Section 3- Microeconomic decision makers Flashcards
Define money
An item which is generally acceptable as a means of payment
Define legal tender
Any form of payment which, by law, has to be accepted in settlement of a debt.
Functions of money
- medium of exchange
- store of value
- unit of account
- standard of deferred payments.
Characteristics of money
- Does not need to have an intrinsic value (does not have to be worth something in its own right)
- should be generally acceptable
- has to be in limited supply
- durable (will last some time)
- portable (can be carried around easily)
- divisible (can be divided into units of different values)
- homogeneous (every note or coin of the same value should be exactly the same)
- recognisable (people can easily see that the item is money).
Define commercial banks
Banks which aim to make a profit by providing a range of banking services to households and firms.
Functions of commercial banks
Accept deposits
Lend
Enable customers to make payments
Differences between the two types of accounts you can make a deposit in
- Current account/Demand/ Sight:
Easy and immediate access to money
Interest is not paid on money held
Customers use current accounts mainly to receive and make payments - Deposit/ Time:
A period of notice often has to be given before money can be withdrawn from this account
Interest is paid on any money held in a deposit account
Use deposit accounts as a way of saving.
Ways of borrowing from a bank
- Overdraft:
Enables a customer to spend more than what is in her or his account, up to an agreed limit.
Interest is charged on the amount borrowed- Mainly used to cover short-term gaps between expenses and income. - Loan
Usually for a particular purpose and for a particular period of time.
Interest is charged on the full amount of the loan but the rate of interest is likely to be lower than that on an overdraft.
A customer may be asked to provide some form of security, known as collateral when taking a loan.
Define liquidity
Being able to turn an asset into cash quickly without a loss.
Define central bank
A government-owned bank which provides banking services to the government and commercial banks and operates monetary policy.
Role and importance of a central bank
- Acts as a banker to the government
- Operates as a banker to the commercial banks.
3 Acts as a lender of last resort - Manages the national debt
- Holds the country’s reserves of foreign currency and gold
- Issues bank notes
- Implements the government’s monetary policy (to keep inflation low and steady)
- Controls the banking system
- Represents the government
Independence of central banks
Central banks decide the rate of interest according to the governments target for inflation.
Unlike a national government, a central bank is unlikely to be tempted to lower the rate of interest to win public support. Most central banks also have extensive knowledge of the banking system and the appropriate rate of interest to set.
Define trade unions
Trade unions are associations of workers formed to represent their interests and improve their pay and working conditions.
Diff types of trade unions:
- Craft unions. These represent workers with particular skills, for example plumbers and weavers. These workers may be employed in a number of industries.
- General unions. These unions include workers with a range of skills and from a range of industries.
- Industrial unions. These seek to represent all the workers in a particular industry, for example, those in the rail industry.
- White collar unions. These unions represent particular professions, including pilots and teachers.
What do trade unions do ?
They negotiate on behalf of their members on wages, job security, working hours, and working conditions.
They also provide information on a range of issues for their members, for example, pensions.
They help with education and training schemes, and may also participate in measures designed to increase demand for the product produced and hence for labor.
Many get involved in pressurizing their governments to adopt legislation that will benefit their members or workers in general, such as fixing a national minimum wage.
They can seek to raise the wages of its members by restricting the entry of new workers into the industry, occupation or craft.
Define Collective Bargaining
Representatives of workers negotiating with employers’ associations.
What are some arguments a worker can put forward when asking for a wage rise?
- Workers deserve to be paid more because they have been working harder and have increased productivity.
- An industry whose profits have risen can afford to pay higher wages to its workers.
- Comparability argument- The workers it represents, should receive a pay rise to keep their pay in line with similar workers (They will seek to maintain their wage differential)
- Need a wage rise to meet the increased cost of living- Sometimes referred to as maintaining their real income
Define real income
Income adjusted for inflation.
Factors affecting the strength of a trade union
- A high level of economic activity- If output and income in a country are increasing, most industries are likely to be doing well, and so should be able to improve the pay and conditions of workers.
- A high number of members. The more members a union has, the more funds it is likely to have to finance its activities.
- A high level of skill- Unions representing skilled workers are in a relatively strong position, as it can be difficult to replace their workers with other skilled workers and expensive to train unskilled workers.
- A consistent demand for the product produced by the workers.
- Favourable government legislation- A union will be in a stronger position if laws allow trade unions to take industrial action.
Define industrial action
When workers disrupt production to put pressure on employers to agree to their demands.
Define strike + types
A group of workers stopping work to put pressure on an employer to agree to their demands.
Official strike: one which is approved and organised by the union
Unofficial strike: one which has not been approved by the union.
Types of industrial action apart from strike
Overtime ban- with workers refusing to work longer than their contracted hours.
‘Work to rule’-This involves workers undertaking the tasks required by their contracts only
How can the severity of a strike be measured?
- the number of strikes
- the number of workers involved
- the number of working days lost.
Define arbitration
Arbitration concerns the involvement of a third party seeking to reach an agreement. The arbitrator may be a government body or an independent third party chosen by both the parties.
What does it mean for a union to operate a closed shop?
When employers can only employ those workers who are members of the union or who agree to join the union.
Advantages of a trade union
It is less time consuming, less stressful and hence cheaper to negotiate with workers as a group, than to negotiate with each worker individually.
Provide a useful channel of communication between employers and workers.
Encourage workers to engage in education and training which raises productivity and promotes improved health and safety.
Provide an outlet to vent workers’ discontent and channel their grievances to the employers, thereby reducing conflict.
Disadvantages of a trade union
Firms can be harmed by industrial action undertaken by trade unions (The amount of revenue lost and damage done to the reputation of a firm)
A firm’s costs and flexibility will also be adversely affected by overtime bans and ‘work to rule’ action.
Influences on spending
- Disposable income
- Wealth
- Confidence
- Rate of interest
- Distribution of income
- Advances in technology
Define disposable income
Income after income tax has been deducted and state benefits received
Define wealth
a stock of assets including money held in bank accounts, shares in companies, government bonds, cars, and property.
How is wealth linked to expenditure
- Wealth generates income
- Wealth can be cashed in
- People can use their wealth as security for loans
- Wealth also affects confidence
How does the rate of interest influence expenditure
A rise in rate of interest,
Makes borrowing more expensive
Encourages saving
Reduce the amount spent by people who have borrowed in the past
Define Rate of interest
a charge for borrowing money and a payment for lending money.
Define dissaving
When people spend more than their income- by either drawing on their past savings or, more likely, borrowing other people’s savings