Microeconomic Decision Makers

Question 1

What are the 4 functions of money?

Answer 1

1. Medium of exchange
2. Measure of Value/Unit of Account
3. Store of value
4. Standard of deferred payment

Question 2

What are the characteristics of money?

Answer 2

1. Durability
2. Acceptability
3. Divisibility
4. Uniformity
5. Scarcity
6. Portability

Question 3

Barter

Answer 3

The act of swapping items in exchange for other items through a process of bargaining and negotiation.

Question 4

Double coincidence of wants

Answer 4

A person that wants to trade an item through bartering must find another person that wants the item he is willing to give. Two people engaged in a trade must both want what the other person is offering.

Question 5

Central Bank

Answer 5

The central authority in a country that oversees and manages the nation’s money supply and banking system. A central bank is responsible for the monetary policy in a country.

Question 6

Money supply

Answer 6

The amount of money circulating in an economy.

Question 7

The lender of last resort

Answer 7

If a certain commercial bank faces financial difficulties, it can, as a last resort, borrow money from the central bank. It helps to ensure that the commercial bank does not collapse and cause financial instability in the country.

Question 8

Roles of a central bank

Answer 8

1. Sole issuer of banknotes and coins
2. The government’s bank
3. The banks’ bank
4. Lender of last resort

Question 9

Commercial bank

Answer 9

A commercial bank is a retail bank that provides financial services to its customers such as accepting savings deposits and approving bank loans.

Question 10

Credit creation

Answer 10

The process by which banks increase the supply of money in an economy by making credit available to borrowers. Credit allows the borrower to gain purchasing power now with the promise to pay the lender at a future time.

Question 11

Interest rate

Answer 11

An interest rate is the reward for saving and the cost of borrowing expressed as a percentage of the money saved or borrowed.

Question 12

Consumer spending

Answer 12

The amount that individuals spend on goods and services.

Question 13

Sources of income

Answer 13

1. Income from labour (return on labour)
2. Interest on savings (return on capital)
3. Rent from property owned (return on land)
4. Dividends - profits from equity (return on enterprise)
5. Profits from business (return on enterprise)

Question 14

Disposable income

Answer 14

Income earned by an individual after income tax and other deductions such as compulsory pension contributions, trade union fees etc.

Question 15

Wealth

Answer 15

The amount of assets owned minus their liabilities (debt).

Question 16

Conspicuous consumption

Answer 16

Occurs when people purchase goods and services that they feel increases their status or reputation.

Question 17

Saving and dissaving

Answer 17

Saving is when a person sets aside some of their current income for future spending. Dissaving occurs when people spend their savings.

Question 18

Savings ratio

Answer 18

The proportion of household income which is saved instead of consumed in an economy.

Question 19

Collateral

Answer 19

Lenders (like banks) sometimes require a borrower to provide an asset with value to use as collateral in order to take out a loan. The lender will gain ownership of the collateral if the borrower is unable to pay back the loan.

Question 20

Bad debt

Answer 20

Debts that cannot be paid back.

Question 21

Labour Force Participation Rate

Answer 21

The percentage of the working population that is working rather than unemployed.

Question 22

Trade Union

Answer 22

An organisation that exists to protect the rights of workers.

Question 23

Collective Bargaining

Answer 23

A process where the trade union representative negotiates terms of employment (usually wages or working conditions) on behalf of the union members.

Question 24

Industrial Action

Answer 24

Action taken by trade union members to protest or demonstrate their dissatisfaction with their employer. Examples of industrial action are strikes, work-to-rule, go slow or sit-in.

Question 25

Functions of a commercial bank

Answer 25

1. Accepting deposits
2. Making loans
3. Credit creation
4. Other financial services such as wealth management, foreign exchange, brokerage, money transfers, bill payment and credit cards.

Question 26

What are the factors affecting an individual’s choice of occupation?

Answer 26

Wages
Non-wage factors
1. Level of challenge - interesting or boring
2. Career prospects
3. 3D - dirty, difficult and dangerous
4. Skill level - some jobs require a lot of training and education E.g. doctors
5. Experience level - some jobs require more experience e.g. manager vs junior executive
6. Personal satisfaction gained from the job

Question 27

Determinants of the demand for labour

Answer 27

1. Changes in consumer demand for goods and services
2. Changes in the productivity of labour
3. Changes in the price and productivity of capital
4. Changes in non-wage employment costs

Question 28

What causes differences in earnings? (Check again)

Answer 28

1) Different skills, abilities and qualifications
2) 3D jobs “Dirty, dangerous and difficult”
The extra money paid for people to do such jobs is known as compensating differentials
3) Job satisfaction - the satisfaction provided by a job may compensate for relatively lower wages for some people e.g. teachers work at lower pay because the job is rewarding
4) Lack of information about jobs and wages
5) Labour immobility
6) Fringe benefits

Question 29

Division of labour and specialisation

Answer 29

Specialisation occurs when a worker becomes an expert in a particular profession or in a part of a production process. Specialisation often occurs when there is division of labour where a production process is broken up into smaller parts and each worker becomes an expert in that part of production.

Question 30

Role of trade unions

Answer 30

1. Bargaining with employers for higher wages and better working conditions
2. Ensuring occupational health and safety regulations are adhered to by employers
3. Giving legal advice to workers
4. Provide legal and financial support to workers that have been unfairly dismissed
5. Lobbying for legislation in favour of workers such a minimum wage laws, working hours, workers rights etc.

Question 31

What influences spending?

Answer 31

1) Income level – rich spending more, poor spend less (large proportion on necessities)
2) Wealth – Wealthier consumers spend more
3) Inflation tends to decrease spending as inflation reduces purchasing power of consumers
4) Increase in interest rates lower spending as the cost of borrowing increases.
5) Confidence - consumers spend more when they are confident in the economy
6) Age - young families spend more establishing their family, buying property

Question 32

What influences saving/borrowing?

Answer 32

1) Age - younger people who are establishing their life and family save less and borrow more as they have little savings, retirees dissave as they do not earn any income
2) Attitude to saving
3) Interest rates - higher interest rates encourage saving and discourage borrowing and vice versa
4) Current/Future consumption - People borrow so that they can consume more now. People might save so that they can consume more in the future.
5) Consumer confidence i.e (Job security,
Expectations about the economy) - The more confident people are in the economy, the less they will save, the more they will borrow as they will want to spend more.
6) Investment - people may save or borrow to invest

Question 33

What factors influence the demand for factors of production?

Answer 33

1. Derived demand,
2. price (cost) of different factors of production,
3. quantity or availability of factors of production
4. quality and relative productivity - higher quality and more productive factors of production are more in demand.

Question 34

Labour-intensive production

Answer 34

The use and cost of labour is proportionately higher than the cost of other factors of production.

Question 35

capital-intensive production

Answer 35

The use and cost of capital is more than any other factor of production.

Question 36

What are the factors that influence the choice between capital-intensive or labour-intensive production

Answer 36

1. cost of labour vs cost of capital
2. size of the market - mass market production tends to be capital intensive while labour intensive production is often used for personalised services
3. firm’s objectives - profit maximising or social welfare (job creation)

Question 37

Productivity

Answer 37

A measure of how well resources are used in the production process. It is also a measure of the efficiency of factors of production in producing output e.g. output per worker.

Question 38

Production

Answer 38

The total output of goods and services in the production process.

Question 39

Derived demand

Answer 39

Factors of production that are not demanded for their own sake but for the goods and services they are used to produce.

Question 40

Total and average fixed costs

Answer 40

Fixed costs are costs of production that have to be paid regardless of output. Average fixed costs is the fixed costs per output.

Question 41

Total and average variable costs

Answer 41

Variable costs are costs of production when the level of output changes. Average variable costs is the variable cost per output.

Question 42

Total and average costs

Answer 42

Total cost = fixed costs + variable costs

Average costs = total cost/output

Question 43

Total and average revenue

Answer 43

Total revenue = Price x output

Average revenue = TR/output

Question 44

Profit

Answer 44

Profit = TR-TC

Question 45

What are the objectives of firms?

Answer 45

1. Profit-maximisation
2. survival
3. social welfare
4. growth (market share - firms sales as a proportion of total sales in the industry)

Question 46

Characteristics of competitive firms (Perfect competition)

Answer 46

1. many buyers and sellers
2. price taker
3. no barriers to entry - free entry and exit
4. homogenous product
5. perfect information

Question 47

Monopoly

Answer 47

A market structure where one seller dominates the market.

Question 48

Characteristics of a monopoly

Answer 48

1. Single supplier
2. Price maker
3. Imperfect information
4. High barriers to entry

Question 49

Barriers to entry

Answer 49

obstacles that prevent or make it difficult for other firms to enter the market. E.g. patents, intellectual property rights, large advertising budgets, regulation, licensing

Question 50

Price maker

Answer 50

A firm with sufficient market power to influence the price of its product

Question 51

Price taker

Answer 51

A firm with little or no market power and is not able to influence the price of its product.

Question 52

How do firms grow?

Answer 52

Internal (organic) growth
1. increasing the number of branches
2. franchising
3. attract investment from other business
External (inorganic) growth
1. Takeover (Acquisition)
2. Merger - When 2 firms join together through mutual agreement (Horizontal, Vertical, diversification-conglomerate)

Question 53

Horizontal integration (merger)

Answer 53

Occurs when 2 firms in the same sector of industry (same part of the production process or supply chain, direct competitor) integrate.

Question 54

Vertical integration (merger)

a) forward vertical merger
b) backward vertical merger

Answer 54

Occurs when 2 firms from different sectors of the same industry (different part of the production process, supply chain) integrate.
It can be forward where the firm merges with its retailer/client.
It can be backward where the firm merges with its supplier.

Question 55

Conglomerate integration (merger)

Answer 55

Occurs when firms from different industries merge. E.g. chaebols in Korea.

Question 56

Economies of scale

Answer 56

Long run average costs decrease as firm’s output increases

Question 57

Sources of internal economies of scale

Answer 57

1. bulk-buying of inputs
2. technical economies of scale - large machinery with large production capacity
3. financial economies of scale - ease of borrowing and lower costs of borrowing due to large firm size
4. managerial economies of scale - large support departments that can specialise and undertake specific functions in the firm e.g. Finance, HR, IT
5. Diversification - large firms are able to diversify away risks more easily
6. Research and development economies of scale
7. Marketing economies of scale

Question 58

Sources of external economies of scale

Answer 58

1. Access to skilled workers
2. Suppliers also benefit from economies of scale
3. Agglomeration economies - cost advantages that arise when similar firms within one or more industries cluster together in the same geographical location.
   a) Shared infrastructure
   b) Specialist service providers such as research and development facilities
   c) Proximity to related firms - being in an industrial cluster

Question 59

Diseconomies of scale

Answer 59

Occurs when a firm gets too large and long run average costs increase as output increases.

Question 60

Primary sector

Answer 60

Firms that extract (natural) raw materials from Earth e.g. fishing, farming, mining, agriculture

Question 61

Secondary sector

Answer 61

Firms that manufacture goods (industry) or construction

Question 62

Tertiary sector

Answer 62

Firms that provide services e.g. banks, schools, hospitals, legal firms

Question 63

Private sector

Answer 63

Firms that are privately owned

Question 64

Public sector

Answer 64

Firms that are owned by the government

Question 65

small medium enterprise

Answer 65

A firm that employs fewer than 250 employees.

Question 66

Why do earnings differ between people doing the same job?

Answer 66

1) Regional differences in labour demand and supply conditions
2) Length of service
3) Local pay agreements
4) Non-monetary rewards differ
5) Discrimination - age, gender
6) Skills
7) Public sector vs Private sector
8) Industry (Primary, secondary, tertiary industry, high profit vs low profit industry)

Question 67

What determines the bargaining strength of trade unions?

Answer 67

The bargaining power of a trade union to secure improved pay and other working conditions from employers is stronger when;

1) The union represents most or all of the workers in the firm or industry
2) Union members provide products and public services consumers need and for which there are few close substitutes e.g. electricity, public transport
3) The union is able to support its members financially during strike action to compensate them for their loss of earnings.

Question 68

state owned enterprise

Answer 68

a firm wholly or partially owned and operated within the public sector of an economy

Question 69

market share

Answer 69

The proportion of total sales recorded in a specific market or industry in a given period of time that has been earned by a single firm or supplier.

Question 70

long run

Answer 70

the period of time in economics in which all factors of production including capital can be varied by firms.

Question 71

short run

Answer 71

the time period in economics in which at least one factor of production is fixed (usually capital)

Question 72

internal economies of scale

Answer 72

Cost advantages associated with increasing the scale of production within a firm.

Question 73

external economies of scale

Answer 73

External economies of scale - cost advantages associated with with increasing the scale of production within an entire industry. As a result, all firms in the industry can benefit from lower average production costs.

Question 74

Sources of diseconomies of scale

Answer 74

1. Communication issues
2. Clash of organisational culture
3. Decreased capital (inefficient use of capital) or labour (low morale, no sense of belonging) productivity
4. Over-diversification and lack of expertise

Question 75

How do we measure firm size?

Answer 75

1. no. of employees
2. organization - small firms usually have a flat hierarchy with few departments while larger firms have a higher hierarchy and more departments
3. capital employed
4. market share

Question 76

Why do small firms remain small?

Answer 76

1. Market size is small
2. Access to capital is limited
3. New technology reduced the scale of production
4. Business owners choose to stay small

Question 77

price competition

Answer 77

when firms compete to offer consumers the lowest price possible for rival products.

Question 78

non-price competition

Answer 78

when firms compete by other product features rather than by lowering the price. Examples; product quality, product variety, after-sales care, promotional campaigns, advertising, customer relationship programs (loyalty cards) etc.

Question 79

What are the strategies for price competition?

Answer 79

1. destruction pricing (or predatory pricing)
2. price war
3. follow-the-leader pricing

Question 80

product differentiation

Answer 80

When firms make minor changes to a product’s features other than price, such as brand name, image, colour, packaging, warranty etc. in order to distinguish it from very similar competing products and attract and retain customers.

Question 81

collusion

Answer 81

an agreement between competing firms to control market supply and price

Question 82

natural monopoly

Answer 82

a single firm that is able to produce the entire market supply of a product at lower average cost than a number of smaller competing firms together

Question 83

contestable market

Answer 83

a market which has no or low barriers to entry so that new firms can come into the market to compete with existing firms

Question 84

What are the different ways a worker can be paid for his labour?

Answer 84

1) time rate - rate of pay per hour worked
2) overtime rate - rate of pay for working additional hours (e.g. during holidays)
3) piece rate - rate of pay per output produced
4) fixed annual salary - wages divided into 12 equal monthly payments regardless of the number of hours worked or output produced.
5) performance-related payments - payments offered to individual employees or teams as a reward for high productivity e.g. commission, share options

Question 85

backward bending supply curve of labour

Answer 85

In general the relationship between labour supply and wages is positive. However, as the hourly wage rate rises, individuals may decide at some point that they earn enough and would like more leisure time. At higher wage rates, it is possible to have both higher income and more leisure time.

Question 86

equilibrium wage rate

Answer 86

The equilibrium wage rate is where labour demand meets labour supply.

Question 87

What affects the supply of labour?

Answer 87

1) Changes in the net advantages of an occupation
2) Changes in the provision and quality of education and training
3) Demographic changes

Question 88

wage differentials

Answer 88

Differences in wages between different occupations and employees in the same occupations