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Economic concepts in action

Anglo American plc is British-based and one of the world's largest mining and natural resources companies. Platinum is one of the metals it mines. This is then converted by others into many different products.

Think of the enjoyment that you get from consuming a good. For example, when you drink a glass of water on a hot day, eat a nourishing snack when you are hungry, or the pleasure of relaxing listening to a favourite CD. Each of these goods – the drink, the snack, and the CD have been brought to us because someone has taken the time and trouble to combine a number of resources to produce the good.

Taking a specific example, a catalytic converter for a modern car . A mining company, has extracted the raw platinum from deposits in the ground. The platinum has been used in the catalytic converter. Both the mining company and the manufacturer have combined a number of things called factors of production.

Combining the factors of production.

The factors of production involved in making the platinum component are:

1. Enterprise
a mining company such as Anglo American, takes the risk of developing and managing platinum (and other types of) mines. The enterprise is responsible for paying all the costs of mining activities. It brings the other factors of production together. An important part of being enterprising is skilful management of a range of financial and non-financial factors.

2. Land
platinum deposits are found occurring naturally in the ground. We use the term ‘land' to describe all of the gifts that nature provides us with, including the soil, rocks and water borne resources. Anglo American acquires the mining rights to exploit mineral resources reserves from governments in many parts of the world like Southern Africa, Australia and South America.

3. Labour
the human resource is an important one in the production of all goods. Anglo American takes pride in developing and training its workforce to provide them with the jobs and the skills to mine and process platinum in a safe and responsible way.

4. Capital
an industry like mining uses a lot of machinery and modern technologies to bring to the surface the rocks that contain the metal deposits. These are then broken down to extract the metals.

Anglo American is very careful about how it extracts platinum deposits from the ground. The company knows that these are scarce resources that are non-renewable (although most metals are highly recyclable). Metal deposits given to us by nature are finite compared with all the purposes that they could be used for by successive generations. Choices therefore have to be made about the use of these resources. For example, a choice that consumers (whether an individual or a manufacturer) might make is that of using platinum in fuel cells, for medical purposes or in jewellery.

A choice that Anglo American has made is that of working towards sustainable development . Mining of itself is not a ‘sustainable' activity since it depletes a natural resource but, responsibly done, it can contribute to sustainable development through enhancing social, human and man-made capital during the lifetime of the mining operation. This is done by financing wages, taxes, pensions, building infrastructure and supporting training, education etc. A sustainable business is one that tries to cut out waste so that this generation can pass on to the next one a healthy supply of raw materials. It seeks to treat fairly those who supply it with factors of production so that their life chances are improved.

Anglo American respects:

•  land, by carefully considering the impact mining has on landscapes, and on the environment. Plans are made for returning used mines to a natural state by landscaping them once mining operations are at an end. Anglo American uses resources carefully by seeking to minimise waste (e.g. through improved energy efficiency).

•  labour, by offering fair wages, training and job prospects. Anglo American is considerate of the communities in which it operates, for example in some it helps to provide medical and education facilities and other community resources.

•  communities by seeking to work with them to understand their concerns and priorities and to involve them in development opportunities.

•  the shareholders who are the real risk takers ( entrepreneurs ).The shareholders return is called a dividend . These investors include many of the leading pension funds in the UK. Anglo American prides itself in listening to shareholder opinions. It pays higher than industry average returns in dividends.

•  capital by making sure that it pays interest as well as repaying sums borrowed from outside the business – e.g. from banks.

Glossary of economic concepts

Capital – in the economic sense, capital refers to goods that go into producing other goods e.g. machinery, equipment and tools. The term financial or money capital refers to the pool of finance available to an enterprise.

Consume – to use up a good or a resource. A consumer good is one that will be used up by the consumer. Some consumer goods are non-durable e.g. a bottle of water, while others are durable e.g. platinum jewellery.

Choice – a decision between a number of options. For example, we could choose to use a certain quantity of platinum in a fuel cell, a necklace or for medical purposes.

Dividend – a reward paid to a shareholder.

Enterprise – can be used to refer to 1) a business organisation, or 2) the act of risk taking in setting up and running a business.

Entrepreneur – an individual who takes a risk in setting up their own business or becoming a shareholder in a business.

Factors of Production – the essential ingredients required to produce goods and services – land, labour, capital and enterprise.

Good – something that is valued because it provides satisfaction in use.

Interest – return paid to external providers of capital to a business e.g. on financial capital provided by banks.

Land – a general term for non-man made resources i.e. ones provided by nature e.g. mineral ores, oil and gas deposits, fish in the sea etc.

Labour – physical and mental work that contributes to production.

Non-renewable – something that once it is used up cannot be replaced e.g. oil and gas, and other mineral deposits.

Resource – something that can be used to produce goods e.g. human resources (labour), and natural resources (land).

Sustainability – involves making sure that society benefits over time from a careful use of resources which respects the resource needs of future generations, and the needs of the environment and communities.

Worksheet activities

This worksheet provides you with a range of activities to carry out to help you to better understand simple economic concepts. There are spaces provided on the sheet for you to input your answers:

1. Scarcity is a fundamental problem facing all societies and most individuals at least some of the time. We can't always have all of what we want.

Because of scarcity of resources we are frequently asked to make choices.

For each of the following examples involving scarcity, explain a choice that might have to be made by the individual, organisation or society concerned.

2. Look at the following list of resources. See if you can identify which of them could be classified as:

3. Explain how renewable resources can be renewed.

4. Explain why it is important to use both renewable and non-renewable resources .Try to use the words sustainable or sustainable development in your answer.

5. Resources that are mined from the ground cannot be put back into the ground because they are used up in the production of goods. What then should mining companies do to make sure that they respect the environment and make a contribution to the sustainability of communities where mines are located?

6. Here is a list of the main types of money incomes that are paid to the owners of the four types of factor of production. See if you can match the reward (money income) with the factor of production in the table below:

The main types of reward are: wages, rent, profit (dividends) and interest payments.

7. Primary industry as we have seen involves extracting raw materials and other gifts of nature. These raw materials are then often processed to manufacture final goods. Processing raw materials is referred to as manufacturing or secondary industry.

Here is a list of some of the product based divisions owned by Anglo American. In some cases Anglo American is simply concerned with extracting primary materials which it sells on to secondary producers. In other cases Anglo American is involved at the secondary or manufacturing stage.

In each case state whether the division would be involved with primary or secondary industry:

8. Mining is classified as a primary industry because it is concerned with extracting gifts of nature.

In each of the following cases explain whether the industry listed is a primary industry or not:

9. An important distinction is made between consumer and capital goods. Capital goods are ones that are involved in further production. Classify the following according to whether they are consumer or capital goods:

10. Businesses like Anglo American are involved in the construction and preservation of a number of types of capital – for example the:

•  creation of man-made capital e.g. the materials to build new roads

•  conservation of natural capital e.g. the recycling of waste products and environmental landscaping

•  development of human and social capital e.g. training employees and building schools and welfare services

•  gaining of financial capital .e.g. increasing the amount of cash available to a business.

Put a tick in the appropriate boxes according to whether you think that the activity listed for Anglo American is primarily concerned with the development of man-made, natural, or social and human capital.

11. Increasingly minerals are being produced in poorer countries because these resources have been largely used up in more developed countries. Explain how mining companies like Anglo American can contribute to the prosperity of poorer countries through their activities in these countries.

12. Study the Good Citizenship section of Anglo American's Case Study at www.tt100.biz/anglo_american. Explain how Anglo American is seeking to operate as a good citizen in the communities in which it operates.

13. Anglo American's Chief Executive is interested in ‘all the things that make the difference between a company that will be here for years – or one that will sustain over centuries.' In your view explain what will enable a mining company to provide wealth for centuries. Explain your answer in terms of the following headings:

•  Providing a good return for shareholders.

•  Respecting natural capital.

•  Building human and social capital.

•  Building partnerships in the community.

14. Study the Long Term Commitment Section 05 of The Times 100 Case Study at www.tt100.biz/anglo_american. Give one example of how Anglo American is investing in human capital.