage
customers to buy their products. In other markets a firm may face very little competition. Competition is the
rivalry that exists between firms when trying to sell goods in a particular market. In some markets there is a lot
of competition. In a competitive market there are likely to be some common features,
a) A large number of buyers and sellers
b) The products sold by each firm are close substitutes for each other.
c) Low barriers to entry. This means that it is fairly easy to break into the market. For example, it is not
technically difficult or it does not require too much capital.
d) Each firm has virtually no control over the price charged. For example, if a firm tries to charge more
than its rivals it is likely to lose business.
e) There is a free flow of information about the nature of products, availability at different outlets, prices,
methods of production and the cost and availability of production factors.
Competition and the firm
Generally firms do not welcome competition. Most firms would prefer to dominate the market and operate
without the threat of rivals, if there is no threat from competition, a firm can usually charge a higher price.
There is also les pressure to be efficient and innovative. This reduces the effort needed to survive and be
successful. When faced with competition, firms have to offer products that give consumers value for money.
This involves:
a)
b)
c)
d)
Operating efficiently by keeping costs as low as possible.
Providing good quality products with high levels of customer service.
Charging prices which are acceptable to customers.
Innovating by constantly reviewing and improving the product.
One aspect of innovation is product differentiation. This means that firms try to persuade consumers that their
product is different from those of rivals. For example, in most UK towns and cities there are likely to be several
Indian restaurants competing for diners. However, although each one is offering Indian cuisine, there are likely
to be differences in the service supplied by each restaurant. There may be differences in menus, food quality,
ambience, décor, customer service and location. Over time each restaurant may be striving to develop their
product so that it suggests to customers that it is different and better than rivals.
The main disadvantage to a firm operating in a competitive market is that the amount of profit made will be
lower and will be limited. In markets where competition is fierce, prices are likely to be lower and the potential
for profit also lower. The total profit in the industry has to be shared between many firms.
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Competition and the consumer.
Most consumers would argue that competition in business is desirable. This is because of the advantages that
consumers enjoy from healthy competition.
a) Lower prices. In a competitive market firms cannot overcharge consumers. If one firm tries to raise price
it will lose a lot of its business. This is because the market is full of good substitutes and consumers can
easily switch from one supplier to another.
b) More choice. Competition means there are many alternative suppliers to choose from. Where possible,
each supplier is likely to differentiate its product from those of rivals. This helps to widen choice even
more. Competitive markets will also have a constant stream of new entrants offering fresh ideas and even
more choice.
c) Better quality. Firms that offer ‘shoddy’ goods in a competitive market will lose business. Consumers are
rational and will look for value for money. This means they consider both the price and the quality of
products when deciding what to buy. Therefore in a competitive market firms are under pressure to
improve quality.
There are also disadvantages to consumers of a highly competitive market
i) Market uncertainty. It could be argued that there may be some uncertainty or disruption in competitive
markets. This is because unprofitable firms eventually leave the market. This means that some consumers might
be inconvenienced. For example, a struggling hair stylist may have small number of regular and satisfied
customers. But if the business collapses, these customers would have to find an alternative. They may have
spent years developing a good relationship with the failed hair stylist. In competitive markets there are always
firms leaving the market, which can result in uncertainty.
ii) Lack of innovation. It could be argued that innovation in a competitive market might be lacking. This is
because firms make less profit in competitive markets. As a result, they may not have enough profit to invest in
product development.
Competition and the economy.
One of the main advantages of competitive markets is that resources will be allocated more effectively. This is
because firms have to operate efficiently to survive. They are under pressure to keep their costs down so that
their prices are lower. To do this they buy cheapest resources available, choose the most efficient production
method, operate from the most cost – effective location and ensure they all factors are working as productively
as possible. The economy will benefit from this resources are less likely to be wasted.
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It is also argued that firms in competitive markets are more innovative. This is because innovative firms can get
a competitive edge over their rivals. This means that firms will develop new products, new production
techniques, new technologies and new materials. The economy will benefit from this because people will have a
better standard of living.
*One main disadvantages of a highly competitive market is that resources might be wasted. One of the
reasons for this is because some factors of production are immobile. When firms cease trading in a competitive
market resources are released for alternative uses. People are made redundant and resources like machines,
tools, equipments, land and buildings come for sale. Some of the machinery and equipment used by a failed
firm may be so specialized that it has no other use. Therefore it must be scrapped, which is wasteful.
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Chapter 19: ADVANTAGES AND DISADVANTAGES OF LARGE AND SMALL
FIRMS
There were an estimated 4.7 million private sector businesses in the UK at the start of 2007 – an increase of
212,000 0n the start of 2006. These businesses employed an estimated 22.7 million people and had a combined
annual turnover of about $28,000 billion. Around 99% of all businesses in the UK are either small – or mediumsized. In some markets, small firms and large firms exist together.
How to measure the size of a firm.
Several methods can be used to measure the size of a firm
a) Turnover. Firms with high turnovers will tend to be larger than those with small turnovers.
b) Number of employees. Firms with large numbers of employees tend to be larger than those with
relatively few employed.
c) The amount of capital employed. This measure is based on the amount of money invested in the
business. Generally, more money will be invested in larger firms.
Small firms
The vast majority of firms in many economies are small. The number of small firms along with self –
employment, has also grown in the last three decades. The government in the UK has encouraged the
development of small businesses. The growth in the tertiary sector has also helped. This is because the
provision of many services can be undertaken more effectively on a small scale.
Advantages of small firms
a) Flexibility. Small firms can adopt to change more quickly. This is because the owners, who tend to the
main decision – makers, are actively involved in the business and can react to change.
b) Personal service. As a firm gets bigger it often becomes difficult to offer customers an individual
personal service. Some people prefer to deal with the owner of the firm directly and are prepared to pay
a higher price for the privilege.
c) Lower wages costs. Many workers in small firms do not belong to trade unions. As a result their
negotiating power is weaker and the owners are often able to restrict wages to the legal minimum wage.
d) Better communication. Since small firms have fewer employees, communication tends to be informal
and more rapid than in larger organization.
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e) Innovation. Although small firms often lack resources for research and development, they may be
surprisingly innovative. One reason for this is because small firms face competitive pressure to innovate.
Disadvantages of small firms
i) Higher costs. Small firms cannot exploit economies of scale because their output is limited. Consequently
their average costs will be higher than their larger rivals.
ii) Lack of finance. Small firms often struggle to raise finance. Their choice of sources is limited. For example, a
sole trader cannot sell shares to raise more finance. They are considered to be more risky than larger firms by
financial institutions and other money lenders.
iii) Difficult attracting right staff. Small firms may find it difficult to attract highly qualified and experienced
staff. One reason is because they lack resources. They may not be able to afford the wages or training that high
quality employees required.
iv) Vulnerability. When trading conditions become challenging small firms may find it more difficult to survive
than their larger rivals. This is because they do not have the resources to draw on when the economy takes a
turn for the worse.
Large firms
Advantages
i) Economies of scale. The main advantages to large firms are that their average costs are likely to be lower than
those of small rivals. They can operate in large scale plants and exploit economies of scale, for example they
can get cheaper supplies of materials and components because they buy in bulk.
ii) Market domination. Large firms can often dominate a market. They have a high profile in the public eye than
small firms and benefit from such recognition. This means they can charge higher prices which will enable them
to make higher profits.
iii) Large scale contracts. There are both small firms and large firms in the construction industry. However, a
small firm could not compete with a large firm for a contract to build a new motorway for the government. This
is because small firms do not have resources to carry out the work.
20
Disadvantages
i) Too bureaucratic. Large firms sometimes become overwhelmed by their administration systems. For
example, decision - -making can be very slow in large firms because so many different people have to be
consulted before a decision can be made.
ii) Co-ordination and control. A very large business may be difficult to control and co-ordinate. Thousands of
employees, billions of pounds and dozens plants all over the world can make running a very large organization
demanding.
iii) Poor motivation. In very large organizations people can become alienated. The organization may become so
large that the effort made by a single employee seems insignificant. The personal contact in large organizations
may be lacking and this can result in poor motivation.
Factors influencing the growth of firms
i) Government regulation: It is the interests of consumers and the economy in general to have healthy
competition between businesses. Competition will encourage innovation, improve efficiency and prevent
consumer exploitation. Consequently, government will monitor business activity and ensure that individual
markets are not dominated by one or a small number of firms. In this role, the government may sometimes
prevent the growth of firms to stop them becoming too big.
ii) Access to finance: Businesses need money for acquisitions, build new factories, open new stores or develop
new products. Firms that can persuade money lenders and other investors to provide finance are in a better
position to grow.
iii) Economies of scale: Main motives for growth is to reduce average costs. As a firm grows, average costs
will fall because it is possible to exploit economies of scale.
iv) The desire to spread risk: Risk can be reduced by diversifying. Selling into new markets and developing
new products means that if one venture fails, success in others can keep the firm going.
v) The desire to take over competitors: One way to grow a business is to take over rivals in the market. This
is a quick way of growing and helps to reduce competition.
21
Reasons firms stay small
Sometimes a firm is unable to grow because there are obstacles which prevent it from doing so.
i.
ii.
iii.
iv.
v.
Limited market (size of the market). The market for some goods is small and as a result large
firms cannot exist. For example, a shop supplying a small rural village cannot grow very big because
the number of customers is limited. Only if the village expands can the firm grow or the market for
luxury yachts is limited.
Lack of finance. Sometimes the owners of a business will want to grow but cannot attract enough
finance to fund growth. Financial institutions are often afraid to lend money to small businesses
because they are considered too risky.
Aim of the entrepreneur. In some cases firms do not grow because their owners are content with
the current size. They may be making enough profit to satisfy their needs and do not want the
responsibility of taking on more workers, expanding operations and borrowing more money.
Nature of the market (Low barriers to entry). In some markets such as grocery, painting and
decorating, hairdressing and taxi driving, the set – up are relatively low. There is little to discourage
new entrants joining the market. Fierce competition stops any single firm from joining.
Diseconomies of scale. Once a firm reaches a certain size any further growth results in diseconomies
of scale. If a firm expands beyond the minimum efficient scale average costs start to rise. A firm is
not likely to grow any further if costs start to rise because it would have to charge more for its
output.
22
Chapter 20: MONOPOLY
In some markets there is no competition. As a result, the market may be dominated by one firm. The firm that
dominates the market is said to be a monopolist. It is often said that where there is a monopoly, consumers will
be exploited.
What is monopoly?
A pure monopoly exists when a market is supplied by just one producer. However, there is a legal monopoly. In
UK for example, if a firm has 25% or more of a market, it is said to be a monopolist. Monopoly is a situation
where there is one dominant seller in a market.
Features of monopoly.
In markets dominated by one seller there are some common features.
A) Barriers to entry. Monopolies often exist because competition is discouraged. In some markets there are
obstacles that prevent new entrants from trying to compete. Barriers to entry are a common feature in monopoly
and the main ones are;
i) High start-up cost barriers. This is when the cost of setting up a firm is too high and therefore the one
which is in operation has no competitor as new one cannot meet the financial requirements to set a similar
business. For example, construction of a railway line.
ii) Legal barriers. In some markets, it is possible to exclude competition legally. This might happen when a
government awards a contract to a single firm to provide a particular service. One way is to obtain a patent. A
patent is a license that prevents firms copying the design of a product or a new piece of technology. The new
developer can be the sole supplier in the market for a period of up to 20 years. This is to enable the firm to
recover the costs incurred during research and development. For example in medicine, an inventor of a drug
needs the right to enjoy the profit alone for a set time.
iii) Technology: if an established and dominant firm has access to complex or up-to-date technology, this can
act as a barrier to entry. For example: if a manufacturer develops a sophisticated new machine to improve
efficiency in production, its average costs will fall and rivals might be forced out of business.
iv) Marketing budgets. Monopolies often have strong brand names. This makes it difficult for new entrants to
compete because their products will be unfamiliar and may not be trusted by consumers. Dominant firms often
spend large amounts of money on advertising to reinforce their brand names. This makes it even harder for new
23
entrants. A monopolist might lower prices temporarily if it thinks a new entrant is about to join the market. This
is called predatory pricing and will make it hard for the new entrant to compete.
b) Unique product. The product supplied by a monopolist will be highly differentiated. There will not be
another exactly like it. For example, where a pure monopoly exists there will be no rivals at all. Therefore,
the product supplied is the only one available. There is no choice whatsoever for the consumer.
c) Price makers. They are able to control the prices they charge. Monopolists are sometimes called price
makers. They can force prices up by restricting the quantity supplied in the market. However, they cannot
fix both prices and quantity. If they try to sell larger quantities the price will be forced down.
d) One business dominates the market: in markets dominated by one seller, a monopoly is said to exist.
However, a monopoly can exist when one firm dominates the market even though there may be others
operating alongside.
The advantages of monopoly
i) Innovation. Monopolies are large and make high profits; they have the resources to invest in research and
development. As a result they are able to develop new products and new technologies from which consumers
will benefit.
ii) Economies of scale. Their average costs are lower. As a result they may be able to supply products to
consumers at lower price.
iii) Efficiency: In some markets, a firm may enjoy all benefits related to a monopoly because this firm has no
competitor. Some of natural monopolies may be as a result of:
a) Very high fixed costs involved in setting up such a firm.
b) If there will be a duplication of resources.
c) A resource happens to be owned by one particular firm.
iv) International competitiveness. If a firm has a monopoly in the domestic market, it can build strength and
compete more effectively with competition from overseas. This will help to increase employment and national
income in the domestic economy.
24
Disadvantages of monopoly.
i) Higher prices. A firm that dominates a market is able to charge more for its products. Monopolies will tend
to restrict output in order to force up the price.
ii) Restricted choice. Consumers will not have variety of goods to choose from as only one supplier for the
product.
iii) Lack of innovation. The firm dominates the market and is able to prevent or restrict entry; there is no need
to develop new products. This is because consumers are forced to buy the existing products.
iv) Inefficiency. The firm does not face competition therefore there is no incentive to keep costs down. This
leads to diseconomies of scale.
25
Chapter 21: OLIGOPOLY
What is oligopoly?
This is a market which is dominated by a few large producers.
Features of oligopoly.
i) Few firms. Market is often dominated by just few firms.
ii) Barriers to entry. The dominant firms in the market are likely to benefit after having invested heavily in
their brands. This may discourage other firms joining the market.
iii) Price competition/Price rigidity. In many oligopolistic market prices stay the same for quite long periods
of time. Price is normally set by market leader and others just follow. This pattern is because firms are afraid of
a price war. If one firm cut prices others in the market have to do the same or they will lose sales.
iv) Non-price competition. Since firms are keen to avoid price wars, they compete using advertising and
promotions such as coupons, loyalty cards, competitions and free offers. Branding is a common feature in some
markets. This is where firms give products a name, term, sign or symbol. This helps consumers identify them
more easily. Firms then try to create brand loyalty through advertising. Product differentiation is also common.
This where the firm tries to persuade consumers that their brands are different from those of competitors.
v) Economies of scale. Firms in an oligopoly will benefit from economies of scale because they are large-scale
producers. As their output increases average costs fall. This helps them increase profits.
vi) Collusion. This is where the dominant firms in the industry set up agreements to restrict competition. For
example, firms might agree to share a market geographically. This means that each firm agrees to supply a
particular region and not compete in other. Another form of collusion is price fixing, where all firms agree to
charge the same price. In many countries collusion is illegal because it exploits consumers.
vii) Different products: in most oligopolistic markets, the products sold by each of the large firms will be very
close substitutes for each other. However, there are likely to be some differences. Also each manufacturer
produces a wide product range where each product is different and aimed at a slightly different market segment.
26
Advantages of oligopoly
a. Economies of scale. Dominant firms are able to exploit economies of scale as their average costs falls.
It is possible that some of the cost savings will be passed on to consumers in the form of lower prices.
b. Price rigidity (price wars). Prices are fairly stable for quite long periods of time. This is helpful for
consumers because it promotes more certainty.
c. Choice. The market ensures that consumers are provided with some choice. New brands provide
consumers with new products and ever growing choice in the market. Choice is also provided by the
small producers that supply to niche markets.
d. Quality: since non-price competition is common in oligopolistic markets, one method firms can use to
differentiate their product is to make it better.
e. Innovation: since large and powerful firms dominate the markets, they can invest in R & D to come up
with new products or new model that is superior to their rival.
Disadvantages of oligopoly.
a. Collusion. If firms agree to restrict competition by price fixing, for example, consumers will end up
paying higher prices.
b. Lack of choice. If a market is shared geographically, consumers will lack choices as each area will only
be supplied by one firm.
c. Cartel. Dominant firms may join together and agree on pricing or output level in the market. This will
make them behave a monopoly.
d. Advertising costs. If too much money is spent on advertising, the cost will be passed on through high
prices. Many consumers might prefer that their products be cheaper and less spent on advertising.
27
Chapter 22: THE LABOUR MARKET
The demand curve for labour
The price of labour is wage rate. The demand curve for labour slopes downwards from left to right as wage rate
and demand for labour are inversely related ( as wages rise it leads to higher production costs, which leads to
firms cutting production and hence fewer workers are needed).
Wage
Rate
W1
W2
DL
Q1
Q2
Number of workers
Factors affecting demand for Labour
Apart from wage rate the other factors that affect demand for labour include:
I.
II.
III.
IV.
Demand for the commodity produced by labour: demand for labour is a derived demand. This means
that the demand for labour is derived from the demand of goods and services produced by workers.
Productivity of labour: productivity refers to output per worker per hour. The higher the productivity
the higher the demand for labour.
Complementary labour costs: demand for labour may also be affected by other costs linked to
employing labour. These include National insurance contributions, recruitment and selection costs, costs
of pension’s etc. If these rise, demand for labour is likely to fall.
Availability of substitutes: if capital becomes cheaper, firms may seek to replace some of their workers
by machines, hence reducing the demand for labour.
NB
Changes in the above factors will have an effect on the demand curve for labour e.g. if there is an increase in the
demand for air travel, there will be an increase in demand for cabin crews. This will shift the demand curve for
cabin crews to the right.
28
Wage Rate
W
DL2
DL1
QL1
QL2
Quantity (workers)
Supply of labour
Is the measure of numbers of workers which are willing and able to work at given wage rate.
THE SUPPLY CURVE OF LABOUR
The supply curve of labour slopes upwards from left to right as wages and the quantity of labour supplied are
proportionately related. The supply curve of labour is upward sloping because as the wage rate increases an
increasing number of people are willing to work. Work is more worthwhile at higher wage rates.
Wage Rate
SL
Quantity (workers)
29
Factors affecting Supply of Labour
The labour supply refers to the total number of hours that labour is willing and able to supply at a given wage
rate. It can also be defined as the number of workers willing and able to work in a given occupation or industry
for a given wage.
The total supply of labour in the economy is influenced by the following factors:
I.
II.
III.
IV.
V.
VI.
The size and composition of the population: the larger the population size, the greater the potential
supply of labour. Apart from the total size of population, other population demographics include; the age
distribution of the population, school leaving age and retirement age that will influence the size of the
labour. For instance in most developed countries they have an aging population which reduces the
labour supply. If the school leaving age is reduced the supply of labour is increased, if the retirement age
is increased the supply of labour will also increase.
The size of the labour force: The labour force is defined as the number of people either in work or
actively seeking paid employment and available to start work. This is not the same as the population of
working age, because some of the population in the working age would be economically inactive for
instance some will be in full time education, others would have retired early or some may be disabled.
The hours worked: the hours labour works will influence the supply of labour. The number of hours
worked is influenced by the length of working week, the number of holidays and the number of days lost
through industrial action.
Role of women in the economy: in many countries, there has been a change in the role of women. An
increasing number of females have abandoned the traditional role of housekeeping and child rearing and
opted to work and pursue careers. This has increased the size of the working population.
A country’s Policy on Labour immigration: if a country adopts a policy of opening its doors to
immigrants then it will have an increase of its labour supply.
Retirement age: if a country rise retirement age there will be more supply of labour and vice versa.
KEY FACTORS AFFECTING LABOUR SUPPLY TO A PARTICULAR OCCUPATION
The supply of labour to a particular occupation is influenced by a range of monetary and non-monetary
considerations.
1. The real wage rate on offer in the industry itself – higher wages raise the prospect of increased factor
rewards and should boost the number of people willing and able to work
2. Overtime: Opportunities to boost earnings come through overtime payments, productivity-related pay
schemes, and share option schemes and financial discounts for employees in a certain job.
3. Substitute occupations: The real wage rate on offer in competing jobs is another factor because this
affects the wage and earnings differential that exists between two or more occupations. So for example
an increase in the relative earnings available to trained plumbers and electricians may cause some people
to switch their jobs. In recent times, the British media has been fond of stories of people leaving jobs in
academia (including high level university research) and moving in household services because the basic
rates of pay and potential earnings are so much greater.
30
4. Barriers to entry: Artificial limits to an industry’s labour supply (e.g. through the introduction of
minimum entry requirements or other legal barriers to entry) can restrict labour supply and force average
pay and salary levels higher – this is particularly the case in professions such as legal services and
medicine where there are strict “entry criteria” to the professions. Indeed these labour market barriers
are partly designed to keep pay levels high as well as being methods of maintaining the quality of people
entering these professions
5. Status: the high status achieved in some jobs e.g. doctors, pilots etc. makes them attractive.
6. The convenience and flexibility of hours: long and unsociable working hours are likely to discourage
potential workers, whereas flexibility of hours may attract people to a given occupation.
7. Job security: the more secure a job is the more attractive it is likely to be, hence increasing the supply
of labour to it.
WAGE DETERMINATION
The equilibrium wage rate is determined by the interaction of the supply and demand for labour. The
equilibrium wage is determined where the demand and supply of labour are equal.
SL
Wage Rate
W
DL1
DL
Q
Number of Workers
An increase in demand for labour as indicated by a shift from DL to DL1 causes a rise in the wage rate from
W to W1.
WAGE DIFFERENCES BETWEEN DIFFERENT OCCUPATIONS
I.
II.
III.
Workers in trade unions may get higher wages than those who are not.
In some countries wages in the public sector are lower than those in the private sector. This might be
because public sector jobs may be considered more secure or other benefits e.g. generous pensions
which may compensate for the lower wages.
Nature of the job – some jobs such as bomb disposal, mine clearance and deep sea diving are
dangerous. Others such as sewerage management, slaughterhouse etc. can be unpleasant. The supply of
workers into such occupations is therefore limited and as a result wages are forced up.
31
IV.
V.
Wages will tend to be higher in expanding industries. As an industry expands, demand for labour in
that industry rises. This forces wages up.
There will be a greater supply of workers in jobs which require no skill, training, qualifications,
experience or special talent. As a result wages for laborers, shop workers, cleaners, waiters etc., will be
relatively low.
NB
Wage Differentials
These are differences in rates of pay received by people in different occupations. They tend to arise because
different jobs require different levels of ability, education, training, experience, responsibility and risk taking.
Between countries, wage rates may differ due to different levels of minimum wage. However, the most
important reason for wage differentials is the difference in the demand for and supply of labour.
Quality of labour: qualifications and training
Although the price of labour is important for employers when making decisions about how many workers to
hire, the quality of labour is also important. Generally, employers will want to recruit people who are literate,
numerate and with good communication skills. If labour supply is well educated and trained. It will be more
productive.
The government and firms must thus invest in education and training in order to improve the productivity of
labour.
32
Chapter 23: THE IMPACT OF CHANGES IN THE SUPPLY AND DEMAND FOR
LABOUR AND TRADE UNION ACTIVITY IN LABOUR MARKETS
Changes in the demand for labour
The demand for labour in a particular industry is not likely to remain constant over a long period of time. For
example, since the demand for labour is a derived demand, if there is sa fall in the demand for a particular
product, there will be a fall in demand for workers involved in the production and selling of that product.
In some countries, the demand for certain types of labour has been growing in recent years. For example, in
china demand for factory workers in manufacturing has increased. This increase in the demand for factory
workers is shown by a shift in the demand curve for labour to the left from D to D. Wages raise from W to W1
and number of workers increased from Q to Q1.
Changes in supply of labour
The supply of labour can change for a number of reasons. For example: growth of population, rise in
retirement age, female participation, migration etc.
If there is an increase in supply of labour, then supply curve of labour will shift to the right from S1 to S 2,
wages decreases from W 1 to W2 and and quantity of people employed increased from Q1 to Q2.
33
TRADE UNIONS
Trade unions are organizations that exist to protect the interests of the workers. The workers come together and
form an organization to protect their interests.
Aims of a trade union




Negotiate pay and working conditions with employers.
Provide legal protection for members such as representation in court if an employee is fighting a case
against an employer.
Put pressure on the government to pass legislation that improves the right of workers.
Provide financial benefits such as strike pay whenever necessary.
In order to improve the welfare of its members, the trade union needs to negotiate with, and put pressure on,
employers, other unions, other workers and government.
Before trade unions existed, a worker had to negotiate and bargain with an employer on his own. Employers
were almost in a more powerful position than workers. They could sack workers and hire others. The sacked
worker would find it difficult to find another job. By combining in unions, workers could begin to match the
power that employers and government had over them.
This introduced collective bargaining, where workers’ representatives negotiated with employers’
representatives.
The trade unions, success in bargaining for higher wages depends on:



Whether or not they can call for industrial action.
Whether or not they can engage in collective bargaining.
PED of the good produced
34



PED of labour.
The productivity of labour.
The level of unemployment.
In the 1960s and 1970s, many trade unions in the UK were involved in disputes with employers. There was a
considerable amount of disruption to production and some people thought that trade unions were responsible.
Some people felt that unions had become too powerful. As a result, in the 1980s, the government passed
legislation to limit the power of trade unions.
For example:
 Required trade unions to have a secret ballot before a strike, a strike could only go ahead if the
majority of the members voted in favour.
 Allowed businesses to sue for compensation if trade unions did not obey the law.
 Banned secondary picketing
 Made closed shops illegal
Secondary picketing
The action of workers, usually during a strike, seeking to protest against the employer's acts or omission and
persuade other workers not to work. It will only be lawful if done peacefully at the employees' own place of
work during a trade dispute, in order to persuade others not to work or communicate information about the
trade dispute. Picketing another's place of work it is secondary picketing and is unlawful.
Closed Shops Company or factory where all the workers must belong to a particular trade union.
Effects of trade unions on wages and employment
A strong trade union may be able to force wages up in some labour markets. If a union has the full support of its
members, it can put pressure on employers during wage negotiations. When this happens, unions are able to
affect wages and employment levels.
If trade union becomes involved, it will force wages up and as a result fewer workers will be employed.
However, job losses might be avoided:
 If labour productivity rises at the same time
 If employers are able to pass on wage increase to customers in the form of price rises.
 If profit margins are reduced
35
Chapter 24: GOVERNMENT INTERVENTION
The need for government intervention
Government intervention is where the government becomes involved in a situation in order to help deal with a
problem. For example: the environment might be damaged, workers exploited, consumers might be overcharged
etc.
One of the roles of the government is to provide a legal system in which businesses can operate and a system of
incentives and penalties to ensure that ‘at risk’ groups are protected.
However, too much intervention will discourage enterprise and reduce foreign investment. This might restrain
growth in national income, reduce job creation, decrease tax revenues and reduce consumer choice.
1. Government intervention to deal with externalities. Refer to chapter 13(pages 89-96) notes.
2 Government regulation of competition
Promoting competition
One of the roles of the government in the economy is to promote competition and prevent anti-competitive
practices. This includes:
a. Encourage the growth of small firms
If more small firms are encouraged to join markets there will be more competition. To do this the
government can provide business start-up schemes to provide funds for new businesses when they first
set up. Also provide information and advice on running a business and obtaining finance. Taxes are also
lower for small firms.
b. Lower barriers to entry
If barriers are lowered or removed then more firms will join a market making it more competitive. For
example reducing the requirements for one to start a business.
c. Introduce anti-competitive legislation. In many countries, legislation exists to prevent practices that
result in reduced competition. For example, in India the Competition Commission of India (CCI) acts as
a regulator to:
 Eliminate practices that reduce competition
 Promote and sustain competition
 Protect the interest of consumers
 Ensure freedom of trade
Legislations will protect the consumers from exploitations by monopolists. Mergers and restrictive practices.
36
3. Limit monopoly power
If monopolies exist in markets, they need to be carefully monitored. Without government intervention, the
temptation to exploit consumers may be too great for some organisations.
In many countries, there is an appointed body that is responsible for overseeing monopolies. For example, in
china the State Administration for Industry and Commerce (SAIC) is responsible for developing and enforcing
legislation relating to the administration of industry and commerce in the country.
4. Protect consumer interests
Consumers want to buy good quality products at a fair price and receive good customer service. They want
information about products that is accurate and clear. They do not want to buy goods that may be dangerous,
overpriced or sold to them on the grounds of false claims.
Without government intervention, some firms may exploit consumers by using anti-competitive practices or
restrictive practices. These includes:
1. Increasing prices to higher levels than they would be in a competitive market.
2. Price fixing where a number of firms agree to fix the price of a product to avoid price competition.
3. Restricting consumer choice by market sharing stocks rival products.
4. Raise barriers to entry by spending huge amounts of money on advertising. Dominant firm might lower
its price for a temporary period. This would be difficult for a new entrant to get established in the
market. Once the new entrant disappears the price would go up again.
In some countries, there is a lot of consumer legislation. Such legislation covers a variety of consumer issues
and aims to protect consumers from some of the practices mentioned above. For example in UK:
Sale of Goods Act 1979: This states that products sold by businesses must be of an appropriate quality and fit
for purpose. For example: customers cannot be sold paint that peels off in the sun after 1 month or a water proof
coat that lets in the rain.
Food Safety Act 1990: This law means that food should be fit for human consumption and comply with safety
standards. For example: a business should not sell frozen food if it has defrosted and been refrozen or fresh
produce that is decaying.
5. Control mergers and takeovers
In order to ensure that markets remain competitive, governments often monitor mergers and takeovers. Mergers
and takeovers usually results in a reduction of competition in a market. Consequently, large mergers or
takeovers are likely to be investigated by government bodies. They be blocked or allowed to go ahead if certain
conditions are met.
37
Government intervention in the labour market
One way in which government interferes in the labour market is to set a minimum wage. This involves passing
legislation (law), which means no employer is allowed to pay their workers below a certain amount (minimum
amount per hour which most workers are legally entitled to be paid).
Reasons for minimum wage legislation
a. To prevent exploitation of workers especially disadvantaged workers e.g. women, ethnic minorities and
low-income families benefit from minimum wages since they reduce inequality and increase fairness.
b. To improve the living standards of the poor. In many countries minimum wages are often part of a
broad strategy to end poverty.
c. To encourage employees to increase labour productivity. Higher wages may serve to motivate many
workers. If workers know that their work is going to be rewarded with higher pay, they may work
harder.
d. To encourage the unemployed to look for work.
Effects of minimum wage legislation on wages and employment
SL
Wage Rate
W Min
Minimum Wage
We
DL
Q2
Qe
Q1
Quantity Demanded and Supplied of
Labour
If the government imposes a minimum wage of W min, which is above the equilibrium wage, by law all workers
will at least receive W min. At this wage rate the quantity supplied of labour will be Q 1 as more workers will be
willing to work at a higher wage. On the other hand the quantity demanded of labour will be Q2 as employers
reduce their demand for labour as it’s more expensive. Thus in labour market there will be a surplus of labour
represented by Q2 to Q1. This surplus of labour is the same as the level of unemployment in the economy as a
result of an imposition of a minimum wage. Theoretically an imposition of minimum wage should result to
unemployment in the economy.
38