Microeconomic Decision Makers

Question 1

What is Money?

Answer 1

Money is a commodity that can be used as a medium of exchange such as cash & bank deposits.

Question 2

Qualities of Good Money

Answer 2

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

Question 3

What is a Coincidence of Wants

Answer 3

A coincidence of wants is when both people want what the other has. This is rare and difficult to work with.

Question 4

What is a Central Bank?

Answer 4

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.

Question 4

Types of Banks - Commercial Banks

Answer 4

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

Question 5

Types of Banks - Credit Union

Answer 5

ADVANTAGES:
- Specialised to the customer’s tastes and needs
- Can pool resources together

DISADVANTAGES:
- Participation requires membership
- Interest Rates are better elsewhere

Question 6

Types of Banks - Islamic Banks

Answer 6

ADVANTAGES:
- No interested payed due to Quran belief

DISADVANTAGES:
- Regular fee paid to participate

Question 7

Types of Banks - Investment Banks

Answer 7

ADVANTAGES:
- Specialised for large companies

DISADVANTAGES:
- Individuals can’t use them

Question 8

What is Income, Disposable Income & Consumption

Answer 8

Income is the payment for FoPs. Disposable Income is the household’s income post taxation. Consumption is the spending by households on G&S

Question 9

Influences on Household Income, Savings & Spendings

Answer 9

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.

Question 10

How to calculate the Household Saving Ratio

Answer 10

Household Saving / Household Disposable Income.

This tells us how much each household saves & spends.

Question 11

Types of Payment for Labour

Answer 11

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

Question 12

Non-Wage Determinants of Willingness to take a Job

Answer 12

NAME 4/7
Future Prospects
Degree of Challenge
Degree of Risk to health
Job Flexibility
Job Security
Qualifications necessary
Job Satisfaction

Question 13

Determinants of Wage

Answer 13

Degree of Experience
Qualification
Level of Skill involved
Unsociable Hours
Occupational Danger
Location Remoteness

Question 14

Potential reasons for Wage Differentials

Answer 14

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

Question 15

What is Division of Labour?

Answer 15

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

Question 16

What is a Trade Union?

Answer 16

Trade unions promote and protect the interests of their members by improving pay and working conditions.

Question 17

Types of Trade Unions

Answer 17

General Unions: Covers many industries
Industrial Unions: Industry specific
Craft Union: Particular to a specific job

Question 18

Functions of Trade Unions

Answer 18

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.

Question 18

Types of Industrial Action

Answer 18

STRIKE:
Refusal to Work

GO SLOW:
Purposely reducing productivity

WORK TO RULE:
Working the minimum stated amount in contract

WALKOUTS & SITINS:
Self Explanatory

Question 19

Trade Union Advantages & Disadvantages to Workers

Answer 19

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)

Question 20

Trade Union Advantages & Disadvantages to Firms

Answer 20

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

Question 21

Trade Union Advantages & Disadvantages to Government

Answer 21

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

Question 22

Classification of Firms

Answer 22

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.

Question 23

Classification of Private Firms

Answer 23

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.

Question 24

How to measure firm size?

Answer 24

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)

Question 25

Advantages & Disadvantages of Small Firms

Answer 25

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)

Question 26

How do Firms Grow

Answer 26

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.

Question 27

What is Economies of Scale?

Answer 27

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.

Question 28

Types of EOS

Answer 28

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.

Question 29

Types of Internal EOS

Answer 29

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.

Question 29

Types of External EOS

Answer 29

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.

Question 30

Diseconomies of Scale

Answer 30

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

Question 31

Demand for Factors of Production

Answer 31

It is derived demand or demand that is derived from demand for goods & services, and can be determined by cost, quality and availability.

Question 32

What is Labour Intensive & Capital Intensive

Answer 32

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.

Question 33

What is Production & Productivity?

Answer 33

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.

Question 34

Factors affecting Productivity

Answer 34

More investment in Capital (Machinery)
Innovation (New Production methods)
Skills, Education & expertise (Training)
Competition (Prevents complacency)

Question 35

What is Cost of Production

Answer 35

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

Question 36

What is Revenue

Answer 36

Revenue is the amount of generated from sales of G&S.

Total Revenue = Price * Quantity Sold
Average Revenue = Price

Question 37

What are the objectives of Firms

Answer 37

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.

Question 38

Types of Competition

Answer 38

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.

Question 39

What is Perfect Competition

Answer 39

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.

Question 40

Types of Barriers to Entry

Answer 40

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

Question 41

What is a Monopoly?

Answer 41

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.

Question 42

Advantages & Disadvantages of a Monopoly

Answer 42

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.

Question 43

What is an Oligopoly?

Answer 43

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.