Microeconomic Decision Makers

Money vs Legal Tender

Money
Anything that is generally accepted as means of exchange

Legal Tender
Any form of payment that is generally accepted as means of exchange

Money does not have intrinsic value. Explain

It only gets its value from its purchasing power, which is the amount of goods and services one can buy with a given amount of money

Origin of Money and Trading

Early societies were self-sufficient. Many societies were nomadic. Since they learned specific skills, specialisation was born. This led to division of labour which allowed the production of surplus goods. They started trading using barter trade

Setbacks of Barter Trade

1. Fixing a rate of exchange

2. Finding someone to exchange with (double-coincidence)

3. Storing surpluses

First Form of Money

Commodity money: shells; ivory; salt; cattle; tea; raw clumps of metal (gold; silver; copper)

These were pressed into coins which later became standardised

Credit was later created (deferred payment)

Functions of Money

1. Medium of exchange

2. Unit of account

3. Store of value

Characteristics of Money

• Acceptable

• Portable

• Divisible

• Uniform

• Scarce

• Durable

What is a bank?

Financial intermediaries between customers who want to deposit money and customers who want to borrow money

How banks earn revenue

1. Charge interest on loans

2. Charge fees for providing services

3. Making investments

Commercial Banks

Clearing banks. Transfer money between each other on behalf of customers. Usually privately owned and profit motivated

Functions

• Accepts deposits

• Provide loans

• Provide insurance

• Exchange foreign currencies

• Assist in making/receiving payments

• Buy/sell shares for customers

• Provide financial advice

• Operate pension funds

Investment Banks

Specialise in helping large organisations raise finance to fund their operations and expansion (stock market)

Central Banks

Centre of the banking system. Mostly government owned. Aim to maintain a stable currency and money supply

Functions

• Issuer of currency

• Manages national debt

• Lender of the last resort

• Operates the monetary policy

• Banker of the government

• Banker of commercial banks

• Regulator of banking sector

• Custodian of forex/gold reserves

Monetary Policy

Stabilise economy and currency by keeping inflation as low as possible/within target

• Increases interest rates; people borrow less; less money circulates; less spending; money supply decreases

• Decreases interest rates; people borrow more; more money circulates; more spending; money supply increases

Households

Owners of factors of production/consumers of goods and services. Most important participants in an economy

Spending: Disposable Income

Disposable income is the amount of money left to spend after all deductions have been subtracted

Real disposable income is the amount of goods that can be purchased with disposable income in terms of purchasing power

Other Determinants of Spending

• Wealth

• Consumer confidence

• Interest rates

APC

Average propensity to consume

consumption ($) / disposable income ($)

Spending Patterns

• Working hours

• Social attitudes

• Size of households

• Environmental concern

• Technological advancements

• Rise in real incomes

• Age of population