Microeconomic Decision Makers Flashcards
What are the 4 functions of money?
- Medium of exchange
- Measure of Value/Unit of Account
- Store of value
- Standard of deferred payment
What are the characteristics of money?
- Durability
- Acceptability
- Divisibility
- Uniformity
- Scarcity
- Portability
Barter
The act of swapping items in exchange for other items through a process of bargaining and negotiation.
Double coincidence of wants
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.
Central Bank
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.
Money supply
The amount of money circulating in an economy.
The lender of last resort
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.
Roles of a central bank
- Sole issuer of banknotes and coins
- The government’s bank
- The banks’ bank
- Lender of last resort
Commercial bank
A commercial bank is a retail bank that provides financial services to its customers such as accepting savings deposits and approving bank loans.
Credit creation
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.
Interest rate
An interest rate is the reward for saving and the cost of borrowing expressed as a percentage of the money saved or borrowed.
Consumer spending
The amount that individuals spend on goods and services.
Sources of income
- Income from labour (return on labour)
- Interest on savings (return on capital)
- Rent from property owned (return on land)
- Dividends - profits from equity (return on enterprise)
- Profits from business (return on enterprise)
Disposable income
Income earned by an individual after income tax and other deductions such as compulsory pension contributions, trade union fees etc.
Wealth
The amount of assets owned minus their liabilities (debt).
Conspicuous consumption
Occurs when people purchase goods and services that they feel increases their status or reputation.
Saving and dissaving
Saving is when a person sets aside some of their current income for future spending. Dissaving occurs when people spend their savings.
Savings ratio
The proportion of household income which is saved instead of consumed in an economy.
Collateral
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.
Bad debt
Debts that cannot be paid back.
Labour Force Participation Rate
The percentage of the working population that is working rather than unemployed.
Trade Union
An organisation that exists to protect the rights of workers.
Collective Bargaining
A process where the trade union representative negotiates terms of employment (usually wages or working conditions) on behalf of the union members.
Industrial Action
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.
Functions of a commercial bank
- Accepting deposits
- Making loans
- Credit creation
- Other financial services such as wealth management, foreign exchange, brokerage, money transfers, bill payment and credit cards.
What are the factors affecting an individual’s choice of occupation?
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
Determinants of the demand for labour
- Changes in consumer demand for goods and services
- Changes in the productivity of labour
- Changes in the price and productivity of capital
- Changes in non-wage employment costs
What causes differences in earnings? (Check again)
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
Division of labour and specialisation
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.
Role of trade unions
- Bargaining with employers for higher wages and better working conditions
- Ensuring occupational health and safety regulations are adhered to by employers
- Giving legal advice to workers
- Provide legal and financial support to workers that have been unfairly dismissed
- Lobbying for legislation in favour of workers such a minimum wage laws, working hours, workers rights etc.
What influences spending?
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
What influences saving/borrowing?
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
What factors influence the demand for factors of production?
- Derived demand,
- price (cost) of different factors of production,
- quantity or availability of factors of production
- quality and relative productivity - higher quality and more productive factors of production are more in demand.
Labour-intensive production
The use and cost of labour is proportionately higher than the cost of other factors of production.
capital-intensive production
The use and cost of capital is more than any other factor of production.
What are the factors that influence the choice between capital-intensive or labour-intensive production
- cost of labour vs cost of capital
- size of the market - mass market production tends to be capital intensive while labour intensive production is often used for personalised services
- firm’s objectives - profit maximising or social welfare (job creation)
Productivity
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.
Production
The total output of goods and services in the production process.
Derived demand
Factors of production that are not demanded for their own sake but for the goods and services they are used to produce.
Total and average fixed costs
Fixed costs are costs of production that have to be paid regardless of output. Average fixed costs is the fixed costs per output.
Total and average variable costs
Variable costs are costs of production when the level of output changes. Average variable costs is the variable cost per output.
Total and average costs
Total cost = fixed costs + variable costs
Average costs = total cost/output
Total and average revenue
Total revenue = Price x output
Average revenue = TR/output
Profit
Profit = TR-TC
What are the objectives of firms?
- Profit-maximisation
- survival
- social welfare
- growth (market share - firms sales as a proportion of total sales in the industry)
Characteristics of competitive firms (Perfect competition)
- many buyers and sellers
- price taker
- no barriers to entry - free entry and exit
- homogenous product
- perfect information
Monopoly
A market structure where one seller dominates the market.
Characteristics of a monopoly
- Single supplier
- Price maker
- Imperfect information
- High barriers to entry
Barriers to entry
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
Price maker
A firm with sufficient market power to influence the price of its product
Price taker
A firm with little or no market power and is not able to influence the price of its product.
How do firms grow?
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)
Horizontal integration (merger)
Occurs when 2 firms in the same sector of industry (same part of the production process or supply chain, direct competitor) integrate.
Vertical integration (merger)
a) forward vertical merger
b) backward vertical merger
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.
Conglomerate integration (merger)
Occurs when firms from different industries merge. E.g. chaebols in Korea.
Economies of scale
Long run average costs decrease as firm’s output increases
Sources of internal economies of scale
- bulk-buying of inputs
- technical economies of scale - large machinery with large production capacity
- financial economies of scale - ease of borrowing and lower costs of borrowing due to large firm size
- managerial economies of scale - large support departments that can specialise and undertake specific functions in the firm e.g. Finance, HR, IT
- Diversification - large firms are able to diversify away risks more easily
- Research and development economies of scale
- Marketing economies of scale
Sources of external economies of scale
- Access to skilled workers
- Suppliers also benefit from economies of scale
- 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
Diseconomies of scale
Occurs when a firm gets too large and long run average costs increase as output increases.
Primary sector
Firms that extract (natural) raw materials from Earth e.g. fishing, farming, mining, agriculture
Secondary sector
Firms that manufacture goods (industry) or construction
Tertiary sector
Firms that provide services e.g. banks, schools, hospitals, legal firms
Private sector
Firms that are privately owned
Public sector
Firms that are owned by the government
small medium enterprise
A firm that employs fewer than 250 employees.
Why do earnings differ between people doing the same job?
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)
What determines the bargaining strength of trade unions?
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.
state owned enterprise
a firm wholly or partially owned and operated within the public sector of an economy
market share
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.
long run
the period of time in economics in which all factors of production including capital can be varied by firms.
short run
the time period in economics in which at least one factor of production is fixed (usually capital)
internal economies of scale
Cost advantages associated with increasing the scale of production within a firm.
external economies of scale
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.
Sources of diseconomies of scale
- Communication issues
- Clash of organisational culture
- Decreased capital (inefficient use of capital) or labour (low morale, no sense of belonging) productivity
- Over-diversification and lack of expertise
How do we measure firm size?
- no. of employees
- organization - small firms usually have a flat hierarchy with few departments while larger firms have a higher hierarchy and more departments
- capital employed
- market share
Why do small firms remain small?
- Market size is small
- Access to capital is limited
- New technology reduced the scale of production
- Business owners choose to stay small
price competition
when firms compete to offer consumers the lowest price possible for rival products.
non-price competition
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.
What are the strategies for price competition?
- destruction pricing (or predatory pricing)
- price war
- follow-the-leader pricing
product differentiation
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.
collusion
an agreement between competing firms to control market supply and price
natural monopoly
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
contestable market
a market which has no or low barriers to entry so that new firms can come into the market to compete with existing firms
What are the different ways a worker can be paid for his labour?
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
backward bending supply curve of labour
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.
equilibrium wage rate
The equilibrium wage rate is where labour demand meets labour supply.
What affects the supply of labour?
1) Changes in the net advantages of an occupation
2) Changes in the provision and quality of education and training
3) Demographic changes
wage differentials
Differences in wages between different occupations and employees in the same occupations
