LESSON NOTES ON MONEY (WEEK 1)

MEANING OF MONEY

Money is anything that is generally accepted in payment for goods and services or in the repayment for debts. Examples of
money today include Coins, Naira, Dollar, Euro, Yen, Cheques, etc.

TYPES OF MONEY

1. Commodity money - This is when yam, cowries’ shell or salt is generally accepted as a means of exchange.
2. Gold and silver - these are also commodity money but have different features in form of durability and portability.
3. Metal coins – these are iron materials refined to suit ease of usage. Examples include Nigerian Kobo and American
Cent.
4. Currency – These are paper money issued by the government through the banks to act as legal tender of the
country. Examples include Nigerian Naira and American Dollar.
5. Bank deposit – This refers to the evidence of ownership of money deposits held in the bank. Examples include
cheques, bank drafts, money order, postal orders, ATM cards etc.

FUNCTIONS OF MONEY

1. Medium of Exchange: Money in the form of currency or cheques is a medium of exchange, since it is used by
people to buy goods and services and make other transactions.
Money as a medium of exchange greatly simplifies the transactions which take place in an economy. The time
spent trying to exchange goods or services are lowered and consequently transaction costs are reduced as well.
The resulting ease and speed with which money is converted into other things – goods or services – is called
“liquidity of money”.
2. Unit of Account: Unit of account means that money provides standardized terms in which prices are quoted and
debts are recorded. Prices are attached to goods and services.
With money, all prices, i.e. the values of goods and services, can be expressed in terms of units of money which can
be paid in bits from time to time. . For example, in Nigeria, the unit of account is the Naira while in US, the unit of
account is U.S. Dollar.
3. Store of Value: As a store of value, purchasing power is transferred from the present to the future. This means that
perishables can be converted to money and stored for a long time to be used in the future.
4. Standard for Deferred Payments: This means that money is used in settlement of debts. Goods and services could
be bought today and paid in the future without problems.
5. Measure of Value: Money is the means by which people can compare the values of two or more items.

CHARACTERISTICS OF MONEY
a. Acceptability – Money has to be generally accepted by a group of people for it to serve its purpose. This is
made possible through their laws and traditions making it a legal tender.
b. Durability – Money must have the ability to last long without spoiling so as to be used for a long period of time.
c. Divisibility – Anything money should be easily divided in units such as C, ₦10, ₦20, ₦50, ₦100, ₦200, ₦500,
and ₦1000 notes to ease payment for goods and services.

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d. Portability – Money must be easy to be moved from one place to another.
e. Scarcity – Anything money should not be in surplus supply, else it will lose its value. It must be relatively scarce
and must not be a free good.
f. Stability – Money must possess relative stability in value, else people will not have confidence in it and may
decide not to use it.
g. Homogeneity – Money must be homogeneous. This means that ₦5 note in Abuja must be the same as ₦5 note
in Lagos.
h. Recognizable - Money should be easy recognized by all the people that are using it. This feature fastens
transactions and eases exchange of goods and services.

TRADE BY BARTER
This refers to the practice of exchanging goods and services for other goods and services. It is the exchange of
commodities for other commodities.
In the past, clothes were exchanged for food, slaves exchanged for gold, mirror, etc. However, a lot of
inconvenience and challenges were faced which brought about the invention of money.

PROBLEMS OF TRADE BY BARTER

1. Double coincidence of wants – It was difficult to find a person that has what you want and also wants what
you have at that particular time.
2. Durability of goods – Before you find someone that has what you want to exchange yours for, goods that
are perishable such as tomatoes, meat, or fruits will spoil.
3. Problem of divisibility – It was difficult for someone who has a live cow to exchange part of it for a cob of
corn. Hence, dividing some commodities like cow into smaller denominations was not easy.
4. Bulkiness of goods – Transferring or moving some goods to another location for exchange was not an easy
task.
5. Value fixing problems – it was difficult to say ten tubers of yams equal one goat. Such transactions were
based on guess work than reality.

REASONS FOR HOLDING MONEY

(1) The transactions motive:

People hold money because it is a medium of exchange that can be used to carry out everyday
transactions such as buying food, paying school fees, buying clothes etc.
(2) The precautionary motive:
People also hold money as a precaution against an unexpected need, e.g. a person might need some
medicine immediately, because she or he suddenly feels ill.
(3) The speculative motive:
People want to hold money for investment purposes in order to create more money in the future.

Reference
1. Susanne König (2001). THE EVOLUTION OF MONEY- From Commodity Money to E-Money by UNICERT
IV Program July 6th. Pp 3 – 8.
2. Ogwumike, F. O. et al (2014). Macmillan Senior Secondary Economics. Lagos. Macmillan Nigeria
Publishers Limited. Pp. 135 – 141.

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 DISTRIBUTION CHANNELS (WEEK 2)

Major participants in the production and distribution cycle (commercial cycle) are:

1. Manufacturer – One who sources raw materials, land, labor and applies his entrepreneurial skills in the production of
goods.
2. Wholesaler – One who deploys huge investments in warehousing and stocking of goods bought in bulk quantities
from the manufacturer to sell them at a markup, i.e. profit margin to the retailers.
3. Retailers – One who sells the goods bought from the manufacturer to the final consumer.
4. Consumers – The people who buy goods from the retailer to satisfy their daily needs.

MEANING OF WHOLESALER

A wholesaler is “a trader who purchases goods in large quantities from manufacturer and sells them to retailers in small
quantities”.

We can also define wholesaler as the one who buys goods in large quantities from manufacturer and sells them in small
quantities with the desire of earning profit.

Characteristic of Wholesaler
The main characteristics of wholesaler are:

1. He buys and sells goods in large quantities.

2. He deals only in a few types of products.
3. He acts as a middleman between the producers and retailers.
4. He usually makes cash purchases and sells goods on credit to the retailers.
5. He operates in particular area determined by producers

Functions of a Wholesaler

1. Assembling - He assembles goods in his warehouse for the purpose of sale to the retailers.
2. Storage - A wholesaler stores the goods in his warehouse. He makes them available in appropriate and requisite
quantities as and when they are required by retailers.

3. Grading and Packing - A wholesaler sorts out the goods according to their quality, size, shape, content etc and then
packs them carefully to sell them to the retailers.
4. Transportation - Wholesaler buys goods in bulk from the producers and transports them to his own ware house.
5. Financing - A wholesaler usually buys goods from the producers and sells on credit to the retailer. In this way, he
provides financing facilities to trade transactions.
6. Risk bearing - He takes the risks of damage, deterioration in quality, spoilage etc in his warehouse.
7. Providing Market Information - He provides important market information to retailer and manufacturer.
8. Dispersing and selling – By selling to retailers who are often scattered over a large area, the wholesaler thus helps
in the dispersion process of marketing.

MEANING OF RETAILER

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Retail is the sale of goods to end users, not for resale, but for use and consumption by the purchaser.

A retailer is a person or business that sells goods to the public in relatively small quantities for use or consumption rather
than for resale.

A retailer purchases in bulk from the wholesalers and sells the products to the customers in small quantities.

In the entire distribution chain, a retailer is considered to be the final link, who deals directly with the consumer.

CHARACTERISTICS OF A RETAILER
Retailing can be differentiated from wholesaling or manufacturing because of its certain distinct characteristics which
include –

1. Direct contact with the customer – Retailers have direct contact with the end user and are a mediator between the
wholesaler and the customer.
2. Relationship with the customers – Retailers form a bond with the customers and help them decide which products and
services they should choose for themselves.
3. Stock small quantities of goods – Retailers usually stock small quantities of goods compared to manufacturers and
wholesalers.
4. Stock goods of different brands – Retailers usually stock different goods of different brands according to the demand
in the market.
5. Customers’ contact with the company – Retailers act as the representatives of the company to the end customers who
give their feedback and suggestions to them.
6. Have limited shelf spaces – Retail stores usually have very limited shelf space and only stock goods which have good
demand.
7. Sells goods at maximum prices – Since retailing involves selling the products directly to the customers, it also
witnesses the maximum price of the product.

FUNCTIONS OF RETAILER

1. Delivery of the goods to the end consumer.

2. Distributes goods manufactured to the target market.
3. Finances the wholesaler
4. Stores the goods according to market requirement
5. Lends a hand in manufacturer’s marketing initiative
6. Assumes storage and credit risks
7. Extends credit facilities to the consumers
8. Offers wide variety of customers an enticing price range in the product line.

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 9. Provides convenience in shopping
10. Offers after sale services, differentiated packaging, giving more information about the use of the product
11. Generating employment for masses
12. Listens to consumer feedback, expectations, complaints, and observes the shift in tastes and preferences of the
consumers.

DISTRIBUTION CHANNELS

A. Direct Channel or Zero Level Channel – The producer can sell directly to his customers without the help of middlemen,
such as wholesalers of retailers.
Examples of direct or zero level channels include:

1. E-business - selling through internet.

2. Chain stores – Use of direct multiple and superstores such as Colourplus, Nike, Bata etc.
3. Selling at manufacturer’s plant- Usually preferred in case of perishable products like bread, milk, ice-cream, fish,
meat, egg, vegetables and agricultural products, etc.
4. Door-to-Door sales- The manufacturer employs salesman to move door-to-door and introduce the new product at
the door of a customer.
5. Sales by mail order method – Through the post, customers are approached by sending catalogues, price lists,
pamphlets, to buy items like books, magazines, medicines, watches, toys, small appliances, clothes, seeds, jewelry,
etc.
6. Sales by opening own shops - This system offers a two way communication and the price is regulated.
7. Through travelling salesmen.

Advantages of Selling through Direct Channels:

i. It is simple and fast
ii. It is economical
iii. The producer has full control over distribution
iv. It satisfies the desire to reduce dependence on middle men
v. Company has complete control over its outlets.
vi. Customers develop loyalty for the individual service employee or for the company.
vii. Direct channels are suited for local service providers such as doctors, dry cleaners
viii. Companies are able to obtain direct feedback from customers
ix. Eliminate the role of middlemen. This leads to lower distribution costs.

Disadvantages of Selling through Direct Channels:

i. Non-availability of expert services of middle man
ii. Large investment is required.

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 iii. Unsuitable for small producers
iv. Selling goods through own retail outlets, postal services, courier services is not easy.
v. Selling goods against orders received, by telephone, email in case of telemarketing.
vi. Company must bear all the financial risks.
vii. Producer rarely enjoys expertise in local markets

B. Indirect Marketing Channels:

1. One-Level Channel - Only one intermediary between producer and consumers is present here.

2. Two-Level Channel - Two intermediaries, namely, wholesaler/distributor and retailer and present here.

3. Three-Level Channel - Three intermediaries, namely, distributor, wholesaler and retailer are present and it is also used for
convenience products.

4. Four-Level Channel - Four intermediaries, namely, agent, distributor, wholesaler and retailer are present here. This type of
channel is used for consumer durable products also.

5. Hybrid Distribution Channel or Multi-Channel Distribution System - Multi-channel marketing occurs when a single firm
sets up two or more marketing channels to reach one or more customer segments.

The indirect channels of distribution are:

(i)Producer-Consumer (especially for industrial goods with high technical content) - This is preferable when buyers are few
and the goods are costly and mostly purchased by industrial users.
Goods such as complex machinery involving high technology, computers and luxury cars fall in this category.
(ii) Producer-Retailer-Consumer (via large department ‘ stores) - This is preferable where the purchasers of goods are big
retailers like department stores, chain stores, super markets or consumer co-operative stores. Goods like electrical appliances,
fans, radios, ready-made garments and a host of other articles fall in this category. This channel is also suitable when the
goods are of a perishable nature, and quick distribution is essential.
(iii) Producer—Wholesaler—Consumer (Mostly for industrial products) - Industrial goods are goods which are used for
further production and not for resale. This is a shorter channel and the producer eliminates the retailer in this channel link. In
this case, the buyers are business houses, government agencies, consumer co-operative stores, etc.
(iv) Producer-Wholesaler-Retailer-Consumer (Mostly for consumer goods) - It is used for the marketing of a variety of
consumer goods of daily use, particularly where the demand is elastic and a large number of similar products are available.
This channel is preferable when the market for the goods is highly competitive.
This channel is also suitable when the producer operates under the following conditions:
(a) The producer has a limited line of products.
(b) The finance available to the producer is limited.
(c) The wholesalers handle specialised goods.
(d) Products are not subject to change due to changes in fashion.

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(e) Wholesalers and retailers can provide good promotional support.

(v) Producer-Sole Agent -Wholesaler-Retailer-Consumer (usually for a prescribed geographical area) -Here, the
manufacturer may appoint a single sole selling agent or he may appoint sole agents area-wise. In the marketing of
agricultural goods, however, it is a common practice to sell through selling agents to pass on the risk of marketing the goods
to the selling agents.

Advantages of Selling through Indirect Channels:

i. Availability of expert services of middle man
ii. Little investment is required.
iii. Suitable for small producers.
iv. Enhances selling of goods through own retail outlets.
v. Facilitates selling of goods through courier services and postal services.
vi. Easy to sell goods through orders received, by telephone, email in case of telemarketing

Disdvantages of Selling through Indirect Channels:

i. It is not simple and fast.
ii. It is not economical.
iii. The producer does not have full control over distribution.
iv. It increases dependence on middle men.
v. It reduces cash sales.
Sources:

1. Essential, Macmillan, and New System Economics for Senior Secondary Schools.
2. Gerald Linda & Associates (2012). www.gla-mktg.com

SOURCES OF FUNDING FOR BUSINESS (WEEK 3)

Funding for business could be sourced internally (within the organization) or externally (outside the organization).

Business capital comes in two main forms: Debt and Equity.

Debt refers to loans and other types of credit that must be repaid in the future, usually with interest while equity refers to
amount of money invested in a company through ownership of shares and expectation of dividends in return.

SOURCES OF FINANCING FOR START-UPS AND ENTREPRENEURS:

There are various sources of finance available, but for new start ups, the most likely options will be:

1. Personal savings (Bootstrapping).

2. Informal loans from family or friends (Love Money).

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3. Bank loans and overdrafts.

4. Credit cards.

5. Private equity investors.

6. Crowdfunding - where money is raised from large numbers of investors.

7. Government funding schemes (Grants and Subsidies).

8. Local authorities.

9. Business angels

10. Business incubators.

11. Venture capital funding.

12. Credit unions (funding through cooperative societies).

13. Hire purchase.

14. Other independent business support organisations and schemes.

SOURCES OF FINANCING FOR COMPANIES

Firms can raise financial capital through the following ways:

a. Early-stage investors (capital from founders).
b. Re-investing of profits (retained earnings).
c. Borrowing from banks.
d. Selling of bonds and debentures to the public.
e. Selling of shares to the public.
f. Leasing.
g. Factoring.
h. Franchising.

Some of the sources are highlighted below.

a. Shares

A share is an individual portion of the company’s capital owned by a shareholder. It is a unit of capital measured by a sum of
money. A collection of shares held by a company is called a stock.

By selling shares to the public, companies raise capital for growth and development of their business. The holders of shares
are paid dividends as return on their investment.

b. Debentures

A debenture is a type of debt instrument that usually has a term greater than 10 years with expected fixed rate of interest on
annual basis.

We have two major types of debentures. These are:

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a. Mortgaged debentures - Debentures issued on the security of the company’s fixed assets where the assets can be claimed if
the company fails to pay the interest.

b. Floating debentures – Debentures issued without attaching security to company’s asset but have fixed rate of interest.

Debenture holders have to be paid their interest whether the company makes profit or not.

c. Bonds

A bond, also known as a fixed-income security is a debt instrument created for the purpose of raising capital. Bonds are
essentially loan agreements between the bond issuer and an investor, in which the bond issuer is obligated to pay a specified
amount of money at specified future dates.

By buying a bond, you are giving the issuer a loan, and they agree to pay you back the face value of the loan on a specific
date, and to pay you periodic interest payments along the way, usually twice a year.

Types of bonds

a. Corporate bonds-Bonds issued by the company to finance its operations.

b. Foreign bonds- Bonds issued by international organizations to generate funds for a specific purpose.
c. Treasury bonds-Bonds issued by the federal government to finance its budget deficits.
d. Municipal bonds- Bonds issued by state or local authorities to generate funds for particular projects.

d. Factoring

Factoring is a type of debtor finance in which a business sells its accounts receivable (i.e. invoices yet to be paid) to a third
party (called a factor) at a discount. A business will sometimes factor its receivable assets to meet its present and immediate
cash needs.

e. Leasing

Lease financing is one of the important sources of medium and long-term financing where the owner of an asset gives
another person, the right to use that asset against periodical payments. The owner of the asset is known as lessor and the user
is called lessee.

f. Hire purchase

This is an arrangement for buying expensive consumer goods where the buyer makes an initial down payment and pays the
balance plus interest in installments.

g. Business incubator

A business incubator is a company that helps new and startup companies to develop by providing advisory and
administrative support services, resources, contacts and capital for a fee they claim when such business starts doing well.

h. Franchising

A franchise is a way of structuring a business. It involves the owner of a business (known as the franchisor) licensing
to a third party (known as the franchisee) the right to operate a business or distribute goods and services using the
franchisor’s business name and systems for an agreed period of time, in return for a combination of a flat fee or fees
based on profits or sales.

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The franchise fee may be an upfront payment by the franchisee to the franchisor, an ongoing fee (e.g. an agreed percentage
of revenue or profit) or a combination of the two.

i. Crowd Funding

This is a way of raising finance by asking a large number of people (each for a small amount of money) to contribute in
raising funds for a particular business. It includes funding sources such as donations, subsidies, and grants that have no direct
requirement for return on investment.

j. Angel investors
These are individuals, normally affluent, who inject capital for startups in exchange for ownership equity or convertible debt.
Angel investors are also called informal investors, angel funders, private investors, seed investors or business angels.

k. Venture capital funding

A venture capital fund is an investment fund made up of contributions from wealthy individuals or companies, who provide
huge capital to ongoing firms to manage their investment portfolio for them and to invest in high-risk start-ups in exchange
for equity.

l. Bootstrapping
This is the act of building a company from personal savings with luck and cash coming in from the first sales. A bootstrap is
a business with little or no outside cash or other support.

m. Love Money
Love money is capital extended by family and/or friends to an entrepreneur to start a business venture.

Advantages of internal financing

a. Capital is immediately available.

b. No interest payments.
c. No control procedures regarding creditworthiness.
d. Spares credit line.
e. No influence of third parties.
f. More flexible.
g. More freedom given to the owners.

Sources:
1. Essential Commerce for Senior Secondary Schools.
2. Essential Economics for Senior Secondary Schools.

PRACTICE QUESTIONS ON SOURCES OF CAPITAL

1. Give at least five disadvantages of sourcing capital outside the organization.

2. Briefly explain how mergers and acquisition can serve as a way of expanding business capital.

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CHANGE IN DEMAND AND QUANTITY DEMANDED

Movement along The Demand Curve (Graph 1)

A change in price causes a movement along the demand curve.

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An increase in price from $12 to $16 causes a movement along the demand curve, and quantity demand falls from 80 to 60.

A change in price doesn’t shift the demand curve – we merely move from one point of the demand curve to another.

Shift in the Demand Curve (Graph 2)

A shift in the demand curve occurs when the whole demand curve moves to the right or left. For example, an increase in
income would mean people can afford to buy more widgets even at the same price.

Effects of Change in Demand on Equilibrium Price and Quantity.

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Graph 3 shows an increase in demand (shift in demand curve to the right) and supply remaining the same resulting in both a
higher equilibrium price and a higher equilibrium quantity.

Graph 4 shows a decrease in demand (shift in demand curve to the left) and supply remaining the same lowering both the
equilibrium price and equilibrium quantity.

The demand curve could shift to the right for the following reasons:

1. The good became more popular (e.g. fashion changes or successful advertising campaign)
2. The price of a substitute good increased.
3. The price of a complement good decreased.
4. A rise in incomes (assuming the good is a normal good, with positive YED)
5. Seasonal factors.
In the real world, a higher price could cause a movement along the demand curve, but in the long-term, it could cause a shift
as consumers respond to the persistently higher prices.

For example, if there is an increase in the price of petrol, there would be a movement along the demand curve, and a smaller
quantity would be bought. However, there is likely to be only a small fall in demand because the demand for petrol tends to
be quite price inelastic.

It is very important to understand the difference and know your terminology. Simply put:

 Change in demand = the whole demand curve shifts

 Change in quantity demanded = you move along the same demand curve from one point to another
Here is a graphic illustration to show the difference on one graph:

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Differences between a change in demand and a change in quantity demanded are given below:

1. Change in demand means change in demand due to the factors of demand other than price whereas Change in
quantity demanded means change in the quantity purchased due to change in the price of a product.
2. Change in demand has no price effect whereas Change in quantity has price effect.
3. Change in demand implies a change in demand curve whereas Change in quantity does not change the demand
curve.
4. Change in demand will result in the shift in the demand curve whereas Change in quantity will result in
movement of demand curve.

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 CHANGE IN SUPPLY AND CHANGE IN QUANTITY SUPPLIED

A change in supply is a shifting of the entire supply curve. But a change in quantity supplied is movement along the
curve from one point to another.

Here is a graph to show the difference:

Change in quantity supplied

Note that this is the supply curve isolated on the graph. At each point on the curve there is a different quantity supplied. So, if
we change from p = 1 to p = 2, there is a change in quantity supplied of 20 units since we have gone from q = 10 at p = 1 to q
= 30 at p = 2.

Change in supply

Again, the supply curve is isolated. A change in supply means a shift in the entire curve. In this case, supply has expanded
because it has shifted to the right. At the same price of N2, quantity supplied has increased from30 units to 50 units showing
a change (difference) in quantity supplied of 20 units.

It is very important to understand the difference and know your terminology. Simply put:
 Change in supply = the whole supply curve shifts.
 Change in quantity supplied = you move along the same supply curve from one point to another
Here is a graphic illustration to show the difference on one graph:

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With a Change in quantity supplied:
1. The price of the product changes.
2. There has been a movement from one point on the supply curve to another point.

With a Change in supply, the supply curve shifts.

An increase in supply is caused by change in determinants of supply as follows:
a. an increase in the number of sellers.
b. a reduction in the cost of inputs (such as labor or electricity).
c. a technological innovation that increases output (such as the development of disease resistant crops).
d. unusually good weather (for an agricultural product).
e. expectations that the price will be lower in the future.

Effects of Change in Supply on Equilibrium Price and Quantity.

Graph 1 shows an increase in supply (shift in supply curve to the right) and demand remaining the same resulting in lower
equilibrium price and a higher equilibrium quantity.

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Graph 2 shows a decrease in supply (shift in supply curve to the left) and demand remaining the same resulting in higher
equilibrium price a lower equilibrium quantity.

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PRODUCTION POSSIBILITY CURVE

The Production Possibility Curve or the Production Possibility Frontier is a graph which depicts all maximum output
possibilities for two goods, given a set of inputs consisting of resources and other factors. Examples of such goods could be
knowledge goods (Schools) and wellness goods (Hospitals).

The manufacture of most goods requires a mix of all four factors of production. Each point on the curve shows how much of
each good will be produced when resources shift from making more of one good and less of the other.

The PPF/PPC assumes that all inputs are used efficiently. Other assumptions are:

1. Technology remains constant.

2. Using given resources only two goods can be produced.
3. Resources are not equally efficient for all type of goods (i.e. to increase production of one unit of good 1 we have
to sacrifice more and more units of good 2).

A typical production possibility schedule and curve looks like this:

Production Possibility for Schools and Bridges.

Schools Hospitals
0 20
20 15
40 10
60 5
80 0
(Hospitals) PPC or PPF

20 *C

15 ----------------------*D *G

10 --------------------*A ------------------ *E *H

5 ------------------ -----------------------*B---------------------*F

0 20 40 60 80 (Schools)

Let’s look at the points on the graph.

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  At point A, the country can produce only10 Hospitals and 20 Schools reserving some amount of resources.
 At point B, the country can produce 5 Hospitals and 40 Schools also reserving some amount of resources.
Now let’s say the country decides to produce at point B, what are the implications?
The implications are that the country loses 20 additional schools or 5 additional hospitals as a result of reserving some
amount of resources. So points A and B are points of inefficient production.

 At points C, D, E, and F, the country can produce efficiently without wasting or reserving any amount of
resources. These are points of efficient production.
 At points G and H, the country cannot be able to produce because of scarcity, her resources are not enough. It
must borrow funds to be able to produce at that time. These are points of unattainable production at that moment.

Another way to illustrate the effects of unemployed resources is with the production possibilities curve (see graph above).
Points “A” and “B” illustrate the effect of UNEMPLOYMENT. With unemployment, less will be produced.

Points “C”, “D”, “E” and “F” represent the maximum possible levels of production with FULL EMPLOYMENT.

The unattained points (G and H) show the Concept of SCARCITY while the trade-off between how much of each goods to
produce at optimum levels show the Concepts of CHOICE and OPPORTUNITY COST. By describing this trade-off, the
curve demonstrates the concept of opportunity cost -making more of one good will cost society the opportunity of making
more of the other good.

If we look at it, the PPC/PPF shows very integral concepts of economics which helps countries determine the true cost of
their decisions.

Simply put, the production possibility curve portrays the cost of society's choice between two different goods. An economy
that operates at the frontier has the highest standard of living it can achieve, as it is producing as much as it can use the
same resources. If the amount produced is inside the curve, then all of the resources are not being used. On the graph, see
points A and B. One possible reason could be:

(a) A recession or depression when there is not enough demand for either goods;

(b) Layoffs can also occur, resulting in lower levels of labor being used.

Note Carefully: Positive factors cause an outward shift while negative factors cause an inward shift of the PPC or PPF.

The PPC of an economy shifts outward if:

1. Resources used in production such as coal, oil, and population in the economy increase.
2. The economy sees improvements in technology which make production more efficient; more goods can be
produced with the same resources.
3. Amount of specialization and trade increases. This decreases the opportunity cost of production for both the
economies involved in the process, allowing for increased production of goods and services.

The PPC can shift inwards if the reverse happens such as:
a. Level of technology degenerates, deteriorates and becomes obsolete;
b. Lack of improvement in labour skills;
c. Government policy becomes unfavourable;
d. Availability and quality of natural resources diminish; although this is very rare.

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THEORY OF PRODUCTION

THEORY OF PRODUCTION

Meaning – Production is the creation of utilities to satisfy human needs and wants. It is any activity directed at the
satisfaction of other peoples’ wants through exchange. The aim of production is to produce the goods and services to
generate wealth that we want for ourselves. Production ends with distribution.

What is not Production?

The making or doing of things which are not wanted or are made just for the fun of it does not qualify as production.

The test of whether or not any activity is productive is whether or not anyone will buy its end-product. If we will buy
something we must want it.

The Theory of Production explains the principles by which a business firm decides how much of each commodity that it sells
(its “outputs” or “products”) it will produce and how much of each kind of labor, raw material, fixed capital goods, etc., that
it employs (its “inputs” or “factors of production”) it will use.

The essential characteristics of the business firm is that it purchases factors of production such as land, labour, capital,
intermediate goods, and raw material from households and other business firms and transforms those resources into different
goods or services which it sells to its customers, other business firms and various units of the government as also to foreign
countries.

Types of Production:
For general purposes, it is necessary to classify production into three main groups:
1. Primary Production:
Primary production is carried out by ‘extractive’ industries like agriculture, forestry, fishing, mining and oil extraction. These
industries are engaged in such activities as extracting the gifts of nature from the earth’s surface, from beneath the earth’s
surface and from the oceans.

2. Secondary Production:
This includes production in manufacturing industry such as turning out semi-finished and finished goods from raw materials
and intermediate goods such as conversion of flour into bread or iron ore into finished steel. They are generally described as
manufacturing and construction industries, such as the manufacture of cars, furnishing, clothing and chemicals, as also
engineering and building.

3. Tertiary Production:
Industries in the tertiary sector produce all those services which enable the finished goods to be put in the hands of
consumers. In fact, these services are supplied to the firms in all types of industry and directly to consumers. Examples cover
distributive traders, banking, insurance, transport and communications. Government services, such as law, administration,
education, health and defence, are also included.

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Fixed factor inputs
Fixed factors are those that do not change as output is increased or decreased, and typically include premises such as its
offices and factories, and capital equipment such as machinery and computer systems.

What are the three stages of production in economics?

The three stages of production are increasing average product production, decreasing marginal returns and negative marginal
returns. These stages of production apply to short-term production of goods, with the length of time spent within
each stage varying depending on the type of company and product.

What are the 4 factors of production and examples?

The four main factors of production are land, or the physical space and natural resources, labor, or the workers, capital, or the
money and equipment, and entrepreneurship, or the ideas and drive, which are used together to make a successful attempt at
selling a product or service

A Classification of Factors of Production:

Land includes farming and building land, forests, and mineral deposits. Fisheries, rivers, lakes, etc. all those natural
resources (or gifts of nature) which help us (the members of the society) to produce useful goods and services.

In other words, land includes not only the land surface, but also the fish in the sea, the heat of the sun that helps to dry grapes
and changes them into resins, the rain that helps farmers to grow crops, the mineral wealth below the surface of the earth and
so on.

Labour – This refers to the productive resources embodied in human physical and mental efforts, skills, and intellectual
powers used in the production of goods and services.

The term covers clerical, managerial and administrative functions as well as skilled and unskilled manual work. It can be
classified into skilled, semi-skilled and unskilled labour.

Capital is that part of wealth which is not used for the purpose of consumption but is utilised in the process of production.
Tools and machinery, bullocks and ploughs, seeds and fertilizers, etc. are examples of capital.

Types of capital

Fixed and Circulating Capital:

1. Fixed capital - Durable capital like tools, machinery and factory buildings, which can be used for a long time.

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2. Circulating capital- Things like raw materials, seeds and fuel, which can be used only once in production are called
circulating capital.

Entrepreneur - the entrepreneur is the person who takes the charge of supervising the organisation of production and of
framing the necessary policy regarding business.

Functions or Role of the Entrepreneur

1. Decision-making: An entrepreneur is to determine what to produce, how to produce, where to produce, how much to
produce, how to sell and so forth.

2. Management Control: Management and control of the business are conducted by the entrepreneur himself. But the
importance of this function has declined, as the business nowadays is managed more and more by paid managers.

3. Division of income: he is to pay rent, interest; wages and other contractual income out of the realized sale proceed.

4. Risk-taking and uncertainty-bearing: such as risks of fire, loss of goods in transit, theft, competitive risk, technical risk,
etc., some can be insured against while others cannot be insured against.

5. Innovation: He makes frequent inventions of new products, new techniques and discovering new markets to improve his
competitive position as well as increase earnings.

Theory of Production explains the principles by which a business firm decides how much of each commodity that it sells (its
“outputs” or “products”) it will produce and how much of each kind of labor, raw material, fixed capital goods, etc., that it
employs (its “inputs” or “factors of production”) it will use. The aim of production is to produce the goods and services to
generate wealth that we want for ourselves.

Three stages of production

The three stages of production are:
a. Increasing average product production;
b. Decreasing marginal returns and;
c. Negative marginal returns.
These stages of production apply to short-term production of goods, with the length of time spent within each stage varying
depending on the type of company and product.

Production Schedule

Labour Total Product Average Product Marginal Product

1 80 80 80
2 170 85 90
3 270 90 100
4 368 92 98
5 430 86 62
6 480 80 50
7 504 72 24
8 504 63 0
9 495 55 -9
10 480 48 -15

1. Total Product:

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Total product of a factor is the amount of total output produced by a given amount of the factor, other factors held constant.
As the amount of a factor increases, the total output increases. It will be seen from the table above that with a fixed quantity
of capital (K), more units of labour are employed, total product is increasing in the beginning.
Thus, when one unit of labour is used with a given quantity of capital, 80 units of output are produced. With two units of
labour, 170 units of output are produced, and with three units of labour, total product of labour increases to 270 units and so
on.
After 8 units of employment of labour, total output declines with further increase in labour input. But the rate of increase in
total product varies at different levels of employment of a factor. Total Product is denoted by the formula TP = AP X L.
2. Average Product:
Average product of a factor is the total output produced per unit of the factor employed. Thus, Average Product = Total
Product ÷ Number of units of a factor employed. It is denoted by the formula “TP ÷ L”.
3. Marginal Product:
Marginal product of a factor is the addition to the total production by the employment of an extra unit of a factor. It is
denoted by the formula “ΔTP ÷ ΔL”.

RELATIONSHIP BETWEEN AVERAGE PRODUCT AND MARGINAL PRODUCT

The marginal product and average product curves initially increase then decrease due to the
law of diminishing marginal returns. Marginal product is the change in total product divided by the change in
quantity of resources (or inputs). The average product reaches its peak when it intersects the marginal product curve.

Total product is simply the output that is produced by all of the employed workers. Marginal product is the additional output
that is generated by an additional worker.

Graph Showing Total Product, Average product and Marginal Product.

500

400

Output TP

300

200

100

AP

0 1 2 3 4 5 6 7 8 9 10

Units of Labour MP

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THEORY OF COST

A core economic concept is that getting something requires giving up something else. For example, earning more money
may require working more hours, which costs more leisure time.

Economists use cost theory to provide a framework for understanding how individuals and firms allocate resources in
such a way that keeps costs low and benefits high.

Cost theory offers an approach to understanding the costs of production that allows firms to determine the level of output
that reaps the greatest level of profit at the lowest cost.

Cost theory contains various measures of costs, both fixed and variable. Fixed costs do not vary with the quantity of goods
produced. Rent on a facility is an example of a fixed cost.

Variable costs change with the quantity produced. If increased production requires more workers, for example, those
workers’ wages are variable costs. Producing more goods costs more, but the costs vary depending on how much work
each additional worker can do. The sum of fixed and variable costs is a firm’s total costs.

Marginal cost is the increase in total cost that results from increasing production by one unit of output.

It can also be defined as the change in total costs incurred divided by change in output.

Marginal costs typically fall at first when there is an increase in production. However, due to the Law of Diminishing
Marginal Returns, at some point costs will increase exponentially as production increases.

The goal of a firm is to maximize profit, which equals total revenue minus total cost. Determining a level of production
that generates the greatest level of profit is an important consideration. That means paying attention to marginal costs
and marginal revenue. Under cost theory, as long as marginal revenue exceeds marginal cost, increasing production will
raise profit.

TYPES OF COST

1. Fixed costs - These are the costs that do not vary with the level of output (at least in the short run). Examples of fixed
costs are certain utility bills, indirect labor and rental expense.

We calculate average fixed costs (AFC) by dividing total fixed cost by output (Q).

2. Variable costs - These are the costs that vary with the level of input. Examples of variable costs include raw materials,
hourly wages, utilities such as electric and gas.

We calculate average variable cost (AVC) by dividing TVC by output (Q) of units produced.

The difference between fixed cost and variable cost is that fixed costs do not change with the level of production on the
short run, while variable costs change at all levels of production.

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3. Total Costs – These refer to the sum of fixed and variable costs of production put together. It is the total amount spent
in producing goods and services at any level of production. We can calculate total costs by adding total fixed costs to
total variable costs. This can be represented by the formula:

TC = TFC + TVC

4. Marginal cost equals the additional cost of producing one more unit. This can be represented by the marginal cost
formula:

Marginal Cost = (Change In Total Cost) / (Change In Quantity).

Below is a cost schedule to demonstrate better.

Output Fixed Variable Total Average Average Average Marginal

(Q) Cost Cost (VC) Cost Fixed Cost Variable Total Cost Cost (MC)
(FC) (TC) (AFC) Cost (ATC)
(AVC)
0 200 0 200 0 0 0 -
1 200 100 300 200 100 300 100
2 200 150 350 100 75 175 50
3 200 160 360 66.7 53.3 120 10
4 200 200 400 50 50 100 40
5 200 300 500 40 60 100 100
6 200 420 620 33.3 70 103.3 120

In summary:

a. FC=TC-VC;

b. VC=TC-FC;

c. TC=FC+VC;

d. AFC=FC÷Q;

e. AVC=VC÷Q;

f. AC=TC÷Q;

g. MC= ΔTC÷ΔQ.

This can be represented on the graph as follows:

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Cost (₦)

650 TC

600

550

500

450 VC

400

350

300

250

200 FC

150 MC

100 ATC

50 AFC

0 1 2 3 4 5 6

Output (Units)

DIFFERENCE BETWEEN ECONOMISTS AND ACCOUNTANTS VIEW ON COST

Economists view costs as what an individual or firm must give up getting something else. Opening a manufacturing plant
to produce goods requires an outlay of money, and once a plant owner spends money to manufacture goods, that money
is no longer available for something else.

However Accountants do not view cost in this way. They only look at the monetary aspect of it and neglect the
opportunity cost.

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THEORY OF REVENUE
Total Revenue:
The income earned by a seller or producer after selling the output is called the total revenue. In fact, total revenue is the
multiple of price and output. The behavior of total revenue depends on the market where the firm produces or sells.

Total revenue is the sum of all sales, receipts or income of a firm.

Total revenue may be defined as the product of planned sales (output) and expected selling price.

Total revenue at any output is equal to price per unit multiplied by quantity sold.

Average Revenue:
Average revenue refers to the revenue obtained by the seller by selling the per unit commodity. It is obtained by dividing the
total revenue by total output.

The average revenue curve shows that the price of the firm’s product is the same at each level of output.

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The relationship between TR, AR and MR can be expressed with the help of a table 1.

From the table 1 we can draw the idea that as the price falls from N10 to N1, the output sold increases from 1 to 10. Total
revenue increases from 10 to 30, at 5 units. However, at 6th unit it becomes constant and ultimately starts falling at next unit
i.e. 7th. In the same way, when AR falls, MR falls more and becomes zero at 6th unit and then negative. Therefore, it is clear
that when AR falls, MR also falls more than that of AR: TR increases initially at a diminishing rate, it reaches maximum and
then starts falling.

MR in mathematical terms is the ratio of change in total revenue to change in output

MR = ∆TR/∆q or dR/dq = MR

Therefore,

Below is the graph.

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RELATIONSHIP BETWEEN MARGINAL COST AND MARGINAL REVENUE

The relationship between marginal costs and marginal revenue helps to determine production levels:

a. If marginal revenues are greater than marginal costs, the company is making a profit per unit and should increase
production levels to make more units.

b. If marginal revenues are less than marginal costs, the company should reduce production levels, as it is losing money on
each unit.

c. If marginal revenues equal marginal costs, this is the most efficient and most profitable point of operation.

In this way, costs and revenues both come into play when determining maximum profit and ideal production levels.

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