Econs 3a Microeconomic decision makers

Problems with there barter system

1. Must be a double coincidence of wants
2. Goods must be divisible for fair exchange
3. Values must be agreed upon by both parties

Functions of money

1. A medium of exchange
2. A means of deferred payment
3. A unit of account
4. A store of value

Characteristics of money

1. Acceptability
2. Divisibility
3. Portability
4. Uniformity
5. Durability
6. Scarce

Central bank

A central bank is the government's bank and controls the monetary policy in an economy.

Role of the central bank

- Keeps inflation low and steady
- Controlling the supply of money
- Setting interest rates throughout the economy
- Gives loans to commercial banks (last resort)
- Manages national debt
- Holds the country's reserves of foreign currency and gold
- Issues bank notes
- Acts as a banker to the government

Relationship between interest and borrowers/savers

- As interest increases, borrowers decrease and savers increase
- As interest decreases, borrowers increase and savers decrease

Commercial bank

A commercial bank is an institution that offers financial services to firms and households in the economy.

Role of a commercial bank

- Accept deposits
- Enable customers to make payments
- Lend money
- Create credit

Income is earned as...

Wages/Salaries

Income is unearned as...

Rent, dividende, interest, pensions and social security benefits

Disposable income

All personal income - income tax

Real disposable income

Disposable income that has been adjusted to take account of inflation. The purchasing power of money income (e.g. if prices rise, purchasing power drops)

Current expenditure

Money spent on goods/services that will be consumed in a year (e.g. food)

Capital expenditure

Money spent on fixed assets that will be long lasting (e.g. a table, a house)

Low income spending

Most spending is for basic necessities such as food, rent and clothing.

Low income saving

Little to none

Low income borrowing

Often unable to lend from commercial banks (seen as too risky) and so often need to borrow from money lenders with high interest.

Medium income spending

Gradually, people start spending more on services that make their lives easier, such as gardeners or cleaners.

Medium income saving

Some saving occurs

Medium income borrowing

Some borrowing, often financed by commercial banks who will usually lend a percentage of the household's income. Credit cards used extensively, borrowing mostly used for mortgages, renovations, etc.

High income spending

Much smaller % of income spent of fulfilling basic needs, more spending on luxuries.

High income saving

Much greater % of income is saved, often through asset purchases like properties or paintings.

High income borrowing

Commercial banks are keen to lend to high income people, and the interest for them will be lower. Loans are often taken out for investments ot big purchases (e.g. yachts)

As interest increases, spending...

Low income households are less likely to change their spending as most money is spent on necessities anyway.

Medium households will spend less, a smaller proportion of income will be spent on luxuries.

High income households may borrow less, but spending patterns may not change much as interest repayments may be a relatively small proportion of their household income.

As interest increases, borrowing...

Low income households may find that money lenders will further increase interest rates.

Both medium and high income households are likely to decrease their level of new borrowing as they are paying more to support their existing borrowing.

High income households may not be affected much as interest repayments may represent only a small % of their income.

As interest increases, saving...

All households will save more as the reward (interest) for saving is higher than before.

As interest decreases, spending...

Low income households will not be impacted much.

Medium and high income households are likely to increase their consumption expenditure as they possibly save less and borrow more. This depends on the level of confidence in the economy. They also will pay less monthly interest, giving more money to spent.

As interest decreases, saving...

This will have very little impact on low income households.

Medium and high income households may decide that the interest rate is too low to encourage saving and so they may withdraw their savings to purchase something they want. However, the extra money available from any reduction in mortgage payments may be redirected to savings, depending on confidence in the economy.

As interest decreases, borrowing...

This will likely have very little impact on low income households as money lenders will continue to keep their rates high.

Medium and high income households may decide to borrow more money from commercial banks, as it is now cheaper to repay.

Consumer behaviour in a recession (low confidence)

Spending and borrowing usually decrease with a decrease in confidence, while saving increases. Low income households continue to spend most of their income on meeting their needs.

Consumer behaviour in a boom

Spending and borrowing increase and saving decreases, as households believe their income for the foreseeable future is secure.

Wage factors affecting an individual's choice of occupation

- Salary
- Wages
- Commission
- Fringe Benefits
- Piece rate pay
- Bonus
- Performance-related pay (PRP)
- Share options

Non-wage factors affecting individual's choice of occupation

- Family influences
- Job security
- Length of training or level of education required
- Job satisfaction
- Career prospects
- Level of challenge
- Status

The demand for labour by firms is said to be a ... demand

Derived demand, dependent on the demand of g/s

Factors that can shift the demand curve of labour

- Changes to the demand for goods and services that the labour is used to produce.
- Changes in the productivity of the workers. If workers are more productive, demand for them increases, vice versa
- Changes to the production process. For example, a move from labour intensive to capital intensive production would decrease the demand for labour.

Factors that can shift the supply curve of labour

- Changes to a country's population, either through birth, death or net migration. A higher population will see the supply of workers increase and wages will likely fall.
- Changes to access for education and training.

Factors affecting the strength of a trade union

- High level of economic activity: demand for labour will be high, falling unemployment means more union power
- High proportion of workers join the union: increase negotiating power as it will be hard to replace a big no. of skilled workers
- High level of skills and specialisation: determines how easy it is to replace workers
- Demand for the product produced by the workers: if products are inelastic then consumers will be frustrated, firm could increase prices
- Favourable government legislation will strengthen union power

Examples of industrial action

- Reducing hours
- Overtime ban
- Go slows
- Stop work
- Sit ins