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2 (a) Explain the contributions of enterprise and division of labour to an economy. [8]

Enterprise refers to an organization that combines scarce resources for the production and supply of goods and services more commonly explained as production activity itself rather than the organization. Enterprise is said to occur when an entrepreneur takes the risk of using his or her own resources in a business venture and so organize the other three factors of production; land, labour and capitol. Countries typically showcase to forms of enterprise; private and public enterprise. Private enterprise is economic activity undertaken by private individuals or groups of private individuals. These put together scarce resources goods and services required by customers using these resources in the most efficient ways possible. In a country enterprise encourages the growth of the economy in several ways. One major way is the employment of people through the set up of organizations who require labour as a resource in order to operate. This will certainly be significant for a country that has been producing below its production possibility frontier. As more people are employed, general standards of living in the country are greatly improved. In addition, the overall buying power is increased as more people are receiving wages and are therefore able to purchase goods and services for their satisfaction. Enterprise within a country could also develop into external trade with other countries which will enhance the economic relationship between the country and other nations.

Division of labour refers to the separation of production processes into distinct operations that are given to each particular worker. An example is in the field of medicine where there are cardiologists who deal with the heart and pediatricians who specialize in treating children. Division of labour is often linked to a higher level of productivity in an economy as well as increased efficiency. This is because each worker attends to one special task that they are good at and so make fewer mistakes as well take a shorter time to perform a task such as along a production line. Division of labour may be advantageous to a country due to possible increased levels of output which then encourages economic growth. Since the tasks are not all being done by one person, it is also possible that extra labour will be required and so raising the number of economically active persons within a country. This way the government stands to receive more taxes due to more people earning an income as well as higher output from companies. This in turn will be beneficial to the locals as the capital may be used to provide and improve both public goods such as defense as well as merit goods such as healthcare and education.

(b) Discuss the desirability of the worldwide movement towards the market economy and away

from the planned economy. [12]

Planned economies are those where it is the government’s responsibility to make the decisions on what to produce, how to produce and whom to produce for. It is most often practiced in communist states where all decisions are made by the state. An example is of Great Britain during the Second World War where the government took up control of all important economic affairs. Planned economies are usually characteised by the state owning and controlling all resources. This logic of public ownership is based on the desire for fair distribution of wealth and income as it was the notion that private ownership leads to great inequalities of wealth meaning that wealthier groups exercise greater economic power. In a planned economy, there is no personal income that is derived from the ownership of property. The goods produced are of low quality as there is no competition in the market also resulting in a lack of choices for consumers and wastage of resources. As a result of these characteristics many countries today are looking towards moving to a free market economy where the government pays little or no pat in economic activities of the state. What is produced and the price charged is determined entirely by the market mechanisms of demand and supply. In a market economy, individuals have the right to own, control and dispose of land, labour, capital and enterprise. Individuals are also free to buy and hire economic resources, to organize them for the production of goods and services and to sell in markets of their choice. Workers are also free to move occupations and locations that will offer the highest wages. Consumers will spend their income on the goods and services that will yield the maximum satisfaction. Competition keeps the prices down and improves efficiency within production. The standards of the products also go up as companies try to attract more consumers to buy their product. As a result of these attributes, it is not uncommon to find many countries transitioning to market economies from their former planned economies. This further influenced by other countries raising stiffer competition in the international markets due to producing high quality goods for a lower cost – efficiency. It is therefore important for planned economy countries to change to market economies so as to be able to compete favorably in the international market. It is however difficult for this transition to take place. These difficulties are illustrated in the case of the former Soviet Union’s transition journey. Since the collapse of communism in the late 1990s, countries from the former Soviet Union and its satellite states have embraced market capitalism and abandoned centrally planned economies. Most of these transition economies have faced some severe short term difficulties and long term constraints on development. One major issue is that of the rising unemployment. As firms tried to increase their efficiency major, retrenchment staff was inevitable as they tried to cut their labour costs. Under communism, state industries often employed more workers than was required. Additionally as newly established firms became subject to better competition, some were driven out of the market causing further unemployment. Another major issue was the increased inflation. This was as a result of the removal of price controls by the government and so newly privatized firms began charging prices that actually reflected the costs involved in production while other entrepreneurs took advantage of this and exploited their position and increased their prices. All this has led to transition countries coming to a compromise and practice mixed economies where some resources are government owned and others are privately owned and therefore characteristics of market economies as well as planned economies are then shared.

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