Microeconomic Decision Makers Flashcards
What is Money?
Money is a commodity that can be used as a medium of exchange such as cash & bank deposits.
Qualities of Good Money
DURABLE: Doesn’t break easily
DIVISIBILITY: Can be divided into smaller units
PORTABILITY: Can be moved around easily
UNIFORMITY: Recognisable and all the same
SCARCITY: Limited amount exists
ACCEPTABILITY: Accepted by wider society
What is a Coincidence of Wants
A coincidence of wants is when both people want what the other has. This is rare and difficult to work with.
What is a Central Bank?
A central bank manages the nation’s money supply and banking system.
BANKER’S BANK: The Central bank will handle loans and transactions for other banks.
ISSUER OF MONEY: For most countries, it is the only bank that can issue notes.
GOVERNMENT’S BANKER: Pays government employees, repairs infrastructure and buys imports
LENDER OF LAST RESORT: If a big bank collapses then the central bank has it covered to prevent too much loss.
Types of Banks - Commercial Banks
ADVANTAGES:
- Easy to set up and access account
- Loans money to smaller businesses
DISADVANTAGES:
- It isn’t used by big corporations
- Is for profit (No best interest)
- Swapping between banks is hard
Types of Banks - Credit Union
ADVANTAGES:
- Specialised to the customer’s tastes and needs
- Can pool resources together
DISADVANTAGES:
- Participation requires membership
- Interest Rates are better elsewhere
Types of Banks - Islamic Banks
ADVANTAGES:
- No interested payed due to Quran belief
DISADVANTAGES:
- Regular fee paid to participate
Types of Banks - Investment Banks
ADVANTAGES:
- Specialised for large companies
DISADVANTAGES:
- Individuals can’t use them
What is Income, Disposable Income & Consumption
Income is the payment for FoPs. Disposable Income is the household’s income post taxation. Consumption is the spending by households on G&S
Influences on Household Income, Savings & Spendings
Income has a positive correlation with consumption.
Interest rates are the price of borrowing and the reward for savings. Higher interest rates lead to more saving & less spending and vice versa.
Confidence relating to the household families economic position. More confidence leads to more consumption. This stems from savings, job security, & permanent Income.
How to calculate the Household Saving Ratio
Household Saving / Household Disposable Income.
This tells us how much each household saves & spends.
Types of Payment for Labour
WAGES - Short term, time based, paid hourly/daily
SALARY - Medium to High end jobs, paid monthly/yearly
PIECE RATE - Per unit of output, in manufacturing
COMMISSION - Percentage of value of good/product/sale, for salesmen
BONUS - Performance related, incentivises better work and staying
SHARE & STOCK - Employees are given part of the company stock, this is for new companies
FRINGE BENEFITS - Education, Transportation, Healthcare, Insurance, Housing
Non-Wage Determinants of Willingness to take a Job
NAME 4/7
Future Prospects
Degree of Challenge
Degree of Risk to health
Job Flexibility
Job Security
Qualifications necessary
Job Satisfaction
Determinants of Wage
Degree of Experience
Qualification
Level of Skill involved
Unsociable Hours
Occupational Danger
Location Remoteness
Potential reasons for Wage Differentials
Gender Pay Gap:
- Discrimination
- Women sometimes need to leave due to family
- Men usually have an uninterrupted career journey
Primary/Secondary/Tertiary Sector pay differences:
- Each higher sector adds more value to the products
Private/Public Sector pay differences
- Private Sector has higher highs and lower lows
- Public Sector has high job security and promotion paths
Skilled/Unskilled Workers pay Differences:
- High supply of unskilled workers, causing surplus
What is Division of Labour?
Division of Labour is the breaking down of the production into specific tasks to increase productivity.
ADVANTGES:
- Increase in supply can be given more quickly (↑PES)
- Employee becomes highly skilled in a particular task
- More Machinery is used so less wages paid
DISADVANTGES:
- Deskilling of other abilities
- Demoralising and lacks job satisfaction & security
What is a Trade Union?
Trade unions promote and protect the interests of their members by improving pay and working conditions.
Types of Trade Unions
General Unions: Covers many industries
Industrial Unions: Industry specific
Craft Union: Particular to a specific job
Functions of Trade Unions
NEGOTIATION:
Negotiates wages, working conditions, benefits e.t.c
DEFENCE:
Protects workers rights such as maternity and paternity leaves, retirement and those who are accused or breaches of contract.
CONSULTATION:
The firm invites the trade union to take part in discussions for opinions.
ADVOCACY:
Fights for LGBTQ+ Rights, Maternity & Paternity Rights and Gender Equality. Petitions to governments.
COMMUNITY:
Clubhouses, Community Events, Get Togethers, Fundraising and More.
Types of Industrial Action
STRIKE:
Refusal to Work
GO SLOW:
Purposely reducing productivity
WORK TO RULE:
Working the minimum stated amount in contract
WALKOUTS & SITINS:
Self Explanatory
Trade Union Advantages & Disadvantages to Workers
ADVANTAGES:
Offers representation (Strength in Numbers)
Convenience (No need boss, have in-between)
Improved wages, benefits, security & training
Protection from discrimination
Advocacy
DISADVANTAGES:
Some require fees to join
Lowest Common Denominator (Helps the lowest workers not the highest)
Stigma against Trade Unions
No choice to leave (Closed Shop Trade Unions mean you gotta do it, while Open Shop gives you a choice)
Trade Union Advantages & Disadvantages to Firms
ADVANTAGES:
Consultation to find out opinions of Workers
Higher skilled workers
Satisfied Workers = Higher Productivity (IN THEORY)
DISADVANTAGES:
Less Flexibility in wage amount
Higher Costs / Less Profit
Strikes can be disastrous at the wrong time
Trade Union Advantages & Disadvantages to Government
ADVANTAGES:
Consultation to find out worker opinions directly
Less Inequality & Discrimination
Higher wages = More Productivity (IN THEORY)
DISADVANTAGES:
Lower demand for labour (More Unemployment)
Strikes are damaging to the overall economy
Inflation as price increases as wages increase
Classification of Firms
Primary Firms are firms that are involved with extraction of resources.
Secondary Firms are related to refining the resources for infrastructure and manufacturing.
Tertiary Firms are related to the sale and marketing of G&S.
Private Firms are owned by individuals and groups, while Public Firms are owned by the government.
Classification of Private Firms
SOLE TRADER:
The firm is owned by a singular person, typically one involved in running the firm. Firms may have employees, but they don’t own it.
PARTNERSHIPS:
2-20 people form a firm. Profits must be shared and disagreements occur, but it reduces risk and gives you more resources to work with.
PRIVATE LIMITED COMPANIES:
Private limited companies can choose who to sell their stock to.
PUBLIC LIMITED COMPANIES:
Shares are sold publicly on the stock exchange. You cannot prevent public purchase. This means the company can be taken over if enough stocks are bought.
How to measure firm size?
Number of Employees (Labour Intensive Firms)
Market Cap ([Number of Shares * Share Price] This is more related to value than size)
Market Proportion (Their proportion of revenue compared to the size of the market)
Advantages & Disadvantages of Small Firms
ADVANTAGES:
- Legally easier to setup & maintain
- Proportion of profit to the Owner is higher
- Stronger Voice & Choice to the Owner
- Personalised Service
- Easier to Manage
DISADVANTAGES:
- Limited resources
- Increased Risk (Less Diversified)
- Owner capability is a determinant of success
- Large commitment is needed
- Doesn’t benefit from Economics of Scale (EOS)
How do Firms Grow
Internal Growth is growing to new markets, selling to more people, selling in new places, hiring more people, opening more branches
External Growth is Mergers and Takeovers of other firms.
What is Economies of Scale?
It is Cost savings brought about by an increase in the scale of production. This results in falling average costs. Average costs is the cost per unit of production.
Types of EOS
Internal EOS is savings brought about by increase in scale of production in the firm.
External EOS is savings brought about by an increase in the size of the market/industry.
Types of Internal EOS
Purchasing EOS:
Larger firms can buy in bulk resulting in lower average costs.
Financial EOS:
Larger firms are more credit worthy and have more resources and credit history, so banks will give them lower interests rates and thus they can borrow larger amounts.
Technical EOS:
Large firms can justify and afford to purchase better equipment. This increases total cost but quantity increases by a large amount, decreasing average costs.
Managerial EOS:
Larger firms can afford to employ more efficient managers which boosts efficiency, lowering average costs. Small firms can’t afford that sort of talent.
Marketing EOS:
Larger firms can attract better talent to market for them, increasing quantities sold. They can afford to market their products more widely too.
Types of External EOS
Recruitment EOS:
Lower recruitment costs because there is more people working in the industry, therefore it is easier to hire people.
Support Service EOS:
Ancillary Services are easily available with a larger market, so a company doesn’t need to try and find it. Competition between these support firms also lower cost.
Infrastructure EOS:
Larger market leads to more investment from the government into infrastructure, making it more efficient and lowering average costs.
Diseconomies of Scale
Management DOS:
If a firm grows too large, it will have a narrow leadership structure, reducing the ability of the firm to adapt, which could lead to its closure
Miscommunication DOS:
If a firm grows in size, it becomes harder to communicate effectively. This can lead to mistakes and higher average costs.
Demotivation DOS:
Leaders and owners are quite far away from entry level employees, which makes it hard to motivate staff. There is less job satisfaction because large firms are more mechanised. Productivity falls, and average cost increases
Demand for Factors of Production
It is derived demand or demand that is derived from demand for goods & services, and can be determined by cost, quality and availability.
What is Labour Intensive & Capital Intensive
Labour intensive industries are industries where the total cost of labour is proportionately higher than the total cost of other FoPs.
Capital intensive industries are industries where the total cost of capital is proportionately higher than the total cost of other FoPs.
Labour intensive goods & services can be higher in price as machines produce goods at a lower average cost. However, these goods can also be more creative and personalised, therefore can be sold at a higher price.
Capital intensive goods have high starting cost as machines are expensive. But because they are highly efficient, they can reduce average cost (technical EoS). In the long run this brings down price.
What is Production & Productivity?
Production refers to the total output of G&S of a firm. Productivity refers to the efficiency of the usage of resources in the production process. Firms aim to be more productive so they are using resources more efficiently and thus lower Average Cost.
Factors affecting Productivity
More investment in Capital (Machinery)
Innovation (New Production methods)
Skills, Education & expertise (Training)
Competition (Prevents complacency)
What is Cost of Production
Cost of Production is the payments made by a firm in the production process of goods & services.
Fixed Costs are costs that are independent of output, e.g machinery price. Variable costs vary with output, e.g raw materials.
Total Cost = Variable Cost + Fixed Costs
What is Revenue
Revenue is the amount of generated from sales of G&S.
Total Revenue = Price * Quantity Sold
Average Revenue = Price
What are the objectives of Firms
Profit Maximisation:
The levels of output at which a firm reaches the largest amount of profit. I.e the greats difference between total revenue and total cost.
Survival:
When a firm produces at an output which enables them to remain in the market. Typically break even point, but could be loss-minimisation. (Key for new firms or in recession)
Social Wellfare:
Corporate Social Welfare, such as climate action or addressing poverty
Growth:
Beeg Company become beeeger.
Types of Competition
Price Competition (Competing to have the lowest price)
Non-Price Competition (When lowering price decreases profitability, they compete on branding, advertising and quality of products)
The more firms in a market, the more competitive. This leads to lower prices, greater quality and more choice. On the other hand, less firms mean less innovation.
What is Perfect Competition
Firms in perfect competition have no market power (I.e cannot change price). Perfect competition has many buyers and sellers, as many sellers ensure low price and many buyers ensure that buyers cannot dictate price. Goods are homogenous, and there is no information asymmetry and no barriers to entry.
Types of Barriers to Entry
Branding:
To get your product/company known in company known in comparison to other really big firms.
Legal:
Bars like medical licences or copyright and patenting rights.
Anti-Competitive Practices:
More established firms using resources to push burgeoning firms out.
Domination of Resources:
Resources have already been taken up by others.
Economies of Scale:
Starting out, you don’t have infrastructure to mass produce at low cost, so you make stuff at a loss
What is a Monopoly?
A monopoly is when one or a a handful of firms have sufficient market power to restrict competition and influence the price & quantity in their favour.
A pure monopoly means there is only one firm is the supplier of G&S. They can use this power opportunistically by restricting market supply to force a rise in prices and earn excess profit. This makes them the price maker.
Advantages & Disadvantages of a Monopoly
ADVANTAGES:
While firms could price gouge, their ability to achieve EoS often leads to lower prices. Not only that but larger profits can lead to higher investment & innovation. This can lead to legal monopolies, but there are limits on prices. This allows the company to develop infrastructure without opposition.
DISAVANTAGES:
There is less consumer choice due to restriction of competitors and lack of alternatives. This also means lower output, higher prices and lower quality. People have no choice but to buy it, especially if it is essential. These firms are also inefficient but lack of competition means they don’t pick up the slack. Lastly, it requires regulation to prevent the firm from going wild, but this takes resources.
What is an Oligopoly?
An Oligopoly is a market structure dominated by a few large firms. These firms are interdependent, and decisions to change price or other things always affect the other firms. So therefore, they usually end up in price rigidity and thus engage in non-price competition.
