Unit 1: Economic activities and geographical spaces

Economics is not all about money. Basic economic principle is satisfaction maximization.
Economic principles help describe why people do what they do to get what they want.

1.1. Economic activity. Components and

sectors.

Economic activity

Production, distribution, consumption

Sectors of economic activity

Primary

Secondary

Tertiary

Goods can be material or immaterial

Primary sector activities concerned with the land (natural resources): agriculture, livestock
farming, forestry and fishing. Why does the primary sector exert a greater influence on
employment and GDP in less developed countries and a lesser influence on more advanced
economies: this is because these countries rely on the primary sector to earn money, much
more so than the tertiary sector. Some products obtained from the primary sector: wheat,
cotton, fish, wood, wool, fish.

Secondary sector: industry, construction, factory – transforming natural resources. Examples

are car industry, clothing industry, olive oil factory, paper factor, hotel construction company.
The secondary sector is important in many emerging countries. Concerned with the
transformation of natural resources.

Tertiary sector is the service sector, deals with immaterial goods. Activities that provide
services. Transport, tourism, trade, education, health care etc. In which types of countries
does the tertiary sector dominate? The tertiary sector dominates in the developed or rich
countries because they are more developed and rely on consumerism more than the collection
of the materials or processing in industry. They are the service dominated countries.

THE IMPORTANCE OF THE THREE ECONOMIC

SECTORS FOR EMPLOYMENT AND GDP
(A COUNTRY’S WEALTH) REVEALS MAJOR
CONTRASTS AROUND THE WORLD

Law of supply and demand: The law of supply

states that the quantity of a good supplied rises
as the price of that good rises and falls as the
price falls. The law of demand says that the
quantity of a good demanded falls as the price
rises

1.2. Components of human activity: Human beings have needs = which can be material or
immaterial (services). These needs are met by purchasing them, obtained through = economic
activity. Economic activity is the PRODUCTION, DISTRIBUTION and CONSUMPTION of
goods. The economic activity is distributed into three sectors PRIMARY, SECONDARY and
TERTIARY.
 Difference between wants and needs: a need is
something that is necessary for survival, shelter, food,
water, medicine whereas a want is something that we
desire to better our lifestyles, happiness, health, wealth
etc. Wants increase our economic satisfaction.
Advertising affects our wants and needs sometimes in an
unhealthy way.

Economic agents and their relationships:

BUSINESSES
Function – produce, distribute and sell goods
Aim – obtain profit ($$)
Basic units for the production of economic goods
types of businesses (can vary due to) size, capital ownership, social organization

FAMILIES
Families are the basic unit of consumption. Families need to spend money to acquire goods so
they can satisfy their needs (their function and aim). They sell their labor to private and public
companies on the labor market and in exchange, earn a salary which they use to pay for goods
they buy from companies and to pay the taxes levied on them by the State.

THE STATE
Unit of production and consumption Uses its enterprises to produce material goods and public
services that are needed by all society and to consume goods and services from private
companies. Aims to provide welfare.
The government as a producer. The government takes responsibility for production for several
reasons. To provide essential goods and services. To supply merit goods (which everyone needs
regardless if they can afford them or not like healthcare and education). To supply public
goods. To control natural monopolies

Taxes
We (working people) pay taxes to the State. Why? The government takes the taxes and uses
them for public spending

To provide public goods

To provide merit goods
To reduce inequalities and help vulnerable people
To invest in the economic infrastructure
To support agriculture and industry
To control the macroeconomy
To give overseas aid (when needed)

The State: Provides public goods and services, aim to provide welfare (gets money from taxes)
Families: Provide labor, aims to satisfy their needs (gets money from salaries)
Businesses: Provide goods and services, aims to make money (gets money from consumers)
 Businesses Families State

Definition Basic units for Basic unit of Unit of production and

production of goods consumption consumption

Function To produce, distribute Spend money on Produce material goods and public
and sell goods to goods services that are needed by all
consumers society and consume goods from
private companies

Aims Make money Satisfaction Economic welfare for the country

maximization

Income Money from families Salaries paid by the Taxes paid by families and by
Source and the state who businesses they businesses
buy their products work for

Economic welfare: Economic welfare is maximized in a society when as many of its (of its
people) needs and wants are satisfied from using scarce resources in the most efficient way
and in a way that will not take away from the quality of life (pollution, water waste etc.)

Gross Domestic Product: GDP per capita is the GDP divided by the population. This is also called
GDP per head because it is the average output or income which each person in the country has.
(It is important to remember that this is only an average figure, the actual GDP will be
distributed unevenly)

Developed vs. underdeveloped countries vs. emerging countries: we usually distinguish

between three types of countries, due to their level of technology, GDP (money), standard of
living, etc. Developed countries are the countries that you feel safe visiting, have good
infrastructure, health, education, a wide variety of goods and services, are easy to access, and
have political stability. Underdeveloped countries are the exact opposite. They might be hard to
access, they have poor infrastructure, are politically unstable, do not have a wide variety of
goods and services, if you get sick while in one of these countries you might have to travel
quite a bit before you find a hospital etc. and you would probably feel unsafe visiting here.
Emerging countries fall somewhere in the middle and usually these countries, like most other
countries, are marked by the differences they have in the upper and lower classes. In these
countries, like in the underdeveloped countries, there lives a very rich upper class which is the
minority (less than 10% of the population) who have almost all of the money in the country
concentrated in a very small amount of the people living there while the other 90+% live in
poverty and have very little money. Emerging countries are called emerging countries because
they are on their way to development due to industrialization and the moving of industries to
their countries meaning also that the wealth of their country is located only in some parts of the
country (India, Thailand etc.)

1.3.1. Factors of production: CTLL (Capital, technology, land (resources), labor)

1. Land (natural resources) Natural resources are

elements provided by nature that have an economic
use. These include water, the atmosphere, the soil,
plants, animals, mineral and energy sources. The
exploitation of these resources gives rise to basic
economic activities like agriculture, forestry, livestock
farming, fishing, mining and both energy and
industrial production which in turn allows us to live
the life we live with the high standard of living we are
used to.

Problems with using resources: exhaustion and overuse if

resources are consumed at a higher rate than that of their
renewal, they run the risk of being exhausted or overused.
To avoid this problem, it is necessary to bring into play the
principal of sustainable development (using resources in a
logical and reasonable way so they can meet our needs and
the needs of future generations, avoiding overconsumption
and encouraging efficient use). We want resources to be used rationally so they can meet
current needs and those of future generations, by avoiding consumerism and encouraging
efficient use as well as recycling. Sustainable use of resources: Using resources in a way that
future stores of them will NOT be affected Resources are the backbone of every economy. In
using resources and transforming them, capital stocks are built up which add to the wealth of
present and future generations. However, the dimensions of our current resource use are such
that the chances of future generations - and the developing countries - to have access to their
fair share of scarce resources are endangered. Moreover, the consequences of our resource use
in terms of impacts on the environment may induce serious damages that go beyond the
carrying capacity of the environment. Resources
can either be renewable or nonrenewable (not
able to be new again).

2. Capital (physical, financial and human)

3. Enterprise: entrepreneurs organize the

factors of production and take risks. Management
(ownership, control or coordination) of the other
three factors of production, this covers the
various organizational skills that entrepreneurs
must undertake. The entrepreneurs are ambitious leaders that combine the other factors of
production to create goods and services (well-known examples: Henry Ford, Bill Gates, Steve
Jobs). They take initiative, innovate and take the risk of failure.
1.3.2. 4. Labor: is the physical or mental effort made by people in order to produce goods and
services. An essential factor for production. Enables businesses to carry out their activity.
Enables people to receive a salary in return for their labor to acquire goods

Government policy: full employment, Employment refers to the employment of labor in the
economy. Most households rely on employment for most of their income (in the form of
wages). Full employment occurs when an economy is using all of its workforce. In practice, this
does not mean 100% employment because there will always be some people who are between
jobs. Unemployment occurs when workers who are able and willing to work at the current wage
rates are unable to find employment. These people are part of the workforce even though they
aren’t currently working. People who are not considered unemployed: retired people, full-time
students, those who have chosen to stay at home and are not looking for work. The
government seeks to achieve full employment because unemployment wastes resources that
could be used to make goods and high levels of unemployment are costly to the government:
tax revenues fall and spending on the unemployed increases. Unemployment can also lead to
social unrest and rising crime rates.

Make sure you know: a thriving economy does need to have some frictional unemployment
because it needs people to move between jobs.

Consequences of unemployment: 1. labor resources

are wasted.
2. lower living standards
3. excluded workers
4. costs to taxpayers
5. a budget deficit
6. regional problems
7. social problems

Labor problems (unemployment) in developed and undeveloped countries is due to different

causes:

Developed countries Undeveloped countries

Unemployment is due to automation of work and transfer of Due to economic underdevelopment and lack
economic activities to cheaper locations of professional training

Working conditions also vary in developed and underdeveloped countries.

In advanced countries In other countries (underdeveloped or

emerging)

Conditions are regulated by labor laws and job Numerous abuses may occur
contracts Child labor
Employment discrimination
Women receive lower salaries

1.5. Economic systems

Scarcity: people have many needs and the resources to meet these
demands are limited. Hence we are facing the concept of SCARCITY
(not enough of something) so governments ask themselves three
questions: What to produce? How to produce it? Who to produce it
for? Scarcity is the condition of not being able to have all of the
goods and services one wants. Scarcity exists because human wants
for goods and services exceed the quantity of goods and services
that can be produced using all available resources. In basic words: people have needs, resources are
limited.

Economic systems: Economic systems are the

different ways of organizing and undertaking
economic activity. In order to achieve this, three
basic problems must be addressed WHICH goods
are to be produced and HOW MANY, HOW they
should be produced and for WHO are they to be
produced? In other words = who gets what and why.
Governments organize themselves as a way to
answer this question = does everyone work and get the same amount (communism), is the overall society
more important than the individuals (socialism), or do those who work hard and make the most money get
the goods (capitalism). In the capitalist system the market economy is controlled by supply and demand
and private property and companies dominate. In the socialist system, it is more regulated by the state
and it is called a planned economy where the planning and supply and demand is determined by the
government. Also, mixed systems exist, combination of the two, more like a welfare state and there is
both private and public institutions and the government does intervene to guarantee that the basic needs
of all citizens are met (this is what we see today).

Economic welfare is what the government is trying to maintain and promote: health care, education,
health of citizens, housing, freedoms and environment.

Reasons for a mixed economy Market economies experience high unemployment sometimes, in mixed
economies, the government can hire unemployed people. Public goods such as defense, law and order,
and street lighting will be not provided by private firms in a market economy. In a mixed economy the
government may provide merit goods like education and healthcare. In a mixed economy the government
can make some drugs illegal or by placing high taxes on them like cigarettes. Private firms in a market
system don’t consider costs to the environment. Poor people in market systems cannot buy many of the
goods and services but with planned economics, the government can give money and goods to people
who need them (In the UK, the government provides unemployment benefits
and free healthcare to those who cannot pay)

Law of supply and demand: In the capitalist system, the market is governed
by the law of supply (what is on sale) and demand (what people are
prepared to buy at a certain price). When there is high demand and many
people are willing to buy a certain product/service but there is a limited
supply, the price RISES. On the other hand, if there is limited demand and
not a lot of people want that product or service and there is plentiful supply,
the price will FALL.

Current economic trends: Neoliberal ideologies (Milton Friedman) = total freedom of the economic system,
solely controlled by market forces (supply and demand). The only role that the State has is to implement
laws to guarantee the free functioning of the market. Public expenditure should be reduced to the
minimum, state enterprises should be privatized and salaries should be reduced

Keynesian ideologies (John Maynard Keynes) Defend that the state should intervene to a certain degree
to correct the problems created by capitalism. Greater public expenditure to protect the poor, existence of
public enterprises and increase in salaries

Advantages of the market system (capitalism)

The market produces a wide variety of goods and services to
meet consumers’ wants
The free market responds quickly to people’s wants
The market system encourages the use of new and better
methods and machines to produce goods and services

Disadvantages of the market system

Labor (people) are only employed if it is profitable

The free market can fail to provide certain goods and services
(street-lighting)
The free market may encourage the consumption of harmful
goods
The social effects of production may be ignored (pollution)
The market system allocates more goods and services to
those consumers who have more money

Problems with capitalism:

Political problems
Economic problems
Social problems
Environmental problems

Globalization: Causes of globalization Advances in telecommunications – instant connection between

people anywhere on the planet Improvements in transportation – help the transfer of merchandise and
people on a worldwide scale and enable businesses to extend their reach to the whole world Spread of
the capitalist system – encourages all types of global exchange through their defense of economic
freedom. The promoters of globalization are International organizations have encouraged the economy to
operate on a global scale by implementing shared guidelines and adopting agreements on a range of
economic matters. The WTO (world trade organization), IMF (international monetary fund), WB (world
bank) and G20 are of particular importance. Multinationals are another powerful set of globalization
agents, as these companies operate with a global strategy in order to obtain maximum profit.

The global operation of the economy: Production of goods is organized on a global scale (exploitation in
poor countries). Exchange of merchandise acquires a global dimension; some poor countries have
benefitted. Consumption of goods becomes more uniform through advertising, irrational exploitation of
natural resources and destruction of the environment

1.8. Worldwide economic areas:

The Triad: USA/Canada, EU, Japan
Emerging economic powers: historically undeveloped countries in Asia like China, India, South Korea,
Singapore, Malaysia, the Philippines, Turkey, Indonesia and in America like Brazil, Mexico and Argentina.
Rapid industrialization, low salary costs for labor, little domestic consumption due to limited salaries.
Historical economic powers like Russia or countries that play an important economic role in their region
like Australia, South Africa and some Middle Eastern countries. Production based on abundant natural
resources