IGCSE Economics
Economics - The study of how scarce resources can be allocated to satisfy people’s unlimited wants. Scarcity - When there are not enough resources to satisfy our wants and needs.
Resources - The inputs that are used in the production process to produce goods and services. These are also called Factors of Production. Resources are limited.
Capital - Human-made goods that are used in the production of other goods. Payment comes in Interest
Entrepreneurs (Enterprise) - The person who takes the risk and has the skills to combine the other factors of production to produce goods and services. Payment comes in Profit
Labour - Human work or effort and the people who offer their services to businesses in exchange for wages. Payment comes in Wages
Land - Any resource that exists as part of a natural process. Can be renewable or non-renewable. Payment comes in Rent
Geographical mobility – the resource is capable of changing location Occupational mobility – the resource is capable of changing use
Opportunity Cost - The next best alternative foregone e.g. Mary could buy lettuce or chips with her $5 and she chose chips. Lettuce would be Mary’s opportunity cost.
Production possibility curve - a curve showing the maximum output of 2 products and combinations of these products that can be produced given existing resources and technology.
This company used to produce 8 Computers and 35 Books (A) with the resources it had, but now it sells only 5 computers but 60 books (B).
Therefore, this business has an opportunity cost of 3 computers as it decided to make more books. A
Consumer – people or firms who need or want goods and services
Producers – use resources to make goods and services to satisfy consumers’ needs and wants Wants – what we desire but do not necessarily need to survive e.g. games, bags
Needs – what we must have in order to survive e.g. food, clothing, shelter
Renewable resources – resources that will regenerate naturally within a reasonable time frame e.g. Fruit, Trees, Vegetables
Non-renewable resources – resources that will not regenerate naturally within a reasonable time frame e.g. Coal, Oil, Ores
Free good – goods that are available without limits e.g. air, sunlight
Economic good – goods that are scarce in comparison to people’s wants and need and therefore must be paid for e.g. television, paper, electricity
Public (collective) good – goods that are non-excludable and non-rival
Non-excludable – once paid for, it is impossible to stop people from using the good or service. This creates the ‘free rider’ problem
Non-rival – consumers do not have to rival each other for use of the good; it will not run out Merit good – a commodity or service that is regarded by society or government as deserving public finance e.g. education
Demerit good – a commodity or service that is regarded by society or government as not deserving public finance e.g. cigarettes, alcohol
Consumer good – goods that are used and paid by individuals or groups in the household sector Normal goods - goods we demand more of as our income increases e.g premium steak
Inferior goods - goods we demand less of as our income increases e.g second hand goods, ‘budget’ brand goods
Durable goods – goods that can be used more than once
Non-durable goods – goods that are perishable and do not last very long Positive good – beneficial to society e.g. clean water, medicine
Negative good – a cost to society e.g. pollution, waste products
Disposable Income – the money remaining after taxes are paid. If taxes increase, disposable income decreases
Demand - The quantity of a good or service that a consumer is willing and able to purchase at various prices at a certain time.
Law of Demand - as price increases, quantity demanded decreases, ceteris paribus and vice versa. Demand Schedule – a table showing the quantity of a commodity consumers are willing and able to buy at a range of prices.
Demand Curve - a graph showing the quantity of a commodity consumers are willing and able to buy at a range of prices.
Market Demand - the total demand that all the individual consumers in the market are willing and able to buy at various prices.
What changes demand? (Non-price factors of Demand)
Taste - things we like. They may be influenced by fashion, values, media, weather, seasons. Income - the money we gain from labour. When we earn more income we are more able to
purchase goods and services, therefore we demand more normal goods, and demand a lesser amount of inferior goods.
Complements - a good which is used in conjunction with another good Substitutes - a good which can be used in place/instead of another.
Supply – The quantity of a good or service that a producer is willing and able to produce at various prices at a certain time.
Law of Supply – as price increases, quantity supplied increases, ceteris paribus and vice versa. Supply Schedule – a table showing the quantity of commodity producers are willing and able to produce at various prices
Supply Curve – a graph showing the quantity of a commodity producers are willing and able to produce at various prices
Market Supply – the total supply that all the individual producers in the market are willing and able to produce at various prices
What changes supply? (Non-price factors of Supply) Productivity – output per unit of input
Environmental – natural conditions which affect output
Taxes – payments made to govt., Subsidies – payments from govt. to firms for support Restrictions on trade – Tariffs = tax on imports; Quotas = restriction on number of imports Other related goods – different goods that can be produced using same resources/inputs Legal – rules and regulations set by the government
Making a Curve: Title - Who, What, When
Origin - Your graph must start from zero
Axes - Price on vertical, Quantity on horizontal (must be labelled)
Do the D/S – Place a D or S next to the line to show it is a demand curve or a supply curve Scale - Graph must be even and consistent
Movements along the Curve:
A movement along the Curve occurs when a price factor changes Draw dotted lines from both points to the axes
Draw arrows from the dotted lines to show the movement
Label the dotted lines: P, P1, Q, Q1, with P1 and Q1 on the dotted lines with new point Shifts of the Curve:
A shift of the curve occurs when a non-price factor changes A shift to the left means the Demand/Supply has decreased A shift to the right means the Demand/Supply has increased
Draw dotted lines from where the change has occurred to the new axes Draw arrows from the line indicating where the line has shifted
Label the new line D1 or S1 and Label the new and old quantities Q1 and Q e.g.
P P1
Q Q1
Decrease in Price
Decrease in Demand
Q1 Q P D1 D P1 P Q1 Q
Increase in Price
Increase in Demand
Q Q1 P
D D1 D
Price Elasticity of Demand - measures the responsiveness of the quantity demanded of a good or service to a change in its price
Elastic Demand – a change in price brings about a large change in the quantity demanded. These have a coefficient greater than 1
Inelastic Demand – a change in price brings about a small change in the quantity demanded. These have a coefficient between 0 and 1
Factors of Price Elasticity of Demand
Proportion of Income – small proportion = inelastic; large proportion = elastic Addictiveness – addictive = inelastic; not addictive = elastic
Necessity or luxury – necessity = inelastic; luxury = elastic
Time period – short time period = inelastic; long time period = elastic Substitutes – not many substitutes = inelastic; many substitutes = elastic
Price Elasticity of Supply - measures the responsiveness of quantity supplied of a good or service to a change in its price
Elastic Supply – when quantity supplied changes by a smaller percentage than price. These have a coefficient greater than 1.
Inelastic Supply - when quantity supplied changes by a greater percentage than the change in price. These have a coefficient between 0 and 1
Factors of Price Elasticity of Supply
The cost of altering its supply – not easy to produce = inelastic; easy to produce = eslatic The ability to store the good – not storable = inelastic; storable = elastic
Time – long time to produce = inelastic; short time to produce = elastic
Inelastic Supply
Elastic Supply
Inelastic Demand
PED =
Elastic Demand
% Change in Quantity
Demanded
% Change in Price
PES =
% Change in Quantity
Supplied
% Change in Price
Special Price Elasticity Curves
Perfectly Elastic - a change in price brings about an infinite response (a tiny price change will cause a huge change in quantity demanded/supplied) giving a coefficient of infinity (∞)
Perfectly Inelastic – a change in price brings about no response (even if price drastically changes, Qd/Qs will stay the same) giving a coefficient of 0
Unitary Elasticity - this occurs when a percentage change in the price results in an equal change in demand giving a coefficient of 1.
Revenue
Total Revenue – total receipts of a firm from the sale of any given quantity of a product Total Revenue = Price x Quantity
Inelastic Demand Elastic Demand
If price increases, the quantity demanded will decrease a little
If price increases, the quantity demanded will decrease by a lot
If price decreases, the quantity demanded will increase a little
If price decreases the quantity demanded will increase by a lot Perfectly Inelastic Perfectly Elastic Unitary Elasticity
TR1 < TR2
TR2 < TR1
TR2 < TR1
TR1 < TR2
Market – a place/situation where buyers and sellers exchange goods Resource Market – where money is exchanged for inputs
Goods Market – where output is exchanged for money
Price Equilibrium – the price where quantity supplied and quantity demanded are equal
Surplus – when the quantity supplied exceeds the quantity demanded. In order to sell the excess stock, the producers lower the price and therefore raising the consumers demand. These market forces keep bringing the price down until equilibrium is reached and the market is ‘cleared’. Shortage – when the quantity demanded exceeds the quantity supplied. Consumers who have missed out on the good, bid the price up so producers increase the quantity supplied due as the good is now more profitable. These market forces will push price up until equilibrium is reached and the market is ‘cleared’.
e.g.
Change in Equilibrium:
A change in the Equilibrium occurs when Demand or Supply has increased or decreased. From both Equilibriums, draw dotted lines to both axes
Label the new points PEq1 (on Price Axis) and QEq1 (on Quantity axis), and the old points PEq, and QEq
Draw arrows from the old points to the new points (e.g. QEq to QEq1) Draw arrows from the old Equilibrium to the new Equilibrium
Equilibrium
S DShortage
Surplus
800 – 200 = 600
At $7, there is a surplus of
600 as producers are
producing more than
demanded.
At $3 there is a shortage of
600 as producers are
producing less than
demanded.
200 800
7
Producers
Private Sector – where scarce resources are owned by private individuals and are used in order to maximise profit
Firms – businesses owned by individuals or groups in the hope of making profit
Voluntary Organisations – driven by the fact that there is a ‘need’ in the community they can satisfy
Public Sector Producers: where scarce resources are owned by the government and are used to produce goods and services that they believe are good for the country
Central Government – These are the elected representatives who meet in Parliament and are concerned with the country as a whole. They are not driven by profit. They may provide goods and services e.g. public health and education.
Local Government – These are made up of officials and representatives that are elected by local communities. They provide public goods for the local area to look after the local people’s welfare e.g. libraries, swimming pools.
Economic Systems
Free Market Economy – when the private sector decides on the three economic questions. They will only produce goods and services that people will want to buy in the hopes of gaining a profit.
Advantages Disadvantages The consumer is sovereign. The market will
provide goods depending on what the customers demand.
Scarce resources will only be employed if there is a profitable use.
The market responds quickly to changes in demand.
Not all goods and services are provided in the free market e.g. public goods
Efficient use of resources, better machinery and better methods are encouraged.
The effects of production on society and the environment (such as pollution) can be ignored High incomes provide an incentive for people to
work hard and for entrepreneurs to set up and expand business
There may be encouragement to buy harmful goods (such as drugs and weapons). The government has to pass laws to stop this. Merits of the Market System
Resources are allocated by price – If the demand increases, price is increased and producers will allocate more resources to the production of this good.
Competition and Incentives – In a free market there are many firms competing with each other for market share and profits. This encourages innovation. Innovation will result a wide variety and high quality of goods being produced
Allocative Efficiency – when resources are allocated towards goods that reflect consumer demand. This consumer is said to be sovereign
Productive Efficiency – In a free market, firms will produce at the lowest possible cost per unit to earn high profits and avoid being pushed out of the market.
Dynamic Efficiency – arises when resources are used efficiently over time. The profit incentive will drive firms to innovate and continue to develop new, improved products that consumers desire
Market Failure
Market Failure – where the market mechanism fails to allocate resources efficiently. It occurs where: Differentiation of goods and services; tricking the consumers into paying for the good
o Branding: designer labels cost three times as much but may not be that much better o Labelling and Product Information: may be inaccurate
Market Power; other firms cannot enter in market, main firms can abuse price raise o Monopolies – where one firm is the sole supplier of a product.
o Oligopolies – where there are a few firms who supply the product. Insufficient quantity of goods and services provided
o Public goods may not be provided at all
o Merit goods may be provided but be charged high prices or shortage
o Demerit goods will be provided but will be over demanded and over produced External costs and benefits exist
o External Costs/Benefits – the costs or benefits to a third party due to the consumption and production activities of others
o Private Costs/Benefits – the costs or benefits on those who are directly involved in the decision to produce or consume a product
o Social Cost = private cost + external cost
o Social Benefit = private benefit + external benefit
o Uneconomic use of resources – if the social costs exceed the social benefits Inequality exists; if without skill, one will find themselves unemployed
o Poverty
o Unequal distribution of factor ownership o Unequal distribution of income
o Large income and wealth gap
Measures to correct Market Failure 1. Laws and Regulations
o The Government can intervene by making it so producers may not charge above a maximum price or below a minimum price
2. Subsidies
o The Government offers subsidies to encourage production of merit goods so they take into account external benefits.
3. Taxation
o The Government will place tax on demerit goods so they take into account external costs.
o On goods with inelastic demand, the price change will not affect it that much and consumers will still wish to purchase the good. Therefore Indirect taxes are ineffective on goods that have inelastic demand.
o On goods with Elastic demand, the price change will affect it a lot and consumers will no longer wish to purchase the good. Therefore Indirect taxes are effective on goods that have Elastic demand.
Mixed Economy – when the public sector and private sector decide on the economic questions for them solely. They do not have much influence over each other.
Employment – In a mixed economy, the government can create jobs and provide incentives to private firms to employ people. If it were a free market economy, there would be high unemployment from market economies.
Provision of Public Goods – In a mixed economy, the Government raises tax to provide public goods. If it were a free market economy, they would not be provided as it would be impossible to pay.
Harmful Goods – In a mixed economy, the government can make the production and consumption of harmful goods illegal or make it less attractive to use the good by placing a tax on it.
Social Costs – In a mixed economy, the government can use laws, taxes and fines to prevent firms from polluting the environment. If it were a free market economy, the costs to society (such as pollution) can go un-checked in a market economy because private firms will only take into consideration their own costs of production.
Equity - in a mixed economy the government can provide benefits or free healthcare for those that cannot afford to pay. If it were a market economy, many people on low incomes would be unable to buy many of the goods and services provided.
Planned Economy – when the public sector decides on the three economic questions. There are no private firms and very little consumer choice.
Allocation of Resources
Public Sector Private Sector
Money Usage Public Goods
Merit Goods
Supporting ‘vulnerable’ groups Helping private sector industries
Managing the economy Cover losses incurred by SOE’s
Private Goods
A mixture of merit and demerit goods
Sources of Income Taxation – this depends on the willingness of consumers to pay, rates
in other countries, income of the country and the reactions of firms and
workers to tax changes Privatisation – raises revenue in the
short term but if the asset was profitable
Borrowing from Overseas – this will depend on the governments ‘credit worthiness’ at home and abroad
Profits – this will depend on how profitable the business is Loans – this will depend on the firms
‘credit worthiness’ and size
Advantages Ensures resources are allocated to merit goods/public goods Ensures fewer resources are allocated
to demerit goods
Resources are used to produce goods and services of a high quality Low cost methods of production are
used, less waste of resources Higher levels of productivity, therefore more output gets produced
in less time Disadvantages If firms know the government is
paying, no incentive to keep costs down
State Owned Enterprises may lack expertise to complete projects on
time
Time consuming decision making
The firm may be a monopoly and therefore have less incentive to keep costs down. Resources will be wasted Resources may be over allocated to demerit goods and under allocated to
merit goods
Disadvantages of Consuming Resources Advantages of Consuming Resources Burning of fossil fuels for energy release harmful
emissions.
Employment rates will increase with higher rates of production and consumption
Deforestation destroys natural habitats for animal and plant species
The government will earn more tax revenue with higher production which can be used to finance
new facilities for education and healthcare etc. Pesticides and fertilisers used in crop production
have polluted rivers and waterways – clean water supplies are becoming short in supply
As some resources become low in supply, the cost of these will increase forcing firms to look
for alternative means and methods anyway Overfishing has depleted fish stocks and harmed
other marine animal populations
The trade position of the country may improve Growing air pollution has increased breathing
Money – a unit of measurement that allows us to value different goods. Functions of Money
Deferred Payment – allows for purchases on credit (loans) that can be paid back later Unit of Account – money can be used to measure value
Medium of Exchange – money can be used to carry out transactions between buyers and sellers. People are happy to accept it and know they can use it to buy something else. Store of Value – money can be kept and used later and still retain it’s worth
Characteristics of Money
Scarce – An increase in money supply can lead to a decrease in its value. For money to be valuable, it must remain scarce
Portable – It must be easy to carry
Acceptable – It is given legal status by the government
Recognisable – It must be easily recognized, yet forgery must be difficult. Copying will cause problems with money supply
Durable – It must be long lasting so it can be saved
Divisible – It must be easily divided up into small amounts for smaller transactions History of Money
1. Self-sufficiency – everything that someone needed, they produced themselves. However it was difficult to produce everything they needed as people had different skills,
2. Specialisation – when a person or group focuses on producing one main good or service. However, people were no longer independent and they had to trade with each other to get everything, thus people became Interdependent.
3. Barter – exchanging goods and services for goods and services. However Barter required a double coincidence of wants and people did not have a proper exchange rate and had no proper value of each good. It was also difficult to save goods and for people to bring all their goods and services to markets to trade.
4. Commodity Money – earliest form of money was goods e.g. pots, shells, etc. People were willing to accept goods in exchange for their produce.
5. Precious Metals – precious metals such as gold, and silver were scarce enough to make them possible money. Weighing and cutting tools were necessary – so rates of exchange could be fixed. Portability was a major problem.
6. Coins – precious metals of predetermined weight were moulded and stamped with the face of the ruler and the coins value. To stop shaving the edges of the coins “ribbed” coins were developed. Rulers would often debase the value of by mixing cheap metals with them, resulting in the precious metal content of coins to be virtually worthless today but people still accept such coins because they are generally acceptable.
7. Goldsmiths – first paper money was issued by goldsmiths, who accepted deposits of precious metals for safe-keeping – in return they issued paper receipts to the owner. The receipts were then often exchanged for goods or services.
8. Banks – Goldsmiths gave receipts for deposited precious metals and would be accepted as payment as the first paper money.
Banks
Commercial Banks – private sector banks which aim to make profit by providing a range of banking services. Their functions are:
To accept payments: people can deposit their money into a Current or Savings Account. To lend: banks make profit from charging higher interest rates on borrowing than saving.
People can borrow from banks in the form of Overdrafts and Loans.
To enable customers to make payments: there is a range of ways people can receive money and make payments e.g. credit card
Exchanging foreign currency
Storing important documents of customers
Providing advice: e.g. completing tax forms, and the purchase and sale of shares Selling insurance
Current Account – easily accessible account for everyday use
Savings Account – interest is paid and funds are not easily withdrawn
Overdrafts – customers can exceed their account limit up to an agreed amount
Loans – money borrowed for a particular purpose and paid back over a certain time period and when taken out, customers are usually required to provide collateral.
Collateral – something pledged as security for repayment of a loan, to be forfeited in the event of a default.
Central Banks – government owned banks which aim to maintain stability of the national currency and money supply. There functions are:
To act as a banker to the Government
To act as a banker to Commercial Banks: Commercial Banks have accounts at the central bank to settle debts between each other and draw out cash
To act as a lender of last resort: the central bank will lend to banks which are temporarily short of cash
To manage national debt: when government debt builds up, the central bank can issue government securities e.g. government bonds
Holds the country’s reserves of foreign currency and gold Issue bank notes: to central bank both prints and destroys notes
Operates monetary policy: this involves controlling the money supply to influence interest rates to keep inflation low and steady.
Mortgages – borrowing to purchase land/property that is secured against the land/property Islamic Banks – specialise in banking services that are compliant with Sharia’s Law which forbids interest charges and payments. Instead they charge fees and share profits.
Stock Exchange
Shares – a unit of ownership interest in a corporation or financial asset. People buy them because of the dividends, capital gain and to influence the running of a company.
Stock Exchanges – an organization for the sale and purchase of shares and other securities Listed/Quoted Companies – companies who sell shares to generate finance
Stock Brokers – those who trade on stock exchanges
Functions of Stock Exchanges:
To provide a market enabling individuals, firms and governments to buy and sell shares on the global stock market
To enable companies to grow by merging or taking over another company Mobilising savings for investment
To supervise the conduct of firms and brokers. Any firm that wishes to be quoted on the stock market has to meet certain requirements such as providing a range of information for prospective buyers
To provide up to date information on the market price of different stocks Bear Market – when share prices are falling
Bears – someone who sells shares expecting their price to fall Bullish Market – when share prices are rising in general Bulls – someone who buys shares expecting their price to rise
Factors that Affect Share Prices
Takeovers – buying up shares to gain control of a firm will usually drive up the price Interest Rates – if increased, people will want to save more in banks so less money is
available for investment in shares. If people are saving more, they are spending less. This will reduce profit for firms; share prices for firms will decrease.
Profit record – a firm with high/rising profits will see an increase in their share price Issue of new shares – an increase in the supply of shares of a firm will decrease the share
price
Government policy – if governments cut corporate taxes, firms will have lower costs of production. If governments cut income taxes, consumer expenditure will increase
Dividends and Yields
Dividend – a share in the profits of a company that is earned by a shareholder. They can be expressed as the nominal price or market (current) price of the share.
Nominal Price – the price at which the share was issued
Yield – the dividend expressed as a percentage of the market price and represents the return on the money paid for a share.
Occupations and Earnings
What influences a person’s choice of occupation?
Wage Factors – firms advertise a wage rate for jobs to attract people to supply their labour. They can be paid for in many ways:
o Time rate – rate of pay per hour worked
o Piece rate – rate of pay per unit of output produced. A worker who produces lots of output will earn more than worker who does not. This can be used to create an incentive for workers to increase productivity.
o Fixed annual rate/salary – an agreed amount between the employer and employee will be divided into equal monthly/fortnightly payments regardless of the number of hours actually worked.
o Performance related payments – usually offered to individuals or teams or workers who are highly productive. The more sales someone makes, the more commission. Non-wage Factors – some jobs don’t necessarily offer high wages yet people are still
attracted to them for other reasons such as:
o Work Environment, Travel Distance/Benefits, Job Security, Training Opportunities, Qualifications required, Holidays, Fringe Benefits, Pension Entitlement, Job Satisfaction
Why do some occupations earn more than others?
Different abilities and qualifications – some jobs (e.g. an accountant) require more training and qualifications than those that don’t. As supply is likely to be more limited due to the necessity of training, the wage will be higher.
‘Dirty’/Risky jobs and unsociable hours – this type of work usually offers a high wage to attract a supply of labour.
Job Satisfaction – a job that is viewed by many as a rewarding occupation (e.g. nursing), attracts a large supply of labour. This results in low market wage rates.
Lack of information about jobs and wage – some workers may work for less than they could in other jobs as they are unaware of better paid jobs elsewhere.
Labour Mobility – when workers can move easily between countries. If a worker can move easily, they can easily move to the job that offers that most pay.
Changes in Earnings Over Time
Entry to the workforce: A young employee will receive relatively low earnings, This is largely because of a lack of work and skills and experience. They can gain skills through
apprenticeship, management training schemes or other training opportunities.
Skilled workers: The more experience an employee has, the more opportunities there are to increase earnings as the more skilled a worker becomes, the greater the demand: more skilled employees will be in shorter supply and they will be able to command higher earnings. Higher wages must be offered to attract highly skilled workers.
End-of-career empoyees: Employees may not keep up to date with changing trends or technologies and therefore have outdated skills, and there wages may decrease. Due to their long-time commitment to a business, they may continue to get high wages.
The Labour Market
Demand for Labour Supply of Labour
Firms need labour to produce goods and services for consumers.
The supply of labour for a job will depend on how many people are willing to do that job. Influenced by the amount of output workers can
produce and the amount its sold for The higher the wage is the more expensive it is for firms to higher labour, therefore when wage
increases, quantity demand for labour decreases
It is likely as the wage rate increases, more people are attracted to doing the job, therefore
when wage increases, quantity supplied of labour will increase
Differences In Earnings Between Groups The Public-Private wage gap
o Public Sector may be expanding and therefore causing more demand for labour, causing wages to be high. It may also be contracting causing less demand for labour, causing wages to be low. There may be a greater supply of labour due to non-wage factors of choosing an occupation and thereforefore wages will be low.
o Pirvate Sector will offer high wages to attract the most skilled individuals who can work as efficiently as possible. However, a large number of unskilled labour is in the private sector and thus earn low wages due to the large supply and small demand. Wages in private sector may also appear lower as fringe benefits are no included. The Male-Female wage gap
o Females generally work in lower paying jobs and often take breaks to raise children which limits career progression
o Males generally work full time rather than part-time to look after children The Skilled-Unskilled wage gap
o In LEDC’s many low-skilled workers are willing to work for low wages.
o In MEDC’s firms are competing for skilled workers and offer high wages to attract them
The Industry wage gap
o Agricultural Industry: In many Asian and African countries, there is a surplus of agricultural workers, resulting in low wages
o Manufacturing Industry: This is bigger than agricultural industry, resulting in more demand for labour and therefore higher wages
o Services Industry: This has the highest demand for workers, thus the highest wages. S
D Wage that will
be offered in the market
Wages ($)
Trade Unions
Trade Unions – an association which represents the interests of a group of workers. It exists to negotiate on behalf of their members. There are four types:
Craft Unions – they represent workers with particular skills e.g. plumbers and electricians working in different industries.
General Unions – they represent workers with a range of skills in a range of industries Industrial Unions – they represent workers in a particular industry e.g. railways White Collar Unions – represent professional workers e.g. teachers, pilots
Functions of Trade Unions
Negotiate wages and other non-wage benefits on behalf of their members Provide educations and training schemes
Protect workers’ rights Provide recreational facilities Fixing national minimum wage
Why will workers make wage claims? Workers working harder and have increased productivity The firm is making higher profits
Maintain wage differentials e.g. if a Nurse gets paid 60% the Doctor’s pay, and the Doctor’s get a pay rise, Nurses will want a pay rise to be back at 60% and restore the differential. Keep up with the cost of living (inflation).
Collective Bargaining – the process of negotiating wages and other working conditions between union members and employers. Collective bargaining exists as individual employees may not have the skill, time, willingness or bargaining power to negotiate with employers
Factors affecting the strength of a trade union
Number of members – more members means more funds to finance activities
High level of output and activity – when output and incomes are high, firms compete for existing workers. Therefore they are more willing to agree to union requests.
High level of skills – unions representing skilled workers are in a better negotiating position as it is costly to replace skilled labour
Consistent demand for the product – unions representing workers who produce goods and services essential to consumers and where there are few substitutes in a strong bargaining position.
High level of public support – if the public supports employees, the firm may lose credibility
Arbitration – needed when trade unions and employers fail to resolve a dispute. The Government of an independent third party will join negotiations.
Benefits of a Trade Union to employers
Short Time Consumption – it is cheaper for firms to negotiate with a union than with individual workers as it is less time consuming
Increase in Productivity – Unions encourage workers to undertake education and training. This encourages productivity.
Reduction in Conflict – provided outlets for workers to channel their anger. Industrial Action
Overtime ban – workers refuse to work more than their normal hours Strike – workers withdraw labour
Go-slow – working deliberately slowly to reduce production
Work To Rule – workers deliberately slow down production by following every rule and regulation Effects of Industrial Action on:
Firms
o Higher costs, less output, less revenue and lower profits o Lose customers to rival firms
o Damages the firm’s reputation Union Members
o Employees will lose pay and may even lose their jobs due to a decrease in demand for their product caused by losing customers
Consumers
o Unable to obtain goods and services they need o Pay higher prices if firms pass on their increased costs
Union Influence the Supply of Labour
Unions can restrict the entry of new workers by insisting that new workers have high qualifications or skills
Closed Shop – all workers in a place of work must belong to a trade union. This is outlawed in a number of countries.
Open Shop – where firms are able to employ workers that are or are not involved in a trade union.
Single-union Agreement – where a firm agrees a single union can represent all its workers. Because this will give considerable bargaining power to a union, a firm will only agree to this in return for commitments by the union on pay, productivity improvements and not to strike.
Consumers
Spending – the purchase of goods and services to satisfy wants and needs and to improve standards of living. It is influenced by:
Disposable Income – when consumers have higher incomes, they are likely to spend more. Wealth – the more wealthy a person is, the higher their spending will be.
Consumer Confidence – if consumers are confident about their jobs and future income, they are encouraged to spend more now. It can change over an economic cycle.
Interest Rates – when interest rates are high, consumers are more likely to save than spend Taste, Age, Gender, Family Circumstances, Religion
Savings – a reduction in the use of disposable income now to use at a later time. People save because of:
Consumption – people may save now to make big purchases in the future
Interest Rates – when interest rates are high, people earn more interest from saving so people will save more
Consumer Confidence – if people believe circumstances will change they will save more now Availability of saving schemes – the more ways to save, the more likely people are to do so Borrowing – the lending of money or items to someone else and paying them back later. People unable to repay their debts are declared bankrupt or insolvent. Their personal assets may get repossessed by the lenders or creditors.
Why do people borrow? To finance necessities or luxuries
To purchase houses – when people buy houses, they typically take out a mortgage to do so. However, property is an asset so it can be considered a form of saving.
To start a business – entrepreneurs will borrow money to start their business and will repay the loan with future revenue
To fund education and training schemes – people will borrow for these and repay the loan with a higher income job in the future, which they get from their new skills.
Factors that influence borrowing
Interest Rates – when interest rates are high, the cost of borrowing is high and loans will take longer to pay. People are therefore less likely to borrow.
Wealth – wealthy people may be more likely to borrow for certain purchases as they are confident in their ability to repay the debt – they can sell off assets if needed. A bank is also more willing to lend to wealthy individuals as they are less likely to default on the loan. Consumer Confidence – confidence in a person’s future financial situation will influence
their decision to borrow.
Availability of Credit – the more available credit is the more likely people are able to
borrow. These days, people can organise overdrafts and loans over the internet and can also buy goons on hire purchase in easy monthly instalments.
Business Organisations
Sole Trader/Proprietor – a business organisation owned and controlled by one person. It may employ other people to work in the business but will only ever have one owner.
Advantages Disadvantages It is easy to set up. Most sole traders need little
capital to start up with. This is because they have few legal formalities, modern technology has reduced the cost of set up and it can be run from home.
Sole traders lack capital. It is difficult to expand as sole traders may have little capital, used up their loans and find it difficult to raise finance through savings. Banks consider sole traders risky as they face competition.
It is a personal business. The owner has close contact with customers and staff meaning they can easily find out peoples wants.
Unlimited Liability. If the sole trader is unable to repay any business debts, they are personally responsible for these and may lose possessions. The sole trader is their own boss so can make all
the decisions on their own and will receive all the profits.
Full responsibility for the business. The sole trader is responsible for running the business. This means working long hours
Partnerships – a legal agreement between two or more people (usually no more than twenty) to own and run a business jointly and to share any profits.
Advantages Disadvantages It is easy to set up. As with a sole trader, there
are few legal requirements in drawing up a partnership agreement. Most partnerships are not required to publish annual financial accounts
Partnerships lack capital. Many countries place a limit on the number of partners allowed in a partnership. With fewer people able to put forward capital, expansion can be difficult Partners can invest new capital to finance
expansion. New partners can buy shares in the ownership of the business which can be used to expand the business in return for a share of the profits which motivates owners to work hard.
General partners have joint unlimited liability. As with a sole trader, general partners may lose personal possessions if the business is unable to repay its debts. Each partner can be held responsible for the actions of other partners. There are more ideas and skills than a sole trader Slow decision making due to disagreements.
Some may be more lazy/inefficient than another. Sleeping Partner – a partner who usually supplies the business with capital, however they do not have an active role in running the business. These have limited liability.
Joint Stock Companies – people and organisations who invest in shares become part owners of the company. They can sell stocks/shares to raise capital.
Private Limited Companies – have one or more shareholders but can only sell shares to people that are known to the existing shareholders.
Advantages Disadvantages Easy to raise finance. Compared to a sole trader
or partnership, private limited companies can raise finance more easily through sale of shares.
Cannot sell shares to the public. Shares can only be sold privately and will place a limit on the amount of finance able to be raised.
Only the board of directors, as elected by shareholders (not shareholders), are concerned with everyday management.
Required to disclose financial information. In some countries, they are required to publish details of their financial performance by law. Limited Liability. Only the money invested is at
Public Limited Companies – has at least two shareholders and can sell shares to anyone through a stock exchange.
Advantages Disadvantages Shares can be sold publicly. This allows the
company to raise large amounts of finance to fund its operations
Expensive to form. Many legal documents and company investigations are needed. Advertising of shares can also be costly.
Shares can be advertised. This can be published in newspapers and magazines. This creates interest and attracts many investors.
Management diseconomies. Disagreements between managers and owners can occur and slow down decision making.
Must hold Annual General Meetings. These are held to keep shareholders informed of the position of the business. These can be expensive and time consuming to set up.
Vulnerable to takeovers. Original owners may lose control of their company if one company buys the majority of the shares.
Divorce of ownership from control.
Owners/shareholders can lose control of the company e.g. large shareholders can out vote minor shareholders
Required by law to publish detailed annual reports and accounts
Multinational Corporations – a firm that has business operations in more than one country, but usually has its headquarters based in one country. Advantages of being a multinational corporation include:
A large market will increase revenue
Can avoid trade barriers by setting up operations in countries that impose tariffs and quotas Minimise transport costs by producing in countries close to resources or consumer markets Minimise wage costs by producing in countries with low wages
Can raise large amounts of capital for expansion, research and development or attract highly skilled labour
Reduce the average cost of producing each unit of output because they produce on such a large scale
Positive Economic Impacts Negative Economic Impacts Increase investment in modern equipment and
cutting edge technologies
Some multinationals may exploit workers in low-wage economies
They provide jobs and incomes for local workers Natural resources can be exploited and cause damage to natural environments
They bring new knowledge and skills which can help domestic firms to improve their own productivity
Multinational may use their power to obtain generous subsidies and tax advantages from governments.
They pay tax on profits which boosts government revenue
Profits may be switched between countries so that multinationals avoid paying taxes
They can increase export earnings through international trade
Local firms may be pushed out of the market as they are unable to compete
Cooperatives – business organisations owned and controlled by a group of people to undertake an economic activity for mutual benefit. There are two types of cooperatives.
Worker cooperatives – the people who work in the business own it, make the decisions and share the profits
Consumer cooperatives – retail enterprises owned and controlled by their customers
Advantages Disadvantages
Owned and controlled by members May be badly run as workers have little business experience
Members of consumer cooperatives enjoy profit dividends or lower prices
May find it difficult to attract new members and raise additional capital for the business
Workers in worker cooperatives take business decisions and share profits
Many consumer cooperatives have been forced out of business by larger companies
Members have limited liability
Public Sector Organisations – organisations owned and controlled by governments
Advantages Disadvantages Decisions are based on social costs and benefits Can be difficult to manage and control
Will not abuse market power May become inefficient and produce low quality products and charge high prices as there is no competition
Planning and coordination of an industry is easier if it is done by one party
Industries which provide basic necessities e.g. healthcare will charge low prices if run by the government
Will need to be subsidies if they are making losses. Government revenue used for subsidies will have an opportunity cost
Privatisation – the sale of public sector assets to the private sector
Benefits Non-Benefits
Private sector producers are motivated by profit and are therefore more efficient
In the absence of competition, private firms may exploit market power
Private sector firms more likely to invest and encourage economic growth
Private firms don’t consider external costs or benefits
Goods will be produced at lower costs and sold for lower prices
The enterprise may have been a good source of revenue for governments. Profits from the SOEs could have been used to fund other areas of the economy
Goods will reflect consumer sovereignty
Stages of Production
Primary Sector – involved in the collection and extraction of raw materials e.g. Agriculture, Mining, Forestry, Fishing, Quarrying
Secondary Sector – processes the raw materials into semi-finished and finished goods e.g. leather hides leather handbags
Productivity
Productivity – the amount of output that can be produced from a given amount of input/resources PRODUCTIVITY =
Labour Productivity – the amount of output that can be produced from a given amount of labour AVERAGE PRODUCTIVITY OF LABOUR =
Production – the act of processing raw materials. Production is measured in units of output Labour-Intensive – firms that use more labour than capital
Capital-Intensive – firms that use more capital than labour
Factors that influence the demand for Capital and Labour
The Productivity of Labour and Capital – when there is a high productivity of capital or a low productivity of labour, there is a higher demand for capital and lower demand for labour, and vice versa.
Market Prices for Labour and Capital – Labour and Capital are substitutes so when the price of labour increases, the demand for capital increases and vice versa.
Profit Levels – if profit levels are high, they are able to buy expensive capital which is more efficient than labour, therefore demand for labour will decrease and demand for capital will increase
Business Confidence – If a firm has high business confidence, meaning confidence in business for the future, demand for both labour and capital will increase and vice versa. Demand for Goods and Services – when there is a high demand for goods and services,
there is a high demand for labour and capital as the firm will want to produce as much of the good as possible so they can earn a higher total revenue through the sale of more output and therefore gain more profit
Interest Rates – when interest rates are high, loans are more expensive to pay off and therefore firms are less willing to get loans for expensive capital. This causes demand for capital to decrease and demand for labour to increase.
Factors that influence Land
Productivity – the greater the output from land the higher will be the demand for it Location – city centre sites can attract a large number of customers so there is a higher
demand for land there and therefore rent increases
Country Wealth – as countries become richer, the demand for water increases. Water is needed for domestic, agricultural, industrial, and energy production purposes
Costs of Production
Fixed Costs – costs which do not change with output. These must be paid even when output is zero e.g. electricity bill, rent
AVERAGE FIXED COSTS =
Variable Costs – costs of variable factors that do change with output. E.g. wages, raw materials AVERAGE VARIABLE COSTS =
Total Costs – all costs required in the production process
TOTAL COSTS = Fixed Costs + Variable Costs Average Costs – the cost required to produce one unit of output
AVERAGE COSTS =
Revenue – total receipts of a firm from the sale of any given quantity of a product TOTAL REVENUE = Price x Quantity
AVERAGE REVENUE PER UNIT =
Profit/Loss – how much money the firm has made once costs of production have been taken into account
PROFIT/LOSS = Total Revenue – Total Cost Breaking Even – the level of output where total revenue is equal to total cost
Long Run Average Cost Curve – a graph showing the average costs of a business or firm in the long run. These curves are U-shaped because as firms increase their scale of production they will first experience economies of scale. After reaching a certain level of output they will experience diseconomies of scale. Total Costs Variable Costs Fixed Costs Total Revenue Break Even Point $ Output
Economies of Scale
Economies of Scale – when average costs decrease as a result of producing on a large scale Internal Economies of Scale – average costs per unit decrease as scale of production is expanded within a firm.
Purchasing Economies – larger firms buy their supply in bulk. Suppliers generally offer price discounts for bulk purchases as delivery is cheaper.
Marketing Economies – large businesses may buy their own vehicles for distribution. This will reduce costs as they do not have to pay the profit margin or another firm. Fixed costs will be spread over a larger amount of output.
Financial Economies – large firms can generally borrow money at lower interest rates as banks view them as less risky than small firms.
Technical Economies – large firms generally have sufficient finance for investment in new machinery, training/recruiting skilled workers, and research and development.
Risk-bearing economies – as larger firms tend to have more customers, they are safe from being too reliant on one customer. Diversification allows large firms to spread their risk over a range of products.
External Economies of Scale – when the expansion of an entire industry benefits all firms within that industry
Access to a skilled workforce – Large firms may have access to a skilled workforce because they can recruit workers trained by other firms within the industry
Ancillary firms – firms which develop and locate near large firms in particular industries to provide them with specialised equipment and services
Joint Marketing Benefits – firms locating in the same area well known for producing high quality produce may benefit from reputation
Shared infrastructure – the growth of one industry may persuade firms in other industries to invest in new infrastructure
Diseconomies of Scale
Diseconomies of Scale – when firms experience an increase in average costs as they try to increase production and expand too much and too quickly
Management Diseconomies – if a firm has offices in different locations, produce many products and have many different layers of management, this can slow down the decision making process
Labour Diseconomies – large firms generally employ computer-controlled equipment and machines. Workers operating this machinery may become bored and become less productive.
Agglomeration Diseconomies – this can occur when a company merges with too many different firms at different stages of production. It can become difficult to coordinate all different activities of the merged firms.
Goals of Producers Profit Maximisation
o Profit is maximised when the gap between total revenue and total cost is maximised. Firms can achieve this by reducing costs (by training workers or upgrading equipment) or increasing revenue (by raising price or increasing demand).
Growth
o Firms try to increase their size and share of the market, typically by providing goods at a lower price than their competitors and will contribute to the goal of profit maximisation Social Responsibility
o Some firms may choose to donate to charities or ensure they source their materials from countries who produce goods fairly e.g. using child labour
Environment
o Some firms may use production methods that conserve the natural environment. This may increase costs, but is likely to also increase revenue as consumers are becoming increasingly concerned with buying environmentally friendly products
Profit Satisficing – sacrificing some profit to achieve other goals Effects of changes in profits
Increasing Profits Decreasing Profits Make it easier for a firm to obtain external
finance e.g. shareholders are more likely to want to buy shares/banks are more likely to give loans
If the decrease in profit is short lived, it may not have significant impact
Provide firms with more finance to update their capital equipment and technology
Firms may have to lower production, or stop production altogether
May attract more experienced
workers/managers/directors to the business
Firms may find ways to cut costs e.g. letting go of workers
May encourage other firms to enter the market
Size of Firms Number of Employees
o Small Firms – generally have less than fifty employees o Large Firms – may employ hundreds or thousands of workers Organisation
o Small Firms – owners and employees carry out all function between them o Large Firms – divided up into specialised departments to carry out different
functions Capital Employed
o Small Firms – generally have little amounts of capital due to lack of finance o Large Firms – more capital means a firm can increase its scale of production Market Share – the share of total market sales for a good that one firm is able to capture
o Small Firms – difficult to keep up with output of large firms so small market share. If market is small, then a small firm may be able to gain a large market share.
Growth
Internal Growth – a firm expanding its scale of production through an increase in factors of production, financed by profits, loans and the sale of shares
External Growth – integration through a merger or takeover Merger – one or more firms agree to join together
Takeover – one company buys enough shares in another company so it can take overall control Horizontal Integration – a merger/takeover of firms that produce the same type of good or service
Advantage Disadvantage
Fixed costs spread over a larger number of units – average costs decrease
Larger firms may dominate the market and abuse market power
More specialised machines and labour Bulk buying
Vertical Integration – a merger/takeover of firms at different stage of production
Forward integration – when a firm in an initial sector joins with a final sector e.g. primary sector secondary sector, secondary sector tertiary sector
Backward integration –when a firm in a final sector joins with an initial sector e.g. tertiary sector secondary sector, secondary sector primary sector
Advantage Disadvantage
Firms can ensure they have access to raw materials
May be management problems operating in a new sector of economy
Firms can ensure they have access to sales outlets
Conglomerate (Lateral) Integration – a merger/takeover of firms making different products
Advantage Disadvantage
Diversification – if demand for one product decreases, firm can still earn profit from another product
Management problems in producing a range of products
Why do some firms remain small?
A small market – if there is only a small number of customers there is no point in expansion Limited access to capital – small firms find it difficult to get loans from banks as they can’t
compete with larger firms
New technology has reduced scale of production needed – easier for small firms to get access to modern equipment and internet allows firms to reach suppliers and customers worldwide
Market Structures
Perfect Competition – a market structure with the highest level of competition.
Monopoly – a sole supplier of a product. It is formed through mergers/takeover, access to resources, or if a firm has been very successful in cutting costs and responding to changes in consumer
demand, making it able to drive competitors out of the market.
Structure Perfect Competition Monopoly
Product Homogenous Only supplied by one
No. of buyers and sellers Many – are perfectly informed of business activity
One
Share of market Small 100%
Entry into Market Free Difficult to enter because of legal barriers, new firms unable to compete, expensive to set up firms, existing brand loyalty
Exit out of Market Free Difficult to leave because of long-term contracts to provide a product of because Sunk costs can’t be recovered if firm leaves industry.
Price Maker/Taker Price Taker – will not raise price as sales will be lost to their
competitors
Price Maker – changes in supply affect market price
Profits for Firm Normal Supernormal
Efficiency Competition gives incentive to be
productive and efficient
Absence of competition can lead to inefficiency
Access to Resources Many firms wanting same resources
Can gain access to all resources. Government can make it illegal for other firms to enter the market and a patent can stop other firms from producing the product.
Macroeconomic Aims of the Government
Macroeconomics – concerned with the whole economy (not just individual producers and consumers)
1. Full Employment – when people who are willing and able to work can find work. People who do not want to work are not part of the labour force e.g. children, students, housewives
UNEMPLOYMENT RATE =
2. Price Stability – encourages greater economic growth and prevents a country’s products from losing international competitiveness. If people can anticipate what the price level is going to be they will not act in a way that will cause prices to rise. A common target for inflation is between 1-3%.
3. Economic Growth – when there is an increase in the output of the economy and in the long run, when there is an increase in the economy’s productive potential
Aggregate Demand – the total demand for an economy’s products
AGGREGATE DEMAND = Consumer Expenditure + Investment + Government Expenditure + Export Receipts – Important Payments (AG = C + G + I + X – M)
Aggregate Supply – the total output of producers in the economy. The AS curve starts out as elastic as the economy has many unemployed resources, letting them increase production without raising prices. The AS curve becomes more inelastic as the economy approaches full employment of resources as firms will have to compete with each other for the use of resources, impacting prices. Actual (short run) economy growth – there is an increase in the output of the economy
Potential (long run) economy growth – the total output of the economy has increased B A Capital Goods Consumer Goods Price Level Real GDP AS AD1 AD
At point A, 100 capital goods and 100 consumer goods are being made. At point B, 200 capital goods and 200 consumer goods are being made. The country’s output has increased.
Capital Goods Consumer Goods Price Level Real GDP 100 200 200 100
When Aggregate Demand increases, it shifts to the right. This causes the country’s output to increase.
PPC PPC1 AD
AS AS1
The productive potential of the economy has increased. This can be achieved through a rise in the quality or quantity of factors of production.
The maximum output that the economy can produce (AS) has increased.
4. Balance of Payments – a record of a country’s economic transaction with the rest of the world. In the long run, governments want export revenue and import payments to be equal.
This is because if import expenditure exceeds export revenue the country will go into debt, and if export revenue exceeds import expenditure, consumers will not be enjoying as many products as possible as standard of living is lower.
5. Redistribution of Income – governments can redistribute money from the rich to the poor through taxation (rich are taxed more than poor) and spending (government can spend more to provide more benefits to the poor).
Conflicts between Government Aims
Full employment vs. Price Stability – policy measures to reduce unemployment, can increase inflation. E.g. the Government may raise expenditure on pensions to raise consumption. Firms will increase production to meet extra demand and more jobs are created. However the increased aggregate demand may lead to higher inflation.
Balance of Payments vs. Economic Growth – policy measures to reduce expenditure on imports may reduce economic growth. E.g. the government may raise income tax to reduce household
expenditure on imports. Less disposable income may also cause demand for domestic products to decrease causing a fall in aggregate demand and therefore economic growth.
A government’s choice on which aim to pursue will depend on: the relative size of the problem, the consequences of the problem, and the degree of concern from the country’s citizens.
Macroeconomic Policies Fiscal Policy – refers to changes in government spending and taxation.
Expansionary/reflationary fiscal policy – involves increasing expenditure and/or decreasing taxation. This helps to achieve:
Economic Growth – firms are able to produce more due to paying less tax
Full Employment – more jobs available due to increased business activity wanting labour Price Stability – during a recession the government will wants people to buy more
Balance of Payments – if economy has been in state of surplus for a long time, lower taxes may encourage consumers to buy more imports
Redistribution of Income – government spending could be spent on supporting the poor Contractionary/deflationary fiscal policy – involves decreasing expenditure and/or increasing taxation. This helps to achieve:
Redistribution of Income – more money given to the government to give to the poor Full Employment – with more from the government, the poor could get trained to get a job Price Stability – during an inflation of prices, the government will want to lower prices
through less demand for the product
Balance of Payments – if economy has been in a state of shortage for a long time, higher taxes may encourage consumers to buy less imports
Monetary Policy – includes changes in the money supply and interest rates. Demand for Money
Expansionary/reflationary monetary policy – involves lowering interest rates or increasing the money supply. This helps to achieve:
Price Stability – during a recession, the Government will want people to buy more by lowering the interest rates so people save less
Economic Growth – firms can borrow more and increase the level of output Full Employment – firms will require more demand with an increase in output
Contractionary/deflationary monetary policy – involves increasing interest rates or lowering the money supply. This helps to achieve:
Price Stability – during an inflation of prices, the Government will want to reduce the prices by having more people save than spend
Supply-side policies – designed to increase the productive potential of the economy. E.g. education and training will increase labour productivity, reforming trade unions may make labour more
productive, and privatisation may increase productive capacity as private firms generally invest more and work more efficiently than State Owned Enterprises.
Increasing the effectiveness of Macroeconomic Policies
Multiple Policies – governments should use one policy measure for each of its objectives Accurate Information – a vital piece of information is the size of the multiplier effect of any
increase in aggregate demand. This is when the final impact on aggregate demand is greater than the initial change
Quick Implementation of Policies – if policies are delayed, economic activity can change and the policy may no longer be useful
MSd MS MSi
Interest Rates
Quantity of Money MD
