Unit 3. The economic organisation of society What is economic activity? Economic activity describes all the jobs done by workers ir order to satisfy the needs of people and societies by providing goods of services. Economic activity consists of three phases: a) Production: the company decides on the product to be produced, the amount (how many) and the manufacturing process. Two types of goods: Consumer goods (clothes, furniture, etc.) Intermediate goods (machines and tools to manufacture consumer goods) What is economic activity? b) Distribution occurs after production and consists of the delivery of the godos or services to the consumer. This involve storage, transport, marketing and sale. Two steps in the sales process: Wholesale: Wholesalers buy a large number of products and sell them to companies, who then sell the goods to individual consumers Retail: Retail businesses buy a small number of goods and sell them directly to the public in shops. What is economic activity? c) Consumption: the buying of goods and services to satisfy our needs. We have primary needs that are those that essential for life whereas secondary needs serve to increase our wellbeing. Three important concepts: Scarcity: our desires and needs are endless, but our resources are limited Overconsumption: buying products or services thar are not necessary. When this practice becomes widespread, it leads to a consumer society that puts environment and future generations at risk. On the contrary, we must be responsable consumers. Factors affecting production The key ingredients for the production are: natural resources, labour, capital, technology and expertise a) Natural resources: Nature gives us elements that we transform to satisfy our needs. These natural resources (water, minerals, oil, etc.) are limited and coud run out son if we overexploit them. Two types: Non-renewable resources: o Coal: Fossil fuel. It was the driving force of the Industrial Revolution because it could be moved relatively easily to wherever there was a significant energy demand. Nowadays, it is pollutant and expensive to mine. Factors affecting production o Oil: Another fossil fuel with high calorific value. Relatively easy to extract and has become a highly valued energy resource. In addition to generating electricity, it is a raw material used in the chemical industry (plastics, paints, etc.) • Remaining reserves will be sufficient to meet global needs for 70 years. o Natural gas: Similar origen to oil, used for heating, electricity production and chemical industry. Is less polling tan oil or coal. o Nuclear energy: Enriched uranium used in nuclear reactors. It generates an enormous amount of electrictiy. The main problem: plants safety and radioactive waste. Factors affecting production Renewable energy sources: They are inexhasutible and include Sun, Water and Wind. Several types: o Hydropower: Hydropower plants use the force of water stored in reservoirs to generate electricity. The energy productin itself is non-polluting, but the construction of reservois leads to serious environmental impact and sometimes the displacement of the population. o Solar (photovoltaic) energy: The radiation of the the Sun’s rays can be harnessed to produce electricity and heat. Photovoltaic solar panels are made form a special material to generate electricity form sunlight. They can be installed on the roofs or in fields (solar farms). Factors affecting production o Wind energy: This energy is obtained by harnessing the force of the wind. It is non-polluting, but wind turbines alter the landscape and cause noise pollutin. The production of energy by wind farms is irregular since the force and frequency of the wind are variable. o Geothermal: This energy uses the heat from inside the Earth, especially in areas with intense volcanic activity. o Tidal energy: This energy uses the movement of seawater caused by tides, waves and currents o Bioenergy: This energy is obtained form the burning of biomass (firewood form forests is the main fuel), biogas (from the fermentation of animal mature –estiércol)) and biofuels (made from vegetable oils and animal fats –grasas animales). Factors affecting production b) Labour: Labour is all human activity, whether physical of intelectual, that is required to produce goods or provide services. In Spain, the minimun wage is 655€ (per 40 hours a week) Human capital is the sum of the skills possessed by a person (or society) and covering academic training, experience, creativity, entrepreneurship, etc. c) Capital: Resources used to produce godos or services. Physical: the land on which the business is built, the construction and maintenance of the premises, the machinery, the raw materials, etc. Financial: the money needed to producing. This includes loans from banks of other institutions. Factors affecting production d) Technology and expertise: Thechnical expertise makes possible the desing, construction and use of devices for the production. According to the technology, we use: manual production, mechanical production and high-tech production. Also, a competitive Company requires quality training programmes for the employees and also laboratories to research. Technology is a determining factor in the growth of the economy. Technological advances have helped companies to increase their productivity, lower labour costs and save time. Productivity: production obtained / resources used Productivity per hour (year, etc.): amount of goods and services produced by a worker in an hour. Efficiency: If a company produces, with several resources, the biggest amount of goods possible. This company is efficient ( How to improve productivity? XVIII century: Adam Smith, father of capitalism, wrote “The Wealth of Nations”. In the book, he proposes the division of labour to increase productivity. Specialization leads to an increase in productivity Investement on capital equipment (better tractors, mower machines, etc.) Improving the profesional skills of the human capital (better education –idioms, expertise, etc.-). Effective institutions: bad government, over-regulation, burocracy, corruption, lack of democracy, etc. damage productivity. Technological advances. They have transformed economies and society to a large degree. The term given to such a changes is Industrial Revolution Industrial Revolutions 1) The First Industrial Revolution: In the mid-18 th century in England Steam-powered machines replaced manual labour and industrial work moved form workshops to factories Coal became a commom energy resource The first railway (1830) joined Liverpool with Manchester The British textile industry was the first to introduce these changes As a result, machines allowed larger amounts of identical goods to be produced in less time. Thie decreased the price of the products and caused the closure of artisanal workshops. The First Industrial Revolution promoted capitalism as an economic system based on generating maximum profits and on the law of supply and demand. Industrial Revolutions 2) The Second Industrial Revolution: It happened around 1870, when the capitalist system was already established and industrial production diversified. As well as Great Britain, other countries (France, Japan, USA, Germany, the Netherlands and Italy) adopted the new methods of production. Spain, with the exception of Catalonia, left out of the industrial revolution remaining as a backward country. The main energy sources were oil, gas and electricity. It took place the invention of the combustion engine, manufacture cars, planes, telegraph, etc. Industry became the main activity, affecting social and political relations. The workers and the bourgeoisie organised themselves into different social clases. In the early stages of industrialisation, workes suffered deplorable conditions (low wages, long hours, little security, etc.) Industrial Revolutions 2) The Second Industrial Revolution: Trade unions were set up to represent and improve the situation of the workers. Maximum working hours were fixed, a basic minimun wage was paid and employment contracts wer established. It was the time of Fordism: Ford was the first company to introduce an assembly line in his factories at the start of the 20 th century, dividing the assembly of cars into specialised tasks. This standardized the production and reduced costs and the final Price of cars. 3) Third Industrial Revolution (from 1970-nowadays): Information technology Robotic Internet, etc. China, India, Brasil, etc. are emerging as economic powers. Economic sectors Economic activities are so diverse that they have been divided into four large sectors: a) The primary sector: This sector includes activities that produce food for people and raw material for industries. It consists of agriculture, livestock, farming, fishing and forestry, among others. The most developed is a country, the less important is this sector b) The secondary sector: This sector includes economic activities that transform raw material found in nature trough industrial processes into manufactured products. The main activities are industry, construction, textile, chemistry, steelmaking and the explotation of energy sources such as oil, gas, coal, minerals, etc. Economic sectors c) The tertiary sector: This sector includes a variety of activities. It provides services to the population or to companies such as healtcare, education, transport, tourism, culture, etc. It is the fastest-growing sector due to the appearance and expansion of an information society and the globalisation of the economy. In the developed countries, close to a 70% of population performs an activity related to the tertiary sector. Nevertheless, there is a lower-end tertiary sector which includes poorly paid jobs that do not require training suchs as cleaners, car park attendants, fast-food workers, etc. d) The quaternary sector: It is based on special training and high levels of expertise related to the creation of social, cultural and economic innovation and research. Economic systems An economic system decides how you will produce the goods and services. Theses systems can be organised in different ways according to social beliefs and historial background: a) The subsistence system: People produce what they need to meet their basic needs • They work the land for food, build their own houses, make their own clothes, etc. • Any surplus goods are sold or exchange (by barter) Economic systems b) The capitalist system: This system defends free competiton between individuals and companies. It is based on the law of supply and demand. The clash of intersest between sellers and buyers set a mutually satisfactory prices for both parties without the intervention of the state The price depends on the scarcity of a product Companies use advertising to publicise the products and services they offer The means of production (land, machinery, etc.) are privately owned. Capitalism was founded by Adam Smith. It started with the Industrial Rev. in the late 18 th century. Today, it is widespread in the world due to economic globalisation. Economic systems c) The planned economy: The state owns the means of production and control all aspectos of the economy. It decides what and hoy to produce, how much will cost and what to do with the profits. This system was widespread for many decades en the 20 th century, buto today it only exists in comunist dictatorships such as China (although is slowly opiening up to the private sector), North Korea and Cuba. d) Alternative economies: These economies reject capitalism because prometes inequality. It suggest a model based on solidarity, respect for Nature and common good. e) Mixed economies: It is a model that includes elements of capitalism (the mayority), but, in several sectors, the state intervenes to regulate the functioning of the economy.