IGCSE EDEXCEL ECONOMICS FULL Flashcards
What is the Basic Economic Problem?
Unlimited Wants
Finite Resources
What are Needs?
The Basic Requirements needed for Human Survival
What Economic Decisions have to be made when overcoming the basic economic problem?
What to produce
How to Produce
For Whom to Produce
What is Opportunity Cost?
The next best alternative forgone
What are Scarce Resources?
Amount of resources available when supply is limited
What is Distributiuon?
Act of sharing things among a large group of people in a planned way
What are Choices?
Deciding between alternative uses of scarce resources
what is expenditure?
spending by a government
What graph illustrates the idea of opportunity cost?
PPC diagram
Why is it never possible to operate outside of the PPC diagram?
The country/government/firm does not have the resources to produce that amount of goods.
Why might Economic Growth occur?
New Technology –> Increases productive potential. Usually Faster and more reliable in production and therefore more output can be produced
Improved Efficiency –> Over time resources are used more efficently. These more efficent methods replace the old ones and more outputs can be produced with fewer resources
Education and Training –> A country’s economy becomes more productive as the proportion of educated workers increases. Educated workers can work more efficently on tasks that require skills. However a country has to find the right balance between academic and vocational education
New Resources –> New Resources more Productive –> Increases Production.
When Might the PPC fall inwards?
Negative Economic Growth
. Country runs out of Natural Resources
. Productive Potential reduced by weather patterns
. If highly skilled workers move overseas
. Wars, Conflicts and Natural Disasters
What are Capital Goods?
Capital Goods –> those purchased by firms and used to produce other goods such as factories, machinery, tools and equipment
What are Consumer Goods?
Consumer Goods –> those purchased by households such as food, confectionery, cars, tablets and furniture
What is PPC diagram?
A line that shows the different combinations of two goods an economy can produce if all resources are used up
What is Revenue?
Money that a business receives over a period of time, especially from selling goods or services
What are the Reasons Consumers may not always Maximise Benefit?
. Consumers may have difficulty in calculating the benefits from consuming a product. (Measuring Sactisfactory gained is very difficult)
. Some consumers develop buying habits that may affect their ability to make rational choices. (Some people stay loyal to a particular brand)
. Some people are influenced by the behaviour of others (children may purchase the same brands as their parents as they trust that their parents or they are familiar with the brand)
Reasons why Producers may not always Maximise their Benefits?
.Some Producers have alternative business objectives. Although profit may be important to them, other issues may also be important. (Producing high quality goods, or increasing the quality of customer service requires higher costs and therefore lower profits)
. Some Commericals are Non-Profit Organisations
.An increasing minority of businesses are being set up as social enterprises. These are organisations that operate commercially but aim to maximise improvements in human or environemntal well-being
What will prevent Consumers and Producers from maximising their businesses?
If they do not have access to all the information available. For example, if a consumer does not know that a particular product can be purchased at a lower price in another location they wont maximise their benefit
What is Demand?
The Amount of a good that will be bought at a given price over a period of time.
What is Effective Demand?
How much would be bought (that is, how much people can afford to buy and would actually buy) at any given price.
What is the relationship between Demand and Price?
Inverse Relationship
As Price Increases Demand Decreases
As Price Decreases Demand Increases
What is the Shift in Demand Curve?
Movement to the left or right of the entire demand curve when there is a change in any factor affecting demand except for the price
What factors May Shift Demand?
Advertising Income Demographic Changes Price of Complements (Some goods are bought together (complementary goods) so if the price of one increases the demand for both will decrease) Price of Substitutes Fashion and Tastes (New Trends)
When There is an Increase in Income what happens to the Demand?
Generally, when Disposable Income rises, demand for goods will also rise. For example, if someone has an increased income they will have more disposable income to buy a car. These are Normal Goods (Goods where when Incomes Rise Demand also Rises)
However, a minority of goods are inferior goods. this means that the quantity demanded will actually fall when incomes rise. For Example, consumers who generally buy a relatively cheap supermarket brand of baked beans may switch to a more expensive brand when Incomes Rise
What Are Normal Goods?
Goods for which demand will increase if income increases or fall if income falls
What are Inferior Goods?
Goods for which demand will fall if income rises or rise if incomes fall
What is Disposable Income?
Income that is available to someone over a period of time to spend; it includes state benefits but excludes direct taxes
How do Demographic Changes affect Demand?
.Age Distribution of Population –> if people in UK are prdominantly older than goods for children decrease in demand
.Gender Population (If there are more men than women in a population there would be a decrease in demand for female goods)
. Geographical Distribution may change demand (In more developed countries more and more people live in urban area. As a result, demand for schools and hospitals in urban areas will be higher than in rural areas)
.Many Countries with large ethnic groups will demand products that are associated with their culture. In Australia, there is a large Southeastern Population. This has resulted in spread of restaurants offering, vietnamese, Thai food Etc:
What is Supply?
The amount of a good that sellers are prepared to offer for a sale at any given price over a period of time.
What is the relationship between Supply and Price?
When Price goes up Supply also goes up
When Price goes down Supply also goes down
Why is there a proportionate relationship between price and supply?
Businesses are motivated by profit. If prices are rising, existing businesses will be willing to supply increasing amounts of a good because they may make more profit. Or, more businesses will join the market in belief that they can also make a profit. As a result supply in the market increases.
What causes Movement along a supply curve?
When Price Increases or when supply increases
What is a shift in the supply curve?
Movement to the left or right of the entire supply curve when there is any change in the conditions of supply except the price.
What is a Fixed Supply and why may it occur?
(When the amount of a good or service that sellers are prepared to offer for sale at any given price over a period of time stays the same)
Supply will be fixed if it is impossible for sellers to increase supply even when prices rise. Supply at venues where sports matches and other events are held may be fixed.
Factors that cause the supply curve to shift?
.Natural Factors .Production Costs .New technology .Indirect Taxes .Subsidies
How does New Technology affect Supply?
Over a period of time, new technology becomes available that many businesses use in their production processes.
New Technology is more efficient –> Reduced Costs of Production –> Reduced Costs –> Increase Profits –> Firms will want to produce these goods more as they believe that they can make a profit.
How do Indirect Taxes affect Supply?
.When Indirect Taxes are Implemented
.Increased Costs to firms
.Decreased Supply due to lower profits
What is Equilibrium price?
Price at which supply and demand are equal
What is Market Clearing Price?
Price at which the amount supplied in a marker matches exactly the amount demanded
What is the Equation for Total Revenue?
Total Revenue = Price x Quantity
What is Total Revenue?
Amount of money generated from the sale of goods calculated by multiplying price by quantity
What happens to the equlibrium price when there is a shift in demand?
The Equlibrium Price will Rise if demand Increases
The Equlibrium Price will Fall if demand Decreases
What happens to the equlibrium price when there is a shift in supply?
An increase in supply for a product is shown by a shift to the right (Price Equlibrium Decreases)
A decrease in supply for a product is shown by a shift to the left (Price Equilibrium Increases)
What is Price Elasticity of Demand?
The responsiveness of demand to a change in price
What does it mean by inelastic demand?
Change in price results in a proportionately smaller change in the quantity demanded
What does it mean by elastic demand?
Change in Price results in a greater change in the quantity demanded
How to calculate Price Elasticity of Demand?
% change in quantity demanded/ % change in price
What does it mean if the value of PED is less than 1?
Price Inelastic Demand
What does it mean if the value of PED is greater than 1?
Price Elastic Demand
What does it mean if the value of PED is = 0 ?
Perfectly Inelastic (Vertical Line)
What does it mean if PED is = infinity?
Perfectly Elastic (Horizontal Line)
What does it mean if PED = -1?
Unitary Elasticity
Unitary Elasticity?
Where the Responsiveness of demand is proportionately equal to the change in price
What would a Unitary Elastic Graph look like?
curve with a negative gradient
Total Revenue will be the same everywhere
Factors affecting Price Elasticity of Demand?
Availability of Substitutes
Degree of Necessity
Proportion of Income spent on a Product
Time
What is Price Elasticity of Supply?
Responsiveness of Supply to a change in price
What does it mean by Inelastic Supply?
Change in Price results in proportionately smaller change in the quantity supplied
What does it mean by Elastic Supply?
Change in Price results in a proportionately greater change in the quantity supplied
How to Calculate the value of Price Elasticity of Supply?
Percentage change in quantity supplied/ Percentage Change in Price
What does it mean by Perfectly Elastic Supply?
Where producers will supply an infinite amount at the given price
What does it mean by Perfectly Inelastic Supply?
Where the Quantity Supplied is fixed and cannot be adjusted whatever price
What does it mean by Unitary Elasticity of Supply?
A change in Price will be matched by an identical change in the quantity supplied
What does it mean if the PES value is less than 1?
Inelastic Supply
What does it mean if the value of PES is greater than 1?
Price Elastic Supply
What does it mean if PES=0?
Perfectly Inelastic (Vertical Line)
What Does it mean if PES = Infinity?
Supply is Perfectly Elastic (Horizontal)
What does it mean if PES = 1?
Unitary Elasticity
What are the Factors influencing PES?
Factors of Production
Availability of Stocks
Spare Capacity
Time
PES For Manufactured and Primary products?
Businesses that create Manufactured Products will be able to increase production quickly although it may cost more they will just need to hire more workers or indulge in Division of Labour so these will be Price Elastic
Farmers may not be able to increase productivity quicker because crops cannot be grown more quickly so these will be Price Inelastic
What is Income Elasticity of Demand?
Responsiveness of demand to a change in income
How to calculate income elasticity of demand?
Percentage change in quantity demanded/ Percentage change in income
What does the Income Elasticity of demand suggest about the product?
Whether it is a necessity or a Luxury Good
Whether it is a Normal or Inferior Good
What is a Normal Good?
A Normal good is a good whose demand rises when consumer income rises
What are Inferior Goods?
An Inferior Good is a good whose demand falls when consumer incomes decreases.
Why is Price Elasticity useful?
It can help firms predict the effect of a price change on total revenue.
Why may firms be interested in knowing income elasticty of demand?
This is because changes in income in the economy may affect their demand for products so firms will adjust their prices accordingly to the Incomes of their consumers
What is excise duty?
Government tax on certain goods, such as cigarettes, alcoholic drinks and petrol that are sold in the country
What is VAT?
Tax on some goods and services- businesses pay value-added tax on most goods and services they buy and if they are VAT registeres, charge value-added tax on the goods/services they sell
What type of goods and services would Governments impose Indirect Taxes on?
Products that have inelastic demand
Consumers will avoid heavily taxed products if demand for them is elastic
Therefore, governments target goods that are either necessities or have a few substitutes
What type of companies would be subsidies by the government ?
The effect of a subsidy is to move the supply curve to the right
Therefore has to be price inelastic if it is used to try and help the poor by making a good cheaper because
If demand is not price inelastic, an increase in supply will only reduce the price slightly
What is the economy?
System that attempts to solve Basic Economic Problem
What is the Private Sector?
Provision of goods and services by businesses that are owned by individuals or groups of individuals
What is the Public Sector?
Government organisations that provide goods and services in the economu
What are the three types of Private Sector Enterprises?
Sole Traders
Partnerships
Companies
What are Sole Traders?
Where the business is owned and controlled by one person
What are Partnership Enterprises?
Where the Business is worked and controlled by two or more people working together. They are often found in professions
What are companies?
Where Shareholders own the business. They elect a board of directors to run the businesses on their behalf
What are Shareholders?
People or organisations that own shares in the company
What are the aims of Private Sector Firms?
.Survival (as companies and not going bankrupt)
.Profit Maximisation (Profit Incentivised)
.Growth (to become larger firms)
.Social Responsibillity
Who owns Public Sector Organisations?
.Central Government Departments (UK ministry of defence etc:)
.Public Corporations or state owned enterprises (Where firms appoint people who run the Organisation)
.Local Authority Services (Local Councils)
.Other Public Sector Organisations (BCC, Post Office, Bank of England)
Who do Public Corporations/SOE’s operate?
.Have Seperate Legal identity
.Can Sue or Be Sued
.State Funded (Government provides their Capital)
.All Assets and Liabilities of Public Corporations belong to the state
Aims of Public Sector Services?
.Improving Quality of Services
.Minimising Costs (to stop wasting resources)
.Allowing Social Costs and Benefits
.Some are Profit Incentivised
What are Dividends?
Part of a company’s profit that is dividend among the people with shares in the company
What are Assets?
Things or resources belonging to an individual or a business that has value or the power to earn money
What are Liabilities?
Amount of debt that is owed or must be paid
What are Stakeholders?
Individuals or groups whoa re considered to be an important part of an organisation or of society because they have responsibillity within it and receive advantages from it.
What is a Monetary?
A system of money in a particular country of the world as a whole, and the way that it is controlled by governments and central banks
What are the three types of Economies?
Market or Free Enterprise Economy
Command or Planned Economy
Mixed Economy
What is the Market of Free Enterprise Economy?
Economy that relies least on the public sector for the provision of goods and services. The Vast Majority are provided by private businesses
What is a Command or Planned Economy?
Economy that relies entirely on the public sector to choose, produce and distribute goods. All resources in planned economies belong to the government and the state is responsible for planning, coordinating and organizing the whole production process
What is a Mixed Economy?
Relies on both public sector and the private sector to provide goods and services
What type of goods do private sector firms produce?
Food, Clothes, Leisure and Entertainment
What type of goods do public sector firms produce?
Education. street lighting and roadworks etc: because the private sector may not be able to produce in sufficent quantities due to market failure
How do Private Sector Firms produce goods and services?
Due to competition between existing firms and the need to make profit firms will use production methods that help them to maximise quality and minimise costs.
How do Public Sector Firms produce Goods and Services?
Public Sector serviced will be provided by the government organisations. They will attempt to supply them efficently.
However, some public sector goods are produced by the private sector. (For example. governments are usually responsible for the provision of roads and motorways, however they may pay private sector business to carry out the actual work
Who do Private Sector Firms produce for?
Anyone that can afford the good or service
Who do Public Sector Firms produce for?
Most Public Sector goods are provided free to everyone and paid for from taxes.
What causes Market Failure?
Externalties- (May not take into account the bad things that are caused by this act)
Lack of Competition
Missing Markets (Public Goods are not provide by Private Sector due to lack of profit and they may not produce something that is in low demand)
Lack of Information (If consumers don’t know everything about the nature of their products then it will become inneficient and if Businesses don’t know about the resources and production techniques to make a prodct they will become inneficient)
What are Merit Goods?
Goods that are under provided by the private sector
What are Public Goods?
Goods that are not likely to be provided by the public sector
What might businesses do to make markets work efficiently?
Factors of Production need to mobile
How might Governments intevrene in markets to stop market failure?
Businesses that impose externalities may be heavily regulated or fined for polluting the atmosphere
Gov. can use legislation –> prevent businesses from dominating markets
State money can be used to provide public and merit goods free of charge
Gov. can pass legislation forcing firms to provide information about products
Gov. can help make some factors more mobile (retraining redundant workers)
What are the chracterisitcs of Public goods?
Non excludable (once provided, any individual consumer cannot be excluded from its consumption.)
Non Rivalrous (Everyone can consume it and it doesn’t reduce the amount available to others)
What is a Free Rider?
Individual who enjoys the benefit of a good but allows others to pay for it
Why do Governments produce Public goods?
Free Rider Problem
If private sector were to provide public goods there would be a free rider problem
Not possible to exclude consumption of a public good by an individual consumer
So there is little reason for people to pay for it
Reduced Profit
What is Privatisation?
Act of selling a company or activity controlled by the government to private investors
What are Nationalised Industries?
Where Public Corporations previously part of the private sector that were taken into state ownership
What are 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
Why does Privatisation take place?
To generate income
Public Sector Organisations were innefficent
To reduce Political Interference
Effect of Privatisation on Consumers?
Higher Quality Goods and lower prices if competition is occuring
If a monopoly then poor quality goods and high prices
Effect of Privatisation in Workers?
Workers are often made redundant
Wages normally cut
Workers will become more productive to save their jobs
Workers may get higher wages as there is no wage restriction
Effect of Privatisation on Businesses?
Increased Profit
Effect of Privatisation on Government?
High revenue
Firms may produce goods that harm the environment but the Government cannot intervene
Diversified?
if a company or economy diversifies, it increases the range of goods or services it produces
Hostile Takeover?
Takeover that the company being taken over does not want or agree to
Production?
Process that involves converting resources into goods or services
Factors of Production?
Resources used to produce good and services, which include, land, labour, capital and enterprise
What are the four factors of production?
Land
Labour
Capital
Enterprise
What is human Capital?
Value of the workforce or an individual worker
What is labour?
people used on production
What is Working Captial and Circulating Capital?
Resources used up in production such as raw materials and components
What does it mean if a firm is capital intensive?
Production that relies more heavily on machinery relative to labour
What does it mean if a firm is labour intensive?
Production that relies more heavily on labour relative to machinery
What are the three sectors of the economy?
Primary, Secondary and Tertiary
What is the Primary sector?
Examples?
Production involving the extraction of raw matierals from earth
Agriculture, Fishing ,Forestry and Mining
What are Assembly Plants?
Factory where parts are put together to make a final product
What is the Secondary sector?
Examples?
Production involving the processing of raw matierals into finished and semi-finished goods
Metalworking, Car Production, aerospace manufacturing, energy utillites
What is the Tertiary Sector?
Examples?
Production of services in the economy
Banking, Insurance, hotels, train, taxi
What is De-industrialisation?
Decline in Manufacturing
Why has manufacturing declined in developed countries while services have grown?
- People may want to spend more of their incomes on services than manufactured goods
- Fierce competition in the production of manufactured goods from developing countries
- Some countries are developed
- Advancements in technology mean that employment in manufacturing falls because machines replace people
Productivity?
Rate at which goods are produced, and the amount produced in relation to the work, time, and money needed to produce them
How farmers increase productivity in land?
Fertilisers and Pesticides
Drainage - Stops pieces of land from getting flooded
Irrigation– (Redirecting water from natural sources to places that need more water)
Reclamation- (Making new land from oceans, riverbeds or lakebeds)
Genetically Modified Crops
How to Increase productivity in Labour?
Training- Workers have more knowledge –> Increase in skill for workers –> Produce goods more efficently
Improved Motivation –> If workers have financial incentives to work they will produce more. (Use schemes such as piece rates
Improved Working Practices –> DoL
Migration –> If more skilled workers are attracted from overseas –> Increase in Productivity
Job rotation?
Practise of regularly changing the person who does a particular job
Piece Rate?
Amount of money that is paid for each item a worker produces, rather than for the time taken to make it
How to increase Productivity in Capital?
New Tech
What is Division of Labour?
Breaking down of the production process into small parts with each worker allocated to a specific task
What is Specialisation?
Production of a limited range of goods by individuals, firms, regions or countries
What are the advantages of Division of Labour to workers?
Focusing on the same task allows the worker to become more skilled –> More able to find employment
The higher skilled they are –> The higher the amount they will get paid
What are the disadvantages to the Division of Labour?
Boring because it is very repetitive (if a task requires little skill)
Boredom –> Job dissatisafaction and affect motivation (affects mental health)
High specialised workers can become unemployed
and if they become unemployed they will be less skilled in other skills
Advantages of Division of Labour on Businesses?
Efficency is improved because, workers can perform tasks more quickly and more accurately.
A greater use of specialist tools, machinery and equipment is possible when workers specialise
Production time is reduced because workers do not have to waste time from one task to another.
The organisation of production becomes easier. (Specialist workers can fit more easily into a structured system of production, such as a production line)
What are the disadvantages of the Division of Labour on businesses?
One of the main problems of the DoL is that if tasks are too repetitive and boring, people will become dissatisfied and poorly motivated –> Poor quality of work
If one stage of production depends on another stage and one stage breaks down all other stages may have to be stopped
Specialisation may result in a loss of flexibility in the workplace.
What are costs?
Expenses that must be met when setting up and running a business
What are fixed costs?
Costs that do not vary with the level of output
What are variable costs?
Costs that change when the output level changes
What is Total Cost?
Fixed costs and variable costs added together
Examples of Fixed Costs?
Rent, business rates and research
Examples of Variable costs?
Raw matierals, fuel and labour
What is the equation linking average cost, quantity produced and total costs?
Average costs = Total Costs/Quantity Produced
How to calculate Total Revenue?
Total Revenue = Price x Quantity
How to calculate Profit?
Total Revenue - Total Costs
What is economies of scale?
Falling average costs due to expansion
What is diseconomies of scale?
Rising average costs when a firm becomes too big
What is internal economies of scale?
Cost benefits that an individual firm can enjoy when it expands
What are the things that firms can enjoy when undergoing internal economies of scale?
Purchasing Economies –> Large firms that buy a lot of resources get cheaper rates. Suppliers offer discounts to firms that buy raw materials and components in bulk.
Marketing Economies
Technical Economies
Financial Economies –> Large firms can get access to money more cheaply as banks trust them more as they are mote stable
Managerial Economies –> As firms expand, they can afford specialist managers
Risk-Bearing Economies –> Larger firms are more likely to have wider product ranges and sell into a wider variety of markets. This reduces the risk in business.
What is Bulk Buying?
Buying goods in large quantities, which is usually cheaper than buying in small quantities
What is Marketing Economies?
Marketing economies of scale occur when larger firms are able to lower the unit cost of advertising and promotion perhaps through access to more effective marketing media.
What is Technical Economies?
Technical economies occur because larger factories are often more efficient than smaller ones. There can be more specialisation and more investment in machinery
What is external economies of scale?
Cost benefits that all firms in an industry can enjoy when the industry expands
What are the things firms can enjoy when undergoing external economies of scale?
Skilled Labour –> If an industry is built up in one area, there may be a build up of labour with the skills and work experience required by that industry. Also likely that local schools and colleges will provide vocational courses that are required by local industry
Infrastructure –> If a particular industry dominates a region, the roads, railways etc: will be shaped to suit that industry’s needs
Access to suppliers –>Suppliers in that industry will set up close by
Similar businesses in the area –> When firms in the same industry are located close to each other, they are likely to cooperate with each other so that they can all gain.
Why may firms undergo Diseconomies of Scale?
Because firms become more inefficent
What are the factors causing Diseconomies of Scale?
Bureaucracy –> If a firm becomes too bureaucratic, it means that too many resources are used in administration. Too much time may be spent filling in forms or writing reports
Communication Problems –> Time differences , different workers speak different languages (makes it harder to communicate)
Lack of Control –> A very large business may be difficult to control and coordinate. Thousands of employees, billions of pounds and dozens of paperwork can be hard to manage. There may be a need for more supervision but that increases costs
Distance between senior staff and shop floor workers–> Relationships worsen. Shop floor workers may feel belittled. Senior workers may not understand worker needs
What are Barriers to entry?
Obstacles that might discourage a firm from entering a market
What is Competition?
Rivalry that exists between firms when trying to sell goods to the same group of customers
What are the features of large firm markets?
Large number of buyers and sellers
Products sold by each firms are close substitutes for each other
Low barriers to entry
Each firm has almost no control over the price changed
Free flow of information about the nature of products, prices, methods of productiton etc:
Innovative?
Commercial exploitation of a new invention
Product differentiation?
Attempt by a firm to distinguish its product from that of rival
When there is competition what do firms have to do?
Operate efficently by keeping costs as low as possible
Providing good quality products with high levels of customer service
Charging prices that are acceptable to customers
Innovating by constantly reviewing and improving the product
Why might Consumers enjoy Competition?
Lower Prices
More Choice
Better Quality
Why might Consumers not enjoy Competition?
Market Uncertainty
Lack of innovation
What is the advantage of Competition on the economy?
Resources will be allocates more efficently –> So firms survive
Firms in competitive markets are more innovative –> To get competitive edge over rivals
What is the disadvantage of Competition on the economy?
Resources might be wasted –> Some F.of.P are immobile.
When firms cease trading in a competitive market, resources are released for alternative uses. People are made redundant and resources like machines, tools, equipment, land and buildings come up for Sale. However, it often takes time for those resources to be allocates
How is the size of a firm measured?
Turnover
Number of Employees
Balance Sheet Total
Advantages of Small Businesses?
Flexibility –> Small firms can adapt to change more quickly –> owners who are the decision makers, are actively involved in the business and can react to change
Personal Service –> As firms gets bigger, it often becomes difficult to offer customers an individual personal service. Some people prefer to deal with the owner of a firm directly and are prepared to pay a higher price for this benefit
Lower Wage Costs –> Many Workers in Small Firms do not belong to TU –> Weaker negotiating power –> Owners often able to restrict pay to minimum wage
Better Communication –> Small Firms –> Less employees, Owner in contact with all staff –> Higher motivation and exchange info quicker
Innovation –> Lack resources for research and development, so become innovative to survive
Disadvantages of Small Firms?
Higher Costs –> Cannot Exploit EofS as output is limited –> Higher Avg. Cost –> Lack comp. edge
Lack of Finance
Difficult attracting quality staff –> Lack of resources
Vulnerability –> Do not have the resources to draw on when economic conditions worsen. Owners may be forced to accept unattractive takeover terms
Advantages of Large Firms?
Economies of Scale
Market Domination
Large-Scale Contracts –> As they are more reliable and have the resources to be able to carry out and meet the high expectations of their service
Disadvantages of Large Firms?
Too Bureaucratic –> Large number of employees –> A lot of resources spent on administration.
Coordination and Control –> Very difficult to control –> Thousands of employees, billions of pounds and dozens of plants all over the world. This require more supervision which raises costs
Poor Motivation –> People become alinetaed. Firm is so large that 1 employee seems insignificant
Factors Influencing Growth?
Government Regulation
Access to Finance
Economies of Scale
The Desire to Spread Risk
The Desire to Take over competitiors
Reasons why Firms stay small?
Size of the Market –> Some markets are too small to sustain very large companies
Nature of the Market –> Some are very Competitive due to low set up costs and low barriers to entry.
Lack of Finance –> Don’t have the finance to increase their output and they are too risky so they are less likely to be given loans
Aims of the Entrepeneur –> They may be making enough profit to satisfy their needs and do not want the responsibility of taking on more workers, expanding operations etc:.
May have other interests than businesses so they don’t have the time to grow their firm
Diseconomies of Scale
Monopoly?
Situation where there is one dominant seller in a market
Features of Monopolies?
- One Business Dominates The Market
- Unique Product
- Price Maker
- They Make Barriers to entry very high
What are New entrants?
Company that starts to sell goods or services in a market where they have not sold them before, or one of these goods or services
What are Price Makers?
Where a dominant business is able to set the price charged in the whole market
What are examples of Barriers to Entry?
Legal Barriers
Patents
High Start up Costs
Tech
Marketing Budgets
What are Patents?
Licence that grants permission to operate as a sole producer of a newly designed product
What are the advantages of a Monopoly?
Efficiency (Natural Monopolies)
Innovation –> Since Monopolies are often large and make high profits, they have the resources to invest in Research and Development. They are able to develop new products and technologies from which consumers will benefit
Economies of Scale
Disadvanatages of Monopolies?
Higher Prices
Restricted Choice
Lack of Innovation
Inefficency
What are Market Segments?
Groups of customers that share similar characteristics , age, income, interests and social class
What is an Oligopoly?
Market dominated by a few large firms (3-7)
Features of Oligopolies?
Few Firms
Large Firms Dominate
Different Products
Barriers to Entry
Collusion
Non-Price Competition
Price Competition
Interdependence?
Where the actions of one country or large firm will have a direct effect on others
Price War?
Where one firm in the industry reduces the price causing others to do the same
Advantages of Oligopolies?
Choice
Quality
Economies of Scale
Innovation
Price Wars
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.
What is a Cartel?
Where a group of firms or countries join together and agree on pricing or output levels in the market
Disadvantages of Oligpolies?
Collusion
If a market is shared out geographically there will be a lack of choice because only one firm will supply each area
Cartels
Wage Rate?
The amount of money paid to workers for their services over a period of time
Derived Demand?
Demand that arises because there is demand for another good
Factors affecting the Demand for Labour? (How many workers are needed)
Demand For the Product
Availability of Substitutes –> Are Machinery cheaper to use
Productivity of Labour –> If every worker becomes more productive then demand for workers will increase
Other Employment Costs –> Free meals, training, private health insurance, sick pay, maternity pay
Factor affecting the Supply of Workers? (How many workers there are)
Population Size
Migration
Age Distribution of the population
Retirement Age
School Leaving Age
Female Participation
Skills and Qualifications
Labour Mobility
Labour Mobility?
Ease with which workers can move geographically and occupationally between different jobs
How do you determine the Wage Rate?
It is the Equilibrium of Quantity of Workers and Wage Rate
What is a boom?
Time when business activity increase rapidly, so that the demand for goods increases, orices and wages go up, and unemployment falls
What is a boom and bust?
When an economy regularly becomes more active and succesful and then suddenly falls
What are Trade Unions?
Organisations representing people working in a particular industry or profession that protects their rights
What are the main aims of TU?
Negotiate pay and working conditions with employers
Provide Legal protection for members, such as representation in court if an employee is fighting a case against an employer
Provide financial benefits, such as strike pay whenever necessary
Put pressure on the government to pass legislation that improves the rights of workers
What is a closed shop?
Company or factory where all the workers must belong to a particular Trade Union
What is 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 company
If TU ask for higher wages what happens?
Tu have high collective Barganing Power –> May force High Wages -> Firms would make workers redundant because they do not have the finances or they may not want to lose their profit.
How can Unemployment from TU’s be prevented?
- If labour productivity rises at the same time
- If employers are able to pass on wage increases to customers in the form of price rises
- If profit margins are reduced
What is inflation?
Rate at which prices rise, a general and continuing rise in prices
What is Macroeconomics?
Study of large economic systems such as those of a whole country area of the world
What is Microeconomics?
Study of small economic systems that are part of national or international systems
What are the Macroeconomic Objectives?
Reducing Unemployment
Protecting the Environment
Balance of Payments
Redistribution of Income
Controlling Inflation
Economic Growth
Economic Growth?
Increase in the level output by a nation
National Income?
Value of income, output or expenditure over a period of time
Why is Economic Growth Desirable?
If the economy is producing more –> businesses are more profitable and share prices rise –> easier for businesses to raise more capital and employ more workers –> Incomes Rise –> Spend more money on goods and services –> Even More Economic Growth
GDP?
Market Value of all final goods and services produced in a period, an internationally recognised measure of national income
Nominal GDP?
The value of goods and services produced by a country in a given period of time
Real GDP?
The value of goods and services produced by a country, having been adjusted for inflation
GDP per Capita?
Total Value of output produced in an economy over a period of time which is adjusted for inflation and expressed per head of population
Total Growth in GDP
The % change in the value of GDP over a period of time
Economic Cycle?
Periods of time where economic growth fluctuates.
Booms?
Peak of economic cycle where GPD is growing at its fastest
Downturn?
Period in the economic cycle where GDP grows, but more slowly
Recession?
Period of temporary economic decline which is identified by a fall in GDP for 2 consecutive quarters
Recovery?
Period in the economic cycle where GDP starts to rise again. Businesses and consumers regain their confidence and economic activity is on the increase.
Overheat?
When demand is rising too fast causing rpices to rise, a situation that governments might try to rectify by raising taxes or when the central bank might try raising interest rates to curb demand
Unsustainable Growth?
Economic Growth that is not possible to sustain without causing environmental problems
Human Capital?
Refers to the level of skill and education of the workforce
What does it mean when the percentage change in real GDP is greater than 0?
Economy is Growing
If the percentage in real GDP is less than 0?
The economy is shrinking
How is GDP measured?
Output Measure - Total Value of the goods and services produced by all sectors of the economy
Expenditure Measure- The Value of the goods and services brought by households and by government, investement in machinery and buildings
Income Measure- the Value of income generated mostly in terms of profits and wages
What is GDP used for?
Settling Interest Rates- If prices are rising too fast, the bank could increase interest rates to try and control them
Planning Economic Policy - If Economy is Shrinking the amount the gov. gets from taxes decreases
Compare Growth between different countries
Limitations of GDP?
Hidden Economy –> Doesn’t capture Unpaid Work in official figures (caring for an elderly relative)
Inequality- GDP doesn’t tell us how income is split across a population. A rising GDP could result from the richest segment getting richer
GDP doesn’t mean higher standards of living (GDP often will increase in war due to increased spending)
Doesnt take into account well being
What other Limitations are there of using GDP as a measure of economic growth?
Inflation Population Changes Statistical Errors Home Produced Goods Hidden Economy External Costs
Why are Population Changes a limitation to using GDP as a measure if Economic Growth?
An Increase In Population –> Increase Demand and Increased Workforce etc: –> Higher GDP
Doesn’t tell u the standrads of living in the country
Why is Inflation a limitation to using GDP as a measure of Economic Growth?
Inflation can make it appear that GDP has risen when actually it might not have
Why are Home Produced Goods a limitation to using GDP as a measure of Economic Growth?
Some goods and services are not Traded and therefore there is no record of these transactions taking place. National income will be understated
Why is the Hidden Economy a limitation to using GDP as a measure of Economic Growth?
GDP figures become innacurate
Why is External Costs a limitation to use GDP as a measure of Economic Growth?
Combustion of fossil fuels –> Good for economy
Bad for the environment
What happens when their is Economic Boom?
High Confidence Increasing Income Increasing Spendng/ Demand Low Unemployment High Inflation High Profits High Investment
What happens during Recession?
Low Confidence Low Spending Low Income Low Business Profit High Unemployment Low SoL High Bankruptcies
What happens during Downturn?
Falling Confidence Falling Spending Income and Unemployment Rising at a slower rate Falling Inflation Investment Rising at a slower rate
deflation?
Period where the level of AD is falling
CPI?
measure of the general price level
Every Month, the government records the prices of about 600 goods and services purchased by over 7000 families.
This average prices is then converted into an index number
Retail Price Index?
Measure of the general price level, which includes house prices and council tax
Demand Pull Inflation?
Inflation caused by too much demand in the economy relative to supply
What causes Demand Pull Inflation?
- Rising Consumer spending encouraged by tax cuts or low Interest Rates
- Sharp increases in Government spending
- Rising Demand for resources by firms
- Booming demand for exports
What is Disinflation?
Disinflation is a decrease in the rate of inflation – a slowdown in the rate of increase of the general price level of goods and services in a nation’s gross domestic product over time.
Cost-Push Inflation?
Inflation caused by rising Business Costs
What is the relationship between Inflation and interest rates?
nflation may be caused when households, firms and the governmnet borrow more money from banks to fund extra spending. This adds to the money supply because there are now more bank deposits. The extra money lent by the bank creates more demand and prices are driven up. This type of inflation is more likely to increase when interest rates are low because consumers would have to pay back less
Impacts of Inflation?
High Prices –> LOW PPP
.High Wages due to High Prices. Firms increase Prices so Workers demand Higher Wages (Cycle repeats)
.Lower Exports due to higher prices
.Reduced Unemployment in order to achieve output needed because of the increased aggregate demand (Demand-Pull Inflation)
.Increased Menu Costs (In resturants you have to update the increased prices)
.Increased Shoe leather costs
.Uncertainty (How can a supplier make profit if it doesn’t what it’s price is going to be)
.Decreased Consumer Confidence
.Decreased Investment (We don’t know how Inflation changes prices)
Interest Rates?
Price Paid to lenders for borrowed money; it is the price of money
Monetarists?
Economists who believe there is a strong link between growth in the money supply and inflation
Purchasing Power of Money?
Amount of goods and services that can be bought wit a fixed sum of money
Menu Costs?
Costs to firms of having to make repeated price changes
Shoe Leather Costs?
Costs to firms and consumers of searching for new suppliers when inflation is high
Hyperinflation?
Very high levels of inflation; rising prices get out of control
Transactions?
Payment, or the process of making one
Definition of Unemployment?
People who are not working who want a job but cannot find work
How do you measure Unemployment?
Labour Force Survey organised by the International labour Organisation
Over 100,00 people in 40,000 households are surveyed every month.
Problems with ILO survey?
International Comparisons are different because the way that unemployment is measured varied widely between countries
Advantages of Labour Force Survey?
More People will admit to employment than claim benefits
Advantages of Claimant Count?
Broad Measure
Easy and Quick to Measure
Disadvantages of Labour Force Survey?
Only once every 3 months
Disadvantages of Claimant Count?
Some can’t claim benefits (they have savings or a partner who earns money)
Some people won’t claim it (pride/ego)
What is Claimant Count?
A way of measuring Unemployment
This is calculated using the number of UK workers claiming the Job seekers allowance
Always lower because people under 18 or over 65 can’t claim it
What is Cyclical Unemployment?
When Unemployment is caused by a recession
Falling demand for goods and services –> fall in derived demand for labour
What is the solution to cyclical unemployment?
Training Programmes so people can find work in the down season
What is Seasonal unemployment?
Demand for some professions will fluctuate according to the time of the year –> Unemployment during seasons where demand is low
Solutions to Seasonal Unemploment?
Training Programmes so people can find work in the down season
What is Frictional Unemployment?
When People are short term unemployed when moving between jobs or leaving education
Solution to Fricitional unemployment?
Job centres and Websites which can provide information about jobs to unemployed
What is Structural Unemployment?
Mismatch between the skill of workers and industry demands
What are the three main types of Structural Unemployment?
Sectoral- When the economy moves from one sector to the next and some workers don’t have the skill for the new sectors
Technological Unemployment- New Technologies make Labour Redundant
Regional Unemployment - The industry a certain region is dependent on goes into deadline, leaving very high levels of local unemployment
What is Geographical Immobillity?
Barriers restricting workers from moving to a different of work (Transport Costs)
What is Occupational Immobillity?
Barriers restricting workers from changing profession (lack of skill due to lack of education)
Solutions to Occupational Immboillity?
Get training
Solutions to reduce Geographical immobillity?
Buy a car –> Reduces time taken to get there
Buy a house –> Ties someone to one location
What is Voluntary Unemployment?
Unwilling to work at the current wage rate
Unwilling to retrain
Unable to work because of Geographical and Occupational Immobillity
Solutions to voluntary Unemployment?
Raise Minimum Wage and lower job seekers allowance –> Encourages people to go to work
Retraining Schemes –> Give them loans to go to school
Only give people benefits who are applying for jobs
or using the free trading schemes
Impacts of Uenmployment?
Lower Output Wasteful Use of Scarce Resources Increased Poverty Increased Government Spending on benefits Decreased Tax Revenue Consumer Confidence falls Business Confidence falls Worsened Society
Balance of Payments?
Record of all transactions relating to international trade
Capital and Financical Account?
That part of the balance of payments where flows of savings, investment and currencies are recorded
Current Account?
Part of the Balance of payments where all exports and imports are recorded
Exports?
Imports?
Goods and services sold overseas
Goods and Services bought from overseas
Current Account Deficit?
When Value of imports exceeds the value of exports
Current Balance?
Difference between total exports and total imports (invisible and visible)
Balance of Trade or Visible Balance?
Difference between visible exports ands visible imports
Invisible Trade?
Visible Trade?
Trade in Services
Trade in Physical Goods
Primary Income?
Money received from the loan of production factors abroad
Secondary Income?
Gov transfers to and from overseas agencies such as the EU
Exchange Rate?
Price of one currency in terms of another
How do Exchange Rate and Current Account Interact?
If a Country’s exchange rate gets stronger –> Exports more expensive and imports become cheaper –> Fewer Exports sold and more Imports bought –> Current Account Deficit but if the CA is already in Deficit then the Deficit will grow
How may Exchange Rates become stronger?
If a country has a surplus on the CA resulting from rising sales of goods abroad, demand for that country’s currency will rise. This could drive up the xchange rate.
Reasons for Deficits and Surpluses?
Quality of Domestic Goods –> Increased Demand For Exports due to rising Sales from Overseas Buyers
Quality of Foreign Goods –> Increase In Demand For Imports due to Rising Sales from buyers in our Country
Price of Domestic Goods
Price of Foreign Goods
Exchange Rates Between Countries –>
Impact of a Current Account Deficit?
Leakages from the Economy –> Output and Employment levels in the domestic economy are under threat
Inflation –> If the prices of imports go up, this will be reflected in the general price level since many imported goods will counted when the CPI is calculated. Consequently, rising imports prices will result in higher domestic inflation levels
Low Demand for Exports –> Due to poor quality of goods or services or the price may just be too high. This results in the country undergoing progressives decline in economic growth and a rise in unemployment (This may mean that they are not competitive in certain industries)
Funding the Deficit –> It will need foreign currency to pay for the rising quantity of imports that are being purchased.
May need to borrow
Causes Major Problems
Government Intervention to Protect the Enivronment?
Taxation
Subsidies
Regulation
Fines
Pollution Permits
Park Provisions
