Economic organization of societies

ECONOMIC ORGANIZATION OF SOCIETIES

Economics is the social science
that studies all the activities the
humans make to satisfy their
necessities: production,
distribution and consumption of
goods and services.
Economics has two branches:
- Microeconomics
- Macroeconomics
DEFINITION OF ECONOMICS

 MACROECONOMICS: it studies the
broad and general aspects of economy
in one country, like the national income,
the sovereign debt, the unemployment
rate, the State budget, the Gross
Domestic Product, imports and exports,
etc.
 MICROECONOMICS: it studies the
particular aspects of an economy,
related to the actions of individuals as
consumers, producers or distributors. It
deals with matters like the purchasing
power of families, the production of a
company, the cost of raw materials, the
price of energy sources and so on.
BRANCHES OF ECONOMICS

HUMAN NEEDS
Economics deals with the satisfaction of human
necessities. There are different types of
necessities:
 Primary necessities: they are indispensable
to survive and usually material, like food or
housing.
 Secondary necessities: they are not
indispensable to survive, but increase human
well-being, they are immaterial and
contribute to improve life in societies.
Examples: healthcare, culture, education,
justice or security.

Economic activities are all the activities
developed by human beings to fulfill the
different necessities of individuals and
societies. These activities can consist in
producing goods or providing services (service
provision).
People’s necessities and wishes can be
unlimited, but resources are limited. That’s
why it is necessary to decide on how to
develop economic activities and look for the
most efficient way to do it, with the least cost
and in order to get the maximum profit.
ECONOMIC ACTIVITIES

TYPES OF ECONOMIC ACTIVITIES
PRODUCTION
DISTRIBUTION
CONSUMPTION
Depeding on people’s role in
economy, there are three
different types of economic
activities:

It consists of making the goods that
consumers demand.
There are two types of goods:
- Consumption or consumer
goods: goods that are
destined to satisfy the
consumers’ necessities
directly. For example: food,
clothes, furniture, electric
appliances, cars…
- Producer goods: goods
that have been
manufactured and
machines and tools used to
produce consumption
goods. For example: the
fabric used to produce
clothes, the machines used
to manufacture a car…
PRODUCTION

All the activities in charge of
connecting producers with
consumers: storage,
transportation and
commercialization.
DISTRIBUTION

Buying or exchanging goods or
services in order to satisfy the
consumers’ necessities.
Consumption will depend on the
consumers’ purchasing power
(amount of money or goods a
person or group of people have
to buy or exchange products for
other products). Purchasing
power is usually related to the
incomes people get from their
work or the properties they
own.
CONSUMPTION

FACTORS OF PRODUCTION
Factors of production or inputs are all the necessary elements to produce
products or provide services.
They are the following:
- LAND
- WORK OR LABOUR
- CAPITAL
http://www.investopedia.com/terms/f/factors-production.asp

It is not only the ground itself, but also
the raw materials that come from the
land, which are the natural resources
that can be consumed directly or used
to produce goods.
These resources are limited and have
to be used carefully, in order to avoid
overexploitation.
There are different types of raw
materials, depending on their origin:
vegetable, animal, mineral or synthetic.
FACTORS OF PRODUCTION: LAND

Any human activity (physical or
intellectual) consisting in
producing the goods or providing
the services people need or
demand. Qualification is the
most important condition for
workers. The more qualified they
are, the better work they will do.
Qualified workers work faster
and have less accidents and
technical knowledge and abilities
are essential for innovation.
FACTORS OF PRODUCTION: WORK OR LABOUR

Wealth, in money or in
property, a person or
company owns or invests
in a business. Capital is not
only the necessary money
to start a business
(financial capital), but also
all the material elements
bought with it, like the
land, the buildings, the
machinery and the raw
materials (physical
capital). Physical capital
can be converted into
financial capital if the
business owners decide to
sell.
FACTORS OF PRODUCTION: CAPITAL

ECONOMIC AGENTS
Economic agents are the people,
groups or institutions that take part
in economy. There are three
different economic agents and they
play different roles in economy:
- PEOPLE
- COMPANIES
- STATE OR PUBLIC SECTOR

They are the consumers. Every
individual or family uses a big
amount of their economic
resources (money) to buy
products and services they need
to fulfill their necessities. Their
consumption level depends on
their purchasing power, which is
related to salaries:
o If salaries increase, the
purchasing power will be
higher.
o If salaries decrease, the
purchasing power will be
lower.
ECONOMIC AGENTS: PEOPLE

ECONOMIC AGENTS: COMPANIES
Business enterprises that produce, distribute
or provide services to consumers. Their role is
supplying products or services.
The main purpose of companies is to make
profits. This is the reason why they have to
earn more than they have invested in
producing their products. The production
expenses have to be lower than the final price
of products:
o If the producers or investors spend more
money than they earn, they will have
losses (deficit)
o If the producers or investors earn more
money than they spend, they will have
profits (surplus).

Depending on their size, companies can
be:
 Multinational companies:
companies that have branches in
different countries.
 Big companies: they have more than
250 workers.
 Medium enterprises: they have
more than 50 and less than 250
workers
 Small enterprises: they have more
than 10 and less than 50 workers
 Microenterprises: they have less
than 10 workers
TYPES OF COMPANIES

Depending on the owner,
companies can be:
 Public: if they belong to the
State.
 Private: if they belong to private
people. They can be co-
operatives, Public limited
companies (Plc) (UK)/ Public
corporations (USA) or private
limited companies (UK)/ limited
corporations (USA).

- Public administration: central, autonomous and
local governments, offices of administration provide:
o Public services: education, justice,
healthcare, security (police), civil defense,
public works, infrastructures…
o Social benefits: healthcare, unemployment
benefits, retirement pensions, illness and
disability pensions, economic help to
families, social services…, provided by the
Social Security system. The Social Security
system is financed with the contributions
of workers and employers.
ECONOMIC AGENTS: THE STATE OR PUBLIC SECTOR
The State also develops some economic activities, especially to provide services to
the population:
- State-owned companies: in the past there were
state-owned companies, which were in charge of
providing services such as transportation,
communications, power stations … But the majority of
the state-owned companies have been privatized in
the last decades.

TAXES
The financing of the economic activities
developed by the State comes from taxes,
which are the money that the State collects
from the citizens. There are two types of taxes:
 Direct taxes: they are collected by the
State directly. Workers and employers pay
taxes in proportion to their incomes. In
Spain this is done through the Income Tax
Return.
 Indirect taxes: these taxes are collected
indirectly, when people consume
products. The most important indirect
taxes are VAT (Value Added Tax) and
special taxes applied to some products,
like tobacco, alcohol, petrol…

Some of the most serious
problems states must face are
fiscal fraud and tax evasion:
- Fiscal fraud is not paying the
taxes one has to pay
- Tax evasion means hiding
the money in tax havens in
order to avoid paying the
corresponding taxes.

ECONOMIC SECTORS
- PRIMARY
- SECONDARY
- TERTIARY
- QUATERNARY
Economic activities can be classified into four sectors:

- Primary sector: it includes all
the activities related to the
extraction of natural resources
from nature: agriculture,
stockbreeding, fishing and
forest logging.
- Secondary sector: it includes
all the activities related to the
transformation of raw
materials into manufactured
products: industry, mining,
construction and production of
energy.

- Tertiary sector: it includes all the activities
related to providing services to the people:
trade, tourism, education, leisure,
transportation, finance, health … It’s also called
service sector.
- Quaternary sector: it includes all the activities
related to managing and distribution of
information, research and innovation, based on
specialized knowledge. The professions of this
sector require high qualification. It includes
activities like computing, ICT (information and
communication technologies), consultancy
(offering advice to businesses) and R&D
(research and development) activities. The
quaternary sector is sometimes included with
the tertiary sector, because it’s also a service
sector.

LABOUR MARKET
It’ s the place where workers and
employers meet. Workers offer their
services in exchange for a salary and
employers offer work.
Workers belong to working population, that
is, the people who are able to work, those
who are more than 15 years old and less
than 65 years old.
Working population includes all the people
who are able and willing to work, whether
they have work (workers) or not
(unemployed).
The non-working population includes all
those who are not in conditions of working,
due to their age or serious illnesses or
disabilities.

Spain’s unemployment rate in the fourth trimester of 2016

In the last years the tendency in
developed countries is to delay the age of
retirement, because life expectancy has
increased and the Social Security systems
have to cover the necessities of an
increasing number of pensioners. The
governments of these countries have
decided that the workers have to
contribute for a longer period to assure
the retirement pensions of the future
generations.

The percentage of working
population in every economic sector
varies depending on the development
of the countries:
•In the most developed
countries(MEDCs), most of the
population works in the tertiary and
quaternary sectors (more than 70%)
and there are few workers in the
primary sector (less than 5%).
•In the least developed countries
(LEDCs), almost half of the population
still works in the primary sector.
Percentage of workers in every sector in Spain
Colin Clark’s sector model of an economy undegoing
technological change: the primary sector reduces and the
tertiary and quaternary activities increase.

There are differences between men
and women in the labour market.
The male working population is
bigger than the female working
population. Women find more
difficulties to work, they earn less
money and they reach less
responsibility posts than men (glass
ceiling, the invisible barrier that
prevents women from getting the
top jobs in companies). This has led
the governments to establish equity
policies (affirmative action in the
USA, positive discrimination in the
UK).

Unemployment is one of the most
important problems for workers. When
enterprises have problems, they try to
reduce labour costs and they dismiss
workers. In the countries where the Welfare
State has been developed, the unemployed
receive a subsidy for a while (it depends on
the time they have worked). In some
countries they have to receive training-
update courses in exchange.
Unemployment statistics are not
trustworthy sometimes. Many workers work
in the black economy – also known as
shadow or underground economy-, they
don´t pay taxes and they don´t contribute to
the Social Security system.
Shadow economy in Spain is more tan 27%

Another problem of workers is job
insecurity, when work is precarious:
temporary work, low salaries, shadow
economy jobs...

WORKERS’ ORGANIZATION
Since the 19th century workers have fought to
improve their work conditions. Workers
created trade unions: associations of workers
created to defend their interests and improve
their work conditions (security, work schedule,
salaries, holidays...). The first unions appeared
in the 1820s in the United Kingdom. At first
unions were illegal, but as time went by the
governments had to accept them and legalize
them. Nowadays workers have the right to join
a union, but unions are still illegal in many
countries.
The role of unions is to improve the labour
conditions of workers. Workers choose their
representatives for the works council, which is
in charge of negotiating collective agreements
with the employers.

Going on strike is another right workers
have. It consists in stopping to work in
order to force the employers to comply
with the workers’ demands. The strike is
the last resource workers have and it´s a
way of putting pressure on the employers
and get what they want. There are
different ways of going on strike:
- sectorial strike
- general strike
- indefinite strike
- slowdown strike/work- to- rule strike
- sick-out strike
- sit-down strike
When workers go on strike, they are not
paid.
Sit-down strike in Flint, Michigan, in 1937

Trade associations are
employers’ organizations
created to defend the
interests of the owners of
the companies.
Joan Rossell, president of the CEOE

Economic organization of societies

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Economic organization of societies