Published On:Thursday, 8 December 2011
Posted by Muhammad Atif Saeed
Economic Resources
| Microeconomics is the study of the behaviour and decisions of individuals and businesses in markets across the economy. We start our study of microeconomics by looking at the resources which an economy may have available to supply and produce goods and services to meet the ever-changing needs and wants of individuals and society as a whole. In economics we classify goods as “tangible” products, example might include food and drink, cars, digital televisions, flat-screen televisions, energy products and cricket bats! Services are sometimes known as intangibles, education and health-care are two important services and tourism, business consultancy, cleaning and home insurance are all examples of services. Finite resources There are only a finite (or limited) number of workers, machines, acres of land and reserves of oil and other natural resources on the earth. Because most of our resources are finite, we cannot produce an unlimited number of different goods and services and by producing more for an ever-increasing population we are in real danger of destroying the natural resources of the planet. This has important consequences for the long-term sustainability of economies throughout the world and potentially huge implications for our living standards and the quality of life.  Tuna reaches the quayside and will soon be supplied to the market – but over-fishing may have destroyed fish stocks and risks the whole future of the tuna fishing industry in the European Union Tuna at risk of extinction Environmental pressure groups such as Friends of the Earth and Greenpeace seek to highlight the permanent damage to the stock of natural resources available throughout the world and the dangers from economic development and global warming. One such issue is the huge threat posed by the global shortage of water as the world’s demand for water for household and commercial use continues to grow each year. At the heart of improving resource sustainability is the idea of de-coupling – a process of trying to increase the efficiency with which resources are used in producing goods and services and breaking the link between ever-increasing output and resource depletion.Bluefin tuna are at risk of extinction in the Mediterranean and eastern Atlantic according to a report from the Worldwide Fund for Nature. They lay the blame on fishermen who have caught more than the quotas allowed under current European Union rules. Over-fishing has led to a reduction in stocks of tuna and average catch sizes are declining. The WWF has called for an immediate halt to bluefin tuna fishing arguing that failure to act now will lead to the complete destruction of what should be a renewable resource. Source: Worldwide Fund for Nature and BBC news reports Factors of production Factors of production refer to the resources we have available to produce goods and services. We make a distinction between physical and human resources. Land Land includes all of the natural physical resources – for example the ability to exploit fertile farm land, the benefits from a temperate climate or the ability to harness wind and solar power and other forms of renewable energy. Some nations are richly endowed with natural resources and then specialise in the extraction and production of these resources – for example – the development of the North Sea oil and gas in Britain and Norway or the high productivity of the vast expanse of farm land in Canada and the United States and the oil sands in Alberta, Canada. Other countries have a smaller natural factor endowment and may be more reliant on importing these resources. Japan for example is the world’s second largest economy but remains heavily dependent on imported oil. Labour Labour is the human input into the production process. It is inevitable that some workers are more productive than others because of the education, training and work experience they have received. What matters is the size and quality of the workforce. An increase in the size and the quality of the labour force is vital if a country wants to achieve economic growth. In recent years the issue of the migration of labour has become important, can migrant workers help to solve some of the labour shortages that many countries experience? And what of the long-term effects on the countries who suffer a drain or loss of workers through migration? Labour is the human input into the production process. It is inevitable that some workers are more productive than others because of the education, training and work experience they have received. What matters is the size and quality of the workforce. An increase in the size and the quality of the labour force is vital if a country wants to achieve economic growth. In recent years the issue of the migration of labour has become important, can migrant workers help to solve some of the labour shortages that many countries experience? And what of the long-term effects on the countries who suffer a drain or loss of workers through migration? Capital To an economist, investment is not the money that people put into the stock market or into bank and building society accounts. Instead, in economics the term capital means investment in capital goods that can then be used to produce other consumer goods and services in the future.
 The global oil and gas industry uses a huge amount of capital equipment to get the product – crude oil – to the refineries and processing stages. Capital inputs and productivityNew items of capital machinery, buildings or technology are generally used to enhance the productivity of labour. For example, improved technology in farming has vastly increased the productivity of our agricultural sector and allowed people to move out of working on the land into more valuable jobs in other parts of the economy. And, investment in information and communication technology can increase the efficiency of workers across many industries. Infrastructure Infrastructure is the stock of capital used to support the entire economic system. Examples of infrastructure include road & rail networks; airports & docks; telecommunications eg cables and satellites to enable web access. The World Bank regards infrastructure as an essential pillar for economic growth in developing countries.  The Gatwick Express – the railway infrastructure is an essential part of our transport network Entrepreneurship An entrepreneur is an individual who seeks to supply products to a market for a rate of return (i.e. to make a profit). Entrepreneurs will usually invest their own financial capital in a business (for example their savings) and take on the risks associated with a business investment. The reward to this risk-taking is the profit made from running the business. Many economists agree that entrepreneurs are in fact a specialised part of the factor input 'labour'. Renewable resources Renewable resources are commodities such as solar energy, oxygen, biomass, fish stocks or forestry that is inexhaustible or replaceable by new growth providing that the rate of extraction of the resource is less than the natural rate at which the resource renews itself. This is becoming an enormously important issue in environmental economics, for example the issue of the over-extraction of fish stocks, and the global risks of permanent water shortages resulting from rising use of ground water stocks. Finite resources cannot be renewed. For example with plastics, crude oil, coal, natural gas and other items produced from fossil fuels, no mechanisms exist replenish them. Factor Rewards Factors of production are used to create output to be sold in markets. Each factor used in production can expect some reward. High oil prices help Shell to record profits IncomeSoaring crude oil prices are boosting oil companies' profits around the world. Royal Dutch Shell has announced record annual profit for a UK stockmarket listed company. Shell generated profits of £13.12bn in 2005 – up nearly a third on the 2004 level. Most of Shell’s profits come from finding and extracting oil, and then selling it on to the world’s oil markets. Source: Adapted from news articles, February 2006 Income represents a flow of earnings from using factors of production to produce an output of goods and services which are then sold in markets. The main sources of income for individuals and households are:
Wealth Wealth is defined as a stock of assets that creates a flow of income and it can be held in a variety of forms by individuals, firms and also the nation as a whole:
Being wealthy can also generate income for if you own shares in companies listed on the stock market then you expect to receive dividend income once or twice a year. And if you have money in a savings account, you will be paid interest on your savings balances. Likewise, if you own properties, then you can earn some income from renting it out to tenants. There has been a huge expansion in recent years in the buy-to-let sector of the housing market with hundreds of thousands of people buying properties and then letting them out. By the summer of 2006 in the UK there were over 700,000 people who had bought property and then let it out to tenants as part of the buy-to-let sector of the housing market. Of course the value of financial wealth can fluctuate over time. In the UK in recent years we have seen a boom in the UK housing market leading to sharp rises in average house prices, particularly in London and the South East. The result has been a jump in housing wealth for people with mortgages, but a growing problem of affordability for people looking to enter the housing market for the first time on relatively low incomes. Share prices have also been volatile with a collapse in prices from 2000-2003 and then a recovery in the stock market over the last three years. Inequality in the distribution of income and wealth Factor incomes or factor rewards are rarely if ever distributed equitably in any country. Indeed it is a fact of life that the distribution of income and wealth in the UK is highly unequal there is a huge gap between the richest and poorest households in our society. For example, the latest available data shows that 94% of the total wealth in this country is held by 50% of the population. Put another way, the other half of our population can lay claim to only 6% of total wealth. Millions of people must rely on relatively low incomes with little opportunity to accumulate wealth. Is this fair? What are the consequences of a high level of inequality? Should the government intervene to change the distribution of income? And what might be some of the effects of such policies? These are important questions and we will return to them when we consider the issue of market failure. Income of the richest UK families is sixteen times that of the poorest Labour and WagesIn 2004-05, the average gross (pre-tax) income of the richest 20% of families in Britain was £66,300, more than 16 times that of the poorest 20% who earned £4,300 on average. After adjusting for taxes and welfare benefits such as income support and the state pension, however, this ratio fell to four-to-one. For direct taxes, the top fifth of households pay 25% of their gross income in direct taxes such as income tax while for the poorest households the figure is 10%. Levels of inequality are little changed from that seen during the years of the Thatcher government. Adapted from the ONS and the Guardian, June 2006 Most people have the ability to do some form of work. If they are of working age and actively seeking a job then they are included in the working population. In industries and jobs where labour is not particularly scarce, wages tend to be lower. Millions of workers in the UK are paid hourly wages well below the national average. The minimum wage (currently £5.05 for all adult workers – it rises to £5.35 in October 2006) seeks to address some of the problems associated with low pay. On the other hand, some people have skills that are quite rare, and these people will command high salaries in the labour market. Capital and Interest Businesses often need to borrow money to fund capital investment. The reward for investing money is called interest. Interest rates can of course go up or down. If the interest rate is high, it becomes less worthwhile to borrow money because any project will have to make more money than before to be profitable since more interest is now being paid. Enterprise and Profit In return for having innovative business ideas and taking the risk in putting funds into a business the entrepreneur takes any money that the business has left after the other factors of production have received their rewards. This is called gross profit. Taxes then have to be paid to the government, and the entrepreneur takes what is left. This after-tax profit is called net profit. Profits flow from increased passenger numbers The low-cost airline EasyJet is reaping the benefits of higher sales and it is forecasting that pre-tax profits in 2006 will be up by as much as 50 per cent. The business is creating higher profits by increasing passenger revenue per seat and achieving extra sales and income from ancillary revenues. EasyJet has managed to overcome the challenge of higher oil prices partly by making cost savings in other parts of their business. EasyJet said it carried 2.6 million passengers in June 2006, up 15.6 percent from a year earlier, while its load factor, a measure of how efficiently it is filling seats on each flight, was 87.6 percent, 2 per cent higher than at the same time in 2005. EasyJet is part of the Easy Group of companies. Source: EasyGroup web site, Adapted from news reports, June 2006
There is also a growing interest in the concept of ethical businesses and corporate social responsibility where the traditional assumption of businesses driven solely by the profit motive is being challenged and where businesses are encouraged to take account of their economic, social and environmental impacts.
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| Author: Geoff Riley, Eton College, September 2006 | ||||||||||||||||||||||||||||||||||||||||||
