Topic 3: Microeconomic decision makers

Question 1

Define money

Answer 1

Any commodity that can be used as a medium of exchange

Question 2

What is cryptocurrency?

Answer 2

A collection of binary data which is designed to work as a medium of exchange

Question 3

What are the characteristics of “good” money?

Answer 3

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

Question 4

Define a central bank

Answer 4

an authority that manages a nation’s money supply and banking system (aka monetary authority)

Question 5

Define household savings

Answer 5

household saving divided by household disposable income

Question 6

Define consumer spending

Answer 6

The total money spent on final goods and services by individuals and households for personal use and enjoyment in an economy

Question 7

List the 7 types of payment for labour

Answer 7

1: Wages
2: Salary
3: “Peace Rate” (if you produce nothing, you get nothing)
4: Commission
5: Gratuity (bonus)
6: Stock/share options
7: Fringe benefits

Question 8

What determines a person’s willingness to take a job? (except pay)

Answer 8

1: future prospects
2: degree of risk/danger (health)
3: job security
4: job satisfaction
5: degree of challenge
6: flexibility
7: qualification

Question 9

What determines the wage of a particular occupation?

Answer 9

1: degree of experience
2: skill
3: qualification
4: unsociable hours
5: danger
6: remoteness

Question 10

How are wages determined?

Answer 10

demand and supply of labour

Question 11

Factors affecting demand for labour

Answer 11

> demand for a good/service
availability of technology
productivity of labour
non-wage employment costs - sick days, can be gov. regulations etc.

Question 12

Define derived demand

Answer 12

the demand for labour is derived from the demand of goods or services

Question 13

Factors affecting the supply of labour

Answer 13

> demographics (age of population)
school leaving age
health of population

Question 14

Define division of labour

Answer 14

Breaking down production into specific tasks to increase productivity. You will see an increase in productivity when dividing labour and allocating them to different people.

Question 15

What is the role of a trade union?

Answer 15

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

Question 16

State the functions of trade unions

Answer 16

1: Negotiation
2: Defence of rights
3: Consultation
4: Advocacy
5: Community/Social

Question 17

State some industrial actions

Answer 17

1: Strike
2: Work-to-rule (bare minimum needed in a contract)
3: Go-slow (reducing productivity)
4: Sit-in (staying on premises without working until demands are met)
5: Walk-out (everyone leaves at the same time)

Question 18

Define closed shops

Answer 18

Everyone is in a union (cannot opt out of it)

Question 19

Define open shops

Answer 19

people can opt in or out

Question 20

Define a single union

Answer 20

Firms work with 1 union

Question 21

State the advantages of trade unions to workers

Answer 21

> representation
wages and benefits
protection from discrimination
advocate for training (increased skill), safety, security

Question 22

State the disadvantages of trade unions to workers

Answer 22

> fees
> "lowest common denominator"
> stigma
> closed shops, no choice
> "crossing the picket line" - not striking and going into work

Question 23

State the advantages of trade unions to firms

Answer 23

> consultation, productivity
highly skilled -> productivity
higher wages, more productive

Question 24

State the disadvantages of trade unions to firms

Answer 24

> less flexibility
higher costs, less profit
strikes are ruinous

Question 25

State the advantages of trade unions to government

Answer 25

> consultation
less inequality
more productive national workforce

Question 26

State the disadvantages of trade unions to government

Answer 26

> lower demand for labour
strikes on a large scale lower economic growth
prices increase as wages increase, so costs increase

Question 27

Define a sole trader

Answer 27

The firm is owned by one person, typically someone who is involved in the activity of the firm.

While the firm may have employees, they do not own the firm

(i.e. plumber, tradespeople)

Question 28

Define a partnership

Answer 28

Usually 2-20 people

Benefits are that finance is easier to raise and added skill/experience

(i.e. law firms, dentists, doctors)

Question 29

Define a private limited company

Answer 29

Sell shares of ownership “privately”. This means you can choose who you see shares to (typically family, friends etc)

Question 30

Define a public limited company

Answer 30

Typically owned by private shareholders

Where shares of ownership are sold openly on the public stock exchange and you cannot prevent public purchase

Question 31

Define a merger

Answer 31

two firms merge together to make one big firm with consent

Question 32

Define a hostile takeover

Answer 32

one firm buys shares from another firm and takes over the latter without consent

Question 33

How can we measure the size of a firm?

Answer 33

1: Number of Employees
2: Market share
3: Market capitalisation of a firm
4: Total revenue
5: Branches/outlets

Question 34

State the advantages of small firms

Answer 34

> legally, they are easy to set up and maintain (cost-effective)
proportion of profit to the owner is higher
voice and choice to the owner
personalised or “bespoke” service
easier to manage

Question 35

State the disadvantages of small firms

Answer 35

> finance is limited
less diversified/risk
capability of owner is a major determinant of success
large commitment needed from the owner
does not benefit from cost savings of being large

Question 36

How can a firm grow in size?

Answer 36

1. expansion into new markets
2. hire more employees
3. open more branches
4. mergers and takeovers

Question 37

What is horizontal integration?

Answer 37

The merging of 2 firms at the same stage of production (i.e. cheese shop purchasing another cheese shop

Question 38

What is vertical integration?

Answer 38

The merging of two firms at different stages of production for the same good or service

forward: to a later stage of production
backward: to an earlier stage of production

Question 39

What is conglomerate integration?

Answer 39

When a firm merges with another firm that produces an entirely different good or service (i.e. an entirely different production process)

Question 40

Define economies of scale

Answer 40

cost savings brought about by an increase in the scale of production, which results in falling average costs.

Question 41

Define internal economies of scale

Answer 41

cost savings brought about by an increase in the scale of production of the firm itself

Question 42

Define external economies of scale

Answer 42

cost savings brought about by an increase in the size of the market industry

Question 43

Define purchasing EoS

Answer 43

larger firms an buy in bulk, therefore resulting in a lower AC

Question 44

Define financial EoS

Answer 44

Larger firms are more “credit worthy”. As they tend to have greater resources & a longer credit history, banks will give them lower interest rates. They also tend to borrow larger amounts

Question 45

Define managerial EoS

Answer 45

Larger firms can afford to emplor the most efficient managers. This will boost productivity, therefore lowering ACs. Smaller firms cannot justify emoying a manager, (i.e. 2 employees) or can’t afford to attract the best talent with small pay

Question 46

Define technical EoS

Answer 46

Larger firms can justify & afford to purchase more efficient machinery. This will increase TC but increase Q by a greater amount, therefore lowering TC

Question 47

Define marketing EoS

Answer 47

larger firms can attract better talent to market for them, thus increasing quality as a result of the increase in scales. They can afford to market their products more widely, & therefore will experience on increase in sales & an increase in Q

Question 48

What determines how much demand there is for a factor of production?

Answer 48

1: Cost
2: Availability
3: Quality

Question 49

What is a labour intensive industry?

Answer 49

Where the total cost of labour is proportionally higher than the cost of other factors in production

Question 50

What is a capital intensive industry?

Answer 50

when the total cost of capital is greater in proportion to that of any other factor of production

Question 51

External EoS

Answer 51

> lower recruitment costs (ease of recruitment)
support services are widely available
quality of infrastructure

Question 52

Diseconomies of Scale

Answer 52

> rising average costs due to an increase in the scale of production

results in:
> miscommunication: if a firm grows in size, it becomes harder to communicate effectively
> harder to manage, decisions are slower: if a firm grows in size, it will have a narrow leadership structure (tiers of leadership)
>demotivation: leaders and owners are quite distant from entry level employees. This can make it hard to motivate staff.

Question 53

What is the difference between production and productivity?

Answer 53

Production refers to the total output of goods and services of a firm but productivity is a measure of how efficiently resources are used in the production process (i.e. output per hour)

Question 54

What is total cost?

Answer 54

sum of all fixed and variable costs