Labour is the workforce of an economy. Each worker will have a set of skills which may or may not be as a result of education and training. The value of a worker is called their human capital. Education and training will increase the value of that human capital. So a worker may wish to improve their human capital through education in the hope of gaining remuneration. This is not the only way in which workers will feel that they are worthy of remuneration though. If a companies profits are increasing then workers may feel that so to is their human capital, and as is the case with the workers on oil rigs, may press for a large pay rise.
Capital is the manufactured stock of goods, tools, machines and other resources that are used in the production process. Capital is of two types, working or circulating capital and fixed capital. Working capital are stocks of raw materials, semi-manufactured and finished goods which are waiting to be sold. In the oil industry this could be crude oil, waiting to be sold to a refinery and/or the refined oil waiting to be sold to a petrol station. Fixed capital is the stock of factories, offices, plant and machinery. It is “fixed” in the sense that it will not be transformed into a final product like working capital will. It is used to transform working capital into a finished, sellable product. For example a factory (fixed capital) with machinery (fixed capital) into a finished, all barrelled up, ready to sell product.
Entrepreneurs are individuals who organise production, and also take risks with their own money and the financial capital of others, to buy factors of production, to produce goods, to hopefully make a profit. Entrepreneurs are typically owners of small to medium sized businesses who run those businesses on a day to day basis. However, managers in companies can also be entrepreneurial if they both organise resources and take risks on behalf of their company. Recently their has been a lot less entrepreneurial activity with the North Sea Oil producers cutting back their spending on investment in exploration and new equipment because of higher costs and taxes. Entrepreneurs basically spend money to buy factors of production, to produce a product, to sell and make a profit. Because of the higher costs and taxes on the oil industry the risks have become much larger and so not many managers or entrepreneurs are willing to take them.
1B) Specialisation is where an individual, firm or country produces a limited range of goods in co-operation with others so that together they can produce a complete range of goods. This is done to increase productivity.
Looking at oil, different firms will specialise in the different steps of turning oil in the ground into a final product. One firm may specialise in finding the oil – exploration, another may specialise in extracting the crude oil, another in refining it and another in selling it. Sometimes however one firm may specialise in a number, if not all of the steps.
At an individual level specialisation is called the division of labour. This can be found even in firms that themselves specialise in certain things. Again looking at oil in the extraction process some workers will be specialised in only certain machines, used for different things yet that all contribute to the extracting of the oil.
With countries some may specialise at producing bananas, like Honduras, and be able to trade these for things they want from other countries. As oil becomes increasingly scarce a country that specialises in producing oil will now be able to trade the same amount of oil for a bigger amount of bananas for example.
1C) Exchange, for the most part of history has meant barter – swapping one good for another. However it would be impossible to use this as a means or medium of exchange in a modern economy. It was the development of money that enabled trade and specialisation to transform economies into what we know today. With oil, as the amount of it decreases and the demand stays the same or even increases its value goes up. So the same amount of oil can now be traded for a bigger amount of something else than it would have say, a year ago. In other words it is now worth more money.
1D) Simply put a market is anywhere that sellers and buyers meet. Keeping it oil related there is an international Markey for oil where large companies and governments meet to buy and sell oil. There are also local markets which would be where the actual petrol stations (the sellers) meet the buyers (you and me – not so much me because I can’t drive yet).
2. The world price of oil changed significantly between 2002 and 2006. What might have been the objectives of the following groups when faced with these changes:
A. Oil companies with North Sea oil installations
B. The UK government
C. UK motorists
D. Workers on North Sea oil rigs?
- As the price of oil massively increased between 2002 and 2006 the oil companies with the North Sea Oil installations would very much want to find more oil. That is not to say that they aren’t always wanting to, but as the same amount of oil in 06 can now be sold at a higher price. However it is due to the scarcity and high demand of oil that makes it so expensive. So if the companies found more oil the scarcity would drop and so would the price, so the oil companies may just want to make sure they know where oil defiantly is and at a later date extract it. Or extract it now and control the amount that they release, so although there is more barrels of oil there isn’t more available to the motorist and so the price stays high. I think this is what is done with diamonds.
B. The UK governments would want to buy a lot of oil so that motorists could still drive their cars. Or, as oil is very expensive they may wish to explore alternative forms of fuel. Or, as they have done, publicise other modes of transport, such as buses and cycling.
C. The UK motorists would want to switch to cars with better mileage to reduce the amount they are spending on fuel, or try other modes of transport.
D. As the profits of the oil companies go up, even with people not driving so much, and switching to cars with better mileage, workers on the North Sea oil rigs may feel that their Human Capital has increases for they deserve more money.
