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Unit 3. The economic organisation of society

Unit 3.
The economic
organisation of
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
 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
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
 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
 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
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.
Natural gas: Similar origen to oil, used for heating,
electricity production and chemical industry. Is less polling
tan oil or coal.
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:
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.
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
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.
Geothermal: This energy uses the heat from inside the
Earth, especially in areas with intense volcanic activity.
Tidal energy: This energy uses the movement of seawater
caused by tides, waves and currents
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
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
 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
 Specialization leads to an increase in productivity
 Investement on capital equipment (better tractors, mower machines,
 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
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
 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
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,
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.