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A period of notice often has to be given before money can be withdrawn from this account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
Define Consumption
expenditure by households on consumer goods and income
Difference between the 2 forms of saving:
- Contractual:
You sign a contract, agreeing to save a certain amount on a regular basis.
E.g. insurance policies and pension schemes - Non-contractual
You place money in a bank and build society accounts, buy government securities, shares and property.
more heavily influenced by changes in interest rates than contractual saving
Difference between the 2 forms of saving:
- Contractual:
You sign a contract, agreeing to save a certain amount on a regular basis.
E.g. insurance policies and pension schemes - Non-contractual
You place money in a bank and build society accounts, buy government securities, shares, and property.
More heavily influenced by changes in interest rates
Reasons for saving
- Target savers
- Retirement
- Children’s future
- Precautionary reasons
- Increase in income- The more people save, the more interest they tend to receive
Influences on saving
- Income
- Wealth
- The rate of interest
- Tax treatment of savings (Tax concessions )
- Range and quality of financial institutions
- Age structure
- Social attitudes
Define savings ratio
the proportion of household disposable income that is saved.
How can a country have a negative savings ratio
It means they’re spending more than they earn, and borrowing to pay for purchases
Define saving
Saving is disposable income which is not spent
Define mortgage
A loan to help buy a house.
Reasons for borrowing
- People who run into financial difficulties
- Buy something like a car
- Finance education
- Cover healthcare costs.
The influences affecting the amount of money people borrow include:
- The availability of loans and overdrafts
- The rate of interest
- Confidence
- Social attitudes
Define earnings
the total pay received by a worker
Define Wage rate
A payment which an employer contracts to pay a worker. It is the basic wage a worker receives per unit of time or unit of output.
WF- Wages of many workers are based on: (+disadvantage)
standard number of hours
number of hours they work (a time rate system)- pays lazy and industrious workers the same.
the amount they produce (a piece rate system)- can only be used if a worker’s output can be easily measured and the product is standardised+ workers may focus on quantity at the expense of quality
WD- Define Overtime
Overtime pay may be paid to the workers who work in excess of the standard working week.
- Enables employers to respond to higher demand without taking on new workers, until they are sure that the higher demand will last
- There is a risk that workers may become tired as a result of working for longer hours; the output they produce over the day may not increase and even its quality may fall
Wage factors
Wages
Overtime pay
Bonuses
Commission
WF- Define bonuses
A bonus is an extra payment. It can be paid to workers who produce above a standard amount, finish a project ahead of time, secure a profitable contract or contribute to higher profits in some other way.
- Provide an incentive for workers to produce both a high and a good quality output or to stay with a firm.
- Resentment may be caused if it is thought that they are awarded unfairly; can lead to workers becoming demotivated and the quantity or quality of their output may fall and some workers may resign
- Those people who welcome a challenge and have confidence in their own ability may be attracted to the jobs which pay bonuses
WF- Define Commission
Commission is often paid to the sales people. It involves them receiving a proportion of the value of the sales they make. Sometimes, this is in addition to a standard wage and sometimes it makes up their total payment.
Non wage factors
job satisfaction type of work working conditions working hours holidays pensions fringe benefits job security career prospects size of firm location.
NWF- Job satisfaction
Nursing and teaching are not particularly well-paid occupations but can provide a high degree of job satisfaction.
Satisfaction from improving people’s health and educating students.
NWF- Type of work
E.g. Most people would rather do non-manual than manual work
Non manual advantages- physically less tiring offers more mental stimulation better paid enjoy a high status safe environment
NWF-Working conditions
Working conditions are an important determining factor. People like to work in pleasant surroundings, with friendly colleagues and enjoying regular breaks.
NWF- Working hours
Managers and senior officials tend to work for longer hours than shop workers Part-time Flexible working hours- workers work longer hours when demand for the product is high Unsociable hours (e.g. Nurses)- work in shifts: This involves working at different periods of the day and night
NWF- Holidays
In a number of countries, the law sets down a minimum length of holiday entitlement for full-time workers.
Teaching is one occupation, well known for the length of holidays on offer. In fact, one reason for people preferring to go for teaching is the benefit of long holidays.
NWF- Pensions
Some jobs provide their workers with generous pensions, whilst others do not provide any financial help post retirement.
Generally, workers in the public (state) sector receive more generous pensions than those in the private sector.
NWF- Fringe benefits
Fringe benefits are the extra benefits provided to workers by their employers. These may include free or subsidised meals, health schemes, and social and leisure facilities.
NWF- Job security
Many workers are attracted by occupations which offer a relatively high degree of job security.
A high degree of job security means that workers are unlikely to be made redundant. Such a situation is more likely to occur in occupations where there is a high demand for the product and workers are given long-term contracts.
Civil servants often have a high degree of job security, but casual workers, including agricultural and building workers, have little job security and can be dismissed at short notice.
NWF- Job security
Many workers are attracted by occupations which offer a relatively high degree of job security.
A high degree of job security means that workers are unlikely to be made redundant. Such a situation is more likely to occur in occupations where there is a high demand for the product and workers are given long-term contracts.
Civil servants often have a high degree of job security, but casual workers, including agricultural and building workers, have little job security and can be dismissed at short notice.
NWF- Career prospects
People are often prepared to accept low wages at the start of their careers, if they think there is a good possibility that they will gain promotion to a well-paid and interesting post.
Trainee accountants, barristers and doctors are not usually highly paid and often work for long hours at the beginning of their careers. They will expect, however, that as they pass examinations and gain experience, their pay will rise to a relatively high level and their work will become more challenging.
NWF- Size of the firms
People are often attracted to jobs in large firms and organisations. This is because such firms and organisations often pay more and offer better career prospects, job security and fringe benefits than smaller ones.
On the other hand, some people prefer to work for smaller firms. This is because they believe that the atmosphere will be more friendly than in a large firm.
NWF- Location
People may choose an occupation which is close to their home. This will mean that they do not have to spend much money or time on travelling to and from work.
Choice of occupation limitations
Qualifications they have
the skills they possess
the experience they have
place where they live.
The more occupationally mobile and the more geographically mobile people are, the wider the choice of occupation available to them.
Factors that determine the amount of pay received by workers
- demand for and supply of their labour- The higher the demand and the lower the supply of workers in an occupation, the higher the pay is likely to be.
- relative bargaining power of employers and workers
- government policies
- public opinion
- discrimination
Influences on the demand for workers
- amount of output they can produce
- price for which that output can be sold
Skilled workers are usually highly productive, producing both a high quantity and a high quality of output per hour, which is why the demand will be higher
Relative bargaining power of employers and workers
Effective when most of the workers are members of a trade union or professional organisation which can bargain collectively on their behalf.
Their bargaining position is strengthened by the knowledge that they would be difficult to replace with other workers and any industrial action taken by them would have serious consequences
Define National minimum wage (NMW)
a minimum rate of wage for an hour’s work, fixed by the government for the whole economy.
Government policies
Those policies, which promote economic growth, tend to push up wages throughout the economy as they increase demand for labour.
Specific government policies may have an impact on particular occupations
Government labour market policies, of course, directly affect wages- NMW
NMW has to be set above the market equilibrium wage rate
NMW can lead to unemployment but with an increase in demand there will be rising employment
Define Wage differential
the difference in wage
Public opinion
Public opinion tends to consider that jobs which involve long periods of study and training should be highly rewarded.
Wage claims made by the workers- For example, firefighters tend to regard their labour as being worth as much as that undertaken by the police. So, if the police get a pay rise, firefighters are likely to seek an equivalent pay rise.
Public opinion can put pressure on a government to revise the wages it pays to the public sector workers- A government seeking to gain or maintain popular support, may feel compelled to raise nurses’ pay.
In countries where social attitudes are against working women, it is harder for women to find employment and they may be receiving significantly less pay than their male counterparts.
Define Discrimination
Discrimination occurs when a group of workers is treated unfavourably in terms of employment, the wage rate, the training received and/or promotional opportunities.
Why are women paid less than men?
- Women tend to work for fewer hours than men
- Less well qualified than men
- More heavily concentrated in low-paid occupations
- Less likely to belong to trade unions and professional organisations
- They are still discriminated against.
Why earnings of occupations change over time
- Change in demand and/or supply of labour
- Changes in the stages of production
- Changes in bargaining power
- Changes in government policies
- Changes in public opinion
What can cause demand for labour to increase?
- An increased demand for the product
- A rise in labour productivity
- A rise in the price of capital
Why would the supply of workers decrease?
- A fall in the labour force
- A rise in the qualifications or length of training required to do the job
- A reduction in the non-wage benefits of a job.
- A rise in the wage or non-wage benefits in other jobs
State and define 3 sectors
Primary sector:
covers agriculture, fishing, forestry, mining and other industries which extract natural resources.
Secondary sector:
covers manufacturing and construction industries.
Tertiary sector:
covers industries which provide services.
How can governments change the wage rate ?
- Raising the national minimum wage will increase the pay of low-paid workers.
- Improved education may actually raise the wages of skilled workers, as it may increase their demand- employing more skilled workers should reduce costs of production and increase international competitiveness.
- Government policies on immigration can also affect wages
- Anti-discrimination laws may help to increase the career prospects and wages of disadvantaged groups
- Advances in technology- reducing demand for workers (if you substitute workers with technology) + can increase wages (eg. online shopping)
Define Specialisation
the concentration on particular products or tasks.
Define division of labour
workers specialising in particular tasks.
How does specialisation of workers lead to a lower cost per unit produced?
- Workers can specialize on the task they are best at and by doing this task over and over again, they become very good at it – practice makes perfect. This should mean that output per worker increases.
- Workers can be trained more quickly and knowledge about handling a full range of equipment may not necessarily be imparted to them.
- Time may be saved as workers will not have to move from one job to another and breaking down the production process into a number of tasks may also make it easier to design machinery, enabling the use of workers alongside.
How does specialisation of workers lead to a higher cost per unit produced?
- Workers may get bored doing the same task each day. This may lead to workers not taking care of their work and as a result making more mistakes.
- Boredom may also result in workers taking more days off due to sickness and staying in jobs for shorter periods of time.
- Having specialized staff may make it difficult for other workers to cover up for those absent, due to both sickness and training.
Advantages for specialised labour
- Lower cost per unit produced
- Can become very skilled and, if their skills are in high demand, can earn high wages.
- Concentrating on a particular task or job can enable workers to pursue their specific interests.
- Specialising in less demanding jobs can reduce the pressure on workers.
Disadvantages for specialised labour
- Higher cost per unit produced
- Demand for their services may fall and if they are trained or practiced in only one job, they may encounter problems getting another job.
- Concentrating on a particular task or job may be boring and may not make full use of a worker’s talents.
