Economics IGCSE CIE CHAPTER 3

CIE IGCSE MICROECONOMIC DECISION MAKERS CHAPTER 3

What is money?

A commodity that can be used for exchange which is widely accepted

What are the 3 forms of money?

Cash-physical form of money

Bank deposits-money in commercial banks mostly electronic

Central Bank reserves-held by central bank, used by commercial banks

What are the 4 functions of money?

-Medium of Exchange

-Measure of value

-Store of value

-Deferred payment

What are the 6 characteristics of money?

Durability

Acceptability

Divisibility

Uniformity

Scarcity

Portability

What is bartering?

trading items for other items; swapping through negotiations

What are the 3 problems with bartering?

-Double coincidence of wants

-Divisibility

-Portability

What is a Central Bank?

-A country’s monetary authority. Issues banknotes, manages the nation’s money supply, responsible for monetary policies, and banking system

What is a Central Bank’s 4 key functions?

Sole issuer of Banknotes

Government’s bank

The Banker’s Bank

Lender of last resort

What is the function of commercial banks?

A commercial bank provides financial services to its customers. They are managed by the Central Bank.

What is the commercial bank’s 3 main functions?

Credit creation (creating usable money through loans)

Making advances (loans)

Accepting deposits

What are the commercial banks’ secondary functions?

collection and transference of money for clients

foreign exchange dealings and wealth management

Safety deposits

Money transfer facilities

Credt transfer facilities'

Online banking facilities

6 influences on household spending?

Income

Rates of Interest

Confidence levels

Inflation

Age

Size

EXPLAIN INCOME AND THEIR RELATIONSHIP WITH HOUSEHOLD SPENDING

-Disposable income is what a family is able to spend after taxes and necessary bills

• Taxes lower disposable income

• Lower incomes spend more money on necessities

-SOURCES: WAGES, PROFIT, INTEREST, DIVIDENDS, RENT, LOANS AGAINST ASSESTS

EXPLAIN THE RELATIONSHIP BETWEEN RATES OF INTEREST AND HOUSEHOLD SPENDING

-Interest rates determine the cost of borrowing money. When it rises consumption falls.

• Demand for loans falls

• Savings may be more attractive

• Existing repayments rise lowering disposable income

EXPLAIN THE RELATIONSHIP BETWEEN CONFIDENCE LEVELS AND HOUSEHOLD SPENDING

When people feel less confident in the future of their economy (during a period of recession or low growth) people may prefer to save. More people are willing spend money when the economy is in a good state.

Explain inflation’s relationship with household spending

-Spending power determines how much a household consumes

Explain age’s relationship with household spending

People spend varying amounts of money on a varying goods/ service at different stages in life

What is the relationship between the size of households and household spending?

-amount of dependents

-amount of streams of income

What are the influences on Household Saving?

-Saving for the future

-Earning interest

-Precaution in case of emergency

What are the influences on household saving levels?

Age of a person

Attitude

Confidence

Interest rates

Income

What are the reasons on household borrowing?

Funding expensive purchases

Pursuing tertiary education

Purchasing property

Start a new business

Fund large business projects or expansions

What are the factors that influence household borrowing?

Interest rates

Confidence levels

availability of funds

Wealth (collateral)

What are the monetary factors affecting an individual’s choice of occupation?

Wages, Salary, Piece Rate, Commission, Bonus, Profit Related Pay, Share Options, Other benefits

What are the none-wage factors to a worker’s choice of occupation?

Level of Challenge, Danger, Level of Education, Recognition, Personal Satisfaction, Experience needed, Career Prospects, and Length of Training

What type of demand is demand for labor?

Derived Demand

What are the factors of demand for labor?

Cost of labor

Productivity of labor

Level of total demand

What is the supply of labor?

people who are of working age who are both willing and able to work at different wage rates

DRAW SUPPLY OF LABOR GRAPH

Hours worked to wages graph.

What are the factors influencing the labor participation rate?

-Number of Women in the workforce

-age distribution

-retirement age

-Number of full/ part time workers

-Availability of welfare

• higher the less likely

• Opportunity cost of losing welfare

-Social attitude

What are the factors influencing wage determination?

-The wage equilibrium rate based on market forces

-National Minimum Wage

DRAW WAGE EQUILIBRIUM RATE GRAPH

What are the advantages of National Minimum Wage?

-livable wage improves lives and prevents exploitation

-More incentives to work

-Stimulates economy by promoting consumption through rise in income

What are the disadvantages of National Minimum wage?

-Unemployment may increase since firms may be unwilling to pay the wage

-Workers who are already well paid may want a proportional increase

What are the different reasons wages are differentiated?

Levels of Skill

• Higher skilled professions are in higher demand

• Workers in primary sectors earn less than secondary and tertiary workers due to the low value they produce

• On average less abundant

Bargaining Strength

• Trade unions-unified interests

• Age and experience-higher demand

• Level of education- higher demand

Male-Female divide

• Women tend to work part-time more

• May face discrimination

• May take flexible hours over pay due to childcare responsibilities

Private-Public divide

• Public sector jobs pay less but are on average more secure

What are the two types of mobility of labour?

Geographical

• Family ties

• Costs of living

Occupational

• How long it takes to change professions

What id division and specialization?

-Specialization=becoming skilled in a specific area

-Dividing=separating the work require to produce something

What are the advantages and disadvantages of specialization and division of labor?

Advantages

• Productivity increases

• Earning potential increases

Disadvantages

• Boring and repetitive

• Alienated from the final product

• Lack of occupational mobility

What are the 3 firm sectors and examples of them?

Primary (Resource extraction)-Fishing and Mining

Secondary (Changing Raw materials)-Construction and manufacturing of goods

Tertiary (services to firms and government)- Lawyers and advisors

What is the goal of the private sector?

TO MAKE PROFIT

What are the 4 types of private firms?

Sole Trader-One owner

Partnership— 2-20 owners

Private limited company-Shareholders unable to sell

Public Limited Company- Shareholders able to sell

What are characteristics of the public sector?

-owned by government

-Funded through taxes

What are the 4 ways to determine relative size of a firm?

Number of employees, market share, Stock value, and Sales revenue

What are the advantages of small firms?

-Less legal issues

-Easier to manage

-More income for the owner

-Flexibility for the Owner

-Personal relationship with consumers

-May be one of the few sellers there

What are the disadvantages of running a small firm?

-Limited capital

-Larger individual risks

-rely on one owner

-Less competitive prices

What are the two ways firms can grow?

Internal and External (mergers or takeover)

What are the two types of mergers?

Horizontal (within the same sector)

Vertical (from a different sector)

What are the benefits of horizontal merger?

-Higher market share

-gaining skilled employees

-Cut down of number of employees

-Economies of scale

What are the disadvantages of horizontal mergers?

-Loss of jobs

-Increased costs from diseconomies of scale

-Culture clashes

What are the two types of vertical mergers?

Forward (lower tier to higher tier) and Backward (higher tier to lower tier)

What are the advantages of a vertical merger?

-More raw materials

-Raw materials are now cheaper

What are the disadvantages of vertical mergers?

-Diseconomies of scale

-Transport costs

What is a conglomerate?

-Unrelated companies merge to become one

What is an economy of scale?

Cost saving benefits of large-scale firms and operations that reduce average costs.

What are examples of economies of scale?

External, Internal, and Risk Bearing economies of scale

Explain Internal economies of scale

Bulk Purchasing, Technical Equipment, borrow more money, more specialized planners and managers improving productivity

What are risk bearing economies of scale?

Research and development

Marketing

What are external economies of scale

Proximity to other businesses

Availability of skilled labor

Reputation of area

Access to transportation

What are examples of diseconomies of scale?

Clash of cultures

Communication issues

more employees

reduced coordination

What are the factors that influence demand on factors of production

-Derived demand

Cost

Quantity

Productivity

What are the two types of productions?

-Labor intensive

• Labor disproportionately high part of costs

-Capital intensive

• Capital disproportionately high part of costs

What do firms use to decide whether labor or capital intensive productions

-Size of market

-Costs in comparison

-The firm’s goals

What are the reasons to choose capital intensive production?

-Mass production

-Low Unit costs

-Reduces chances of human error

Reasons for labor intensive production

Highly customized products

Better service

Higher quality

more flexible (changing number of employees)

What is production?

Overall output of goods from a production process

What is productivity?

Measurable efficiency of the factors of production

Why is productivity important?

Creating economies of scale

Higher profit margins

Able to afford higher wages

improved competitiveness

Economic growth

What are the influences on Productivity?

Investment

Innovation

Skills

Entrepreneurship skills

Competition

What are costs of production?

Payments that firms make in the production process

What are the 4 main costs of production?

Wages

Rent

Advertising

Utilities

What are fixed costs?

Costs paid no matter what

What are variable costs?

Costs that change when output change

Draw variable and fixed costs total graph

What is average fixed costs; draw a graph

Average fixed costs is the fixed cost divided by units of output; the AFC lowers as more units are produced

What is average variable cost

TVC/UNITS

What is average total cost; draw a graph

Total costs/ Output levels

How to calculate revenue

Price x Quantity sold

What are the aims of firms?

Survival, social welfare, growth, profit and profit maximization

What is profit?

total revenue-total cost=profit

What is market structure?

The key characteristics of a market

• the number and size of firms

• the degree and intensity of price and non-price competition

• The nature of barriers to entry

What are the two extreme market structures?

Monopoly and competitive markets

What are characteristics of a competitive market

Price Takers (determined by market forces)

Quality-Homogeneous at times

Low levels of profit due to competition

Wide variety of choices-more advertising

What are the benefits of competitive markets?

-Higher quality and customer service

-More choice

-Lower costs and higher output due to incentives

-Innovation to stay ahead of competition

What are drawbacks of a competitive market?

Firms may not survive

Some firms may not innovate

-Waste through advertising

-Too many choices

-Profts may be shared

What are characteristics of a monopoly market?

-single supplier

Price maker

imperfect knowledge

high barriers to entry

What are the benefits of a monopoly market?

-huge economies of scale

-more chances to innovate

eliminate wasteful competition

What are the drawbacks of monopoly markets?

-less incentive to innovate

-inefficient and can hurt customers

-price gouging