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Chapter 16: Money and Banking

Definition of Money

• Money is defined as any commodity that can be used as a medium of exchange for purchasing goods and services, which includes:

  • Banknotes

  • Coins

Forms of Money

1. Cash

   • Physical currency in the form of banknotes and coins.

2. Bank Deposits

   • Money that is held in commercial bank accounts.

3. Digital Money

   • Electronic forms of money used in online transactions.

4. Legal Tender

   • Payment forms that must be accepted by law.

     • Includes:

       • Coins (limited value)

       • Banknotes

     • Excludes:

       • Bank accounts

       • Credit cards and other non-physical payments.

Functions of Money

1. Medium of Exchange

   • Widely recognized and accepted for facilitating trade.

2. Measure of Value (Unit of Account)

   • Expresses market value, simplifying trade, which was complex in historical terms like cloth or livestock.

3. Store of Value

   • Allows saving for future use, maintaining purchasing power over time.

4. Standard of Deferred Payment

   • Used for future debt payment (e.g., loans).

Characteristics of Money

1. Durability

   • Should withstand handling; for instance:

     • US bills last about 9 years, while coins last about 30 years.

     • Polymer notes are even more durable.

2. Acceptability

   • Must be recognized and accepted widely (e.g., Canadian dollar).

     • Historical context: Gold was widely accepted, but the Zimbabwean dollar became unacceptable due to hyperinflation.

3. Divisibility

   • Must be easily divided into smaller units (e.g., cents); largely impractical forms like cattle due to indivisibility.

4. Uniformity

   • Consistent appearance (e.g., alike $50 banknotes); early uniform money included cowry shells.

5. Scarcity

   • Limited supply to retain value; oversupply can devalue forms like seashells or salt, while precious metals are valued for their scarcity.

6. Portability

   • Should be easy to carry; for example, banknotes are lightweight, and electronic money enhances this portability.

Barter System vs. Money

• Barter System: Swapping goods without money, reliant on both parties' wants and needs.

  • Issues with Barter:

    1. Double Coincidence of Wants: Both parties must desire what the other has.

    2. Divisibility: Difficult with items like sheep.

    3. Portability: Larger items are more cumbersome compared to paper money.

Chapter 17: Households

Income Sources

• Income is pivotal in determining spending on goods and services and includes:

  • Wages/Salaries

  • Interest on Savings

  • Rent from Property

  • Dividends

  • Business Profit

Disposable Income

• Definition: Income left after taxes and deductions, influencing spending and saving habits.

  • Higher disposable income usually boosts both.

Spending Patterns by Income Group

• Low Income: Focus on necessities, save little, often borrow for capital purchases.

• Middle Income: Less spent on necessities, some savings, borrowing for capital items, and moderate use of credit cards.

• High Income: Minimal spending on necessities, more on luxuries, substantial savings, and lower borrowing risks.

Types of Expenditure

1. Current Expenditure: Money spent on goods/services consumed within a year.

2. Capital Expenditure: Long-lasting investments (e.g., computers, cars).

Determinants of Spending, Saving, and Borrowing

1. Interest Rates:

   • Higher rates deter spending and encourage savings; lower rates have the opposite effect.

2. Confidence Levels:

   • Higher confidence increases spending; lower confidence leads to savings during uncertainty.

3. Inflation:

   • High inflation decreases purchasing power, affecting spending and increasing borrowing options.

4. Age:

   • Different life stages impact income and spending.

5. Household Size:

   • Larger households typically consume more than smaller ones.

Influences on Household Savings

• Reasons for Saving:

  • Funding future needs, earning interest, or precautionary measures.

• Factors Affecting Saving:

  • Age, attitude to saving, confidence levels, interest rates, and income levels.

Influences on Household Borrowing

• Reasons for Borrowing:

  • Purchases, education, property, or business expansion.

• Factors Affecting Borrowing:

  • Interest rates, confidence, fund availability, and personal wealth.

Chapter 18: Workers

Factors Affecting Occupation Choice

• Wage Factors: Include method of payment.

  • Types of Payment:

    • Wages, salary, piece rate, commission, bonuses, profit-related pay, and share options.

Non-Wage Factors Affecting Occupation Choice

1. Challenge Level

2. Career Prospects

3. Job Danger Level

4. Length of Training

5. Education Requirement

6. Recognition in Job

7. Personal Satisfaction

8. Experience Level

9. Fringe Benefits

Wage Determination

• Wages determined by labor supply and demand dynamics.

  • Demand for Labour: Higher wages may not yield a linear increase in workforce due to cost versus benefit.

Supply of Labour

• Includes all available workers willing to work, influenced by various factors.

Labour Force Participation Rate

• Percentage employed versus the unemployed in the working-age population.

Factors Influencing Labour Supply

1. Welfare Benefits

2. Changing Social Attitudes

3. Geographical Mobility

4. Occupational Mobility

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Equilibrium Wage Rate

• The point where labor supply meets demand; several factors can affect adaptability.

National Minimum Wage (NMW)

• Government-set lowest wage limit with mixed implications for labor markets.

  • Advantages: Fair wages, increased consumption.

  • Disadvantages: Potential unemployment, higher operational costs.

Reasons for Differences in Earnings

• Skilled vs. unskilled education, different sectors, gender, and public vs. private sector discrepancies.

Chapter 19: Trade Unions

Definition and Purpose

• Trade unions represent and protect workers' interests and negotiate employment terms.

Membership and Aims

• Membership involves an annual fee. Unions aim to secure better employment conditions and legal support.

Types of Trade Unions

Craft Unions

1. Industrial Unions

2. ‘White Collar’ Unions

3. General Unions

Role in the Economy

1. Bargaining with employers

2. Ensuring workplace safety

3. Legal assistance

4. Legislative advocacy

Industrial Action

• Methods include strikes, work-to-rule, and go-slow tactics to exert pressure on employers.

Factors Affecting Union Strength

1. Economic activity levels

2. Membership size

3. Skill level of workers

4. Demand for products

5. Government legislation

Advantages and Disadvantages of Trade Unions

• Advantages: Communicative channels, improved wages/conditions, legal protections.

• Disadvantages: Disruption from strikes, increased employer costs.

Chapter 20: Firms

Economic Sectors

1. Primary

2. Secondary

3. Tertiary

Private Sector Types

1. Sole Trader

2. Partnership

3. Private Limited Company

4. Public Limited Company

Firm Size and Characteristics

• Small firms prioritize personalized service; larger firms benefit from economies of scale.

Firm Growth

• Internal Growth: Expanding using own resources.

• External Growth: Involves mergers, takeovers, or franchises.

Types of Mergers

1. Horizontal Mergers

2. Vertical Mergers

   • Backward and forward variances

3. Conglomerate Mergers

Economies of Scale

• Cost advantages gained as production increases; includes internal and external aspects.

Chapter 21: Firms and Production

Demand for Factors of Production

• Derived demand dictates that production factors' needs depend on the demand for finalized goods and services.

Labour-Intensive vs. Capital-Intensive Production

1. Labour-Intensive: More manpower than machinery.

2. Capital-Intensive: Heavily reliant on machinery/goods.

Production and Productivity

• Production: Total output; Productivity: Efficiency metric leading to economic benefits such as lower prices and improved standards of living.

Factors Affecting Productivity

1. Investment

2. Innovation

3. Workforce Skills

4. Entrepreneurial Spirit

5. Competition

Chapter 22: Firms’ Costs, Revenue and Objectives

Costs of Production

• Breakdown of costs into fixed and variable expenses.

Revenue and Profit

• Monetary metrics include total revenue and average revenue associated with firm operations.

Objectives of Firms

1. Survival

2. Social Welfare

3. Growth

4. Profit Maximisation

Chapter 23: Market Structure

Market Structure Overview

• Explores competitive dynamics, monopolistic scenarios, and the barriers to market entry, determining market characteristics.

Competitive Markets vs. Monopoly

• Competitive Markets: Many firms operate with lower prices.

• Monopoly: Sole supplier with the power to influence supply and prices.