3. Macroeconomic decision makers Flashcards
3.1 Money and banking 3.2 Households 3.3 Workers 3.4 Trade unions 3.5 Firms 3.6 Firms and production 3.7 Firms’ costs, revenue and objectives 3.8 Market structures
Economic agents
Households (private individuals in society), firms that operate in the private sector of an economy and the government (the public sector of an economy)
Properties of money
Medium of exchange - A widely accepted economy
Unit of Account - Able to assign a unit to each account ($1 vs $10 - easy difference)
Store of value - possible to put money in a savings account for future use etc.
Bartering
A system of exchange where people trade non money items between each other.
Bad debts
Occur when people and businesses cannot repay a loan.
Borrowing
Occurs when an individual, firm, or the government takes out a loan fom a financial institution, paying back the debt with interest over a period of time.
Collateral
Security for a loan, eg. property in the case of a mortgage, or the car purchased in the case of a car loan.
Conspicuous consumption
Occurs when people purchase highly expensive goods and services due to status or desired image.
Consumer spending
Refers to the amount of household expenditure per time period.
Disposable income
Refers to the earnings of an individual after income tax and other charges have been deducted.
Aggregant demand (def)
The total of all of the demand in an economy in a year.
Aggregant demand (equation)
C + I + G + (x - m) = AD
C onsumer spending
business I nvestment
G overnment spending
e X ports
i M ports
Aggregant Demand
Dissaving
Occurs when people spend their savings (rudn down spending account) (tends to happen during recession bc those paid by hourly wages get less shifts - thus income falls)
Income
Total amount of earnings an individual recieves in a period of time. It may consist of wages, interest, dividends, profits and rental income.
Mortgage
A secured loan for the purchase of the property (repossession)
Saving
Occurs when a person puts aside some of their current income for future spending
Savings ratio
Refers to the proportion of household income which is saved instead of consumed in an economy
Wealth
Measured by the value of assets a person owns minus their liabilities (the amount they owe to others)
Low income - Spending, Saving, Borrowing
Spending
- Spend most of their income on necessities (eg. food, clothes, housing)
Saving
- Tends to be low as there is not much income lefft over after needs
Borrowing
- Borrow to fund their expenditure on capital items (furniture, cars, computers)
- In extreme cases may have to borrow to fund necessities expenditure
- Banks less likely to lend money to low-income earners as they represent higher risk.
Middle income - Spending, Saving, Borrowing
Spending
- Spend on necessities and some luxuries
- Spend a lower proportion of their income on food + other necessities
Saving
- Tends to save some money from their wages or salaries
Borrowing
- Borrow to fund expenditure on capital items (eg. furniture, cars, computers etc.)
- Use credit cards to pay for both capital and current expenditure
- Take out mortgage to purchase a home
High income - Spending, Saving, Borrowing
Spending
- Spend the smallest proportion of income on necessities.
- Purchase luxury goods and services
Saving
- High level of savings possible
- Save a greater proportion of their income than other groups
Borrowing
- Borrowing occurs but only small risk to repay loans and mortgages
- Banks lend money easily to high-income earners
- Generally less a need to borrow money to fund items of capital expenditure
Collective bargaining
Occurs when a trade union representative negotiates on behalf of the union’s members with the employer to reach an agreement that both sides find acceptable.
A go-slow
Occurs when workers decide to complete their work in a leisurely way and therefore productivity falls .
Industrial action
Any deliberate act to disrupt the operations of a firm in order to force the management to negotiate better terms and conditions of employment, e.g. strike
A sit-in
When union members go to their place of work, occupy the premises but do not undertake their normal work.
A strike
Occurs when union members withdraw their labour services by refusing to work.
A trade union
An organisation that aims to protect the interests of its members: namely, the terms of pay and conditions of employment.
Work-to-rule
Means that workers literally work to fulfil the minimum requirements of their job and do nothing outside what is written in their contract of employment.
Employers aims (trade unions)
Maximise profits
Minimise costs
Maximise sales.
Employees aims (trade unions)
Maximise wages/salaries
Work in a safe and healthy environment
Have good terms and conditions at work
Maximise their non-wage benefits
Enjoy job security.
Trade unions benefits
- Strength in numbers
- Advice if dismissed (unfairly or made redundant)
- Improved communications between employees and management
- Improved working conditions
- Improved pay
- Advice if unfairly treated
- Services such as Insurance, social facilities
- Possible influence on government decisions
- Improved conditions of employment
Craft unions
These are the oldest type of labour unions, which were originally formed to organise workers according to their particular skill.
General unions
These trade unions are usually prepared to accept anyone into membership regardless of the place they work, the nature of their work or their industrial qualifications. These labour unions have a very large membership of unskilled workers. The Transport and General Workers’ Union (TGWU) is a very large general union in the UK.
White collar’ unions
These labour unions recruit professional, administrative and clerical staff (salaried workers) and other non-manual workers. They are common in teaching, banking, the civil service and local government.
Role of unions
- Bargaining with employers for pay rises and better terms and conditions
- Ensuring that equipment at work is safe to use (supported by health and safety legislation) and that workers are given sufficient training to enable them to perform their role at work safely
- Ensuring members are given legal advice when necessary
- Giving support to members when they are made redundant (unemplyed)
- Providing financial and legal support to workers who may have been unfairly dismissed or disciplined
- Persuading the government to pass legislation in favour of workers, such as laws covering minimum wages, maximum working hours, pension rights and the retirement age.
Basis for wage claims
- A rise in the cost of living due to inflation has reduced the real income of trade union members.
- Workers in comparable occupations have received a wage increase.
- The increased profits in the industry justify a higher return to labour. (rich company can afford to pay higher wages)
- The productivity of labour has increased, again possibly justifying an increase in wages
Strike Impacts
Employer
- Production of goods and services ceases temporarily
Employee
- Lose wages because they aren’t paid. –> Standard of living falls.
- Maybe discriminated against later eg. not given promotions etc. (illegal but hard to prove)
Work to rule Impacts
Employer
- Productivity + effieciency falls
Employee
- Cannot be disciplined because they are still fulfilling their contract
Go slow Impacts
Employer
- Productivity + efficiency falls
Employee
- Morale may drop + difficult / unlikely to be acknowledged
Sit in (Impacts)
Employer
- Production of goods and services ceases temporarily
Employee
- Loss in wages –> standard of living falls.
Economies of Scale
As the scale of production increases, the average cost per unit decreases.
Diseconomies of Scale
As the scale of production increases, the average cost per unit increases.
Internal dis/economies of scale
When the average costs increase/decresase due to internal company factors.
External dis/economies of scale
When the average costs increase/decrease due to external factors (eg. government regulations.)
Internal economies of scale …
Factors lowering average costs
Purchasing - Bulk-buying discounts
Marketing - Transport advertising (don’t having to refilm for different regions)
Financial - Lower interest rates (larger companies = less risk for banks)
Managerial - Specialist in all departments (small companies only have few skillsets)
Technical - Specialisation and latest equipment (better equipment increases efficiency)
Innovation - Research and development to find better solutions.
Internal economies of scale …
Factors increasing average costs
Poorer communication - Moving to a new country (having to employ translator team etc.)
Slow decision making - Many workers + all of them want input in decisions (time taken for decisions is oppurtunity cost of the time product could have been gaining revenue and selling)
Lower Morale - Decreases efficiency + production
Control - Hard to keep track of everything in a large company
Industrial Relations - Larger firms often have more problems (eg. high profits = basis for wage claim)
Average Cost
Total Cost / Total units of production (revenue)
External economies of scale …
Factors decreasing average costs
Infrastructure - Improved infrastructure improves economy (better transport = less labour wages / petrol etc.)
Skilled Labour - Ready supply of well trained owrkrs will reduce your training costs
Reputation - This could act as free advertising
Specialit Markets - Large industries may develop markets. Eg. Silicon Valley / Hollywood
Internal economies of scale (curve changes)
Only curve shifts if the company doesn’t change output number but finds new ways of production (eg. machines) thus increasing efficiency. In this case curve will shift downwards.
If company doesn’t change anything except quantity produced the point shifts bc the output is increased.
External Economies of scale (curve changes)
If there is a government law which causes an increase / decrease in the cost of production the curve will shift up / down.
If the government puts a limit on the amount produced the point will shift on the curve not the curve itself.
What are the different business sectors?
Primary sector
Secondary sector
Tertiary sector
Primary sector
The first stage in the production process. These harvest the raw materials for other businesses to use.
Secondary sector
They use the raw materials and manufacture products from them. (Produces a finished product)
Tertiary Sector
Concerned with providing a service to its customer. Sells the manufactured goods. (Also includes, healthcare, education, police force and other public sector markets.)
Public Sector
- Owned or controlled by the government
- Aim is to provide a good or service for the public (Not always for free)
- Profit made is called surplus and goes back to the government but this is uncommon
- Sometimes Merit goods are provided for free - thus 0 revenue but provided for by tax - bc it operates in best interest of society
- Subsidies may lower costs (eg. SL tickets)
Private Sector
- Firms - owned by private individuals (economic agents) –> aim to provide profit for owners + operate in best interest of shareholders.
- More common in a free market economy
- Tend to pay higher wages
- Examples - Apple, Amazon, HM etc.
Common ways to measure the size of a business.
- Number of employees (Cons - Indome may be concentrated –> impact on economy = low)
- Value of output (Cons - Cheap products = cheap labour)
- Value of sales - ???
- Value of capital employed - Amount of investment in company (Cons - Company may rely on machinery instead of labour = low impact on economy)
Who is interested in business size?
- Investors (Is it worth investing?)
- Banks (Bigger companies = less risky loans)
- Government (Whether or not to subsidies + preventing monopolisation –> forcing to sell / preventing mergers / limits on price)
- Employees (Wage basis / Job security)
- Competitors (Want to know how large the competition is.)
Organic growth / Internal growth
Business expands its own operations instead of relying on takeovers and mergers.
Reasons that cause Organic/Internal growth.
- New tech / more capital –> increases production capacity
- Develop / launch new products
- New markets –> exporting into new countries
- Growing a customer base through marketing
Merger
A friendly deal where two businesses join together (each business own a share of the other business for mutual benefit)
Takeover
A foced and sometimes hostile deal where one firm buys a share fo the other business.
Horizontal integration (merger or takeover)
Occurs when firms in the same industry and at the same stage of production process combine to form a larger business.
Vertical integration (merger or takeover)
This occurs when a firm expands by combining with an existing business but in a different stage of production process.
Eg. Car manufacturer merges with car retailer.
How can firms grow externally?
Through integration - When one firm combines with another business.
Forward vertical integration (merger or takeover)
A firms buys into a later stage of production.
Eg. Oil company buys refinery or petrol station.
Eg. Primary sector buys secondary / tertiary sector
Backward vertical integration
A firm buys into an earlier stage of production.
Eg. KFC bought a poultry company plant –> protecting their supply chain.
Eg. Tertiary sector buys secondary / tertiary sector.
Diversification
A takeover or merger with another firm in an unrelated industry.
When a firm increases the range of businesses it is involved in, it may develop into an industrial combine, or conglomerate.
Eg. Nestle, Yamaha etc.
Features of Perfect Competition
- Large number of buyers and Sellers.
Ensures that the action of one producer will not influence market forces. Too many firms so one is insignificant. Also demand changes of one consumer is insignificant.
- Homogeneous Product.
Since all products are perfect substitutes one firm cannot increase the price. (No-one would buy that product.) - Thus there is no price difference in a perfect market.
- Free entry and exit conditions.
There are no restrictions to enter / exit a market. eg. no laws etc.
- Perfect knowledge on the part of buyers and sellers.
Buyers and sellers have all the information about competition. This means that firms do not have to spend money on advertising. + sellers / buyers know what prices competition is setting.
- Perfect mobility of factors of production.
Factors of production can be freely moved from one use to another.
- Absence of transport cost.
With transport costs, the costs would be different in different sectors bc of geographical problems.
- Absence of Government or artificial restrictions.
Government / artificial restrictions can hinder perect competition. Eg. can limit free entry + exit of markets etc.
Imperfect knowledge
This means that customers + rival firms don’t have easy access to information about products + prices charged by competitors.
Very likely to happen in reality.
Eg. mobile phone network providers use very confusing pricing packages for their services.
Eg. banks offer a variety of interest rate charges for their various types of loan.
Differentiated Products
Products aren’t similar.
Very likely to happen in reality.
Eg. Products use slogans + logo brands on prodcuts.
Eg. Branding + marketing strategies is also a form of differentiation.
Why is competition good?
A high degree of competition in a market can benefit consumers.
- Bc they get good-quality products and good customer service, all are the right prices.
- Competition causes greater choice, higher output + more competitive prices.
Monopoly
A monopoly is a business entity that has significant market power. A legal monopoly owns 25% of the market.
Pure monopoly
When a company owns the whole market with no competitors.
Legislative monopoly
A government controlled monopoly (systembolaget, SL)
Natural monopoly
Single firms that can produce for the entire market (rather than two or more smaller firms).
A natural monopoly exists in a particular market if a single firm can serve that market at lower cost than any combination of two or more firms
Features of monopolies
H - High barriers to entry
Barriers that prevent other firms from entering the market.
Eg. Economies of scale of existing firms, ownership of essential resources, Legal rights (namely, patents, trademarks and copyrights), advertising expenditure + legal barriers to entry.
I - Imperfect knowledge
Other firms imperfect knowledge of monopoly’s trade secrets protects monopoly status.
P - Price maker / (Price setter)
Has enough market power + market supply to charge higher prices to charge higher prices. No other consumer options…
S - Single supplier
Monopolist is the single supplier of a product in a given market. Due to high barriers of entry causing a lack of substitutes.
Shakira’s hips lied, just like monopolies do…
Sales Revenue
The amount of money received by producers when they sell a good or service.
Sales revenue = price of the product x quantity of the product sold.
Break-even point
The level of output at which a firm’s total costs are equal to its total revenue.
Fixed Costs
A cost the firm must pay which remains the same irrespective of the level of output. For example, repayment of a bank loan.
Average fixed costs
Fixed costs divided by output. AFC will fall as output increases.
–> can cause economies of scale
Variable costs
The cost of production that changes with the quantity of units produced. These costs are directly related to production. If a firm stops production temporarily, there will be no variable costs to pay. Eg. The cost of raw materials.
Average variable costs = Total variable costs / Output
Total Costs
The combined costs of production
Total costs = Fixed costs + Total variable costs.
Total Revenue
The sum of all the money a firm receives from the sale of goods and services in a particular time period.
Total revenue = Price * Quantity sold
Average Revenue
Average revenue = Total revenue / Quantity sold
Firms objectives
Profit Maximisation
Survival in the short term - Usually small businesses
Social Welfare - Using ethically sourced raw materials + using renewable fuel sources
Growth - A growing company is less likely to fail.
Labour-intensive production (advantages)
- Workers can generate new ideas + provide feedback to management
- Workers can connect to customers –> builds customer loyalty.
- Workers can respond to customer feedback - Can modify the product to suit them.
- Number of workers hired can fluctuate along with demand for the product.
Labour-intesive production (disadvantages)
- Productivity varies along with the workers’ health and energy levels.
- Absenteeism causes problems or delays in production.
- There may be shortages of the skilled labour required.
- Each worker requires a wage and non-wage benefits, which often make the cost of hiring labour relatively more expensive than using machinery.
Capital-intesive production (advantages)
- The firm can gain from technical economies of scale and reduce the average total cost.
- Human error is avoided and quality remains high and more consistent.
- Production can be maintained for long periods with only short breaks to allow for the maintenance of machinery.
- The problems caused by absenteeism and a possible shortage of skilled workers are no longer factors to be considered or managed.
Capital-intensive production (disadvantages)
- The cost to purchase and install machinery may be very high.
- There is a low level of customisation. Once installed, it can be difficult for the firm to respond to changing tastes and fashions.
- Machinery lacks initiative or the ability to improve processes, but the rise of artificial intelligence is changing this.
Production
The act of adding value to the factors of production to create products. Eg. creating a product such as LEGO, which calls for specific raw materials to be combined at different times and in different ways.
Productivity
A measure of efficiency that calculates the amount of outputs produced per unit of input.
Productivity (Measurement)
Productivity = output / input
Productivity = value of output / hours of input
Central bank
The government’s bank. It is responsible for setting up and maintaining the financial system in an economy, and carrying out the monetary policy.
Central Bank Responsibility
- Managing the creation and distribution of currency.
- Regulating commercial banks
- Setting the interest rate
- Acting as a bank to the commercial banks in the economy - Account for the required reserve.
- Lender of last resort to commercial banks.
- The central bank is responsible for payments and receipts in all government-owned firms.
- Managing the exchange rate of a nation’s currency. (Important to have a healthy balance of payments)
- Monitors corrupt money flows (usually referred to as money laundering).
Commercial banks
An institution that offers financial services to firms and households in the economy.
Accepting deposits from the public, making loans, offering current accounts to help customers manage their money, and creating or extending credit.
Functions of commercial banks
Accepting deposits - Reduces the risk of theft or loss - offer rates of interest rates in return
Current accounts - Employees’ wages or salaries are paid into it regularly.
Making loans - A firm might borrow a loan to expand their operations
Creating credits - Have the ability to create money (credit) does this via fractional reserve banking.
Salary
Amount of money paid to a person on a regular basis
Wages
Agreed amount of money per hour –> directly linked to the number of hours worked.
Bonus
One-off reward payment during good profits
Commission
Payment, typically a % of value of transaction involved.
eg. a realtor is pard by 3-4 % of property value
Piece rate pay
Agreed amount paid per completed item produced.
Eg. Often used in the clothing industry in Bangladesh.
Performance-related pay
Payment based on how well workers perform
Share options
Payment throught the issuing of additional shares in the company. Value calculated by…
No of shares * shareprice
Fringe benefits
Benefits provided alongside normal salary
Eg. healthcare, company care, free lunches, schooling etc.
Commodity
Products that are produced in the primary sector, such as agricultural goods, forestry, fishing, etc.
(Bc these goods are homogenous)
How to draw good diagrams
ACE them
Axis labelled
Curves labelled
Equilibrium drawn
Ad valorem
A tax whose amount is based on the value of a transaction or of a property.
Indirect tax
Marginal cost
The cost added by producing one additional unit of a product or service.
If the marginal cost is higher than the current cost –> a diseconomy of scale occurs.
