GR 11 ECONOMICS U2 TITLE PAGE

GRADE 11

ECONOMICS

UNIT MODULE 2

GROWING THE ECONOMY

TOPIC 1: FACTORS OF PRODUCTION

TOPIC 2: CHAIN OF PRODUCTION
TOPIC 3: SPECIALISATION OF PRODUCTIVE
RESOURCES

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 GR 11 ECONOMICS U2 ACKNOWLEDGEMENT

ACKNOWLEDGEMENT

We acknowledge the contributions of all Secondary Teachers who in one way or

another have helped to develop this Course.

Our profound gratitude goes to the former Principal of FODE, Mr. Demas
Tongogo for leading FODE team towards this great achievement. Special thanks
to the Staff of the English Department of FODE who played an active role in
coordinating writing workshops, outsourcing lesson writing and editing processes,
involving selected teachers of Central Province and NCD.

We also acknowledge the professional guidance provided by Curriculum and

Development Assessment Division throughout the processes of writing, and the
services given by member of the English Review and Academic Committees.

The development of this book was Co-funded by GoPNG and World Bank.

DIANA TEIT AKIS

PRINCIPAL

Flexible Open and Distance Education

Papua New Guinea

Published in 2017

@ Copyright 2017, Department of Education

Papua New Guinea

All rights reserved. No part of this publication may be reproduced, stored in a retrieval
system, or transmitted in any form or by any means electronic, mechanical, photocopying,
recording or another form of reproduction by any process is allowed without the prior
permission of the publisher.

ISBN: 978 9980 89 719 0

National Library Services of Papua New Guinea

Compiled and finalised by: Social Science Department-FODE

Printed by the Flexible, Open and Distance Education

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 GR 11 ECONOMICS U2 CONTENTS

TABLE OF CONTENTS

Contents……………………………………………………………………………………………………………….……3
Secretary’s Message………………………………………………………………………………………………….4
Unit Introduction ………………………………………………………………………………………………………5
Learning Outcomes …………………………………………………………………………………………..………5

TOPIC 1: FACTORS OF PRODUCTION …………………………………………………………..7

11.2.1.1: Economic Resources ………………………………………………………….………….8
11.2.1.2: Labour …………………………………………………………...................................10
11.2.1.3: Land Resources in Papua New Guinea……………………….…………………..16
11.2.1.4: Land Ownership.………………………………………………………….…………………20
11.2.1.5: Land and Economic Development…………………………………….…………….24
11.2.1.6: Capital and Appropriate Capital ………………………………………….………….27
11.2.1.7: Entrepreneurial Skills …………………………………………………………………….28
11.2.1.8: Case Studies of Successful Businesses in Papua New Guinea…..…....29
11.2.1: Summary ………………………………………………………………………………….…..33
Student Learning Activity 11.2.1 ……………………………………………………………………………..34
TOPIC 2: CHAIN OF PRODUCTION…………………………………………………………..……37
11.2.2.1: Inputs in the Production Process……………………………….…………………..39
11.2.2.2: Outputs in the Production Process …………………………………….………….41
11.2.2.3: Production Possibilities…………………………………………………………..………43
11.2.2.4: Types of Production………………………………………………………………………..45
11.2.2.5: Costs and Benefits of Production ……………………………………………..……47
11.2.2.6: Production Variables ………………………………………………………………..……49
11.2.2.7: Diminishing Returns………………………………………………………………….……59
11.2.2.8: Economies and diseconomies of Scale…………………………………………..63
11.2.2: Summary ………………………………………………………………………………..…….69
Student Learning Activity 11.2.2 ………………………………………………………………….………….71
TOPIC 3: SPECIALISATION OF PRODUCTIVE RESOURCES ……………………………75
11.2.3.1: Specialisation and Division of Labour…………………………………………….76
11.2.3.2: Forms of Specialisation………………………………………………………………….78
11.2.3.3: Productivity in Papua New Guinea…………………………………………………81
11.2.3: Summary ………………………………………………………….…………………....……86
Student Learning Activity 11.2.3 ……………………………………………………………………….…….87
ANSWERS TO LEARNING ACTIVITIES 11.2.1 to 11.2.3 ……………………………………………..88
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 GR 11 ECONOMICS U2 SECRETARY’S MESSAGE

SECRETARY’S MESSAGE

Achieving a better future by individual students and their families, communities or the nation
as a whole, depends on the kind of curriculum and the way it is delivered.

This course is a part of the new Flexible, Open and Distance Education curriculum. The
learning outcomes are student-centred and allows for them to be demonstrated and
assessed.

It maintains the rationale, goals, aims and principles of the national curriculum and identifies
the knowledge, skills, attitudes and values that students should achieve.

This is a provision by Flexible, Open and Distance Education as an alternative pathway of

formal education.

The course promotes Papua New Guinea values and beliefs which are found in our
Constitution, Government Policies and Reports. It is developed in line with the National
Education Plan (2005 -2014) and addresses an increase in the number of school leavers
affected by the lack of access into secondary and higher educational institutions.

Flexible, Open and Distance Education curriculum is guided by the Department of

Education’s Mission which is fivefold:
 To facilitate and promote the integral development of every individual
 To develop and encourage an education system satisfies the requirements of
Papua New Guinea and its people
 To establish, preserve and improve standards of education throughout Papua
New Guinea
 To make the benefits of such education available as widely as possible to all
of the people
 To make the education accessible to the poor and physically, mentally and
socially handicapped as well as to those who are educationally disadvantaged.

The college is enhanced to provide alternative and comparable pathways for students and
adults to complete their education through a one system, many pathways and same
outcomes.

It is our vision that Papua New Guineans’ harness all appropriate and affordable
technologies to pursue this program.

I commend all those teachers, curriculum writers, university lecturers and many others who
have contributed in developing this course.

DR.UKE KOMBRA,
Secretary for Education

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 GR 11 ECONOMICS U2 UNIT INTRODUCTION

11.2: GROWING THE ECONOMY

UNIT INTRODUCTION

Growing the economy, covers how best limited resources can be used to produce goods and
services to satisfy Papua New Guineans’ needs and wants. Moreover, it discusses economic
growth, improve quality and increase quantity of the factors of production which leads to
increased efficiency, innovation, investment and the creation of wealth. In this unit, you will
use and apply various skills to examine the issues surrounding production and the growth of
the economy.

Broad Learning Outcomes

At the end of this unit module, you will be able to:

 describe the meaning of measurement and trends of economic growth in Papua New
Guinea
 evaluate the costs and benefits of pursuing economic growth in Papua New Guinea
 demonstrate an understanding and application of concepts, principles, models, skills and
terminology used in the study of Economics.

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 GR 11 ECONOMICS U2 INTRODUCTION TO ECONOMICS

Time Frame

This unit should be completed within 10 weeks.

If you set an average of 3 hours per day, you should be able to complete the unit comfortably by
the end of the assigned week.

Try to do all the learning activities and compare your answers with the ones provided at the end of
the unit. If you do not get a particular exercise right in the first attempt, you should not get
discouraged but instead, go back and attempt it again. If you still do not get it right after several
attempts then you should seek help from your friend or even your tutor. Do not pass any question
without solving it first.

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 GR 11 ECONOMICS U2 UNIT INTRODUCTION

TOPIC 1: FACTORS OF PRODUCTION

Basically, the aim of this topic is to give a clear understanding of the factors of production and how
best these factors can be used to produce goods and services that are vital to Papua New Guinea’s
economy. Improvements in the quality and quantity of production will lead to economic growth,
increased efficiency, innovation, investment and the creation of wealth.

Specific Learning Outcomes

At the end of this topic, you will be able to;

 identify and define the four factors of production.
 explain the types of resources and their factor rewards.
 explain land resources in Papua New Guinea.
 explain capital and appropriate capital.

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 GR 11 ECONOMICS U2 GROWING THE ECONOMY

11.2.1.1: Economic Resources (Factors of Production)

Production of goods and services take place anyway in the world. In Papua New Guinea, our
ancestors produced goods and services using the available resources to satisfy needs and wants.
The surplus produced was exchanged for what they did not have.
A factor of production is an economic term to describe the inputs that are used in the production
of goods or services in the attempt to make an economic profit. These goods and services are used
to satisfy human needs and wants and to trade. Factors of production are also called Economic
Resources. They are classified into four groups;
1. Land
2. Labour
3. Capital and
4. Entrepreneurship

FACTORS OF PRODUCTION

Source: www.romeconomics.com

Land
This refers to all the natural resources, gifts of nature needed for production. For example, air,
water, oil, sea, fish and the natural forests.
Labour
This refers to any productive human effort contributed towards changing raw materials to
finished products. For example, a hairdresser, a block layer and a driver.

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 GR 11 ECONOMICS U2 UNIT INTRODUCTION

Capital
Human created wealth or man-made items which help in further production such as roads,
factories, computers, machines and trucks.

Enterprise/Entrepreneurship
Taking the risk to make a profit is called entrepreneurship. People see an opportunity to make a
profit and investing in it with the combination of other factors. For example, self-employed
people, shareholders, shop owners, farmers and managers. They organise the raw materials,
capital and labour in the production process. All factors are essential to produce a good because
production is not a job of a single factor. Production refers to the making of these goods and
services. Firms or businesses are producers. Firms use the land, labour and capital called inputs to
make goods and services known as outputs.

THE PRODUCTION PROCESS

Entrepreneurs decide’ WHAT TO PRODUCE?

HOW TO PRODUCE?

Land, Labour & Capital The Firms Goods and Services

Inputs Productions Outputs

The aim of production is to satisfy the needs and wants of people, therefore, the process is not
complete until the goods and services actually reach the people who need and want them.

Factor Payments
These are payments made to economic resources, or the factors of production (labour, capital,
land, and entrepreneurship), in return for productive services. Factor payments are categorised
according to the services of the productive resource being rewarded.

1. Wages are paid for the services of labour

2. Interest is the payment for the services of capital
3. Rent is the payment for service on land
4. Profit is the factor payment to entrepreneurship

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 GR 11 ECONOMICS U2 GROWING THE ECONOMY

11.2.1.2: Labour

What is labour?
Labour is the human effort, which can be physical or mental, put into the production of goods and
services. It is the work done by human beings to produce something. Construction and plantation
workers provide physical labour, whereas engineers, managers and accountants provide mental or
conceptual labour. Both groups are equally important to the production process and the economic
growth of a country.
The Labour Force in Papua New Guinea refers to the total number of people who are capable of
working. Therefore, the actual workforce in Papua New Guinea and other developing nations is
more difficult to count because many children are economically active from an early age.
Workforce refers to those who are actively working or participating in the production of goods and
services. They are actually employed and contributing towards the economy.
Generally, the labour force includes;
 the armed forces
 the unemployed and
 first-time job-seekers

In Papua New Guinea, people are engaged in different types of activities to earn money for their
living. These activities are divided into two main sectors.

1. Formal Sector Labour Force

The part of the economy comprising of firms (businesses) which hire productive resources in order
to produce goods and services. The formal sector provides a narrow employment base, which
consists of workers engaged in the mining and manufacturing industries. It also includes the public
sector employees (police, teachers, doctors) and service industries such as finance, construction
(building roads and bridges), transportation and utilities.
Formal wage employment in Papua New Guinea is relatively insignificant when compared to other
economic activities. Please read the report by the Asian Development Bank on employment in the
formal sector of Papua New Guinea on the next page.

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 GR 11 ECONOMICS U2 UNIT INTRODUCTION

Formal Sector Job Growth, a Key Challenge for Papua New

Guinea - ADB Report
PORT MORESBY, PAPUA NEW GUINEA (3 July 2014) – While its economy enjoys robust
economic growth, Papua New Guinea (PNG) will face challenges in continuing to generate
formal job opportunities for a rapidly growing work force, according to the Asian
Development Bank’s (ADB) new issue of the Pacific Economic Monitor, launched today.
“Papua New Guinea has made some significant progress in creating more formal job
opportunities for its young, rapidly growing workforce, but more needs to be done,” said ADB
Country Economist, Aaron Batten. “Recent estimates show that the number of formal sector
jobs doubled over the last decade. However, the majority of PNG’s population remains
excluded from formal job markets.”
The Monitor says a defining feature of PNG’s formal job growth between 2002 and 2013 has
been the diversity of employment-generating sectors. Estimates show that agriculture
accounted for the largest share of net job creation, followed by manufacturing, then building
and construction.
The Pacific Economic Monitor says that underpinning this job growth is improved investor
confidence created by fiscal prudence, macroeconomic stability and important policy reforms
that reduced government involvement in the financial services and telecommunications
sectors.
Papua New Guinea’s GDP growth is forecast at 6.0% in 2014, picking up to a record 21.0%
next year, as liquefied natural gas exports start their first full year of production.
The report recommends that policies aimed at reducing inequality and improving the
inclusiveness of economic growth should be targeted at expanding access to social services
and protection to informal sector workers.
Even with sustained growth in formal sector job creation, it will take decades to move a
majority of the population out of the informal sector, the Monitor says. Raising the living
standards of those in the informal sector will require assistance that can provide essential
infrastructure and social services necessary to expand their access to markets and their ability
to participate in PNG’s growing economy.
The Pacific Economic Monitor is a bi-annual review of economic developments in ADB’s 14
developing member countries in the Pacific region.

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 GR 11 ECONOMICS U2 GROWING THE ECONOMY

2. Informal Sector Labour Force

The informal sector refers to those workers who are self-employed, or who work for those who
are self-employed. People who earn a living through self-employment in most cases are not on
payrolls thus, are not taxed. Many informal workers do their businesses in unprotected and
unsecured places. The active labour force in the informal sector is difficult to know. The majority
of the population who are dependent upon self-employment and subsistence activities will
continue to increase.
Labour is a marketable factor of production meaning, labour can be sold. Entrepreneurs pay wages
for the use of labour in production activities. Wage rates are determined by the labour market
based on demand and supply. There are many industries in PNG, ranging from fishing, building and
construction, mining, agriculture, finance and transport have risen and fallen in their employment
levels. This depends on how strong each industry is performing in the market.

Factors affecting the Supply of Labour

Labour supply in an economy is concerned with the number of hours that workers are willing to
work at a given wage rate at a given time. This supply of labour available to an economy for use in
production is determined by the following factors;
 The size of the population
This factor is obviously of prime importance. A country with a large population has a large pool of
potential workers who can be employed into the labour force.
 Age composition
In this category people who are too young or too old are unable or unwilling to actively participate
in the labour force. These people entirely depend on others for their basic needs. Such people are
known as dependents. A country that has a greater number of old people may probably have a
low supply of labour for production. This is because these people do not increase productivity but
they place a heavy burden on the nation and thus the supply in the labour force falls.
 The school leaving age
This affects both the supply and the quality of labour. When more children stay at schools and
tertiary institutions, there is a smaller number entering the workforce. The better education
received by these students make them potentially more productive when they join the workforce.
 Number of working age people
 Number of hours or days legally allowed to work per week
The number of hours worked by the members of the labour force will have a significant attitude
on the labour supply available to assist in production.
 Wage rate and other benefits.
 Migration increases the size of the population so it will inevitably increase the labour force.
 Number of women
The social attitude towards women going out to work has a great impactt on the labour supply.

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 GR 11 ECONOMICS U2 UNIT INTRODUCTION

When the number of unemployed people is deducted from the number of people with jobs we can
work out the proportion of the population that is engaged in economic production. The labour
force compromises of the number of people employed and looking for employment in a country.

As recorded in Australian Aid 2009, Papua New Guinea has 85% of the workforce employed in
semi-subsistence agriculture. A large proportion of the population lives in small, rural
communities regulating their lives according to traditional village values.

Generally, Papua New Guinea, like all developing countries, has a big problem of unemployment.

Unemployment refers to those who are willing and able to use their human effort in return
for wage or salary but, are not engaged in this activity. These are the people who want to
work for pay in the production process but, are not actually working.

Wage is the total amount of money someone receives based on a predetermined wage rate
(usually agreed between an employee and the employer) and number of hours worked.
Wage rate is the minimum amount of money an employee is entitled or obliged to receive in one
hour.
The current minimum wage rate for PNG, as endorsed by the government through the Minimum
Wages Board, is K3.20. This rate is gazetted (endorsed by government) to be changed in two years’
time to K3.50. This is the legal (by law) minimum amount of money all employers in the country
must pay per hour to their employees. Any employer who pays below the current wage rate of
K3.20 per hour is deemed to break the law.
Salary is a fixed amount of money that an employee earns every fortnight. Wage rate and number
of hours worked do not determine how much salary you earn. It is fixed and received by the
employee every fortnight (two weeks).
Big unemployment problem means there is large number of people unemployed in the country.
Despite high unemployment level, the government is currently coming up with policies to further
increase the size of employment level.
One such policy is the free education and free health services.

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 GR 11 ECONOMICS U2 GROWING THE ECONOMY

Let us use the supply and demand model to see what happens with the introduction of such
policies and analyse the effect of free education policy on labour.

EFFECT OF FREE EDUCATION POLICY ON LABOUR

We assume that;
 Before the free education policy, the initial market demand and supply is S0 and D0, which
intersects at E0. The wage rate paid initially is W0.
 When the government implemented free education policy, there will be more people passing
out from schools, further adding to unemployment level. This increase is shown as Q 1 and S1
(intersecting at E1).
 What then will happen to the wage rate? Graphically, it has indicated that there is a drop from
the initial wage rate W0 to new wage rate W1. Does this analysis relate to common sense? Off
course it does. When you have too many products to sell in the market, the price will drop.
Employers or companies will off course have the advantage of paying lower wages (in most cases
not below the minimum wage rate) because there are too many of us (increases size of
unemployment) looking for jobs.

The quality of skills that people in the labour force have is an important factor that contributes to
the efficiency of production and economic growth. Education, training, health and experiences all
help to raise the productive capacity of the labour force.

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 GR 11 ECONOMICS U2 UNIT INTRODUCTION

Characteristics of Labour
 It compromises of individuals
 It is a human factor
 It cannot be stored; if labourers are idle they are unproductive
 Mobility
 Labourers sell their labour

Productivity is a measure of the number of goods produced per person during a given
period of time.

There are certain factors which contribute to the low levels of productivity. They are;
 poor diet, hygiene, health and sanitation
 absenteeism, underemployment and an ability of many people to stand the pressure of work
 absence or severe shortage of inputs such as capital and educational facilities
 attitudes of workers and management
 attitudes towards work, discipline and authority, flexibility of workers, alertness and job
satisfaction may all need to be considered during efforts to increase productivity.

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 GR 11 ECONOMICS U2 GROWING THE ECONOMY

11.2.1.3: Land Resources in Papua New Guinea

This category of resources comprises all the natural resources that the natural environment
provides. Land is a valuable resource used in production, which includes not only the site of
production but natural resources above or beneath the surface of the earth. These resources
include rainforest, mineral deposits, wild life, seas and oceans, river systems and soil and
landform.
Land provides natural resources that cannot be consumed in their original form. These resources
are altered or changed using other factors of production to get an output (finished good). For
instance, trees are harvested and go through the process of manufacturing to make paper.

MAKING PAPER

Source: worldscrap.wordpress.com.

Natural Resources of Papua New Guinea

Papua New Guinea is one of a resource rich nation in the world. It has a resource dependent
economy in which resource extraction contributes more to its export earnings and the
government revenues.
Below is a list of natural resources in Papua New Guinea
 Mineral resources like gold, copper, zinc and nickel.
 The forest industry in PNG is also a major exporter of forest products.
 The fishing industry
 The gas and oil industry
 The Cash crop industry
 The fruits and vegetables market

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 GR 11 ECONOMICS U2 UNIT INTRODUCTION

PAPUA NEW GUINEA’S EXPORTS

Source: www.tradingeconomics.com.

The significance (importance) here is the wise use of such resources for their sustainability.
Resources are scarce compared to wants at any time; the quantity of land cannot be increased
over time. It becomes relatively even scarcer than the other factors of production. This scarcity is
reflected now a days, in the way prices for blocks of land especially in commercial areas have risen
drastically over the years.

Land is a marketable resource which can be bought or sold. Entrepreneurs need the land resource
for creation of goods and services. They also decide the quantities to be supplied according to
prices available in a market. The landowners receive returns (prices) in the form of rent for
allowing land to be used in the production process. The more productive the land, more rent that
will be offered. So we simply say that rent is determined by the market forces of supply and
demand.

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 GR 11 ECONOMICS U2 GROWING THE ECONOMY

THE DEMAND FOR LAND IN PAPUA NEW GUINEA

R2 New Equilibrium (E2)

(E1)

D1

The graph above shows;

 A perfect competitive land market in which rent is determined by the intersection of supply and
demand curves. Fixed supply of land means that the rent will change if the demand changes.
The supply will remain the same.
 When the demand for land increases to D1, it forces the price (rent) for land to increase to R2.
Land as a factor of production is a gift from nature and has a fixed supply but its availability is
limited. Land which is not productive is not a resource. Land has yields that depend on the
efficiency of other factors. A higher output can be achieved if capital and labour are used more
efficiently. People believe that supply of resource is essentially unlimited because they see and
enjoy the abundant wealth the earth provides.
Some of these resources can be renewed but in the long run the supply of all land resources is
limited. With this fact, natural resources used in production should be utilised economically
because non-renewable resources like gold, oil and others will become scare due to overuse.
Additional expenses will be required for replacement (e.g. replacing and recycling of renewable
resources).
Therefore, the following should be considered when using natural resources.
 Avoid over use: over- hunting, over-fishing, clear-felling type of logging and open-pit mining.
 Pollution: polluting river system destroys all natural resources and cause extinction to wildlife

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 GR 11 ECONOMICS U2 UNIT INTRODUCTION

Land Use in Papua New Guinea

This entry contains the percentage shares of total land area for three different types of land uses
in Papua New Guinea in 2011.

1. Agricultural Land (arable land) is about 0.65%

Land cultivated for crops like sweet potatoes, ramu sugar, and rice that are replanted after each
harvest.

2. Permanent Crops make up 1.51%

Land cultivated for crops like citrus, coffee, rubber, oil palm, tea and cocoa which are not
replanted after each harvest. However, they occupy the land for a long period of time. This may
include land under flowering shrubs, fruit trees, nut trees, and vines, but excludes land under trees
grown for wood or timber.

3. Others make up about 97.84% (2011)

Any land not arable or under permanent crops; includes permanent meadows and pastures,
forests and woodlands, built-on areas, roads and barren land.
(www.indexmundi.com & www.trading economics.com)

Major environmental issues about land include;

 inappropriate land use practices due to intensified farming systems that accelerate land
degradation (eg. soil erosion, siltation, and loss of soil fertility)'.
 unsustainable logging practices that result in adverse environmental impacts (eg. soil erosion,
hydrology and water quality impacts, and loss of habitat and biodiversity.
 destructive fishing practices and coastal pollution due to run-off from land-based activities and
oil spills that cause impacts on coastal and marine resources.
 environmental impacts of large-scale mining operations (eg. discharge of heavy metals, cyanide,
and acids into rivers) that cause adverse impacts on forests and water quality.
 increase of extreme weather events due to climate change (eg. El Nino, extreme droughts /
floods) that increase vulnerability to impacts of natural disasters.

To conclude, PNG has been described as "a mountain of gold floating on a sea of oil". It reflects the
importance that PNG's extensive natural resources play in the country's development. It is also
appropriate, from the agricultural point of view, to describe PNG as a Garden of Eden. Fertile soil
and a conducive (favourable) climate allows most agricultural products to be harvested.

PNG is rich in natural resources. There are extensive reserves of natural gas and oil. The first oil
production began at the Kutubu field in mid-1992. Estimates of recoverable reserves have been
put at around 270 million barrels. The main mineral deposits are copper and gold but there are
also recoverable deposits of other minerals. The Ok Tedi mine is now producing more copper than
that produced by the huge Bougainville mine before its closure in the late 80s.

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 GR 11 ECONOMICS U2 GROWING THE ECONOMY

11.2.1.4: Land Ownership

Papua New Guinea is located on the eastern half of the island of New Guinea and is 160 kilometres
north of Australia. PNG comprises of both the mainland and some 600 offshore islands. It has a
total land area of 470,000 square kilometres.
PNG's population is about 7.321 million people. Around 15 percent of the population live in the
ten major urban areas. The major city and capital of the country is Port Moresby with a population
of just over 220,000. Other important towns and cities include Lae, (population around 90,000),
Madang (30,000), Mt Hagen (45,000), Wewak (23,000) and Goroka (25,000)

MAP OF PAPUA NEW GUINEA

Source: hausples.com.pg

Land is useful to the majority of our people because they depend entirely on it for their livelihood.
Unlike many other countries, in Papua New Guinea 97% of land is communally owned or
customary.

Land Ownership in Papua New Guinea

1. Customary or Tribal Land (97%)
It is land held under customary title by the traditional landowners. These lands are not registered
and members of a tribe or clan own the land. It is owned by Indigenous communities and
administered in accordance with their customs. Common ownership is one form of customary land
ownership.

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 GR 11 ECONOMICS U2 UNIT INTRODUCTION

2. Alienated Land (3%)

Alienated lands are controlled by the Government and are in two groups.
(a) State Land
The government leases these lands for development purposes to developers. The developers can
use leased land for commercial purposes, including the construction of buildings. Most state lands
are found in the urban centres and small towns. The alienation of land from customary owners is a
legacy of the early German and Australian colonial administration that negotiated and acquired
land for towns, ports and other purposes.
(b) Private Freehold Lands
These lands are owned by individuals or companies. They are registered under the owner’s name
which means they hold the title.

Land Tenure in Papua New Guinea

Land resource management in Papua New Guinea (PNG) has been experiencing a lot of pressure
over the years in response to economic and social development and change. Customary tenure is
the dominant form of tenure yet it has received very little attention as a resource which underpins
(strengthen) such development.
Papua New Guinea’s customary land ownership is legally recognised by the Constitution. It is
generally estimated that around 97% of the land in PNG is under customary ownership. Some
people find this an impediment (barrier) to progress.

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 GR 11 ECONOMICS U2 GROWING THE ECONOMY

The table below shows a comparison of some characteristics of alienated and customary land
tenure systems in PNG.

Alienated Land Tenure (3%) Customary Land Tenure (97%)

Origins Based on traditional practice in Europe; Local practice; appropriate for

unfamiliar and formal in the PNG traditional needs; established and
context. well understood by users.

Responsiveness Extensive and on-going modifications Responsive to internal pressure;

to change to internal and external pressures; less responsive to external
formalised through courts and impacts; flexible as verbal.
legislation. Control of system and Control by landowners.
ownership of land are separate.

Political Aspects ‘Ownership’ is limited to interests in Outright ownership by the clan;

land under the State. Activities are individual members have rights to
documented and recorded. Penalties use and occupy land. Based on
for infringement. (breaking the laws) verbal agreement. Penalties for
infringement. Conformity at the
Conformity (fit into) at the level of
level of the clan.
society.

Social Aspects Planning and zoning system provides The clan sets aside land for
for areas of sporting, recreational/and meetings, singsings, feasts, rituals
entertainment uses. and sports.

Economic Economic specialisation generates Role of land is to ensure survival of

Aspects surplus production, freeing much land the clan, traditionally through a
and labour from direct production of high level of self-sufficiency.
basic needs.

Source: www.indiana.edu.pg

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 GR 11 ECONOMICS U2 UNIT INTRODUCTION

Land related problems are and have been for many years, and is a major concern in Papua New
Guinea. Land issue is one problem that hinders economic growth here in Papua New Guinea.
Below is report from the Institute of National Affairs (INA) titled Land Policy and Economic
Development in Papua New Guinea (Knetsch and Trebilcock, 1981), which highlights some of the
land related problems facing Papua New Guinea today.

Land policy is correctly perceived (seen) as a major issue in PNG. Land is central to the welfare
of most people in the country; it is the source of much of the present wealth, and with little
doubt offers for the foreseeable future the greatest potential for improving the economic
well-being of most people. Further, and rightly, current policies are widely thought to be
seriously deficient- procedures are unduly burdensome, for example, and do not adequately
protect the interest of those they were designed to aid; worthwhile changes have been
discouraged or prevented; and land matters continuous to be the source for civil conflict and
disruption, taking excessive amounts of the time and energies of the government and private
parties alike. (pp. 30)

Uncertainty over land ownership has frequently discouraged new investment in Papua New
Guinea. Administrative procedures for registering land claims are very complex and time
consuming. It is believed that many of the problems facing the systems of land registration and
settling land disputes have occurred because these systems are excessively ambitious; Policies and
procedures need to be organised so that they can be efficiently administered.

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 GR 11 ECONOMICS U2 GROWING THE ECONOMY

11.2.1.5: Land and Economic Development

Economic development needs economic growth. Economic development is the improvement in a

country’s standard of living (for example: the building of schools and hospitals close to all villages
and towns) and economic growth (for example: growth in production activities) is the result of an
increase in the production of goods and services.
Land plays a vital role in setting up factories and office buildings, establishing plantations, and
developing infrastructure such as communication towers, air and sea ports, and roads.
With the current land tenure system, it is hard to acquire land. This has been seen as an obstacle
to economic development in PNG, where land is not a traded commodity like in other
development countries. There are cultural values attached to land in many traditional societies.
Owners believe that customary lands are given to them by ancestors to be used wisely. If they sell
their lands, it is seen as an act against their ancestors wish. Therefore, people have a responsibility
to protect their lands, which are not just, property like in the developed countries.

Economic Development in Papua New Guinea

Papua New Guinea’s economy is described as dualistic. That is, we have;
i. a large scale export sector based on natural resources (minerals, petroleum, timber,
plantation tree crops and fish).
ii. on the other hand a subsistence or semi-subsistence rural economy supports over 80 % of the
population. The trend is slowly changing as smallholders now increase their participation in
commercial agriculture.
Papua New Guinea’s Gross Domestic Product (GDP) is dominated by minerals, petroleum, logs,
tree crops and fish. The manufacturing sector is small and supplies mostly the domestic market
while it relies heavily on imports of manufactured goods.
Tourism is largely hindered by law and order problems including under developed, expensive and
inconvenient transport services. This is, despite the fact that Papua New Guinea has extremely
diverse natural and cultural attractions. From 2003 to 2005, GDP growth has been steady at 3%
and was forecast to continue at this rate beyond 2006.

Factors that hinder Economic Growth

The Asian Development Bank (ADB) reported that; there are three broad development challenges
that face Papua New Guinea.
1. To convert natural resources revenues into sustainable development outcomes.
2. To broaden the base of the economy and the basis for economic growth and job creation.
3. To tackle very poor health and education standards.
Quality of governance and public sector capacity limits are binding constraints and addressing
them underpins efforts to meet each of these challenges. Strengthening public financial
management is a key step to achieve the problems mentioned above.

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 GR 11 ECONOMICS U2 UNIT INTRODUCTION

According to the surveys conducted by the Government and the ADB,

i. creation of jobs and income earning opportunities and
ii. re-building service delivery into rural areas
are two critical issues which stand out clearly.
The World Bank also stated that, the deteriorating transport infrastructure and law and order
problems, the workings of the provincial and district administrations and the inability of the
Government to allocate finance to these services cause delays. Therefore, improvements in the
Government’s governance as well as public sector and the public finance management urgently
needed to overcome these constraints. (www.abd.org/Documents)
The business houses in Papua New Guinea also acknowledge the deteriorating conditions of
transport and communication infrastructure, law and order problems, corruption and
administrative inefficiency will take years of sustained effort to overcome.
Papua New Guinea has a dual system of Land Tenure.
1. The adopted tenure system is based on the written legislation and the management and
administration of the 3% alienated land on which most economic activities take place.
2. Customary land Tenure is dominant about 97% of Papua New Guinea’s land comprising over 46
million hactres.
Customary tenure operates on unwritten laws, customs and practices which are accepted by
people themselves. Although land ownership rights vary in different places, kinship groups
recognise and strengthen customary land rights thus providing security.
Almost 85% of Papua New Guineans depend on customary land for food, water and shelter for
survival. Any changes proposed to this system can cause serious problems indicating the people’s
strong ties to their land.

www.pngblogs.com. www.aidwatch.org.au

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 GR 11 ECONOMICS U2 GROWING THE ECONOMY

The pictures below show different types of economic developments.

RH Ramu Logging in 2009, Mt. Fubilan, Tabubil, OK Tedi

Source: news.mongabay.com Source: en.wikipedia.org

Oil Palm seedlings in WNB. Fish Processing

Source: www.tourismwestnewbritian.org.pg Source: www.businessadvantage png.com.

Land management and administration in Papua New Guinea is highly problematic. Effective
management and administration of land cannot be achieved without land information such as the
location, size, value, use, improvements, owners, occupiers, rights, responsibilities and restrictions
relating to land.
Government has experienced difficulties in purchasing land from customary owners because
people now see land as a valuable and important commodity.
Today they demand extremely high monetary compensation for the acquisition of their land and
rightly so! Land is viewed as an asset. There cannot be a fixed value for land but depending on the
period in time when land becomes an issue as well as what land is used for. For example 50 years
ago people gave land away to the state and churches for settlement purposes in exchange for
tobacco and steel axes. This was at a period in time when the cash economy played a lesser role in
the lives of the people.

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 GR 11 ECONOMICS U2 UNIT INTRODUCTION

11.2.1.6: Capital and Appropriate Capital

Capital is a productive resource or durable good that is used for the production of other goods and
services. It consists of any productive resources which have been obtained as a result of previous
productive effort. Included in capital are machinery, transport equipment and factories. Capital
significantly increases the productivity or efficiency of production.
For example, new machinery that improves working conditions is an appropriate capital, where as
out-dated and worn machinery which reduces productivity due to break downs inappropriate
capital. When such break downs occur, workers cannot perform their part in the production
process. This reduces the productivity of labour and also increases wastage and production costs.
Therefore, it is important that the appropriate capital base is used in production processes. Should
more sophisticated capital equipment be found on the market, the use of this equipment is
appropriate, as long as it is suitable and affordable.
Suitability-capital is said to be appropriate when it meets the objectives of its purchase. If you buy
a machine that is capable of producing 6000 units a day when you really need a machine that
produces 10 000 items a day, then its purchase has not been appropriate.

Use of capital goods need to reduce the cost of production to satisfy market demand.
In other words, capital needs increase productivity.

Affordability-capital resources are affordable when a business is able to generate revenue that
covers its operating, maintenance and loan financing costs. Over-spending or cost blow-outs in
production will affect profitability, so it is important to prevent this happening. The appropriate
use of capital needs to reduce the costs of production and to satisfy market demand. In other
words, it means capital needs to enhance productivity.

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 GR 11 ECONOMICS U2 GROWING THE ECONOMY

11.2.1.7: Entrepreneurial Skills

The final economic resource that is necessary for efficient production is entrepreneurial skill.
Entrepreneurs are concerned with taking risks and making management decisions.
Entrepreneurship is the ability to combine the other factors of production, being innovative and to
face up to all business risks. This is a skill that takes years of hard work for those who wish to
dedicate themselves to running an enterprise. Lack of adequate entrepreneurship may limit the
size of a business and the ability of a nation to achieve its economic goals.
Collectively, entrepreneurs are people who have changed the world through their innovative
products. Two examples include Steve Jobs (Apple) and Bill Gates (Microsoft).Often these
entrepreneurs who have adapted other people’s inventions to manufacture new goods that
appeal (attractive) to consumers.
In return for this contribution, the entrepreneur receives profit. It is the reward for having the
initiative to go into business, to implement a new idea, to take the risk of producing a good which
had not yet proved successful or to use a different production method. For instance, in PNG we
have farmers or village gardeners who grow their own food and sell a proportion of this produce
at local markets; or we have others who risk their time and money investing in buying goods and
re-selling them, or buying machines to produce goods which they then hope to sell. is an example
of risk. Profit is what remains after deducting costs of production such as rent, and interest ,from
sales revenue. When a consumer buys a coffee table for K200, the amount does not all go to the
shop owner. The K200 is divided up according to the factors of production:
1. Land-part of money goes to pay timber owner.
2. Labour-saw mill operators and carpenters needs to be paid
3. Capital-interest for the use of capital
4. Entrepreneurship-this part of the money is the furniture manufactures reward, or profit.

Characteristics of Good Entrepreneurs

 No production activity can occur without the intervention (involvement) of entrepreneurs.
Therefore, it is the fundamental factor of production.
 Entrepreneurs are the decision – makers and good organisers who allocate resources.
 Entrepreneurs generate innovations and have good knowledge to compete with other
businesses.
 Entrepreneurs are willing to bear and take reasonable risks. In world of uncertainty they
produce products to sell in unknown future markets. There are times when political, economic,
social or technological factors adversely affect profitability .Example include rascal gangs in Port
Moresby, or in natural disasters such as the volcanic eruptions in 1994 which destroyed the
town of Rabaul.
 Entrepreneurs operate their businesses as sole proprietorships, partnerships or companies.
 Reliable, honest, flexible and respect of employees.

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 GR 11 ECONOMICS U2 UNIT INTRODUCTION

11.2.1.8: Case Studies of Successful Businesses in Papua New Guinea

To conclude this topic, you have learnt about the factors of production and their significance in the
production process. Now I believe that you would also be interested to read stories of successful
business people who make use of these economic resources in today’s competitive business
world. Read the case studies below.
Case Study One: Story told by the owner, Berry MAIP

Here is an exciting story of a successful businessman by the name of Berry Maip who is the
Managing Director of Whisky Fresh Ltd. Berry comes from Baisu, a village few kilometres
away from Mt. Hagen in Western Highlands Province.
Whisky Fresh Ltd is 100% Papua New Guinea owned and is specialised in supplying and
distributing fresh vegetables to big supermarkets and shops in major cities like Port Moresby
and Mount Hagen and catering for institutions like the University of Papua New Guinea.
Berry was a correctional service officer. He used to save K50.00 from his salary every
fortnight. After two years, he withdrew his savings and had a dream to invest that money by
doing something productive. This all started with an amount of K1400 to buy few vegetables
from Mt. Hagen market and sent to Port Moresby and sold them at the famous Gordon
market. With great determination and commitment by Berry and his hard working wife, the
business grew quickly.
They began to cultivate any land that was available to grow their own vegetables apart from
buying at Mt. Hagen market. The production increased and more vegetables were sent to
Port Moresby to be sold. Berry realised that he needed people to help him so he employed
villagers to work on the land.
In 2002, Berry engaged his younger sibling to manage his business as he was caught up with
his job. However, things did not work out right as his brother misused the money and had
nothing in the account.
Anyway, Berry took this as a challenge and made the toughest decision to retire from his job.
He got his retired savings and started all over. He learned from his mistake and managed the
business on his own with the help of his wife. Berry was very confident and successfully
signed contracts with big companies like Stop and Shop, RH Group of Companies and Super
Value Stores to supply vegetables. Whisky Fresh Ltd is now the main supplier of vegetables to
supermarkets in Port Moresby.
With positive thinking and proper management, Berry is also engaged in other business
activities such as, hire cars and a building construction company with employees.
To conclude, Berry spoke of the challenges involved in business and how to overcome. He
said, ‘making business is actually taking a risk, but it all depends on, self-determination,
confidence, commitment and positive thinking’. Berry thanks and appreciates his wife for her
endless support. They have a very big family mansion worth half a million in their village and
send their children to the best schools in Papua New Guinea.
After their hard work, Berry and His wife are happy together.

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 GR 11 ECONOMICS U2 GROWING THE ECONOMY

Case Study Two: The National, Tuesday, January 27, 2015.

Firm Owner Tells Success Story

A milestone has been achieved in the construction industry for a locally-owned company to
be awarded a major road construction project worth K29.1 million.
The Evelyn and Jerelyn (EJ) Sisters Company, owned by PNG women, is one of four
companies to win a contract for a 12.38 km road construction project from Pangia to
Laiagam, in Enga.
Everlyn Kepa is an account by profession so the motivation to run a family company was the
greatest achievement for her. She is the first born of a family of three and said she learnt a
lot from her parents and she and her younger sister Jerelyn were encouraged on how to
start managing small capitals.
Venturing into business with the construction company was their father Thomas’ dream
achieved after fifteen solid years of commitment as a simple operator at the Pogera Mine
Work Station.
“I believe the key to success is how cooperative the parents Nelly and Thomas had put their
best effort”, she added.
From a humble beginning, Thomas and Nelly had better plans with selling second-hand
clothes and then ventured into Public Motor Vehicles (PMV) buses.
The company was registered with the Investment Promotion Authority (IPA) in 1995. With
more than ninety plant operating machines, the owners of EJ Sisters Company are building
on the achievements of their parents.
“Nothing comes free but anyone can start somewhere, depending on the self-determination
to do something in order to be successful or achieve your goal”. Kepa said.
She said preserving one-tenth offering (tithe) for GOD is the essential part of their success.
They said they could not thank their parents enough for their commitment and being faithful
in what they wanted to do.
They have signed the K21.9 million Pangu and Liagiam road rehabilitation contract with the
state in Port Moresby recently.

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Factors which influence the success of businesses

 Self-determination
Successful business people have a high degree of personal energy and drive. They possess
energy to work for long hours for the good of their business.
 Self-confidence
Business people believe strongly in themselves and their ability to achieve the goals they set.
The set clear goals, which are usually challenging but also realistic so that they are not put
off by difficult situations.
 Commitment
Successful business people set up firms and make them grow. They commit themselves to
building and expanding their business. These people do not simply get in and out in a hurry
once they have made a certain amount of money. Successful business people stick to what
they planned to do initially to achieve the goals set.
 Ability to take risks
Successful people like the challenge of a situation in which a certain amount of risk is
involved. They are able to operate under conditions of uncertainty.
 Accountability
Most importantly, the finances of the businesses are managed well so the firm keeps on
operating.
 Innovative and creative
Successful business people are always smart and creative. They think of new and exciting
ways to attract customers where there is competition.

Factors which cause a down fall in businesses

Many businesses are unsuccessful in their first or second year of operation because of poor
management. The owners are poorly prepared for operating the of firms. They may leave
the running of their business to their relatives or others and not properly supervise them as
in case study one, where Berry Maip gave the responsibility to his brother who used the
finance and shut down the business and he had to start all over again. Anyway, the main
cause of failure is due to mismanagement. Below are factors which contribute to failure in
business.
 Lack of initial planning
Lack of proper planning at the start is one of the main reasons why businesses fail in their
early years. Some people are really excited about establishing a business as quickly as
possible that they fail to do planning in the beginning. As a result, they may have no real idea
of the likely success of the business until the money and assets are already committed. What
often happens in such a situation is that the financial needs of the business are much greater
than expected and the firm soon finds itself with a serious cash shortage.
 Lack of proper records
Some business people sometimes do not see the need for or recognise the importance of
keeping accounting records of their operations. As a result of not keeping proper records, it
may not be possible to know if a business is operating profitably. Owners of loss making
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 GR 11 ECONOMICS U2 GROWING THE ECONOMY

firms may not be aware of their losses until the losses become so great that the future of the
business is in serious danger.
 Owners not running their own business
In Papua New Guinea, it is very common for owners not to personally manage their own
business. Instead they may get relatives to run the business for them. These relatives may
not be closely supervised because they are not living in the same town or area. In this
situation, the persons running the business may not always act in the best interests of the
owners. For example, they may sell goods on credit to their wantoks which is a major cause
of failure.
 Unsuitable location
Choosing a suitable location is very important in doing business. Many businesses fail
because they choose the wrong location, which means, there are not many customers and
the demand is low, high criminal activities or there is competition in that area.

Recommendations for emerging small businesses in Papua New Guinea

As mentioned already, the main reason why businesses fail is lack of proper planning before
they are set up. Unfortunately many business people do not even prepare a business plan. A
person may have a very sound business idea, but the business may be unsuccessful in
practice unless detailed research and planning has been carried out in advance. Once a
business person fails, his or her reputation is damaged which makes it difficult to obtain
capital in the future in order to start up again. Therefore, below are some things business
people need to consider before establishing a business. When developing a business plan,
you must;
 consider your skills, assets and weaknesses.
 research the market in order to discover costumers’ needs. For example, through
questionnaires.
 find the best location to set up a particular kind of business
 being creative and find ways of selling the product or service you have decided upon
 decide on the number of people to be employed
 identify the equipment to be used
 decide on the organisational structure of the business
 identify your suppliers, choose the cheapest but quality and bargain.
 do a cash flow plan. Estimate the costs.

The careful preparation of a business plan presents a great opportunity to consider all
aspects of operating a business. Planning provides a person with the chance to examine the
likely results of different marketing, production and financing policies. This helps to decide
how much money, labour and other resources are needed to expand a business.

NOW READ THE SUMMARY OF 11.2.1 ON THE NEXT PAGE.

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11.2.1: SUMMARY

 Factors of production refer to the economic resources used in the production of goods
and services to make an economic profit.
 Factors of production include;
a. Land b. Labour
c. Capital d. Entrepreneurial skills
 Land consists of all the natural resources used in the production process to produce goods
and services to satisfy people’s needs and wants.
 Land resources are significant in the development of Papua New Guinea as it brings in
money which increases the money supply.
 Land is a marketable resource which can be bought or sold. There is increasing demand
for land which increases the price.
 There are two types of land ownership in Papua New Guinea;
a. Customary land which comprises of 97 % b. Alienated land of 3 %
 Types of land use in Papua New Guinea;
a. Agricultural (arable) land which is about 0.65 %
b. Permanent crops make up 1.51 % c. Others consisting of 97.84 %.
 Capital is a productive resource used to produce other goods and services.
 Entrepreneurial skills refer to the ability to combine the other factors of production to
produce goods and services.
 Rewards for the factors of production are;
a. Land – rent b. Labour – wage
c. Capital – interest d. Entrepreneurial skill - profit
 Characteristics of successful business people;
a. Self-determination b. self-confidence c. commitment
d. Ability to take risks d. accountability e. innovative & creative
 Characteristics of unsuccessful businesses;
a. Lack of initial planning b. No proper records of business transactions
c. Owners not running their own businesses d. Unsuitable location

NOW DO STUDENT LEARNING ACTIVITY 11.2.1 ON THE NEXT PAGE.

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TOPIC: 1. Student Learning Activity

1. Given below is a basic overview of the factors of production. For each factor given write
the factor payment in the box below each one of them.

1.

a. b.
c. d.

2. In your own words, explain how the diagram above works. That is, explaining the factors
of production and their factor payments.

a. Land
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
b. Labour
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

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 GR 11 ECONOMICS U2
GROWING THE ECONOMY

c. Capital
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

d. Entrepreneurial Skills
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

3. In a paragraph, describe and differentiate between the types of land ownership in Papua
New Guinea.
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

4. In your own words, explain what this statement means “PNG is a mountain of gold
floating on a sea of gold”.
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

5. Explain the relationship between land and economic development in Papua New Guinea?
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

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 GR 11 ECONOMICS U2 GROWING THE ECONOMY

6. Identify and write about an unsuccessful business person in your area or someone you
know. What are some factors which have contributed to the failure of that business? What
could have been done or how would you advice the owner of the business to run a very
successful business?
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

NOW CHECK YOUR ANSWERS AT THE END OF THE UNIT.

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TOPIC: 2 CHAIN OF PRODUCTION

Have you ever heard of a production chain before? In your grade 9 and 10 Business Studies
Course you may have already come across these words. It is also known as the production
process. Now, if you can recall the meaning of the word production that you learnt earlier,
production is the making of goods and services.
A process refers to steps or a series of actions taken in order to achieve a particular end.
Therefore, a production chain or process refers to the steps followed in order to change raw
materials into finished goods which are used by consumers like you and me. Take a look at
the process of making sugar given below.

THE PROCESS OF MAKING SUGAR

Collecting the Cleansing and Juicing Clarifying

harvest Grinding

Separation Refining Crystallisation Evaporation

and Packing

This is the process used to produce sugar. As you can see, there are complicated steps
involved before reaching the final product. Now, from this you can make a list of the things
needed to produce sugar. They have used things like, sugar cane, tractor to harvest,
machines for grinding, water, packets for packing and even a factory building where these
processes took place. Can you guess what name is given to these things used in the
production process? They are known as inputs in the production process. The finished
product which is the sugar is called the output of the production process. This has brought
us to our first topic of discussion ‘The Chain of Production’.

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 GR 11 ECONOMICS U2 GROWING THE ECONOMY

Specific Learning Outcomes

At the end of this topic, you will be able to;

 define chain of production

 identify the inputs and outputs in the production process
 interpret production possibility curves
 list and explain the types of production
 differentiate between economies of scale and diseconomies of scale
 explain the concept of diminishing returns
 identify the costs of production
 interpret graphs showing the different costs of production

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 GR 11 ECONOMICS U2
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11.2.2.1: Inputs in the Production Process

Inputs in the production process refer to things or resources a firm uses in order to produce
a final good. As you learnt earlier, the factors of production (land, labour, capital and
entrepreneurial skills) are inputs which make it possible for production to occur.
Inputs are of two types;
(a) Fixed Inputs (factors)
Inputs that cannot change during a certain time period are those that are held constant over
a range of output. For example, a factory building is used many years regardless of the
number of items produced. The factory building will not run out after a certain amount is
being produced unless it is destroyed by fire, fights, earthquakes and other problems.
Otherwise, it will still be used for many years until there is a need be renovated or rebuilt.
(b) Variable Inputs (factors)
An input whose quantity can be changed in the time period given. Variable inputs change in
accordance with the volume (quantity) of production. This means, no production means no
variable input; more production means more variable inputs. The most common example of
a variable factor of production is labour. A variable factor of production provides the extra
inputs that a firm needs to expand short-run production.

TYPES OF INPUTS IN THE PRODUCTION PROCESS

Inputs

Fixed Variable

Land, factory buildings, Raw materials, labour,

machinery,

Both the land and factory building are examples of fixed factors or inputs. The output of
fixed factors can sometimes be increased by using more of the variable factors such as the
number of workers employed. This implies that the fixed factors were not being fully used
before, there was excess capacity.

Excess capacity refers to a situation where a firm is producing at a lower scale of output
than it has been designed for.

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 GR 11 ECONOMICS U2 GROWING THE ECONOMY

It may arise because as demand increases, firms have to invest and expand capacity in lumpy
or indivisible portions.

Short Run and Long Run

There are time periods in the production of goods and services. If a firm wishes to increase
the amount of goods and services produced, it must employ more resources. If it wishes to
do this very quickly, it can usually do so by hiring more labour to work for it or by asking its
existing workforce to work overtime. Obtaining more natural resources like land or capital
goods such as a new factory building takes a long time
There are time periods in the production of goods and services.
The momentary run is the period of time during which a firm will not be able to increase
production. This may be no more than a day.
The short run is the period of time during which a firm can increase production only by
employing more labour because no more land or capital is available. In the short run, labour
is a variable factor of production while land and capital are fixed in supply. It is the time
period in which production is varied by changing the variable factors only. The output can
only be increased with an increase in variable inputs
The long run, however, is when a firm employs more of all the factors of production. In the
long run it is possible to vary all fixed and variable inputs. In the long run, for example, a firm
can build new factory buildings; carry out research and development programs to devise
new processes and products. They may also recruit and train managers and skilled workers.
However, in the short –run these things are impossible.

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11.2.2.2: Outputs in the Production Process

Output is the quantity of goods or services produced in a given time period, by a firm,
industry, or country. These goods and services are either consumed or used for further
production. Consumption of goods and services is assumed to provide utility (satisfaction) to
the consumer.
Goods are items that can be seen and touched, such as books, pens, salt, shoes, hats, and
folders.
Services are provided by other people, such as doctors, lawn care workers, dentists, barbers
and waiters.
Outputs are of two types;
(a) Capital Goods and Services
These are goods and services used for production of other goods. They are also known as
producer goods and services. For example, machines may be an output for a production
process that has already occurred but an input for another process because it is a capital
good which will be used to produce other goods.
(b) Consumer Goods and Services
Goods, such as food and clothing that satisfy human wants through their consumption or
use. They are produced for final consumption. That is, when you buy it, you consume or use
it and it will not be used again. Look at the diagram below.

TYPES OF OUTPUTS IN THE PRODUCTION PROCESS

Outputs

Capital Goods and Services Consumer Goods and Services

Capital Goods Capital Services Consumer Goods Consumer Services

Variable Capital Fixed Capital Non-durables Durables

timber factory bread radio

advertising taxi

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Now, look at the diagram carefully, bread is a non- durable consumer good and a factory
building is a fixed capital good. The difference is, bread is a consumer good because will be
consumed and that is the end of it. However, a factory building is capital because it will be
used to produce other goods. We also have services provided, like the taxi. It is the
producer’s choice to engage in the activity which gives the most satisfaction and depending
on certain factors.
Factors which determine the types and amount of goods produced.
1. Types and amount of resources available
2. Climate
3. Size and skill of the labour force
4. Willingness of the entrepreneurs to take the risk
5. Access to and type of capital available
6. Availability of land
When most of these factors are in order, firms are successful in their production thus, make
profits. Otherwise, production is low and firms may make a loss. Therefore, entrepreneurs
make judgements and decide what to produce and where to produce. It all goes back to
carefully studying the ‘Basic Economic Questions’ and finding answers which bring maximum
satisfaction. With the resources available, firms can produce one good or service and skip
another because it is not possible to produce everything at the same time.

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11.2.2.3: Production Possibilities

This is a revision of what you have already studied in Module 1. The different mixes or
ranges of goods that could be produced if an economy exploited all available workers,
technologies, and other resources to the full is known as production possibility.

One of the main principles of economics is that everyone faces tradeoffs because resources
are limited. These tradeoffs are present both in individual choice and in the production
decisions of entire economies.

Trade-off is a situation where you give up one thing in order to get something else that
you also desire.

The production possibilities frontier (PPF, sometimes called a production possibilities curve)
is a simple way to show production tradeoffs graphically. It is a graph representing
production tradeoffs of an economy given fixed resources. Below is a sketch of a production
possibilities curve.

Since graphs are two-dimensional, economists make the simplifying assumption that the
economy can only produce two different goods.
For example, we choose guns and butter when describing an economy's production options.
Since guns represent a general category of capital goods and butter represents a general
category of consumer goods, the tradeoff in production can then be framed as a choice
between capital and consumer goods.

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Therefore, we use guns and butter as the axes for our production possibilities frontier.

PRODUCTION POSSIBILITIES CURVE FOR GUN AND BUTTER

The PPC shows left to right downward position. A PPF (production possibility frontier) or PPC
typically takes the form of a curve.
An economy that is operating on the PPF;
 that is, points B, C and D is said to be efficient. An efficient point is one that lies on the
production possibilities curve. At any such point, more of one good can be produced only by
producing less of the other. The resources are fixed, meaning the available quantities of
factors of production do not change over time and technological progress does not occur.
For example, the economy is operating on the PPF production of guns would need to be
sacrificed in order to produce more butter. If production is efficient, the economy can
choose between combinations (i.e., points) on the PPF: B if guns are of interest, C if more
butter is needed and D if an equal mix of butter and guns is required. Therefore, any point
that lies either on the production possibilities curve or to the left of it is said to be an
attainable point, meaning that it can be produced with currently available resources.
 In the PPF,
all points on the curve are points of maximum productive efficiency i.e., no more output of
any good can be achieved from the given inputs without sacrificing output of some good.
However, if the economy is operating below the curve that is, point A, then, it is operating
inefficiently. A point inside the frontier can be produced but is productively inefficient. It
could reallocate resources in order to produce more of both goods. The available resources
are not being fully utilised to produce more.
 Points that lie to the right of the production possibilities curve are said to be unattainable
because they cannot be produced using currently available resources. For example, point E
cannot be produced with the given, existing resources. Refer to Unit 1 for more information.

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11.2.2.4: Types (stages) of Production

You have studied the types of resources in Grade 9 and 10 Business Studies. This is only
revision and we will discuss where Papua New Guinea’ strength is, in production.
Papua New Guinea is rich with natural resources, but it has become difficult to extract them
because of the rugged terrain and the high cost of developing infrastructure. Agriculture
provides a subsistence livelihood for the bulk of the population. In Papua New Guinea,
extracting of natural resources is the main type of production. Not many businesses are
involved in the secondary and tertiary production of resources due to lack of skills and
capital.

Primary Secondary Tertiary

Production Production Production

Stages of Production

1. Primary Production is the extraction of raw materials provided by nature, either above or
below the earth surface. The extractive industries are: Farming, fishing, logging and
mining. Without these, production would not take place.
2. Secondary Production refers to industries that take raw materials obtained by the
extracted industries and change them into products such as fishing goods and office
supplies. This involves the transformation of raw materials into goods e.g. manufacturing
steel into cars.
3. Tertiary Production is when these finished products must be transported, stored, insured
advertised and sold by traders. Tertiary production involves the provision of services to
consumers and businesses, such as cinema and banking. A shopkeeper and an accountant
would be workers in the tertiary sector.

Rimbunan Hijau in PNG PNG Tuna Processing in Madang Transporting Oil

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The relative importance and size of each sector is closely measured by economists using a
measure of GDP which adds together the value of output produced by each sector in the
economy using the concept of value added. Value added is the increase in the value of a
product at each stage of the production process.
Let us look at the stages of production and the economic value of Trukai rice.
Trukai has been Papua New Guinea’s favourite rice since 1970. With its unique flavour and
consistency, Trukai rice appeals to all consumers and as a result continues to maintain its
position as one of the strongest and most recognisable brands in Papua New Guinea.
However, Trukai is much more than rice. It is about people, community, agriculture and
knowledge.The company employs more than 1,000 Papua New Guineans, and supports tens
of thousands more through family networks and indirect employment across the rice
industry supply chain.
Most importantly, Trukai has a strong track record of supporting the local community, both
socially and economically, and making extensive investments in agriculture. Through this,
Trukai continues to produce nutritious food and maintain its standing as Papua New Guineas
leading supplier of quality rice.

Primary Production Secondary Production Tertiary Production

Harvesting rice using a rice Rice Production 2013 Trukai Fun Run
harvester. in Port Moresby.

In general, Papua New Guinea economy is highly dependent on imports for manufactured
goods. Its industrial sector excluding mining is only 9% of GDP and contributes little to
exports. Small-scale industries produce beer, soap, concrete products, clothing, paper
products, matches, ice cream, canned meat, fruit juices, furniture, plywood, and paint. The
small domestic market, relatively high wages, and high transport costs are constraints to
industrial development.

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11.2.2.5: Costs and Benefits of Production

The costs and benefits of economic activity were explained in unit 1. In this section we will
study costs and benefits in relation to production. If you recall the meaning of production, it
is the making of goods and services using resources. The resources used in the production
process are the inputs.

The costs incurred in the production are divided into two groups.
1. Private Costs
The costs of money spent on the factors of production used in the production process are
called the private costs. This includes wages for workers, raw materials, transportation and
depreciation.

2. External Costs
The negative effects as a result of production to the surrounding community are called the
external costs. Noise, traffic congestion, air and water pollution and stress are examples of
external costs.
The difference between private and external costs is, private costs can be measured but
external costs cannot be measured. In reality, external costs are not recorded in the firm’s
accounting records.

The Social Cost of Production

This refers to costs mentioned above. That is, Social Costs = Private Costs + External Costs.

The Benefits of Production

1. Private Benefits
Profit is the major private benefit of the firm.

2. External Benefits
These are benefits gained by people other than the firm or the producer. For example, a
mining company built a road to the mine site to be used for transportation during the mining
period. However, it is now used by the surrounding community. Another benefit is the
employment of the local people by the mining company.

The Social Benefits of Production = Private Benefits + External Benefits

Social Benefit is the sum of all beneficiaries regardless of who generates the production.

Externalities
Production does not affect only the producers of goods. It has negative and positive effects
on others who do not take part in production. These negative (harmful) and positive
(beneficial) effects are called externalities. They are borne by those who are not party to the
production.
Such third parties who receive benefits do not make any payments. They enjoy the benefits.

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For instance, local people collecting off-cut timber for firewood, building houses or other
uses from a logging company without any payment. However, there are third parties who
suffer from externalities such as the noise from the mill and the dust deposited over their
vegetable gardens.

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11.2.2.6: Production Variables

Just as consumers make decisions about what goods and services to buy, entrepreneurs
make decisions about what goods and services to produce and how to do this. Whatever
method of organising production an entrepreneur uses, the aim is to reduce costs to their
lowest possible level so that they can make as much profit as possible.
Below is a case study of a firm which produces toy bears. Read and find out various costs
accumulated in the production process.

The Bear Company

Sue Brown used to make toys when she was a young girl at school. Her friends and
relatives thought that they were so good that they asked her to make some for them to
give as presents to others. She gave Sue an idea for the future.
When she left school she went to work in a local furniture-making factory for two years
where she gained experience of using cloth to make seat covers. She saved some money
and asked her bank to lend her some more so that she could start up her own business.
She rented a small factory unit on a new industrial estate. The cost of the building,
including fittings is K100 per week. She also hired some machinery at a cost of K45 per
week. Sue employed her two brothers to help her make toy bears. Sue pays herself and
her brothers K1.00 for each toy bear they complete.
Since she started, her toy bears became very popular and she had many orders for them.
The average price she charged for her toy bears was K10.00 each.

The costs of the Bear Company

In running her toy making business, Sue has a number of things she has to pay for. These are
her costs. Some things have to be paid for each and every week, no matter how many toys
Sue makes and sells. These are her fixed costs which do not vary with the numbers of bears
she produces. On the other hand, variable costs change with the number of bears produced.
The more Sue produces, the more materials and foam she needs. Wages to herself and her
brothers also rise.

Fixed Costs are costs of production which remain constant (do not change) in the
short run regardless of the level of output. This includes, rent, salaries of management
and loan interest.
Variable Costs are those that change depending on the level of output. They include
payment for raw materials, labour, power and transport.

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Fixed Costs per week Variable Costs per bear

Rent & Rates of Factory K100.00 Materials K6.00

Hire & machines K45.00 Foam K1.00
Heating & Lighting K5.00 Wages K1.00
Repayment of Bank Loan K50.00

Total K200.00 K8.00

The Total Cost (TC) of producing bears is found by adding together the fixed costs (FC) and
the variable cost (VC).

Total Costs (TC) = Fixed Cost (FC) + Variable Cost (VC)

Sue keeps any profit that is left after she has taken away her costs from the money or
revenue she earns from selling bears.

Let us assume that Sue produced 100 toy bears in a week, what is her total cost;

FC = K200 per week

VC = K8.00 per bear so K8 x 100 bears = K800.00
TC = FC + VC
TC = K200.00 + K800
TC = K1000.00

On the next page is a table showing the costs of producing certain number of bears in a
week. Following the above example and the formula given calculate the total cost.

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Bears produced Fixed Costs Variable Costs Total Costs

in a week
0 - - -
50 K200 K400 K600
100 K200 K800 K1000
200 K200 K1600 K1800
300 K200 K2400 K2600
400 K200 K3200 K3400
500 K200 K4000 K4200
600 K200 K4800 K5000
700 K200 K5600 K5800
800 K200 K6400 K6600
900 K200 K7200 K7400
1000 K200 K8000 K8200

We will now use the above information to draw a graph which shows how costs change with
the number of bears produced.

SUE’s TOY BEAR PRODUCTION

10,000
9000
Costs per

8000
week

7000
6000
Variable Cost
5000 Fixed Cost
4000 Total Cost
3000

2000
1000
0
50 100 200 300 400 500 600 700 800 900 1000
Number of toy bears produced per week

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So far we have discussed three costs of production;

a. Fixed Costs
These costs do not vary with the level of output or production. Fixed costs remain constant
regardless of quantity produced. Examples include; rent for factory, loan interest, salaries for
full time staff, equipment and machinery.
b. Variable Costs
They vary with output. As production increases, variable costs also increase. These include
water bills, electricity, raw materials and labour.
c. Total Costs
This is the sum of fixed and variable costs.
As output changes the only cost that varies is the variable cost. The more you use, the more
you pay. Therefore, at zero output, total cost consists of fixed cost only. The only factor that
determines the change in total cost is the variable cost. This means that by managing the
variable costs, a firm can reduce its total cost.
Let us look at Sue’s Toy Bear Production again. We will calculate how much it costs on
average to make one bear. This is known as the average cost or unit cost of production. It is
the fourth cost of production.
d. Average Cost
From the example, when Sue produced 400 bears per week, her total costs were K3400.
Therefore, if 400 bears cost K3400 to make then, one bear cost K8.50 to make (K3400 ÷ 400).

Average Cost (AC) = Total Cost

Number of bears produced

Thus, we will calculate the average cost for Sue’s Toy Bear production.

Bears produced in Fixed Costs Variable Costs Total Costs Average

a week Cost
0 0 0 0 0
50 K200 K400 K600 12
100 K200 K800 K1000 10
200 K200 K1600 K1800 9
300 K200 K2400 K2600 8.7
400 K200 K3200 K3400 8.5
500 K200 K4000 K4200 8.4
600 K200 K4800 K5000 8.3
700 K200 K5600 K5800 8.3
800 K200 K6400 K6600 8.3
900 K200 K7200 K7400 8.2
1000 K200 K8000 K8200 8.2

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Now that, we have the average cost of producing one toy bear, we are able to draw the
average cost curve.

SUE’s TOY BEAR PRODUCTION AVERAGE COST CURVE

A
K14
v
e K12
r
a K10
g K8
e
K6
C
o K4
s
K2
t

100 200 300 400 500 600 700 800 900 1000
Toy Bears per week

When output is low, average costs are high because fixed costs still have to be paid. As
output rises, average costs fall because the fixed costs remain the same but their burden is
spread over a much larger output.

The optimum point of production or best level will therefore be where the average cost
of producing each good is at the lowest level possible. At this point, the entrepreneur
has managed to organise and combine the factors of production in the most cost
effective or efficient way.
Therefore, the optimum point of production in the above example is where AC is K8.20.

e. Marginal Cost
Sue would now like to know how much it would cost to produce one extra bear. The cost of
producing an additional item is known as the marginal cost of production. It is the change in
total cost as output increases by one unit.
Return to your table and calculate the marginal cost of production.
For instance, when 50 bears are produced, the total cost is K600. The following week
number of bears produced increased to 100 and total cost also increased to K1000. In this
case, the marginal cost is the difference between K600 and K1000. Thus the marginal cost
for the initial increase is K400. Do the same for the other levels of output.

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Bears Fixed Costs Variable Total Costs Average Marginal

produced in a Costs Cost Cost
week(Output)

0 0 0 0 0 0
50 K200 K400 K600 12 400
400
100 K200 K800 K1000 10 800
800
200 K200 K1600 K1800 9 800
800
300 K200 K2400 K2600 8.7 800
800
400 K200 K3200 K3400 8.5 800
800
500 K200 K4000 K4200 8.4 800
800
600 K200 K4800 K5000 8.3 800
800
700 K200 K5600 K5800 8.3 800
800
800 K200 K6400 K6600 8.3 800
800
900 K200 K7200 K7400 8.2 800
800
1000 K200 K8000 K8200 8.2 800
100

After drawing cost curves in the examples above, you are now able to construct a marginal
cost curve. You may use the space below to sketch a marginal cost curve.

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To conclude, below is a table showing all the production costs of a product. We will
construct cost curves for each of them.

Units of Output Total Cost (K) Average Cost Marginal Cost

1 20 20 -
2 24 12 4
3 30 10 6
4 38 9.5 8
5 48 9.6 10
6 60 10 12
7 84 12 24
8 112 14 28

i. TOTAL COST CURVE

Total Cost Curve

120

100

80
COST

60

40

20

0
1 2 3 4 5 6 7 8
OUTPUT

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ii. AVERAGE COST CURVE

AVERAGE COST CURVE

25
Optimum Point
20

15
COST

10

0
iii. MARGINAL COST
1 CURVE
2 3 4 5 6 7 8
MARGINAL COST CURVE OUTPUT
30

25

20
COST

15

10

0
1 2 3 4 5 6 7 8
OUTPUT

It is possible to insert all the three cost curves on the same graph. You can do this as a
practice and see how they look.

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Total Revenue
The total revenue of a firm is the price received for each unit multiplied by the quantity sold
at each price. Total revenue is given by this simple equation.

Total Revenue = Price x Quantity Sold

(TR = P x Q)

Average Revenue
This is the revenue per item sold. Average Revenue is equal to the price of the item.

Average Revenue = Total Revenue ÷Quantity Sold

(AR= TR ÷ QTY)

Marginal Revenue
Marginal revenue is the extra income or revenue earned from the additional unit of good
produced. It is total revenue at a given level of output (Q) minus total revenue at the
preceding level of output.
Usually a firm will keep producing more of its product while the marginal revenue is enough
to cover the cost of producing that extra product (marginal cost). Once the marginal cost
becomes higher than marginal revenue, it will no longer be profitable to increase
production.
Thus, firms will usually try to increase production up to the point at which marginal revenue
equals marginal cost. This is the point at which profits are maximized. The graph below
illustrates this concept.

Profits maximised
MR=MC
Marginal Cost

Marginal Cost
and
Marginal Revenue
MR ˃MC MC ˃MR

Marginal Revenue

Increase output Decrease output

Output

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Profit
The profit of a business is the income of the entrepreneur.
To find the profit or loss made from producing and selling, use the equation below.

Profit = Total Revenue -Total Cost

(P = TR – TC)

If Total Costs are greater than total revenue, then the firm makes a loss. However, if the total
revenue is greater than total cost, the firm makes a profit. Many firms price their products to
make a desirable level of profit. However, entrepreneurs must be careful not to price above
other competitors as they will lose customers.
As a firm sells more of its goods and services, the total revenue from their sales rises and
appears on a graph as an upward sloping line. With total cost plotted on the same graph, we
can mark those outputs that result in a loss or a profit and find the break-even point of
production.

Have a look at the graph below.

THE BREAK – EVEN POINT OF PRODUCTION

Total Revenue

Costs and Total Cost

Revenue Area of
Profit

Area of
Loss

Break – even point of production

Total Product
Output below the break-even level means loses and output above the break-even level
means profit.

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11.2.2.7: Law of Diminishing Returns

Any business owner or entrepreneur will try to combine the factors of production to obtain
the best possible results from their use. There is an important relationship between the
inputs of production and the output they produce. This relation can be shown by law of
diminishing returns.

Diminishing Returns is the decrease in the marginal (additional) output of a production

process as the amount of a single factor of production is increased, while the amounts of all
other factors of production stay constant. It is when inputs increase and outputs increase
less than proportionately.

The law of diminishing returns states that in all productive processes, adding more of one
factor of production, while holding all others constant ("ceteris paribus"), will at some point
yield lower incremental per-unit returns.

For example, the law of diminishing returns states that in a production process, adding more
workers might initially increase output and eventually create the optimal output per worker.
After that optimal point, however, the efficiency of each worker decreases because other
factors such as the production technique or the available resources remain the same.

Let us read a case study to clearly understand how diminishing returns occur in a firm.

Farmer Scale’s Apple Orchard

Farmer Scale has a very large apple orchard full of apple trees. At the end of the summer,
the trees were heavy with ripe fruits ready for picking.
The farmer employed a young apple-picker named Sam who could pick 50 kilograms of
apples each day in his basket. To enable him to do this, Farmer Scale had a ladder, which
Sam would prop against the apple tree so that he could reach the fruits on the high
branches.
But Farmer Scale was worried that, not all the apples would be picked before the cold
weather arrived. He decided to higher some more units of labour. Angus was the first
new employee. He and Sam would climb the ladder together. Sam picked fruits from the
highest branches while Angus picked from the lowest branches. Together they could pick
80 kilograms of apples each day. That is, on average, they picked 40 kilograms of apples
each. This was their average output or average product. Because the ladder had become
a little unsteady with both Sam and Angus climbing it so their picking of apples was
slowed down.
On his own, Sam could pick 50 kilograms of apples each day. With Angus the total weight
of apples picked increased to 80 kilograms. Thus, the employment of Angus raised total
output or total product by 30 kilograms per day. This extra 30 kilograms is known as
Angus’s marginal output or marginal product.

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Lisa was the second employee who joined the farm two weeks later. Sam, Angus and Lisa
climbed the same the ladder together. All three could pick 84 kilograms of apples in a day,
which is an average product of 28 kilograms each. This is because the ladder began to
wobble quite a lot which made picking difficult.
Together, Sam and Angus could pick 80 kilograms of apples each day, but the employment of
Lisa, increased the total product of apples to 84 kilograms per day. Thus, Lisa’s marginal
product was only 4 kilograms of apples.
A fourth unit of labour is added. Bob, Lisa, Angus and Sam climbed the ladder together but
they could only pick 45 kilograms each day. By now the ladder became
over-crowded, it was unsafe and difficult for everyone. Clearly, the employment of Bob
resulted in total product falling from 84 to 45 kilograms of apples per day. Bob’s
employment reduced total product by 39 kilograms per day. His marginal product is a minus
or negative number. (Moyhihan & Titley, 2000)

The total, average and marginal products of Farmer Scale’s workers are presented in the
table below.

Units of Labour Kilograms of Apples Per Day

Total Product Average Product Marginal Product

0 0 0 0 Increasing
1 (Sam) 50 50 50 returns

2 (Angus) 80 40 30
Decreasing
3 (Lisa) 84 28 4 returns
4 (Bob) 45 15 -39
Source: (Moyhihan & Titley, 2000)

This example illustrates the law of diminishing returns. It states that if one factor of
production is fixed in supply (land/capital) in the short run and extra units of another factor
(labour) are added to it, then the extra output or returns gained from the employment of
each extra unit of this factor must after a time go down or diminish.
Farmer Scale discovered this when he added extra units of labour to his fixed unit of capital
(ladder). The ladder was shared among too many workers and picking apples became more
and more difficult. That is, he experienced diminishing returns to labour.

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Calculating the Average and Marginal Product of Labour

If 100 workers produce a total output or total product of 4000 shoes in one week, then
clearly on average each worker has produced 40 shoes. We use the following equation to
calculate the average product of labour.

Average Product (AP) = Total Product (TP)

Number of Workers

If one more worker is employed and Total Product rises to 4030 shoes then, the employment
of the extra unit of labour has added 30 shoes to total product. That is the marginal product
of the worker. We therefore, use the following equation to calculate the marginal product of
labour.

Marginal Product (MP) = Change in Total Product

Change in number of Workers

Let us use Farmer Scale’s example to draw a graph illustrating average and marginal
products.

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FARMER SCALE’S APPLE PRODUCTION

120
110
100

90
80
70
60
50
40
Total Product
30

20
Average Product
10
0
Sam Angus Lisa Bob
-10
-20
-30
-40
Marginal Product

The graph shows how each new employee or unit of labour produced less than the
employee before them until eventually the fourth employee caused the total amount of
apples picked to fall.

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11.2.2.8: Economies and Diseconomies of Scale

In order for you to understand the concepts of economies and diseconomies of scale, we will
have a look at a case study. The case study is based on three (3) chocolate manufacturing
firms. These firms have expanded their production in two years. All three firms have doubled
their inputs or the factors of production they used. But what happened to their output of
chocolate boxes?

The ACE Company The BOOM Company The CRIKEY Company

Year 1 Year 1 Year 1

Labour = 50 Labour = 40 Labour= 60
Number of Machines = 10 Number of Machines = 15 Number of Machines= 5
Number of Factories = 1 Number of Factories =1 Number of Factories =1
Total Product = 10 000 Total Product =12 000 Total Product =9 000

Year 2 Year 2 Year 2

Labour =100 Labour =80 Labour =120
Number of Machines =20 Number of Machines =30 Number of Machines =10
Number of Factories= 2 Number of Factories =2 Number of Factories =2
Total Product =25 000 Total Product =20 000 Total Product =18 000

=increasing return to scale = diminishing return to scale = constant return to scale

 A firm that doubles all its inputs and more than doubles its output of goods or services
as a result is said to be experiencing increasing returns to scale. This is what happened
to the ACE Chocolate Company.
 The BOOM Company however, doubled its input but did not manage to double its
output of chocolate boxes. Firms like this are said to be experiencing decreasing or
diminishing returns to scale.
 On the other hand, the CRIKEY Chocolate Company experienced constant returns to
scale because as it doubled its inputs, it also doubled its outputs.

Increasing Returns to Scale is when firms increase the factors of production (inputs) to
produce a larger amount of output.
Decreasing Returns to Scale is increasing the factors of production (inputs) but produces
a lesser amount than the doubled input.
Constant returns to Scale are doubling the factors of production (inputs) which doubles
the output.

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The three chocolate companies have doubled all their inputs and have therefore doubled
their costs. One firm managed to more than doubled its output, one doubled its output
while the other did not do this at all. Now, calculate what happened to the average cost of
producing boxes of chocolates in each company as they moved from year 1 to year 2.

Average Cost (AC) = Total Cost (TC)

Total Product (TP)

The ACE Company The BOOM Company The CRIKEY Company

Year 1 Year 1 Year 1

Total Cost of all inputs = Total Cost of all inputs = Total Cost of all inputs =
K10,000 K12,000 K9,000
Total Product = 10,000 Total Product = 12,000 Total Product = 9,000
Average Cost = K1.00 Average Cost = K1.00 Average Cost = K1.00

Year 2 Year 2 Year 1

Total Cost of all inputs = Total Cost of all inputs = Total Cost of all inputs =
K20,000 K24,000 K18,000
Total Product =25 000 Total Product = 20 000 Total Product =18 000
Average Cost = K0.80 Average Cost = K1.20 Average Cost = K1.00

 The ACE Company experienced falling average costs.

 The BOOM Company experienced increasing average costs.
 The CRIKEY Company had no change (constant) in average cost.

Falling Average Cost (AC) is a very important benefit to the firm. In this situation we say that
the firm experiences economies of scale. That is, average costs fall as output increases up
to a certain level. It makes costs savings from increasing the scale of production by raising
the output. This was certainly the case for the ACE Chocolate Company whose average cost
per box of chocolate fell from K1.00 to K0.80 as it doubled all its inputs and total costs. In
other words, it experienced increasing returns to and more than doubled the output.

However, if the average cost of production rises as more is produced then the firm is
experiencing diseconomies of scale. It arises when a firm produces beyond the minimum
point which causes the average cost of each successive unit of output to increase. The firm is
producing too much and has become inefficient. This happened to the BOOM Chocolate
Company where it doubled its inputs but failed to double its outputs. Diminishing returns to

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scale here meant that the firms average costs increased from K1.00 to K1.20 per box. The
BOOM Company, like any firm in this situation would regret taking the decision to expand its
scale of production.
Deciding how large a firm should be, is not easy for entrepreneurs. If the firm expands its
scale of production it may be lucky and experiencing falling average costs or economies of
scale.
If the firm expands too much and watches its average costs rise, like the BOOM Company, it
experiences diseconomies of scale.
Clearly, then the best or optimum size for a firm is where it can reduce average cost to its
lowest point in the long run. Here it can benefit fully from economies of scale, with low
average costs and higher profits. The firm could use these profits to improve their factory
and products and may even lower prices to attract customers away from competing firms.

Internal and External Economies of Scale

When a firm expands the scale of production, it has a chance to become more efficient and
lower its average costs. This is because it gives the management or owners a change to re-
organise the way the firm is run and financed. Such decisions are taken within the firm and
so the advantages they bring are known as internal economies of scale. These are the cost
savings that result from a firm being large. We shall now look at this in detail.

 Division of Labour and Specialisation

As the firm expands, workers become better at what they do, for example if they a
producing refrigerators, they improve their knowledge of parts and assembling techniques.
This may reduce waste of time or materials. In other word, an expansion sees an increase in
productivity through improved specialisation thus reducing costs.
 Technical Economies
An expansion in the size of the business means that it can invest in more complicated and
specialised plant and machinery. For instance, a small scale electrical goods producing
company may use simple and few machinery while a large electrical goods producing
company may automate the entire production process to make goods for an entire region at
lower cost.
 Managerial Economies
When firms expand many people are needed to look after sections, therefore, they employ
mangers to take care of different departments which increases operational efficiency. Small
scale firms have managerial problems when one manager tries to oversee the entire
business.
 Marketing Economies
Bigger firms have the advantage in advertising, bulk buying and distribution. A single
advertisement may cover an entire population which increases the demand for its products.
They have the power to attract customers.

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 Research and Development

As the firms increase in size, they need to know the market of their products. Huge amounts
of money are invested into doing more research on selling their products. They spend more
money on producing variety using the same inputs so the firm does not concentrate on one
product. This will generate additional revenue for the firm.
 Financial Economies
An advantage of being big is that the firm is popular and is easy to obtain financial assistance
from financial institutions at low interest rates. This reduces the financing costs. They have
track records of profits and solid sales and revenues which will guarantee them the loans for
further improvements in the expansion of the business.

Eternal Economies of Scale

This refers to economies of scale which occurs outside a firm but within an industry. When a
whole industry expands, because the number of firms within it is growing or the existing
firms are getting bigger, the firms in the industry may find they can enjoy certain benefits.
External economies of scale are those advantages in the form of lower average costs which a
firm gets from the growth of the industry. They are especially important when all the firms in
the industry locate together in one particular place.

 Skilled Labour
When firms involve in the same types of activities located near each other, they all employ
and train local people in the work skills they need. A large skilled labour force emerges, this
can benefit other firms who move into the area.
 Ancillary Firms
In areas where similar firms locate, other firms may join them to cater for some of their
needs. For example, smaller car parts producing firms may set up near large cart factories.
 Co-operation
When firms locate together to produce one particular good or service they tend to help each
other, even though they are competing.

A general expansion of industries in a particular area may lead to setting up of banks and
supermarkets which all facilitate in the purchasing and sale of goods which reduce the cost
of production. Localisation or concentration of firms within a similar industry in the same
geographic location allows other support industries to enter the same area to provide
services such as transport, maintenance, cleaning, computer software, development,
catering and training.
The government may also assist by providing power, road construction, and communication
networks encouraging firms to further expand. This will all lead to a reduction in the firms
average costs.

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Diseconomies of Scale
It seems very beneficial for a firm to go to a large size so that it may enjoy economies of
scale. However, some firms become too large which can cause inefficiency, that is,
production slows down and costs rise. This is caused by diseconomies of scale. In other
words, as a firm continues to expand, it reaches a point where economies of scale are no
longer possible, which means it reached the minimum average cost. At this point, cost of
production will rise but the product output will fall which leads to a reduction in the firm’s
profits. For example, if the inputs of a firm increase by 10% and output increases by only 8%,
then diseconomies of scale exist. Please read the examples of the three chocolate producing
companies and find out which company experienced diseconomies of scale.

Factors which contribute to the existence of diseconomies of scale

 Management Diseconomies
Large firms have to be divided up to many specialist departments. For instance, there may
be a planning department, personnel, accounts, production, design and sales. Each
department will have a manager responsible for running it. For the firm to run successfully
all the departments must work together, but with many department managers, decisions will
take a long time and there may be disagreements. On the other hand, if there is only one or
few managers, they are unable to coordinate all the operations of the business.

 Labour Diseconomies
Production inefficiencies are the other factors that contribute to diseconomies of scale. With
growing demand a firm is unable to plan and schedule production because the capacity of
the fixed factors is not sufficient to produce large quantities. However, if the firm decides to
increase more inputs to production then, diminishing returns to scale occur. This is when
production decreases and average costs increase.

Sometimes large firms use specialised mass production techniques where there is division of
labour which leads to boredom because of repetitive job. The work force may then become
less cooperative or less attentive to their work leading to poor production.

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Now read this example,

‘Big is not always Better’

Diseconomies of scale exist in schools. One teacher may be able to teach a class of twenty
(20) students, really well, having time to deal with students on a one – to - one basis where
necessary. But if the same teacher is to have a class of fifty (50) students, their productivity
in terms of student learning may fall as the same amount of personal attention cannot be
given. This is why educators try to reduce class sizes in order to improve educational
outcomes. (Panditha Bandara, 2013)

Now, after reading the above example, think about the education system of Papua New
Guinea?

NOW READ THE SUMMARY OF 11.2.2 ON THE NEXT PAGE.

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11.2.2: SUMMARY

 Production process refers to the steps followed in order to change raw materials into
finished goods to satisfy needs and wants.
 Inputs are resources or raw materials used to produce a final good.
a. Fixed inputs b. Variable inputs
 Outputs are the final goods and services produced or the outcome of the production
process.
a. Capital goods and services b. consumer goods and services
 Production possibility refers to the alternative combinations of the amounts of two
goods or services that an economy can produce with a given amount of resources.
 A production possibility curve is a representation of the amount of two different goods
that can be obtained by shifting resources from the production of one good to the
production of the other. It is used to describe a society’s choice between two different
goods.
 The three stages of production are;
a. Primary is the extraction of natural resources or raw materials
b. Secondary is the making and changing of raw materials to finished goods
c. Tertiary production is the provision of services to the consumers
 Cost of production refers to all the cost paid for in producing a good or providing a
service.
a. Fixed costs do not vary with the numbers of goods produced. They are constant over
a period of time.
b. Variable costs vary with the number of output. The more a company produces, more
materials are needed which automatically increases the variable cost and vice versa.
c. Total cost is the sum of fixed and variable costs.
d. Average cost is the cost of producing one unit or a single good or product.
e. Marginal cost is the additional cost of producing one extra unit of a product or good.
 Revenue is the money received from the sales of the products produced.
a. Average revenue is the income received from each item sold.
b. Marginal revenue is the extra income earned from the extra unit of output.
c. Total revenue is the sum of average and marginal revenues.
 Profit of the business is the difference between the total cost and the total revenue.
 The optimum point of production in a business is where the average cost of producing a
good is at the lowest possible level.

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 The profit of a business is maximised when the Marginal Cost is equal to the Marginal
Revenue (MC=MR).
 The break –even point of production is when the expenses of the business are equal to
the revenues (Expenses = Revenue).
 Law of diminishing returns is when one factor of production (number of workers, for
example) is increased while other factors (machines and workspace, for example) are
held constant, the output per unit of the variable factor will increase but at a certain
point it will eventually diminish or decrease.
 Increasing returns to scale occurs when a firm increases its inputs, and its output
increases more than proportionately. If, for example, inputs double and outputs more
than double, we experience increasing returns to scale
 Constant returns to scale is when inputs increase and outputs increase by the same
percentage
 Increasing returns to scale is associated with economies of scale.
 Decreasing returns to scale is associated with diseconomies to scale.
 An economy of scale is the situation experienced by a firm when the Average Cost per
unit is decreasing. Economies of scale explains the relationship between the long run
average cost of producing a unit of good with increasing level of output.
 A diseconomy of scale is an economic concept referring to a situation in which
economies of scale no longer function for a firm. Rather than experiencing continued
decreasing costs per increase in output, firms see an increase in marginal cost when
output is increased.

NOW DO STUDENT LEARNING ACTIVITY 11.2.2 ON THE NEXT PAGE.

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Learning Activity 11.2.2

Read the questions carefully and write the answers on the spaces provided.

1. Choose a product that is processed in Papua New Guinea or one that you can make.
a. Describe the processes or steps in making that product with diagrams.
b. List the inputs used in this production process.
c. List the outputs of the production process.

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Refer to the diagram below to answer question 2.

2. Describe the production possibilities of capital and consumer goods on the following
points.
a. B ___________________________________________________________________
__________________________________________________________________

b. D ___________________________________________________________________
____________________________________________________________________

c. E ___________________________________________________________________
___________________________________________________________________

3. Complete the table by making a list of firms under each stage of production.

Primary Secondary Tertiary

RH Ramu Logging Global Construction Digicel Communication

Company

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Refer to the information below on OK Tedi Mine to answer question 4.

The Ok Tedi Mine is an open-pit copper and gold mine in Papua New Guinea located near the
headwaters of the Ok Tedi River, in the Star Mountains Rural LLG of the North Fly District of
the Western Province of Papua New Guinea. Discharges from the mine have caused
widespread and diverse harm, both environmentally and socially, to the 50,000 people who
live in the 120 villages downstream of the mine.

The mine is operated by Ok Tedi Mining Limited (OTML) which is majority owned by the PNG
Sustainable Development Program Limited (PNGSDPL). Prior to 2002, it was majority owned
by BHP Billiton—the largest mining company in the world since a merger in 2001.

Located in a remote area of PNG, above 2,000 m (6,600 ft) on Mount Fubilan, in a region of
high rainfall and frequent earthquakes, mine development posed serious challenges.[1] The
town of Tabubil was built to serve the mining operation. (From www.wikipedia.com)

4. List the external benefits and external costs of OK Tedi Mine on the surrounding
community.

External Benefits External Costs

5. Complete the following table on production costs of a firm.

Total Product (Output) Total Cost (TC) (K) Average Cost (AV) Marginal Cost (MC)
0 10
1 20
2 28
3 34
4 46
5 62
6 84
7 112

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6. Use the information in the table (Q5) to construct cost curves (total cost, average cost and
marginal cost). Please note, all the three curves must be plotted on the same graph.

7. Differentiate between diminishing returns and economies of scale. Sketch a graph to

show the difference.
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

CHECK YOUR ANSWERS AT THE END OF THE UNIT.

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TOPIC: 3: SPECIALISATION OF PRODUCTIVE RESOURCES

Most people earn the money they need to exchange for the goods and services they want by
doing one particular occupation, such as plumbing, engineering, accountancy, printing or
making containers,. People do this to take full advantage of their natural talents or the
abilities they have acquired from their education or training.
This is a very different situation from that faced by our primitive ancestors who tried to be
self-sufficient, that is each person or community produced all the things they needed and
wanted for themselves. For example, growing and hunting their own food, making their own
clothes and shelter.
However, people were not always very good at doing everything for themselves and so
people slowly started to specislise in doing the tasks they were best able to do. Some people
specialised in making spear heads, while others made the spear rods. Others would hunt,
while others built shelters and made cooking pots.

Specific Learning Outcomes

At the end of this topic, students will be able to;

 differentiate between specialisation and division of labour

 state the importance of specialisation and division of labour
 identify the characteristics of specialisation and division of labour
 identify and describe forms of specialisation
 define productivity
 describe the relationship between specialisation and productivity
 list and discuss factors which increase productivity
 discuss productivity and economic growth in Papua New Guinea

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11.2.3.1: Specialisation and Division of Labour

Specialisation was the first step towards a wealthier society. A community which practised
specialisation was able to produce more than enough food, clothes, pots and other things.

Specialisation is concentrating on producing particular types of goods and services, and

relying on others to provide what one does not produce.

Early Specialisation
Specialisation began in early times within a family or tribe of people in a village where the
fruits of their labour were shared among the whole family or tribe. In subsistence
economies people produced goods mainly for their own consumption or family use. Each
person’s share depended on his or her contribution to production, then the total output of
the whole group. Although there was division of labour, particularly between the sexes,
there was limited specialisation. The table below shows division of labour between men and
women in subsistence economies.

Women Men

Collecting vegetable foods Hunting and fishing

Cooking Making tools
Making baskets and pots Making weapons
Care of children Carving and painting
Educating children Administering laws
Collecting water and firewood Care of sacred objects
Care of animals and gardens Organising ceremonies
Care of the house Building houses

However, as we move into medieval times, people began to specialise in trades. Labour was
divided up according to what good or service they produced and medieval guilds developed.
These were groups of skilled trades people trained to be bakers, engineers, butchers and
carpenters.
Since then, the production process has been broken down into series of separate operations,
each one performed by a separate person or a group of people.
For instance, in the early days of the motor - car industry, one person would put together the
entire engine. However, the leading car manufacturer, Henry Ford decided to separate the
work into eighty-four (84) varied operations. Eighty-four people were needed to build a
whole engine instead of just one person. This meant more engines could be built each day.

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Specialisation and the division of labour means that if people concentrate on doing those
tasks, they are best able to do, much more can be produced and more wealth created. This
means, peoples’ standard of living would improve and they would have greater choice.
With specialisation people need to exchange or trade. If people specialise in producing one
particular good or service, then they exchange the surplus for other goods and services to
have a variety to satisfy their needs and wants. In modern economies, it is difficult for one
person to produce a good alone.

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11.2.3.2: Forms of Specialisation

Specialisation of labour takes three (3) forms;

1. Specialisation takes place between industries

Different industries specialising in producing different goods and services. For example, the
coffee, clothing and baking industries.

2. Specialisation in the types of work done

People are specialised in the type of work they do. Teachers are specialised in teaching while
doctors are specialised in treating sick people. Geologists study rocks while a chef prepares
delicious food.

3. Specialisation within the different stages in the production process

This is the more highly developed form of specialisation which occurs within the different
stages or steps in the production process. For instance, Henry Ford’s idea mentioned. When
producing biscuits, a worker may be there only for packing or sealing the packet. This is
actually where the division of labour occurs.
The increased production achieved by specialisation is the result of the division of labour.
.

Division of Labour is the breaking down of the production process into a number of
steps/stages and the specialisation of workers in particular tasks.

Look at the diagram on the next page and see how division of labour works in industries.

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DIVISION OF LABOR IN INDUSTRY

Source: Microsoft ® Encarta ® 2008. © 1993-2007 Microsoft Corporation.

Division of labor is a basic tenet of industrialisation. In division of labor, each worker is

assigned to a different task, or step, in the manufacturing process, and as a result, total
production increases. As this illustration shows, one person performing all five steps in the
manufacture of a product can make one unit in a day. Five workers, each specialising in one
of the five steps, can make 10 units in the same amount of time.
The organisation of labour into a number of divided and specialist tasks have brought a
number of advantages to firms and to the economy.

Advantages of Specialisation (Division of Labour)

1. More goods and services are produced

When workers become specialists in the jobs they do, repetition of the same operation
increases the skill and speed of the worker and as a result more is produced. In other words,
it increases productivity.

2. Full use is made of everyone’s abilities

With the division of labour, there is greater chance that people will be able to do those
things at which they are best and which interest them the most.

3. Time is saved
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If a person had to do many different tasks or operations, then much time would be wasted,
switching from one task to another.

4. It allows the use of machinery

As labour is divided up into specialist tasks, it becomes worthwhile to use machinery, which
allows a further saving in time and effort. However, many people complained that their jobs
are taken over by machines and they have been unemployed.

Disadvantages of Specialisation (Division of Labour)

1. Work becomes boring

A worker who performs the same operation each and every day becomes bored.

2. Workers feel alienated

Workers feel unimportant because they can no longer see the final result of their efforts.
Think of the chance of achievement and pride you would have if you could build a complete
car by yourself instead of just tightening the wheels.

3. People become too dependent upon each other

Specialisation and division of labour means that people come to rely on others for the
provision of goods and services. For example, people who do not produce food rely on those
who do, while the people who produce food rely on others for the provision of other things
such as machinery and fertilizer. This illustrates how workers in one industry depend on
other industries.
4. Products are all the same
The goods produced under a system of specialisation turn out in big numbers and share the
same design. They are said to be standardised.

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11.2.3.3: Productivity in Papua New Guinea

According to the Oxford Dictionary of economics, productivity is the amount of output that
can be produced from a given input of resources by a firm, an industry or by a country.
For example, a firm that uses 10 units of labour, land and capital to produce 40 units of
output is twice as productive as a firm that uses 10 units of resources to produce 20 units of
output.
The aim of any business is to combine its resources in the most efficient way. That is, it will
attempt to maximise the productivity of its resources in order to produce as much as it can
at the lowest cost possible.
For instance, a construction firm that employees 10 carpenters and yet supplies only 1
hammer, drill and chisel between them has clearly not combined labour and capital in the
most efficient way. By increasing the input of capital, that is more hammers and chisel, the
firm will increase productivity.
In general, productivity in a firm will increase if more output can be produced with the same
input of resources, or if fewer resources can be used to produce the same amount of output.

X100 X100 X100 X100

A B x10
X100 X100 X100 X100

X100
0
o Total Cost of labour, materials & o Total Cost of labour, materials &
capital = K200 capital = K200
o Total Output = 400 o Total Output = 500
o Average cost per unit = K50 o Average cost per unit = K40
Productive More Productive

From this you can see that the amount of resources used is the same. However, the output
varies which means that firm ‘B’ is more productive than firm ‘A’. Productivity is used for
comparison purposes. It is used to compare the output or production levels of similar firms
in an industry. It is a key factor which determines cost per unit and competitiveness by using
less input to produce a given level of output.

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Factors which increase Productivity

1. The nature of the product
Products in high demand, in domestic and international markets will tend to be mass
produced using a large input of automated machinery

2. The relative prices of labour and capital

If wages are high, a firm may decide to use more capital instead of labour.

3. The size of the firm

As a firm grows in size, it tends to employ more capital relative to labour.

Labour Productivity
Labour productivity which indicates output per labour is an important indicator that
measures labour efficiency. It is calculated by dividing total output in a given period of time
by the number of workers employed.

Average product of labour = Total Output

Number of employees

The average product of a labour is a useful measure of how efficient workers are.

For example, if a company employs 10 workers to produce 200 DVD players per day, then
the average product per labour is;

APL = T O ÷ # of employees
APL = 200 ÷ 10
APL = 20 DVD players

If output rises to 220 DVD players per day without the company employing any more
workers, then productivity will have increased to 22 DVDs per worker per day. When output
increases, it can be seen as a productivity improvement.

How can firms increase the productivity of Labour?

A firm can attempt to raise the productivity of its workers through a combination of the
following:
1. Train workers to improve their existing skills.
2. Rewarding increased productivity with performance –related pay and bonus payments
3. Encouraging employees to buy shares to in their organisations.
4. Improving job satisfaction (improving the working environment and team working.)

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5. Replacing old plant and machinery with new ones.

6. Introducing new production processes and working practices designed to reduce waste,
improve quality and increase output

Why increasing Productivity?

1. Increased profits
2. Lower costs of production
3. Improve market competitiveness

Productivity in Papua New Guinea

Papua New Guinea’s economy is dominated by a large – labour intensive agricultural sector
and a capital intensive minerals sector. The formal sector consists of extractive industries,
cash crop production and a small manufacturing sector. The informal sector is largely
subsistence agriculture. Over the years Papua New Guinea’s uneven growth rates have been
accompanied by structural transformation.
Unlike the trend observed in other developing countries, the share in Gross Domestic
Product (GDP) of the primary sector has increased steadily since 1975 while those of the
secondary and tertiary sectors have declined.
The main agricultural sector including the cash and subsistence crops is dominated by small
farmers and has been hurt by the deteriorating physical infrastructure and of weak law and
order.
The mining sector’s share of GDP has increased. This sector is mostly foreign –owned,
though the government holds equity in some projects.
The manufacturing sector has been declining. This sector includes food, soft drinks, beer,
tobacco processing, furniture making, small scale-engineering and metal processing, clothing
and other lighting industries. This sector is dominated by firms geared to the domestic
market. Its expansion has been delayed by shortage of entrepreneurial, managerial and
skilled labour, complicated regulations, high utility and transportation overheads and the
high cost of labour relative to productivity. Its contribution to GDP has varied over the years.
The output of the construction sector is characterised by year to year variations reflecting
the impact of large individual projects.
The service sector includes economic activities such as transportation, banking,
communication and advertising. This sector has deteriorated overtime as well as community
and personal services which are sensitive to weaknesses in law and order and governance.

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Papua New Guinea’s economic growth reductions are mostly accounted for by a significant
slowdown in capital inputs and lower total factor productivity growth. On average, no
productivity improvements in labour have been recorded since independence. Significantly
higher productivity growth and investment will be needed to sustain higher GDP growth
rates. The historical performance also indicates that, in the absence of structural reforms
and stronger institutions, higher rates of productivity growth will be hard to achieve.
Below is a speech from the Prime Minister Peter O’neill.
We are now looking to secure the development of new LNG plants, and wider gas sector
development, as well as empowering sectors that will last beyond the LNG sector. These are
sectors like agriculture, fisheries and tourism."
Prime Minister Hon. Peter O’Neill said to build these sectors would require hard work from
everyone.
"This approach is also going to require us to do something else. This is something that I have
spoken about on a number of occasions.
We must lift our productivity and improve the infrastructure which is so vital to the growth
of our economy. ”Productivity remains a real challenge for us. We cannot afford to be a
high-cost producer both in the resources sector, and sectors like agriculture.
"We have to be able to compete not just regionally but internationally. “The PNG LNG story is
a wonderful success story as a low cost project, but we need to build on that success – with
the development of at least two more substantial projects in the years ahead,” Prime
Minister Hon. Peter O’Neill said.
He said the mining sector also continues to be impacted by low world mineral prices but it
also brings challenges as well and that is to be addressed through better productivity and a
competitive environment.

Factors that hinder development and greater productivity.

 Cost of Finance
It is quite difficult for locally based investors to have access to finance. The available
financial instruments may not match the needs of investors due to a mismatch between
the loan period and the investment requirements.
 Social Returns to Investment
Low levels of economic growth and investment can be caused by low social returns to
economic activities, which in turn can be due to inadequate human capital,
infrastructure and other public goods that compliment private investment. Formal
employment opportunities are low in PNG and a majority of the labour force is involved
in farming. Skilled human capital is scarce in most of the formal sectors of the economy.
 Infrastructure
Inadequate infrastructure adds to the cost of doing business, thus, reducing economic
returns to investment. PNG’s infrastructure remains less developed. Deficiencies in
telecommunications, transport and electricity are the most critical constraints to
development. PNG’s road network is inadequate and poorly maintained.

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 Law and Order

Papua New Guinea performs poorly in enforcing law and order compared to other
developing countries. Port Moresby has some of the best infrastructure in the country;
however, the high crime rate may be hampering its ability to attract investors and slows
down economic growth.
 Control of Corruption
Corruption is an impediment to investment in which PNG is weak and unable to control.
 Political Stability
Political and policy stability has been improving with the introduction of the Organic
Law.

Engaging employees for greater productivity

Create a sense of belonging and company advocates. An engaged workforce can have a
significant impact on an organisation’s performance. Employees, who have a greater sense
of belonging, believe in the goals of the organisation, and share a common understanding of
the behaviour needed to carry-out key tasks are far more productive.
With the cost of disengagement for business significant benefits can be gained through
employee engagement including:
 higher operating incomes
 net income growth and earnings per share
 higher retention rates

NOW READ THE SUMMARY OF 11.2.3 ON THE NEXT PAGE.

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11.2.3: SUMMARY

 Specialisation is concentrating on producing particular types of goods and services.

 Division of Labour is the breaking down of the production process into a number of
steps and the specialisation of workers in particular tasks.
 Specialisation and division of labour increase productivity.
 Forms of specialisation;
a. Specialisation between industries
b. Specialisation in the types of work done
c. Specialisation within the different stages in the production process.
 Advantages of specialisation;
a. Production increases
b. Full use of everyone’s ability
c. Saves time
d. Allows the use of machinery
 Advantages of specialisation;
a. Work becomes boring
b. Workers feel alienated
c. People become too dependent upon each other
d. Products are all the same
 Productivity is the volume of output produced using a given amount of resources.
 Factors that increase productivity;
a. The nature of the product
b. The prices of labour and capital
c. The size of the firm
 Labour productivity indicates output per labour.
 Reason for increasing productivity;
a. Increased profit
b. Lower cost of production
c. Improve market competitiveness
 Papua New Guinea’s economic growth reductions are mostly accounted for by a
significant slowdown in capital inputs and lower total factor productivity growth.
 Productivity remains a real challenge for Papua New Guineans. We cannot afford to be a
high-cost producer both in the resources and agriculture sectors.

NOW DO STUDENT LEARNING ACTIVITY 11.2.3 ON THE NEXT PAGE.

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Learning Activity 11.2.3

1. In your own words, explain early specialisation and division of labour.

________________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________

2. Differentiate between specialisation and division of labour.

________________________________________________________________________
_______________________________________________________________________
________________________________________________________________________

3. Describe the relationship between specialisation and productivity.

________________________________________________________________________
________________________________________________________________________
_______________________________________________________________________

4. Complete the table below by listing some examples of the forms of specialization.

Specialisation between Specialisation in the types of Specialisation within the

industries work done different stages in the
production process

Clothing industry Electrician Packing

YOU HAVE COME TO THE END OF UNIT 2. THE ANSWERS TO STUDENT LEARNING
ACTIVITIES 11.2.1 TO 11.2.3 ARE ON THE NEXT PAGE.

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ANSWERS TO STUDENT LEARNING ACTIVITIES TOPIC 1 – TOPIC 3

TOPIC: 1

1. a. rent b. wage c. interest d. capital

2. a. Land is an economic resource because it contains all other resources. When land is
used by an individual or a firm they pay rent to the person who owns the land.
b. When human physical effort is used to produce a good or a service, wages are paid
to compensate for the labour.
c. Owners of capital goods are paid interest for the use of machinery for production.
d. The organisers of the factors of production in the production process receive profits.
They take the risk in order to make a profit.
3. In Papua New Guinea there are two types of land ownership;
a. Customary land which consist of 97% owned by the indigenous people of Papua New
Guinea.
b. The remaining 3% is called alienated land which is state land and controlled by the
government. The government leases these lands to individuals and groups for
development purposes.
4. Papua New Guinea is a resourceful nation. Its existence depends on the natural
resources.
5. When more land is released to be used more development takes place. However,
when land is not given away then it hinders economic development. When the price or
rent for land increases, development will slow down but when price or rent for land
decrease more development takes place.
6. Answers will vary.

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TOPIC 2

1. Production Process

a. The Production of Juice

b. Inputs: Oranges, Plastic containers, water, mixer, labour, factory building etc.
c. Output: Vita Juice

2.
a. It is an efficient point of production meaning the resources are well used to produce
consumer and capital goods.
b. Point D is an inefficient point meaning the country is operating or producing below
the expected quantity. The resources allocated to produce consumer and capital goods
are not fully utilized. Wasting of resources for production.
c. This point is unattainable because it cannot be reached with the resources available.

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3.

Primary Secondary Tertiary

RH Ramu Logging Global Construction Digicel Communication

Company
RD Tuna Canning RD Tuna Canning
Bank of South Pacific
Ramu Sugar Ramu Sugar
Mapai Transport
Barric Ramu Nico Niugini Pot
Exton Mobil Paradise Beversges (Assorted EMTV for Advertising
Drinks)

4. OK Tedi Mining

External Benefits External Cost

 Local people having excess to the  Pollution of the river
road built by the company  Destruction of the forest leading to the
 Start spin-off businesses such as a extinction of wildlife
trade store 
 Employment for local people 
 Royalties for landowners 
 Acquire skills from expatriates

5.
Total Product Total Cost (TC) (K) Average Cost (AV) Marginal Cost (MC)
(Output)
0 10
1 20 20 10
2 28 14.00 8
3 34 11.33 6
4 46 11.50 12
5 62 12.40 16
6 84 14.00 22
7 112 16.00 28

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6. Production Cost Curves

115
110 TC
105
100
95
90
85
80
75
70
Costs
(K)

65
60
55
50
45
40
35
30
25
MC
20
15 AC
10
5
0 0 1 2 3 4 5 6 7

Output
Please note: You should have a graph similar to the one shown above showing all the costs.
If you have time you may also draw three different graphs showing TC, AC and MC.

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7. Law of diminishing returns is when one factor of production (number of workers, for
example) is increased while other factors (machines and workspace, for example) are
held constant, the output per unit of the variable factor will increase but at a certain
point it will eventually diminish or decrease.
Whereas, economies of scale is an economy of scale is the situation experienced by a
firm when the average cost i.e., cost per unit is decreasing. Economies of scale explains
the relationship between the long run average cost of producing a unit of good with
increasing level of output.

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TOPIC 3

1. In traditional subsistence and barter economies, there was limited specialisation. It

began within the families and tribes. They produced goods for self-consumption. In
producing food, the tasks were divided among the family members. Each one of them knew
exactly what to do and the fruits of their effort were shared among themselves depending
on their contribution.

2. Specialisation is when concentrating on doing one particular job and division of labour
is breaking down the process of production into a number of steps.

3. Specialisation increases productivity.

4.
Specialisation between Specialisation in the types of Specialisation within the
industries work done different stages in the
production process

Clothing industry Electrician Labeling

Automobile industry Teacher Packing
Food industry An accountant Advertising
Plumber Distributing
Singer

NOW CHECK THE LIST OF BOOKS USED IN THIS MODULE ON THE NEXT PAGE.

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 GR 11 ECONOMICS U2 GROWING THE ECONOMY

BIBLIOGRAPHY OR REFERENCES

Moynihan Dan & Titley Brian. 1989, Economics- A Complete Course. 3rd edition, New York,
Oxford University Press.

Economics for Developing Nations

Foundations of Economics

E.D.Shade & P.M. Scott. 1990, Fundamentals of Economics. 3rd edition,

John Black, Nigar Hashimzade & Gareth Myles, ‘Dictionary of Economics’,2013.

Panditha Bandara,’11 Economics – Save buk PNG Upper Secondary’. 2013.

www.google.com.

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PC FODE ADDRESS CUG PHONES WIRELESS SENIOR CLERK CUG PHONE

NO PROVINCIAL (COORDINATORS) PHONES
. CENTRE
1 DARU P. O. Box 68, 72228146 77522841 Mr Kevin Sere 72229047
Daru
2 KEREMA P. O. Box 86, 72228124 77522842 Mr David Saria 72229049
Kerema
3 CENTRAL C/- FODE HQ 72228110 77522843 Mr Aubi Elodo 72229050
4 ALOTAU P. O. Box 822, 72228130 77522844 Mr Albi Bapera 72229051
Alotau
5 POPONDETTA P. O. Box 71, 72228138 77522845 Mr Stansen 72229052
Popondetta Sevese
6 MENDI P. O. Box 237, 72228142 77522846 Mr Wari Tange 72229053
Mendi
7 GOROKA P. O. Box 990, 72228116 77522847 Ms Ovin Tuki 72229054
Goroka
8 KUNDIAWA P. O. Box 95, 72228144 77522848 Mr Denge Gundu 72229056
Kundiawa
9 MT HAGEN P. O. Box 418, 72228148 77522849 Mr Robert Maki 72229057
Mt. Hagen
10 VANIMO P. O. Box 38, 72228140 77522850 Mrs Isabella 72229060
Vanimo Danti
11 WEWAK P. O. Box 583, 72228122 77522851 Mr David 72229062
Wewak Wombui
12 MADANG P. O. Box 2071, 72228126 77522852 Mrs Applonia 72229063
Madang Bogg
13 LAE P. O. Box 4969, 72228132 77522853 Ms Cathrine Kila 72229064
Lae
14 KIMBE P. O. Box 328, 72228150 77522854 Mrs Bernadette 72229065
Kimbe Litom
15 RABAUL P. O. Box 83, 72228118 77522855 Mrs Verlyn Vavai 72229067
Kokopo
16 KAVIENG P. O. Box 284, 72228136 77522856 Mr John Lasisi 72229069
Kavieng
17 BUKA P. O. Box 154, 72228108 77522857 Mr Marlyne 72229073
Buka Meiskamel
18 MANUS P. O. Box 41, 72228128 77522858 Ms Roslyn Keket 72229080
Lorengau
19 NCD C/- FODE HQ 72228134 77522859 Mrs Marina 72229081
Tomiyavau
20 WABAG P. O. Box 259, 72228120 77522860 Mr Salas 72229082
Wabag Kamberan
21 HELA P. O. Box 63, Tari 72228141 77522861 Mr Ogai John 72229083

22 JIWAKA c/- FODE Hagen 72228143 77522862 Joseph Walep 72229085

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SUBJECTS AND GRADE TO STUDY

Grade Levels Subjects

1. English Language
2. Mathematics
3. Science
Grades 7 and 8
4. Social Science
5. Making a Living
6. Personal Development
1. English
2. Mathematics
3. Science – Biology/Chemistry/Physics
Grades 9 and 10 4. Social Science
5. Business Studies
6. Personal Development
7. Design and Technology- Computing
1. English - Applied English/Language and Literature
2. Mathematics - Mathematics A/Mathematics B
3. 3. Science – Biology/Chemistry/Physics
Grades 11 and 12
4. 4. Social Science – History/Geography/Economics
5. 5. Business Studies
6. Personal Development
7. ICT

REMEMBER
 For Grades 7 and 8, you are required to do all six (6) courses.
 For Grades 9 and 10, you must study English, Mathematics, Science, Personal Development,
Social Science and Commerce, Design and Technology-Computing is optional.
 For Grades 11 and 12, you are required to complete seven (7) out of thirteen (13) courses to
be certified.
 For Matriculation, you must successfully complete 8 courses; 5 core and 3 optional courses.

Matriculation Certificate

CORE COURSES OPTIONAL COURSES

 Basic English  Science Stream:
 English 1 Biology, Chemistry and Physics
 English 2  Social Science Stream:
 Basic Maths Geography, Introduction to Economics,
 Maths 1 and Asia and the Modern World
 Maths 2
 History of Science & Technology

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