Econ All Units

Economic goods

Requires scarce resources to produce, limited in supply

Scarcity

Situation in which unlimited wants exceed the limited resources available to satisfy those wants

Free goods

Zero cost - more than enough available to satisfy demand

Occupational/geographical mobility

Ability of a factor of production to move (one occupation to another/one place to another)

Opportunity cost

next best alternative foregone

Microeconomics

Study of economic behaviour of individuals and businesses

Macroeconomics

Study of the whole economy

Demand

the quantity of a good or service that consumers are willing and able to buy (given price and time period)

Supply

the quantity of a good or service that producers are willing and able to produce (given price and time period)

Market equilibrium

Where the QD by consumers and QS by producers are equal

PED

Responsiveness of QD to changes in price

PES

Responsiveness of QS to changes in price

Planned economy

Economy where all decisions concerning production, investment, prices and incomes are determined by the government

Market economy

Economy with prices based on competition between private sector businesses, markets not controlled by the government

Market failure

Situation where an economy's resources are not efficiently allocated because the market does not provide goods and services at the social optimum quantity

Private goods

goods that are rival (one person's consumption diminishes another person's) and excludable (people can be prevented from using it)

Public goods

goods that are non-rivalrous (can't stop someone from using it because they haven't paid) and non-excludable (one person using doesn't stop another person from using it)

Merit/demerit goods

A product which is more beneficial/harmful to consumers than they realise

mixed economy

economy that has both private sector firms and a government supplying goods and services

Nationalisation/Privatisation

transfer of ownership between private sector and government

Indirect tax

tax on spending, burden can be moved on to someone else

Subsidy

government payment that designed to encourage production and consumption

Three economic questions

What to produce? How to produce? For whom to produce?

Price Mechanism

Prices send Signals -> act as an Incentive-> prices Ration scarce products -> Allocates scarce resources

Non-price determinants of demand

Income

Price of related goods

Tastes and preferences

Future price expectations

Number of consumers

Non-price determinants of supply

Productivity

Indirect taxes

Number of firms

Technology

Subsidies

Weather

Costs of production

Determinants of PED

Substitutes

Percentage/Proportion of Income

Luxury vs Necessity

Addictiveness

Time Period

Determinants of PES

Production lag

Stocks

Spare capacity

Substitutability of FOPs

Time period

Advantages of planned economy

Economies of scale

Prevent wastage

Social Equality

Social Protection

Employment of resources

Disadvantages of market economy

Wasteful competition

Income inequalities

Some goods not provided

Environmental issues

Disadvantages of planned economy

Lack of economic freedom

Lack of incentives

Bureaucracy

Advantages of market economy

Price mechanism

Consumer sovereignty

Responsive to demand

Choice is provided

Competition and profit motives promote efficiency

Incentive for entrepreneurs to produce

Causes of market failure

public goods not provided

merit goods underconsumed

demerit goods overconsumed

information failure

externalities

abuse of monopoly power

factor immobility

Microeconomic policy measures

Direct provision of goods and services

Provision of information

Regulations

Indirect taxes

Subsidies

Problems of government interventions

Takes a long time to agree/impact

Can encourage smuggling and black markets

Distort price signals/incentives

Increase production costs/prices

Public sector may be inefficient

Conflicts of interest

May be based on political/personal choice

Money

anything that is generally accepted as payment for goods and services

Functions of money

medium of exchange, unit of account, store of value, standard of deferred payment

Characteristics of money

generally acceptable, limited and stable supply, portable, durable, divisible, homogeneous, recognisable

Types of money

Commodity, representative, fiat

Roles of central banks

Issue notes and coins
Control monetary policy
Manage reserves of foreign currency
Banker to the government and commercial banks

Central Bank

Bank of the government responsible for controlling money supply, issuing notes and coins and setting rules for commercial banks

Commercial Banks

Financial institutions that individuals and firms and save money and obtain loans

Roles of commercial banks

Accepting deposits of money
Making loans
Buying and selling shares

Household

A group of people who share the same living accommodation, who pool some of their income and consume certain goods and services collectively

Factors affecting spending, saving and borrowing

Income
Taxation
Interest rates
Consumer confidence
Wealth
Age
Household type
Culture

Why countries have different saving rates

Income level and distribution
Culture
Social welfare
Household type
Access to financial services
Government policies
Economic conditions

Non-wage factors

job satisfaction, working conditions, working hours, holidays, fringe benefits, pension provision, job security, promotion prospects, location

Wage factors

Wages/salaries, bonuses, commission, overtime pay

non-wage determinants of labor demand

demand for product, productivity of labour, profit of firms, cost of capital

non-wage determinants of labor supply

wages of substitute occupations, barriers to entry, non-wage factors, size of the working population

Determinants of elasticity of labour demand

ease and cost of factor substitution, labour costs as a % of total costs, time period, PED for final product

Determinants of elasticity of labour supply

length of training, skills of workforce, time period

difference in earnings

skills/qualification, sector of economy, bargaining power, location, experiences, advances in technology, nature of work, demand/supply

Division of labour

The specialisation of workers on specific tasks

Benefits of specialisation for workers

Increased skills
Use of natural strengths
Job satisfaction
Higher standard of living

Costs of specialisation for workers

Boredom
Deskilling
Lack of job security

Benefits of specialisation for producers

Higher output
Higher Productivity
Higher quality
Economies of scale
Time saving

Costs of specialisation for producers

Increased costs
Dependency
Movement of workers (boredom)

Trade union

An organisation which represents its members by protecting workers' rights, and seeks to improve workers' pay or working conditions

Factors influencing the strength of trade unions

- size of membership
- financial strength
- skills of workers
- support from the general public
- degree of influence
- negotiating skills
- macroeconomic environment

Pros of trade unions for workers

- better working conditions
- increased wages
- protect workers' rights
- provide training

Cons of trade unions for workers

- membership fees
- limitations on individual negotiations
- lack of choice in union membership
- unpaid during strikes

Pros of trade unions for firms

- may encourage more workers to apply for jobs
- reduces costs of negotiating
- provides a channel of communication
- may promote training
- may reduce conflict

Cons of trade unions for firms

- potential impact on wages and working conditions
- reduced control over hiring and dismissal
- administrative and accounting costs
- disruptive industrial actions

Pros of trade unions for government

- single point of contact and information
- reducing inequality
- boosting productivity and economic growth
- increased labour mobility
- may push up wages

Cons of trade unions for government

- impact on labour demand and unemployment
- wage inflation without productivity improvement
- lost production and reduced economic growth
- disruption in essential industries
- impact on foreign investment

Firms

organisations that produce goods and services

Classification of firms

Stage of production, ownership, size

Pros of small firms

- flexible with fewer people
- more personal attention
- government subsidies
- concentrate on a niche market
- good labour relations
- avoid diseconomies of scale

Cons of small firms

- may be driven out of business
- may be difficult to raise finance
- risk of being taken over
- difficulty recruiting highly skilled workers
- lack of resources to survive fall in demand
- not taking advantage of economies of scale

Internal growth

expanding the capabilities of the business using the firm's own resources

Takeover

the process which one firm buys another firm either by buying out the owner or by purchasing more than 50% of its shares

Merger

the process by which 2 independent firms come together to firm a new firm

Horizontal merger

when 2 or more firms at the same stages of production in the same industry merge

Vertical merger

when 2 or more firms at different stages of production in the same industry merge

Conglomerate merger

when 2 firms in different industries merge

Pros of horizontal merger

- gain market power or share, eliminating a competitor
- economies of scale to reduce average costs of production
- keep up with competitors

Cons of horizontal merger

- lack of diversification
- monopoly increases prices for consumers
- diseconomies of scale

Pros of vertical merger

- ensures supply of raw materials
- restrict competitors from access
- ensures outlets for products
- ensures products are well-displayed
- economies of scale

Cons of vertical merger

- higher costs due to lack of competition
- situation where money spent on the earlier stage may limit the amount available to spend on the next stage
- diseconomies of scale

Pros of conglomerate merger

- diversification of interests so the firm is less vulnerable to losses due to decline in sales of one sector
- increases the customer base
- better use of finance in the area where there is likely to be most growth
- economies of scale

Cons of conglomerate merger

- managers from different firms brought together may not fully understand other parts of the business
- need to understand how the other industry work leads to rising costs
- problems in bringing different work practices and values together
- diseconomies of scale

Internal economies of scale

technical, managerial, financial, marketing, purchasing, risk-bearing

External economies of scale

education and training facilities, concentration of firms, transport, finance, location

internal diseconomies of scale

managerial, communication, labour diseconomies, poor industrial relations

External diseconomies of scale

higher labour, higher rental costs, more environmental problems, saturation of existing market

Production

total output of goods and services produced by a firm/industry in a period of time

Productivity

total output per total product per period of time

Efficiency

how effective the firm is in using factors of production to generate output

Pros of labour intensive production

- increased flexibility, easier adaptation
- opportunities to establish strong relationships with customers
- provision of personalised service

cons of labour intensive production

- wage and non-wage benefits can be expensive for the firm
- low supply in some areas, leading to high costs
- workers can get ill
- less efficient
- can go on strike or take industrial action

pros of capital intensive production

- lower production costs enable large-scale production, increases productivity and efficiency
- quality may improve because of greater consistency
- no industrial action
- eliminates repetitive tasks, enhancing workers' job satisfaction

cons of capital intensive production

- cost of purchasing/installing can be very high
- difficult to respond to changing customer tastes/fashions (inflexible)
- most machinery cannot improve processes
- machinery needs to operate on a large scale to be efficient

Influences of demand for FOPs

- demand for goods/services
- price of different FOPs
- availability of factors
- productivity of factors

Influences on production

- factors affecting FOPs
- natural factors
- technology
- infrastructure
- government policies

Influences on productivity

- technology
- education and training
- effective management
- migration
- working conditions

Market structure

how different industries are classified and differentiated based on their degree and nature of competition for goods and services

Pros of competitive markets

- may lower prices
- may raise quality
- increase choice
- goods and services may be readily available
- give consumers some power (consumer sovereignty)

Cons of competitive markets

- firms may be too small to take advantage of EOS
- firms may not have much profit to invest in research and development
- there may be wasteful duplication
- reduction in quality due to cost-cutting
- may be too much choice, taking time to make decisions

Natural barriers to entry

economies of scale, capital size, historical reasons legal considerations