• The development achieved through economic development, social development, conservation of the environment is known as sustainable development.
• Countries enter into the sustainable development approach due to the following reasons:
  • Conservation of environment
  • To protect natural resources
• Utilization of environmental resources and natural disasters affect the sustainable development, examples of them are:
  • Unlimited consumption of natural resources
  • Increase in global warming
  • Melting of ice mountains
  • Climatic changes
  • Depletion of the ozone layer
  • Deforestation
  • Water pollution

Capital required for Sustainable development 

• Physical capital
• Human capital
• Natural capital
• Social capital

Aim of the Sustainable development concept 

• Maintain a balance between the Economic development
• Increase in natural resources and Environment

Pillars of Sustainable development

• Economic development
• Social development
• Protection of environment

The market which exchanges consumer goods is defined as the goods and services market
The market which exchanges land, labour and capital is defined as the factor market

• Households demand goods and services and firms demand factors of production
• Firms supply goods and services for consumption and households supply factors of
  production
• Demand for factors of production exists, is due to the demand for goods and services
• There is a derived demand for factors of production while there is a direct demand for
  consumer goods
• Demand for goods and services for consumption depends on their marginal utility and
  the demand for factors of production depends on the marginal productivity of these
  factors.
• Factor earning will be determined by factor prices and the amount of factors exchanged
  factor market.
• Factor earnings consist of transfer earnings and economic rent.
• The minimum income expected by a particular factor remaining in current use is identified
  as transfer payments.
• Any earnings above transfer payments is the economic rent.
• Demand for factors of production exists, due to the demand for goods and services

• Economic development is a changing process of the economy and increases the economic development of the life of the people and increases the quality of life.
• There is development in the social, political environmental and cultural sectors with the economic development.
• Economic development is a multi-dimensional process as it develops several sectors in the economy.
• The following conditions should be fulfilled to achieve Economic development together with Economic growth:
  • Structural changes in the production process in the economy
  • Increase in productivity of production resources / Factors of production
  • Improvement in production techniques and in technology
  • Modernization

Individual indices to measure the progress of Economic development 

• Per capita G.D.P
• Relative income distribution
• Life expectancy
• Literacy rate
• Gini Coefficient
• Labour force participation rate

Composite Indices

• Physical quality of life index
• Human Development  index
• Human poverty  index

• Continuous increase in real gross national production is called economic growth.
• It shows long term expansion of production potential.
• It illustrates quantitative changes in the production of goods and services in the economy.
• Economic growth is measurable.

Advantages of Economic growth 

• Eleminates poverty when achiveing high levels of living standards
• Increase in income
• Businesses or Entrepreneures can earn higher profits
• Increase in rate of employment
• Increase in creditability in business
• Decrease in budget deficit

 Costs of economic growth 

• Risk of inflation
• Negative effects of increase in production and consumption on the environment
• Inequalities in distribution of income and wealth
• Regional disparities
• Harmful to sustainable development
• Enviornmental degradation
• Increase in global warming
• Loss of international co-operation for the development of human welfare since the country is catogerised as a  high income country

The economic system consists of: consumers, producers, government and industrial organizations

 

• Each and every system purchases goods and services in order to satisfy human needs
• There is a coordination mechanism among these sectors
• It has developed various conventions, traditions, laws and regulations and norms for the function of the mechanism.
• Some sectors control the other sectors in order to maintain the sustainability of the mechanism

A few shapes could be found in the coordinating mechanism as follows 

• Traditions
• Price Mechanism
• Command / Planning mechanism
• When allocating scare resource answer the basic economic problems: what to produce in what quantity, how to produce and for whom to produce by the coordinating mechanism
• The price mechanism provides answers to the basic economic problems based on the profit and the price signal of the goods market and the factor market
• The planning mechanism provides answers to the basic economic problems concerning the common welfare in general

 

The laws and regulations mentioned below exist in each and every economic system in order to strengthen the economic process

• Legal framework
• Here, freedom of property, freedom of entrepreneur, freedom of choice are
  specially important.
• Process
• Policies Here economic policies and social policies are important
• Norms and traditions
• Habits and culture

Any society face basic economic problem generally.
• Different economic systems occur as the result of solving these basic economic problem.
• These economic systems can be categorized as Market economy, Command economy and Mixed economy.
• Market economy is termed as a Capitalist economic system or a Free enterprise economic system, alternatively.

 

The main characteristics of a Market economy can be explained as follows

 

• Private ownership of property
• Free enterprise and freedom of choice
• Competition and free market
•  Function of a price mechanism
• Self interest and profits
• limited role of the government
• A price mechanism functions as the coordinating mechanism of solving basic economic problems in the market economy.
• The basic economic problems of what and how much to produce is solved in the Market economy by the price signals of the good market.
• The basic economic problem of how to produce is solved in the market economy by the signals of the factor market.
• In the market economy , individual income is decided by two factors such as , price of factors of production in the factor market and exchange of quantity for the price
• The price mechanism does the following functions in the market economy
• Signaling function
• Incentive function
• Allocation function

There are some disadvantage also in the market economy such as,

• Inefficient allocation of resources.
• Failure to provide public goods and merit goods.
• Externalities.
• Occurrence of economic disparities.

Command economic system is explained as an economy where the basic economic questions are solved by the centrally planned authority.
The main characteristics of a Command economic system can be explained as 

• Government owns all the factors of production except labour.
• Basic economic problems are solved by a centrally planed authority under
  the guidance of the government.
• Competition and free market
• Function on social welfare
• A centrally planned authority decides on what and how much to produce andinforms production units.
• A centrally planned authority decides on how to produce. production units are the
  government entrepreneurship and incentives are decides according to the orders of a centrally planed authority.
• For whom to produced is decided according to the price of factors of production
• Because of the disadvantages of Command economic systems, these economic systems have been transited to Market economy.Examples: Russia, China and eastern European countries
• Most characteristics of Command economic system and Market economic systems are mixed up and mixed economies occur in most countries
  Example: Sri Lanka, India and Pakistan

The Following characteristics can be seen in a Mixed economic system.

• Public ownership of property
• Private freedom limited.
• The decisions regarding allocating resources of society is taken by the
  government or is centrally planed by authority.

A society faces the following common and basic economic problems.  What is produced in what quantity? – Problem on resource allocation

• How to produce? -problem on technology use
• For whom to produce? – Problem on how to distribute production
• Basic economic problems arise due to limited resources, alternative uses of resources
  and unlimited human wants

Basic economic problem of What to produce in what quantity, arises due to the following reasons

• Available resources are limited
• Resources have alternative uses
• Human wants are unlimited

Two types of main technology could be identified when we find solutions to the basiceconomic problem of How to produce?

• Labor intensive technology
• Capital intensive technology

Basic economic problem of What to produce in what quantity arises due to the following reasons

• Available resources are limited
• Resources have alternative uses
• Human wants are unlimited

Two types of main technology could be identified when we find the solution to the basic economic problem of How to produce?

• Labor intensive technology
• Capital intensive technology

The basic economic problem of How to produce? arises due to the following reasons

• Alternative combinations of factors of production
• Change in comparative cost
• Limited resources

The basic economic problem, “for whom to produce?” arises due to the following reasons

• Limitation of the quantity of goods produced
• Change of personal purchasing power

Even though the basic economic problems are common for all the method used to solve the problem differs from society to society

When there is full and efficient utilization of resources production combination lies on the boundary of the Production Possibility Curve.

• When there is under and inefficient utilization of resources, production combination
  lies on the left side of the Production Possibility Curve.
• Scarcity can be shown by a point on the right hand side of the Production Possibility
  Curve.
• The point which moves from the left side to the Production Possibility Curve, can
  increase production of both goods without opportunity cost
• The point which moves from the Production Possibility Curve to the left, shows
  decrease utilization of resources and efficiently.
• Production Possibility Curve can be shifted to the right due to the increase in
  capacity of production

The factors of increase in capacity of production are given below.

• Increase in factor endowments.
• Increase in productivity.
• Production Possibility Curve can be shifted to left side due to the decrease in the
  capacity of production

The factors of decrease in capacity of production are given below.

• Decrease in factor endowments.
• Decrease in productivity.
• Outputs received from the inputs are known as normal productivity

The following factors affect determination of productivity of the factors of production

• Technology
• Management
• Human Capital
• Division of labor and specialization

 

• Factor productivity can be computed as follows :
  Factors Productivity = Outputs / Inputs

 

• Productivity of the various factors of production can be computed as follows:
  Productivity of Land = Total output / Amount of land units