Economics Module 3 Flashcards
What is money?
Anything widely accepted or used to exchange for goods
What is bartering?
Exchanging one good for another
Why is money preferable to bartering?
Dis. of bartering: Not enough goods to make fair exchange, only need one part of a good
Adv. of money: Portable, divisible, all worth the same
What are the functions of money?
- Medium of exchange (means of payment)
- Unit of account (price can be measured)
- Store of value (saving money)
- Standard for deferred payments (borrowing money)
What are the characteristics of money?
- Scarcity
- Acceptability
- Portability
- Durability
- Divisible
What are the functions/services of a commercial bank?
- Keeping money safe
- Lending money
- Means of making payment (cheques)
- Providing foreign currency
What are the methods of borrowing from a commercial bank, and what do they mean?
- Loans (money taken out, after period of time must be payed back plus interest)
- Overdraft (taking out more than has been put into the account)
- Credit cards (paying for an item through borrowing and paying the back later)
- Mortgages (legal deeds of ownership kept by back until mortgage has been repaid)
What is the difference between savings accounts and current accounts?
- Savings accounts pay the depositor a set rate of interest on sums saved
- Current accounts pay less interest, but sums can be withdrawn to make payments
Who do commercial banks provide to?
Businesses/firms and households/individuals
What is a commercial bank’s relationship to borrowers and lenders?
Banks act as intermediaries between borrowers and lenders
What is the central bank?
The bank responsible for supervising the banking system in its country’s domestic economy
What are the functions of the central bank?
- Supervising the financial system
- Issues legal tender (coins and notes)
- Sets interest rates
- Supervises monetary policy (helps government to create and manage it)
- Acts as banker for commercial banks and government
- Carries out government tax revenue and major spending
What is national debt?
The total amount a government owes to its lenders in bonds
What are the definitions of spending, saving, and borrowing?
- Spending is exchanging money for goods
- Saving is setting money aside instead of using it
- Borrowing is receiving money with the intention of paying it back
What are the motives for spending, saving and borrowing?
- Spending: to buy goods and services
- Saving: to have the funds to make a purchase at a later date
- Borrowing: to spend more than you earn in income, to buy an expensive item, or if you anticipate being able to repay it in future
What effect does a reduction in interest rates have on saving and borrowing, and why?
Saving becomes less attractive and borrowing becomes more attractive, because the cost of future payment is lower and they will be rewarded less for saving.
What is a country’s savings ratio?
The proportion of a country’s income that is not spent
What does the term ‘consumption’ mean?
Spending on goods which can be used up immediately or over a period of time.
What are the patterns of expenditure in high-income households?
- Not likely to spend all of income
- Will be able to save some of their income
- Unlikely to need to borrow
What are the patterns of expenditure in low-income households?
- Likely to spend all of income (still may not cover all needs)
- Most will not be able to save
- Many will have to borrow, but cannot because lenders are unsure about being repaid
How does a household’s spending change as they become richer?
They are able and likely to spend more, but likely spend a smaller proportion of additional income than they earn
What is the link between indutstrialisation and consumption?
Rapid industrialisation leads to rising consumption, as individuals have more money to spend and save.
What determines someone’s choice of occupation?
A combination of wage factors and non-wage factors.
What are the different wage factors?
- Basic pay (money that will be received minus increments or deductions)
- Earnings (total amount received)
- Overtime (additional hours worked, payed 150%, time and a half)
- Bonuses (incentives to work harder or longer)
- Commission (percentage of sales a salesperson makes)
What are the different non-wage factors?
- Job satisfaction (enjoying work)
- Career prospects (opportunity for promotion)
- Fringe benefits: subsidised housing, payment of school fees, company car/subsidised transport, discounts for company products
- Length of holidays, good pension schemes, job security, location
How are wages affected by supply and demand for labour?
- Demand: determined by elasticity of demand for products produced.
- Supply: determined by elasticity of supply for labour.
What happens to wages when supply and demand are elastic and inelastic?
Elastic: lower wages
Inelastic: higher wages
When is the bargaining power of unions strong?
When supply of labour is low and there is inelastic demand.
Why do earnings vary between skilled and unskilled workers?
- Skilled = high wages, unskilled = low wages
- Skilled workers are more productive
- Supply for skilled workers is inelastic as it takes a long time to train
Why do earnings vary between the public and private sectors?
- Public sector = higher wages, private sector = lower wages
- Education and training required to work public sector jobs
- Strong bargaining power of trade unions in public sector
Why do earnings vary between male and female workers?
- Gender wage gap, women payed less than men
- On average women spend less time part of the full-time labour force (less skilled, lower wages)
- Women more likely to work part-time jobs
- Discrimination
Why do earnings vary between agriculture and manufacturing services (different industries?)
- Labour is derived from demand for the product being produced
- Wages may be high to tempt workers to change from working in agriculture to manufacturing
- The nature of the industry (high/low demand, advancing technology)
What is derived demand?
The demand for labour
What is the division of labour?
The specialisation of individuals at work
What are the advantages of division of labour?
- Increase in skill (higher productivity)
- Time saving
- Satisfaction (workers take pride in and enjoy what they specialise in)
- Knowledge of/familiarity with supporting technology
- Higher earnings
What are the disadvantages of division of labour?
- Dependency (if someone you rely on is inefficient, you suffer)
- Unemployment (skill no longer required)
- Frustration and boredom (unfulfilling work)
- Over-concentration (unable to develop other skills)
What is a trade union?
An association of employees to protect and promote the interests of its members. Run by members who pay an annual subscription.
What are the benefits of belonging to a trade union?
- Knowing you’re part of a group that protects your interests
- Direct benefits
- Support for members if there is a grievance (complaint against conditions/pay)
- Direct action to support members (strikes)
What is a disadvantage of trade unions?
Collective action can disrupt other economic sectors, which may lead to unemployment
What are the three sectors of firms (stages of production)?
- Extractive (primary industry)
- Manufacturing and construction (secondary industry)
- Services (tertiary sector)
What are the different ways firms can be classified?
- Primary, secondary, tertiary
- Public and private
- Small, medium, large
What factors determine a firm’s size?
- Number of employees
- Value of output (sales in a year)
- Market share (% of market firm is responsible for)
- Value of capital employed (value of what firm owns)
Why are firms classified?
To help the government target support at different sectors and encourage economic growth.
What are the advantages of small firms/why are they important?
- They are major employers
- Provide raw materials and components for larger companies
- Provide to local economies
- Provide new enterprise and dynamism
What are the disadvantages of small firms?
- Unable to meet large demand
- Unable to compete with large companies
- Unable to access quantity and quality of capital & research and development available to larger firms
- Small advertising and marketing budgets, so less well-known
What are forms of internal (‘organic’) growth of a firm?
- Investing in new products
- Selling more of existing products
- Opening new stores/other outlets
- E-commerce (online trading platform - website)
- Franchising (letting others to use an idea/format for a profit)
- Outsourcing (contracting some work to an outside supplier)
What is external growth of a firm?
The takeover of another business or merger of another business. Includes more risks than organic growth, but can make a firm grow rapidly.
What is integration?
When two businesses join together, either by a takeover or a merger
What is the difference between a takeover and a merger?
- Takeover: when one firm acquires part of another firm
- Merger: when two firms combine to form a single company
Why does integration take place?
- Too much supply relative to demand
- Firm wants access to new markets
- Firms wants new technologies from other firms
- Firm wants large-scale production
What are the five types of integration?
- Horizontal
- Vertical
- Lateral
- Conglomerate
- International
What is horizontal intergration?
When firms join together at the same stage of production.
What is vertical integration?
- Forward: firm takes over another at a later stage of production
- Backward: firm takes over another at an earlier stage of production
What is lateral integration?
A merger of firms that use the same distribution channels (i.e. export to the same supermarkets chains)
What is conglomerate integration?
When profits established from one firm is used to develop another. (Tata Steel and Tata Tea profits channelled into growing Tata IT comapny)
What is international intergration?
When a global company takes over other companies worldwide. Joint Ventures are collaborations of national and international companies.
What are economies of scale, and what are the two types?
- The advantages of producing enough for a firm to cut the cost of individual units of production (NOT AN ACTUAL ECONOMY)
- Internal economies (a firm’s own growth) and external economies (growth of a firm’s industry)
What benefits can a large firm gain from being larger than its rivals (internal economies of scale)?
- More money to invest in technology to make production more efficient
- Can borrow money at lower rates
- Can attract better employees
- Better able to obtain discounts for buying in bulk
- Risk-spreading
What does risk-spreading mean?
- An internal economy of scale.
- A firm reducing risk through diversification of products, markets, suppliers and production
What are the disadvantages of a large firm?
- Processes too complicated
- Managers unable to manage everything effectively (too much going on)
- May produce more than it can sell
- Workers may organise strikes
What are examples of external economies of scale?
- Improved transport links
- Improved education
- Development of suppliers
- Improved housing
- Development of banking and insurance services
