1.2 Business Economics Flashcards
1
Q
Production
A
process that involves converting resources into goods or services
2
Q
Factors of Production
A
resources used to produce goods and services, which include land, labour, capital and enterprise
3
Q
4 Factors of Production
A
Land, Labour, Capital and Enterprise
4
Q
Human capital
A
value of the workforce or an indivisual worker
5
Q
Labour
A
people used on production
6
Q
What are the 2 types of capital?
A
- working capital or circulating capital
- fixed capital
7
Q
Working capital or circulating capital
A
resources used up in production such as raw materials and components
8
Q
Fixed capital
A
stock of ‘man made’ resources, such as machines and tools, used to help make goods and services
9
Q
Entrepreneurs
A
indivisuals who organise the other factors of production and risk their own money in a business venture
10
Q
What do entrepreneurs do?
A
- comes up with a business idea
- they are the business owners
- they are risk takers
- are responsible for organising the other 3 factors of production
11
Q
Capital intensive
A
production that relies more heavily on machinery relative to labour
12
Q
Labour intensive
A
production that relies more heavily on labour relative to machinery
13
Q
Primary sector
A
production involving the extraction of raw materials from the earth
e.g. agriculture, fishing, etc.
14
Q
Secondary sector
A
production involving the processing of raw materials into finished and semi-finished goods
15
Q
Assembly plants
A
factory where parts are put together to make a final product
16
Q
Teritary sector
A
production of services in the economy
17
Q
De-industrialisation
A
decline in manufacturing
(this is because different sectors grow and decline according to economic and social changes)
18
Q
Why had manufacturing declined in developed countries while servies has grown?
A
- people may prefer to spend more of their income on services than manufactured goods. There has been a decline in demand for the goods produced by some of the traditional industries in manufacturing, such as textiles or ship building
- fierce competition in the production of manufactured foods from developing countries such as Brazil, China and India
- as countries develop, the public sector grows. Since the public sector mainly provides services, this adds to the growth of the teritary sector
- advancements in technology mean that employment in manufacturing falls as the machines replace people
19
Q
What is the difference of an economy of a developed country to a developing country?
A
In most developed countries, the primary sector is less important to the teritary sector so only a small percentage of the workforce is employed in the primary sector. In many developing countries, the secondary sector is now growing with some expansion of the teritary sector
20
Q
Productivity
A
rate at which goods are produced, and the amount produced in relation to the work, time and money needed to produce them
🧲 businesses can produce more output if productivity can be raised. Productivity is the output per unit of input. Raising productivity is highly desirable as more goods and services can be produced with the same, or fewer resources
21
Q
3 Factors affecting productivity
A
Land, Labour, Capital
22
Q
How does LAND affect productivity?
A
Land quality varies ~ but you can make them productive by…
- using fertilisers (improves health, increasing the yield of crops) and pesticides (kill pests)
- drainage (improves the flow of water to prevent areas from flooding)
- irrigation (redirecting water from natural sources such as rivers to land that needs more water)
- reclaimation (when you create new land)
- GM crops (reduces the possibility of plants getting affected by diseases)
23
Q
How does LABOUR affect productivity?
A
Quality of human capital can be improved by…
- training (involves increasing the knowledge and skills of workers so they can do their jobs more effectively. It is important as it allows employees to acquire new skills, improve existing ones, perform better and become better leaders. This can also improve employee motavation so productivity will be higher. It is also important as it teaches new staff how to work safely in their new environment. The government can also help improve the quality of human capital by investing in the school system, to equipt young people with the skills needed in the workplace)
- improved motavation (2 ways you can improve this is to use a financial incentive such as piece rates or have job rotations)
- improved working practices / the way labour is organised and managed (e.g. changing the layout of the factory, workstations or reorganising the flow of production)
- migration (attracting skilled workers from overseas)
24
Q
How does CAPITAL affect productivity?
A
Improvements in productivity often arise because of the introduction of new technology. Improvements may occur because more capital are employed, at the expense of labour, or because new technology is more efficient than the existing technology. These improvements in technology will improve productivity in all 3 sectors of economy
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Division of labour
breaking down of the production process into small parts with each worker allocated to a specific task
26
Specialisation
production of a limited range of goods by indivisuals, firms , regions or countries
🧲 it is argued that this raises efficiency in firms and in the economy
27
Advantages of Division of Labour to a WORKER
Workers can become more skilled at doing a specific task as the repetitiion of the same task means the worker would get better and better. This means they will be able to find employment easily and are also more likely to be paid
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Disadvantages of Division of Labour to a WORKER
Specialisation however, may become boring as it is repetitive, especially if a particular task requires little skill. Repetitive tasks can also have an impact on the workers health. This could mean specialised workers may be at risk of unemployment
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Advantages of Division of Labour to a BUSINESS
- efficiency as through specialisation, workers can carry out their tasks more quickly and accurately. There are fewer mistakes and productivity (output per worker) will rise
- a greater use of specialised tools, machinery and equiptment when workers specialise
- production time reduced as workers do not have to move from one task to another
- organisation of production becomes easier because specialist workers can fit more easily into a structured system or production such as a production line
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Disadvantages of Division of Labour to a BUSINESS
- tasks are repetitive and boring, resulting in people being dissatisfied and poorly motivated causing a poor quality of work, staff arriving late, increase rates of absence and high staff turnover. This reduces productivity having an impact on profitability
- problems can occur if one stage of production depends on the other. If one stage breaks down, all other stages may be affected
- specialisation may also result in a loss of flexability in the workplace e.g. if a specialised worker was absent, there is no one else with the same set of skills causing a disruption in production
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Costs
expenses that must be met when setting up and running a business
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Fixed costs
costs that do not vary with the level of output
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Variable costs
costs that change when output levels change
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Total costs
fixed costs and variable costs added together
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Total costs equation
the cost to a firm of producing all output over a period
total fixed costs + total variable costs
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Average costs equation
AC of production is the cost of producing a single unit of output
total cost / quantity produced
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Total revenue equation
the amount of money a firm recieves from selling its output
price x quanitity
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Profit equation
total revenue - total costs
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Scale
size of a business
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Economies of scale
falling average costs due to expansion
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Internal economies of scale
cost benefits that an indivisual firm can enjoy when it expands
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6 Sources of internal economies of scale
- purchasing economies (large firms that buy losts of resources get cheaper rates ~> bulk buying)
- marketing economies (e.g. some firms may find it more cost effective to run its own delivery vechiles as if they had lots of deliveries to make this could be cheaper than paying the distributor. These economies can occur because some marketing costs are fixed)
- technical economies (because larger factories are often more efficient to smaller ones as there can be more specialisation and more investment in machinery)
- financial economies (large firms can have access to more money and also has a variety of sources to choose from)
- managerial economies (as firms expand, they can afford specialist managers ~> efficiency improves and average costs fall whereas small firms can only employ a general manager)
- risk bearing economies (larger firms are more likely to have a wider product range and sell into a wider variety of markets, reducing risks in the business)
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Bulk buying
buying goods in large quantities, which is usually cheaper than buying in small quantities
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External economies of scale
cost benefits that all firms in an industry can enjoy when the industry expands
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External economies of scale are more likely to occur if an industry is concentrated on 4 regions. What are they?
- skilled labour (if industry is more concentrated in one area, there may be a build up of labour with skills and work experience required by that industry. As a result, training costs will be lower when workers are recruited. It is also likely that the local schools and colleges provides vocational courses that are required by the local industry)
- infrastructure (if a certain industry dominates a region, the roads, railways, ports, buildings and other facilities will be shaped to suit that industries particular needs)
- access to suppliers (an established industry in a region will encourage suppliers in that industry to set up close by as they are likely to be attracted to the area. All firms in the industry will benefit from their services)
- similar businesses in the area (when firms are located close to each other, they are more likely to cooperate with each other so that they can all gain)
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Diseconomies of scale
rising average costs when firm becomes too big
🧲 average costs start to rise because aspects of productions start to become inefficient
47
What are some reasons why diseconomies of scale might happen?
- bureaucracy (larger businesses rely on bureaucracy but if a business becomes too bureaucratic, it means that too many resources are used in their administration. Therefore, too much time may be wasted filling out forms and reports. Also, the decision making might be slow as communication channels are too long. If resources are wasted in administration, average costs will start to rise)
- communication problems (some large organisations tend to employ thousands of thousands of workers, whom are likely to spread around the world. Workers from different countries speak different languages and have different cultures. There is also time differences between different global operatiosn, making communication challenging)
- lack of control (a large business may find it difficult to control and coordinate the thousands of employees, billions of money and dozens of plants all over the world can make running a large organisation demanding. There may then be a need more supervision and more layers of management, raising overall costs)
- distance between senior staff and shop floor workers (if firms get too big, relations between workers and managers may worsen as there may be many layers of managment between the chairperson at the top and the shop floor workers in a factory. This means the senior managers may not be aware of the needs of the workers and so this lack of understanding may result in demotivation of workers causing conflicts that may waste many resources to resolve)
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Bureaucracy
system of administration that uses a large number of departments and officials
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Competition
rivalry that exists between firms when trying to sell goods to the same group of customers
50
Deregulation
to remove or reduce the number of government controls on a particular business activity, done to make companies work more effectively and to increase competition
51
Barriers of entry
obstacles that might dicourage a firm from entering a market
52
Why may firms not welcome competition?
most firms prefers to dominate the market and operate without the threat of rivals. This is because if there is no threat from competition, a firm can usually charge a higher price, face less pressure to be efficient and innovative. This reduces the effort needed to survive and be successful.
However, when faced with competition, firms have to offer products that give consumers the value for money. This involves:
- operating efficiently by keeping costs low
- providing good quality products with high level of customer service
- charging prices that are acceptable to customers
- innovating by constantly reviewing and improving products
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Innovative
commercial exploitation of a new invention
54
Name one aspect of innovation
product differentiation - means that firms try to persuade their customers that their products are different from those of their rivals
55
Product differentiation
attempt by a firm to distinguish its product from that of rival
56
What is the main disadvantage in operating in a competitive market?
amount of profit made is limited as in markets with fierce competition, prices are likely to be lower and the potential for profit will also be low. The total profit in the industry has to be shared between many firms
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Advantages of competition to a CONSUMER
- low prices (they cannot overcharge their consumers as if they raise prices they may lose alot of its business as they can find a substitute or can switch from one supplier to another)
- more choice (competition means there are many alternative suppliers to chose from. Each of the different suppliers are likely to differentiate their product from their rivals => widening choice. Competitive markets will also have a constant stream of new entrants offering fresh ideas, offering even more choice)
- better choice (firms that offer poor goods or services in a competitive market will lose business. Consumers rational and so will look for value for money. This means they consider both price and quality of products when deciding what to buy, especially modern consumers as they are more aware and informed)
58
Disadvantages of competition to a CONSUMER
- market uncertainty (because unprofitable firms eventually leave the market which means that some consumers might be unconvienced)
- lack of innovation (because firms are arguably earning less profit in competitive markets and so they may not have enough profit to invest in product development)
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Advantage of competition in an ECONOMY
resources are allocated more effectively because firms have to operate efficiently to survive and are under pressure to keep their costs down so their prices are lower
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Disadvantage of competition in an ECONOMY
resources may be wasted because some factors of production are often immobile. When firms cease trading in a competitive market, resources are released for alternative uses. People are no longer employed and resources such as machines, tools, equiptment, land and buildings come up for sale. However, it takes time to reallocate resources
61
How is the size of a firm measured? Name 3 methods
- turnover (firms with high turnovers tend to be larger than those with small turnovers)
- number of employees (large firms employ more employees compared to smaller firms)
- balance sheet total (this is a measure based on the amountof money invested in a business by its owners so more money will be invested in larger firms)
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Advantages of SMALL FIRMS
- flexability (they are able to adapt to changes more quickly. This is because owners are the decision makers so are actively involved in the business and so can react to change)
- personal service (as firms get bigger, it gets harder to offer customers an indivisual personal service. Some people prefer to deal with the owner of a firm directly and so are ready to pay high prices for that benefit. Owners in small businesses are more accessible so are able to do this)
- lower wage costs (many workers in a small firm do not belong to trade unions. As result their negotiating power is weaker and the owners are often able to restrict pay to the legal minimum wage)
- better communication (since small firms have fewer employees, communication ends to be informal and more rapid than in larger organisations. This is also because the owner will be in close contact to the staff so can exchange information quicker and more efficiently. As a result, decision making is faster and workers will be better motivated)
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Disadvantages of SMALL FIRMS
- high costs (small firms cannot exploit economies of scale because their output is limited so their average costs will be higher than their larger rivals. This means that small firms often lack a competitive edge)
- lack of finance (small firms often struggle to raise finance as their choice of sources is limited. And are considered to be risky by moneylenders or by financial institutions)
- difficult attracting quality staff (small firms may find it difficult to attract highly qualified and experienced staff because small firms lack resources so may not be able to afford the wages or training that a high-quality staff requires)
- vulnerability (when trading conditions worsen, small firms may find it more difficult to survive than their larger rivals because they do not have the resources to draw on when economic conditions worsen. Small firms are also at risk from takeovers and owners may be forced to accept unattractive takeover terms)
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Advantages of LARGE FIRMS
- economies of scale (their main advantage is that their average costs are likely to be lower than those of smaller rivals. They can operate in large scale plants and exploit the economies of scale. e.g. they can get cheaper supplies as they buy in bulk)
- market domination (large firms often dominate the market. They have a higher profile in the public eye than smaller firms and benefit from such recognition. This may mean they can charge higher prices that enables them to make higher profits)
- large-scale contracts (there are both small and large firms in the contruction industry but a small firm could not compete with a large firm for a contract to build a motorway for the government. Only large firms can win these large-scale, often highly profitable contracts because small firms fo not have the resources to carry out the work)
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Disadvantages of LARGE FIRMS => similar to diseconomies of scale
- too bureaucratic (large firms sometimes are overwhelmed by their administration systems. e.g. slow decision making, too many resources taken up by administration, wasted time on filling out forms or reports, long communication channels and too many managers employed)
- coordination and control (thousands of employees, billions of money and dozens of plants all over the world making running a large organisation demanding. There may also be a need for more supervision that will raise costs)
- poor motivation (in large organisations, people can become alienated so the efforts made by a single employee seems insignificant. Personal contact between the employees in large organisations may also be lacking and may result to poor worker motivation)
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5 Factors influencing the growth of firms
- government regulation (it is important for both the economy and the consumer for businesses to have healthy competition. This is because competition will encourage innovation, improve efficiency and prevent consumer exploitation. So governments will monitor business activity to ensure that indivisual markets are not dominated by one or a group of firms from getting too big. They can do this by investigating each merger and takeover and blocking those that prevent competition)
- access to finance (businesses need money to make to make acquisitions, build factories, open new stores or develop new products which is needed to finance to grow)
- economies of scale (one of the main motives for a firms growth is to reduce average costs. As a firm grows, average costs fall because it is possible to exploit the economies of scale. In some industries, such as car manufacturing, air transport, power generation and water distribution, costs can be lowered significantly by producing large quantities of output so they can grow in such industries. However, in other markets exploiting the economies of scale may be difficult, such as international taxi firms, giant window cleaning operations and multinational hair salons, as there are few opportunities to exploit it so growth is limited)
- desire to spread risk (another motive for growth is to spread business risk and risk can be reduced by diversifying. Selling into new markets and developing new products means if one venture fails, success in others can keep the firm going. If business risk increases, perhaps because of growing uncertainty in certain sectors, firms are likely to diversify and grow as a result)
- desire to takeover competitors (one way to grow a business is to take over their rivals in the market and is a quick way to grow by reducing competition)
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5 Reasons firms may decide to stay small
- size of the market (some markets are too small to sustain very large companies. e.g. luxury yacht because not everyone can buy it so these businesses in the market will struggle to grow into large organisation)
- nature of the market (in some markets where set-up costs are low, there is little to discourage new businesses from joining the market and as a result fierce competition stops any single firm from growing. Also, in some markets, businesses serve a particular market niche. Customers in niche markets have very particular needs, which are sometimes neglected by larger firms. Therefore, there is a gap in the market for a business that is prepared to tailor goods or services to this small customer good => small firm)
- lack of finance (although some small firms may want to grow, they may not have the finance needed to expand. Growth usually requires the investment in new resources such as property extensions, new machinery, equiptment and more labour. However, most are unable to persuade their money lenders that once they are successful they will be able to pay their money back as they are too risky)
- aims of entrepreneur (some business owners may not want to grow their business as they may be happy running a small one as they could be making enough profit to satisfy their needs and may not want to take more responsibility in hiring more workers, expanding operations or borrowing more money. Also, some businesses could be 'lifestyle' businesses so owners may have other intrests other than their business that they want to pursue and so need to have the time and be flexible)
- diseconomies of scale (once a firm reaches a certain size, any further growth results in this. If a firm expands beyond the minimum efficient scale, average costs start to rise so cannot grow as it would have to charge more for their output)
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Market niche
smaller market, usually within a large firm or industry
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Monopoly
situation where there is one dominant seller in a market
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4 Features of a MONOPOLY
- one business dominates the market
- unique product (product sold by a monopolist will be highly differentiaed and so there will be no other product like it. Therefore, the product supplied is the only one available and there is not much choice whatsoever for the consumer)
- they are called the price-makers (they can force prices up by restricting the quantity supplied in the market but cannot fix both price and quantity. So if they try to sell larger quantities, prices will be forced down)
- barriers to entry (monopolies exist because competition is discouraged. In some markets there are obstacles that prevent a new entrant from trying to compete)
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New entrant
company that starts to sell goods or services in a market where they have not sold before, or one of these goods or services
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Price maker
where a dominant business is able to set the price charged in the whole market
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5 Main barriers of entry
- legal barriers (when government awards a contract to a single firm to provide a particular service => once they signed a contract, competition is legally forbidden)
- patent (is a licence that prevents other firms from copying the design of a new product or a new piece of technology. This means the new product developer can be the sole supplier in the market for up to 20 years. This allows the firms to charge a higher price and recover the costs from research and development (R&D). A common example, is in a pharmaceuticals industry where firms can sell new drugs or medicine without competition => they encourage R&D)
- marketing budgets (monopolists often have strong brand names which makes it difficult for new entrants to compete because their products will be unfamilar and may not be trusted by consumers. This is because firms often spend large amounts of money on advertising and strengthening their brand name, these high spending level makes it difficult for the new entrants to match)
- technology (if an established and dominant firm has access to complex or up-to-date technology, this will act as a barrier to entry. This is because new technology increases efficiency in production, lowering average costs which could force rivals out of business -> unless rivals can copy the technology)
- high start-up costs (in some markets, the cost of setting up afirm to compete with existing operators can at times be too high but new competitors may find it difficult to match such financial commitment)
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Patent
licence that grants permission to operate as a sole producer of a newly designed product
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Advantages of MONOPOLY
- efficiency (in some markets natural monopolies might exist, where it is more efficient if just one firm supplies all consumers. In these markets, it is often the case that the sole supplier is unable to exploit all economies of scale. e.g. two railway companies that go to the same destination -> huge duplication of resources can be wasteful)
- innovation (since monopolies are large and so make high profits, they have the resources to invest in research and development. As a result, they can develop new products and new technologies from which consumers benefit)
- economies of scale (since monopolies are large, they are able to exploit the economies of scale which means that their average costs are lower. As a result, they may be able to supply products to their consumers at a lower price, benefitting the consumers as they can save money. It can be argued that if a firm has a monopoly in the domestic market, it can build strength and compete more effectively with competition from overseas -> helps increase employment and national income in the domestic economy)
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Natural monopolies
situation that occurs when one firm in an industry can serve the entire market at a lower cost than would be possible if the industry were composed of many smaller firms
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Disadvantages of MONOPOLY
- higher prices (a firm that dominates a market is able to charge more for its products and will tend to restrict output in order to force up prices)
- restricted choice (if there is only one supplier in the market, consumer choice is obviously limited as they cannot just switch to another supplier)
- lack of innovation (it can be argued that if a firm dominates a market and are able to prevent or restrict entry so may not see the need to develop new products)
- inefficiency (it can be argued that monopolists can be inefficient. This is because if a firm does not face competition, there is no incentive (motivation) to keep costs down. As a result, they may adopt a 'care-free' approach to a business and so may face unnessessary costs. If monopolies get too big, they might suffer diseconomies of scale. And as a result, average costs rise. Also, monopolists may offer poor customer services => they know they cannot switch providers)
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Market segments
groups of customers that share similar characteristics, such as age, income, interests and social class
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Oligopoly
market dominated by a few large firms
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7 Features of a OLIGOPOLY
- few firms
- large firms dominate
- different product (in most oligopolistic markets, the products sold by each of the large firms will be very close substitutes for each other but with small differences such as changing it shape, style or colour. Firms in the oligopolitic market usually make a a deliberate effortto differentiate theeir products from their rivals)
- barriers of entry (the firms that dominate a market benefit from the barriers of entry. They may discourage entry by investigating heavily in brand names. Without the barriers to entry, the high profits enjoyed by dominant firms would attract new entrants which would then reduce their dominance)
- collusion (in some oligopolistic markets collusions might take place. This is where dominant firms in the industry set up agreements to restrict competition. e.g. one form is how firms might agree to a share geographically which means they can supply a particular region and not compete with others. Another form is price fixing where all firms agree to charge the same higher price and finally may agree to restrict output by decreasing supply and raise prices)
- non-price competition (instead they compete using advertising and promotions such as coupons which helps consumers identify them more easily. They also try to create brand loyalty through ads, so customers carry on buying the brand. Product differentiation is also common to persuade customers that they are different from their rivals which can be both imaginary (done by the marketing team) or real)
- price competition (prices take a long time and the market leaders often set the price while others follow. One reasons for this is because firms are afraid of price wars as if one firm cuts price, they will have to do the same or lose fails. As a result, revenue and profit would be lower for all firms. But if they do happen they only happen for a short period of time. Firms in oligopoly are said to have interdependence so will have changes on their on their own so they do not risk losing market share to rivals)
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Collusion
informal agreements between firms to restrict competition
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Interdependence
where the actions of one countryor large firm will have a directt effect on others
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Price war
where one firm in the industry reduces price causing others to do the same
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Advantages of an OLIGOPOLY
- choice (one way in which oligopolists compete is is by launching new brands providing consumers with new products and so widen choice in the market. Small producers also provide choice by supplying a niche market. But in other markets there are little real choice)
- quantity (since non-price competition is common in oligopolistic markets so they differentiate their products to make them better instead. As a result, the quality of products in some markets may be superior but consumers may assume this due to the amount of ads and promotion to which shapes their views)
- economies of scale (if dominant firms can exploit the economies of scale, they have low average costs. This can benefit cnsumers in the form of low prices)
- innovation (level of innovation in these markets can vary. One hand, since large and powerful firms dominate the market, it can be argued that they had the resources to invest in research and development which could be superior than their rivals. Another hand, in a consumers perpective, the large amounts of money on ads and promotions)
- price-wars (in these markets prices are stable for a long time ensuring certainty to the consumers but they may also benefit from price wars as if one firm cuts price, than the other firm will also have to lower costs. However, the price wars does not last long and there is a threat of being taken out of the market. As a result, the market may get less competitive and survivors may raise prices in the long term)
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Niche market
market for a product or service, perhaps an expensive or unusual one, that does not have many buyers, but that may make good profits for companies that sell it
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Disadvantages of an OLIGOPOLY
- main disadvantage is the temptation between firms to collude. This means there will be too much spent on ads and may be a lack of innovation
- price wars eliminates one or more firms and so there will be less competition between the remaining firms => there may be less innovation, product development, lack of choice and raise in prices
- if firms restrict competition, for example by price fixing, consumers would end up with higher prices
- they will also suffer if a market is shared out geographically so there will be a lack of choice as only one firm will supply the area
- in a minority of of oligopolistic markets, a cartel may exist which is where a group of firms or countries formally join together and agree on pricing or output levels in the market. If they are successful, they will become a monopoly
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Cartel
where a group of firms or countries join together and agree on pricing or output levels in the market
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Value-added
products or services have an increased value because work has been done on them, they have been combined with other products and so on; this increase in value to the buyer is what the buyer pays for
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Wage rate
the amount of money paid to workers for their services over a period of time (that is the price of labour)
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The demand curve for labour
the price of labour is the wage rate where the amount of money that has to be paid to people for them to work for a period of time.
the demand curve for labour slope downwards -> left to right
This is because wage rate and demand for labour are INVERSELY RELATED which means when wages rise, firms demand for less workers but when wage falls they demand more.
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4 Factors affecting the demand for labour
- demand for a product (the demand for labour is said to be a derived demand which means demand for labour is derived from the demand for goods and services supplied by firms and public sector organisations)
- availability of subsitutes (demand for labour may be affected by the cost and availability of subsitutes for labour. If firms believe machines are more efficient and cheaper than people, they will most likely subsititute people with machines)
- productivity of labour (if every worker is able to produce more output, demand for workers would increase because production becomes more profitable as there is more output to be sold)
- other employment costs (demand could be effected by the costs linked with employing labour which include national insurance contribution (NIC)s which are paid to the government when employing a worker in some countries, these are: recruitment and election costs, training, maternity costs, holiday pay, etc)
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Derived demand
demand that arises because there is demand for another good
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The supply curve for labour
supply curve slopes upwards -> left to right
This is because wages and the quantityof labour supplied are PROPORTIONATELY RELATED. So if wage rates rise more people will make themselves available
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8 Factors affecting supply for labour
- population size (more people will be available for work so the supply of labour will increase over time)
- migration (many countries welcome immigrants to help increase the working population)
- age distribution of the population (in most developed countries in the world there is an aging population so the number of people over the age of about 65 years as a proportion of the total population increases. This also means the number of dependents (non-workers) increases and this places a a financial burden on the rest of the population)
- retirement age (once people reach a certain age they are entitled to a state pension otherwise known as retirement age. This means as the population ages, the supply of workers decrease)
- school leaving age (in most countries, children must attend school until they reach a certain age which is called a school leaving age. Once they reach this age, children are allowed to work and so can affect the supply of labour)
- female participation (over the years there has been a change of roles of women as there has been an increasing number of women elected to work due to changes in society and more favourable equality legalisation to work and pursue careers. This had increased the size of the working population)
- skills and qualification (supply of labour will increase if people become more employable. This happens if people have good skills and are qualified for work)
- labour mobility (for example, if workers are geographically mobile, it means that they can move easily from one region to another to find work so can switch from one type of job to another easily. As workers become more mobile, the supply of labour in a particular market can rise)
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Labour mobility
ease with which workers can move geographically and occupationally between different jobs
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Wage determination
the wage rate in any labour market is determined by the interaction of the supply and demand for labour. The equilibrium wage is determined where the supply and demand for labour is equal
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What is the importance of quantity and quality of labour to businesses?
- a business is not likely to locate a factory in a particular place just because labour is cheap but whether the labour available meets the skills required to maintain quality standards as they cannot afford the consequences of poor quality work. This is because in locations with cheap labour, most workers are unexperienced, unskilled and often poorly educated => as a result, the business needs to invest substantial sums of money for training
- they also need to ensure that there are enough workers near the site chosen and whether this will be enough towards for future operations when expanding. Businesses need access to sufficient numbers of skilled workers in order to minimise costs, operate efficiently and make more profit but can be difficult to find if there is fewer workers available for work
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What is the impact of education and training on the quality of human capital?
the quality of human capital and quality of labour can be improved through education and traning.
- generally, employers will want to recruit people who can read or write and have good communication skills. They may also want to employ people with specialist skills. This is because if the labour supply is well educated and traed it will be more productive
- this responsibility is divided between the state and the firm. Over time, countries may want to improve its quality of labour so that it can be more productive => will require investment by state and firms providing education and training
- the main reason for training is to provide workers with the skills and knowledge needed to do their jobs effectively so productivity can increase. But also for other reasons such as: new health and safety procedures, new technologies or working practices => so some businesses train their workers in a range of different jobs so that they can be multiskilled adding to the firms flexibility + workers feel secure that they know they are trained to do their job effectively as not being able to do a job properly may cause anxiety, frustration and dissatisfaction for workers to which can demotivate staff
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Boom
time when business activity increases rapidly, so that the demand for goods increases, prices and wages go up, and employment falls
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Boom and bust
when an economy regularly becomes more active and successful and then suddenly fails
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Changes in demand for labour
demand for labour is not likely to stay constant as there may be a fall in demand for a particular product so there will be a fall in demand for workers involved in production and selling that product or the demand for a certain type of labour may change e.g. in manufacturing
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Changes in supply for labour
- one of the main reasons for this is the growth of the global population => if more people in the world, there are more people available for work
- in some countries, governments have increased retirement ages so that more people can work for longer before they get any state pension. Therefore will increase supply of labour
- however it could be said that growth in the supply of labour have decreased wages of workers
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Trade unions
organisation representing people working in a particular industry or profession that protects their rights => they exist to protect the intrests of the workers. Their aims are:
- negotiating pay and working conditions with employers
- provide legal protection for members such as legal repressentation in court if they were fighting a case against employers e.g. discrimination
- put pressure on government to pass legalisation that improve the rights of workers
- provide financial benefits
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Closed shop
company or factory where all the workers must belong to a particular trade union
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Secondary picketing
workers in one workplace or company strike in a group at a particular location in order to support the striking workers in a different workplace or economy
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Effects of trade unions on wages and employment
- a strong trade union may be able to force wages up in some labour markets, if a union is full of support of its members => they can pressure their employers during wage negotiations and affect wages + emplyment levels
- can be argued that trade unions interference has increased wages at the expense of some of its members. But can be avoided if: labour productivity rises, price increases to pay the new high wages or if proft margins are reduced
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Inflation
rate at which prices rise, a general and continuing rise in price
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Government intervention
where the government becomes involved in a situation in order to help deal with a problem
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Government intervention to deal with externalities
- for example, a business may clear a large amount of a rainforest for grassland for cattle. But this may destroy the some ancient rainforest and some natural habitat for wide range of plants and animals species => this can have a negative impact on the environment so is an example of an negative externality. Both the production and consumption can result in external costs
- it can also generate benefits to third parties. For example, if a business wants to set up a waste recycling operation which would be most likely to encourage recycling => benefits the environment and the economy in general as a greater quantity of resources would be reused which is an external benefit or positive externality. So in many countries the government is likely to use a range of measures to reduce these external costs and provide benefits. These could be: taxes, subsidies, regulation or pollution permits, etc.
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Goverment regulation of competition
One of the roles of the government in an economy is to PROMOTE COMPETITION and prevent anti-competitive practices by:
- encouraging growth of small firms
- lower barriers to entry
- introduce anti-competitive legalisations
Another is to LIMIT MONOPOLY POWER
also, to PROTECT CONSUMER INTERESTS (consumers want to buy good quality products at fair price with good customer service ant not goods that are dangerous or overpriced. Without the government, some firms may exploit their consumers by using anti-competitive practices or restrictive practices. Legalisation exists to orevent businesses from activties such as making false claims about the performance of their goods or selling good that are not fit for purpose. If businesses break consumer laws, they may be fined and have to compensate for the consumers loss). 2 examples of this in the UK is:
- sales of good act 1979 = products have to be sold must have appropriate quality and fit for purpose
- food safety act 1990 = food should be fit for human consumption and comply safety standards
Finally, they CONTROL MERGERS and TAKEOVERS (they montior them because they reduce competition)
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Anti-competitive practices (or restrictive trade practices)
attempts by firms to prevent or restrict competition
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Fit for purpose
usable (by consumers) for the prupose for which it was intended
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Subsidaries
companies that are at least half-owned by another company
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Government intervention in the labour market
one way governments intervene in the labour market is by setting a minimum wage which involves passing legalisation that means no employer is allowed to pay their workers an hourly rate below the limit set => employers will face penalty if they pay wages lower than the national minimum wage and workers will be entitled to have money repaid for the current rates
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Minimum wage
minimum amount per hour which most workers are legally entitled to be paid
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Reasons for minimum wage
- the general reason is to raise income of low pay workers
- benefit disadvantaged workers such as women, ethnic minorities or to low-income families since they reduce inequality and increase fairness. It can also be argued that it could close the gap between the rich and the poor
- benefits the state, however if incomes increase, the amount they are entitled to claim for will fall and save government money. Also this will benefit the government as they can raise tax
- higher wages will also motivate workers which will help boost productivity of the economy
- because the employers are paying workers higher wages, they may respond by making their workers more productive to justify their new wages. They may invest in training and replace inefficient labour with efficient labour which would all boost the productivity of the economy
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Impact of minimum wage on wages and employment
supply and demand curve cross each other can be used to show the effects of minimum wage on wages and employment in labour markets
