Economics IGCSE - EVERYTHING
The merits of in trade (that is, the reasons why countries trade with one another) include the following:
- Access to resources - international trade enables firms and consumers to gain access to goods and services that they cannot produce themselves. For example, countries without a manufacturing industry, like the Maldives, can purchase laptop computers, motor vehicles and Hollywood movies produced around the world. - Lower prices - Free trade reduces the costs of trading, whereas protectionism increases the costs of trading. For example, it is cheaper for Germans to purchase foreign-produced smartphones made in China and Taiwan because of the high labour costs in Germany. Unfavourable weather conditions in Sweden mean it is better of importing tropical fruits from Jamaica. By contrast, the imposition of trade barriers would mean that 001:h domestic firms and consumers have to pay more for imported goods and services. • Economies of scale - By operating on a larger scale in global markets, firms can benefit from economies of scale (see Chapter 14). These cost savings can be passed on to consumers in the form of lower prices and/or kept by the firms in the form of higher profits. • Greater choice - Free trade enables consumers and firms to access a larger variety of goods and services from different producers around the world. For example, while Germans can choose from domestic motor vehicles such as Audi, BMW or Mercedes-Benz, they are also able to choose from foreign suppliers such as Lexus (Japan), Jaguar (India) and Cadillac (USA). • Increased market size - international trade enables firms to earn more revenues and profits. For example, US firms can sell products to a domestic market of 300 million people, whereas they can sell to a larger market of more than 2.4 billion potential customers by selling their products to China and India. • Efficiency gains - Free trade forces domestic firms to focus on improving the quality of their output due to foreign competition. For example, Japanese car- makers and South Korean electronics firms have forced US producers such as General Motors and Apple to create better-quality products. By contrast, protectionist measures give domestic firms a false sense of security, which can make them inefficient. • Improved international relations - The absence of trade barriers encourages international trade and cooperation between countries. By contrast, if a country uses international trade barriers, other nations are likely to retaliate by doing the same.
conserving resources vs using resources
- All economic activities involve social costs and benefits and every decision has an opportunity cost. - For example, the decision to allow a firm to build a factory on a green field has a cost to the environment through the loss of green space, increased traffic etc. - BUT it also brings jobs to the area and creates business for related firms
Advantages of being a sole trader
- Can set up the business easily - Sole proprietorships are the cheapest and easiest type of business to set up. There are very few legal procedures needed to start the business - has autonomy in decision making - The owner is the boss and does not need to consult anyone about their decisions. This makes the business relatively ea1y to run - Keeps all the profits made by the business - This gives an incentive for the sole trader to work hard as they are rewarded with more profits as the business becomes more successful. - enjoys tax advantages - In many countries, small businesses pay a lower rate of tax on profits than large companies Enjoys privacy - The business does not need to publish its accounts to the general public. only tax authorities need to see the financial information of the sole trader. Can be flexible in what the business does - For example, the owner has some flexibility in the choice of working hours. Also, if one business idea does not work out, the sole trader can quite easily introduce new trading activities or dose down the business and start another one Has a sense of achievement - Sole traders are motivated by running their own business. There is a real sense of person achievement if the business is successful
advantages of the market system
- Consumer Sovereignty: Consumers have the power to determine what is produced since they are the ultimate purchasers of the good. When the consumer's demand for a good is high so the price will rise and so producers will make more of it. - Quality and choice of goods: Due to competition, consumers have a wide range of goods to choose from and can, therefore, maximize their material welfare. Firms also try to compete with each other by providing the highest quality to consumers. - Efficiency: Firms that produce goods using the cheapest method of production are said to be efficient. Firms in the free market economy try to be efficient in order to make high profits. New methods of production and better machinery can help firms to reduce costs. The profit motive and competition promote efficiency also. - Automatic operation: The price mechanism helps to reduce the need for making decisions through the large administrative bureaucracy as prices act as a signal telling producers get to know whether they should make more or less of a good. - Time is not wasted on planning and deciding which good should be produced and also the cost of employing planners is avoided.
Types of trade protection - Administrative barriers
- Countries often use bureaucratic rules and regulations as a form of protection. Examples include strict rules regarding food safety, environmental standards and product quality. Complying with these rules and regulations consumes a lot of time, and increases the costs for overseas firms.
disadvantages of co-operatives
- Decision making may be slow as all members of the co-operative can contribute to the decision-making process and this may be time consuming - It can be difficult to settle disputes because of the number of people involved in the decision making - Co-operatives may suffer from a lack of capital as they cannot raise funds through selling shares and so are limited to the amount contributed by their members - Productivity and profitability may be low as people are not motivated by self-interest - there may be inefficient managers because the co-operative is unable to use high salaries to provide incentives to work harder - only a small amount of the profits is shared between members as the rest is re-invested in the co-operative
Causes of economic growth
- Factor endowments - This refers to the quantity and quality of a country's factors of production e.g. Australia has many natural resources such as coal, gold and iron ore. Countries like that can therefore specialise production on a large scale, thus benefiting from economies of scale and export their lower-priced products to overseas markets, by contrast, countries that lack natural resources, land and productive labor tend to struggle to achieve economic growth. The labour force - The size, skills and mobility of the economy's workforce has an impact on the country's economic growth. For example, India's large labor force and Germany's highly skilled workers have contributed to the economic growth of these countries. The mobility of labour refers to the extent to which workers can change between jobs (known as occupational mobility) and the extent to which they are willing and able to move to different locations for employment (known as geographical mobility). Generally, the more occupationally and geographically mobile workers are in a country, the greater its economic growth is likely to be. - Labour productivity - This refers to the amount of goods and services that workers produce in a given time period. It is often referred to as output per worker, expressed as a monetary value (GDP divided by the country's labour force). Labour productivity (the productive use of labour) is a key determinant of economic growth. This is determined by several interrelated factors, such as the qualifications, experience and training, and motivation of the labor force. Technological advances, such as the use of internet technology in e-commerce (online trading), can also enhance labour productivity. An increase in the labour productivity of a country helps to improve its international competitiveness and hence its prospects fur economic growth. Investment expenditure - In order to remain competitive in the long run, countries must invest in capital resources. Investment is a component of aggregate demand, so any increase in investment should help to boost the country's GDP. Investment helps to boost the country's productive capacity in the long run. Investment expenditure on physical capital, such as the use of computers in production can also help to improve labor productivity. Policies to encourage foreign direct investment (the investments made by foreign multinational companies in overseas markets) can also help a country's economic growth and development.
Factors affecting demand
- Fashion, habits and tastes - Weather - Advertising - Complements
The three main criticisms of using the HDI to classify countries
- First, the components of the HDI (life expectancy, education and income) are weighted equally, although they do not necessarily contribute to human development in an equal way. - Second, the three components arc too narrow as an indicator of living standards. For example, the HDI ignores political and economic freedom, which many consider crucial to the standards of living in a country. - A third criticism is that the HDI docs not take imo account inequalities in income and wealth within and between countries, so comparisons of living standards become less meaningful.
What are the three market systems?
- Free Market Economy - this economic system relies on the market forces of demand and supply to allocate resources, with minimal go,·ernment intervention. - Planned Economy - This economic system relies on the government allocating resources. It is often associated with a communist political system that strives for social equality. Examples include North Korea, Laos and Cuba. - Mixed Economic System - As its name suggests, this economic system is a combination of the planned and market economic system, with some resources being owned and controlled by private individuals and firms whilst others are owned and controlled by the government in the public sector. Examples include the UK, Germany and Canada.
Price stability (aims of government policies) (PERBF)
- Inflation is the general persistent rise/increase in the price for goods and services in an economy - Low and sustainable rates of inflation are vital to achieving economic stability and social wellbeing - The prices in an economy rising due to inflation will decrease international competitivity. This will lead to lower export sales, thus causing potential job losses this is because if companies aren't earning enough money they will have to close down exports (meaning people lose their jobs.
Examples of supply side policies
- Investment in education and training helps unemployed people to gain new skills so they can find employment. An example is retraining structurally unemployed manufacturing workers to help them find work in the tertiary sector. Education and training expenditure should also help future generations to become more skilled and employable. - A reduction in trade union powers means that labor unions arc not in such a strong bargaining position to obtain higher wages. Strong trade unions have often been able to demand annual pay rises in excess of inflation and the marker equilibrium level. Hence, government intervention to reduce the influence and power of trade unions can help to reduce classical (real-wage) unemployment. - Employment incentives can be offered to firms for training and hiring the long-term unemployed. For example, the government can offer firms tax allowances and/or subsidies to reduce their costs of training and hiring workers. Similarly, enterprise zones could be set up in areas of high unemployment to create jobs. However, firms might be reluctant to do so because of the lower productivity and higher risk of hiring the Jong-term unemployed. - A review of welfare benefits ensures that there are incentives to seek employment rather than to rely on state welfare benefits. If it is made more difficult for people to claim unemployment benefits, they become more proactive in searching for jobs. This could significantly help to reduce unemployment. While supply-side policies tend to have more permanent impacts on employment, these effects take longer to accomplish compared with demand-side policies aimed at reducing unemployment in the economy.
describe the allocation of resources (characteristics) in market system
- Private Property: Individuals have the right to own, control and dispose of land, buildings, machinery and other man-made and natural resources. Owners are also provided with the right to income from property owned in the form of rent, wages, interest and profits. Rent is earned from land Wages are earned by labour Interest is earned on capital Profits are earned through enterprise - Freedom Of Choice: Producers are free to buy and hire any economic resources for the production of goods of their own choice. Workers are free to enter and leave any occupation for which they are qualified. Consumers are free to choose the goods and services they want to buy. Consumers can choose which firms to buy from. - Price Mechanism: It is one of the most important features in the free market economy. Through the price mechanism, the consumers can inform producers about the goods they want to buy. Producers who are motivated by large profits will produce the goods that the consumer wants. The price mechanism works in the following way if the good becomes popular among consumers, the demand for it would start to rise, which would lead to an increase in the price. - This increase in the price would motivate the producers to make more of the good. However, if the consumers do not want a particular good, then its price would fall informing the producers not to make that good thus prices act as a signal telling producers to make or not to make a good. - Self Interest Firms will try to maximize profits Workers will tend to move to those occupations and locations which offer the highest wages. Consumers will spend their incomes on those goods which yield the maximum satisfaction. - Competition: Producers compete against one another for consumer spending. Workers compete against each other to get a better job. - Absence Of Government Involvement: The government plays little or no role in economy. It does not decide what is to be produced, how it is to be produced and for whom it is to be produced in a free market economy.
Examples of supply side policies - Privatisation
- Privatisation - is the policy of selling off stare-owned assets (sud1 as property or public-sector businesses) to the private sector, if they can be run more efficiently. This is because private-sector firms are motivated by profit and can, in theory, develop better products and deliver better services. Competition, productivity and efficiency are essential components of the private sector, which help to boost the productive potential of the economy.
describe the allocation of resources (characteristics) in planned system
- Public ownership - Government owns the factors of production. - No freedom of choice - Social interest - Government decides What to produce? How to produce? For whom to produce? Through the help of planners
Relative poverty
- Relative poverty is a comparative measure, rather than an absolute measure, of poverty. - People in absolute poverty are undeniably impoverished, whereas those in relative poverty have a lower standard of living in comparison with the average member of society. - For example, it is rather pointless to compare what is meant by poverty for someone living in Singapore or Luxembourg with someone living in poverty in Sierra Leone or Niger. - Relative poverty measures the extent to which a person's financial resources fall below that of the average income for the population. - Although real national income and standards of living have grown over time, these gains are not evenly distributed across the population.
Supply factors that cause deflation
- Technological advance has reduced cost of production, pulling down cost-push inflation. - Labour productivity has risen: higher output will make for lower average costs, which could reflect as lower prices. - Aggregate supply exceeding aggregate demand: a shift in the supply curve to the right will cause an extension in the demand, causing a fall in the price.
Delayed workforce (changing population patterns)
- The average age of the employees entering the workforce rises as more people start working in the tertiary sector this this ie because more certifications are required
Economic growth (aims of government policies) (PERBF)
- The increase in a countries Gross Domestic Product - achieving economic growth improves prosperity and raises living standards it can be achieved through improving the quality of the factors of production
External costs
- The negative side-effects of production or consumption sustained by third parties, for which no compensation (providing someone with money due to loss, suffering etc) is paid - For example, a driver does not pay for the costs of air pollution or congestion when driving the car - This is an example of market failure because the private costs do not represent the true costs to society
Factors affecting supply
- Weather - Taxes - Subsidies - Costs of production
Availability and level of welfare benefits
- Welfare benefits are paid to the unemployed. - However, if welfare benefits are high and readily available, this can discourage people from seeking work because the opportunity cost of not working and receiving welfare payments is too high. - Governments try to regulate who can receive benefits to prevent disincentives to work. - For example, in the UK a person must prove that they are actively seeking work if they are to continue to receive welfare payments.
public goods
- are non excludable - are non rivalrous in consumption
Factors affecting population growth
- birth rate - measures the number of live births per thousand of the population in a year it is measured by dividing the total number of births in a country by the population size, expressed per thousand of the population. - Fertility rate - measures the average number of children born per woman, thus indicating the potential for population change in a country. Economists consider a fertility rate of two children per woman to be the minimum replacement fertility rate for a stable population (the number of children that the average women must have to replace the existing population). Fertility rates above two children indicate a growing population, with a declining median age for the population - Death rate - measures the number of deaths per thousand of the population in a year. It is measured by dividing the total number of deaths in a country by the population size, expressed per thousand of the population. - Net migration rate - The size of a population can also cl1ange due to the physical movement of people in and out of a country. Immigration occurs when people enter a country to live and to work. Emigration occurs when people leave a country to work and live abroad. The net migration rate measures the difference between the number of people entering and leaving a country per thousand of the population in a year. It is calculated using the formula: Net migration rate : immigration - emigration
Aging population (changing employment patterns)
- birth rates decrease - the life span of individuals in an economy increases therefore firms are more willing to employ older employees past their retirement age
Consequences of deflation
- causes job losses within an economy because as deflation usually occurs due to a fall in aggregate demand in the economy, this causes a fall in the demand for labor - Wealth effect - As the profits of firms fall, so does the value of their shares during times of deflation. This means that dividends and the capital returns on holding shares fall, thus reducing the wealth of shareholders. • Bankruptcies - During periods of deflation, consumers spend less so firms tend to have lower sales revenues and profits. This makes it more difficult for firms to repay their costs and liabilities (money owed to others, such as outstanding loans and mortgages). Thus, deflation can cause a large number of bankruptcies in the economy. Debt effect - The real cost of debts (borrowing) increases when there is deflation. This is because real interest rates rise when the price level falls. Government debt - With more bankruptcies, unemployment and lower levels of economic activity, tax revenues fall while the amount of government spending rises (due to the economic decline associated with malign inflation). This creates a budget deficit for the government, meaning that it needs to borrow money even though the real cost of borrowing rises with deflation. • Consumer confidence - Deflation usually causes a fall in consumer confidence levels, as consumers fear that things will get worse for the economy. Thus, they may postpone their spending, especially on consumer durable goods such as cars, as they expect prices to fall even further in the future or wait until the economy improves. TI1is clearly docs not help the economy to recover, thereby causing a downward deflationary spiral. It is difficult to break out of a downward deflationary spiral. To do so would require a significant boost to aggregate demand. Business and consumer confidence levels would also need to increase. !merest rates (sec Chapter 16) could be cut to encourage consumer spending and increased investment expenditure in the economy.
The causes of inflation
- cost push inflation - Demand pull inflation
Causes of fall in demand
- decrease in consumer income - fall in price of substitutes - rise in price of complements - decreased advertising - change in weather/season
Causes of Rise in Market Supply
- decrease in costs of production - Improvements in technology - increase in supply of resources - increase in government subsidies
Factors of inelastic demand
- few substitutes - low cost product - necessary item
What are the four policies that can be used to improve a country's current account balance?
- fiscal policies - These measures use a combination of higher taxes and reduced government spending in order to reduce the amount of money available to spend on imports. In theory, this helps to reduce the current account deficit. - monetary policies - Higher interest rates make new and existing loans more expensive for households and firms. Therefore, this reduces their demand for imports. Alternatively, the central monetary authority of a country might decide to devalue the exchange rate to improve the nation's competitiveness. This also has the effect of reducing the price of exports and making imports more expensive. - supply-side policies These policies strive to raise the productive capacity of the economy. Examples are: - investment in education and health care to improve the economy's human capital, productivity and international competitiveness. - investment in infrastructure to support businesses and industries, especially those engaged in export markets. - measures to encourage export-driven business start-ups and industries, such as government subsidies and tax incentives. - protectionist measures - These measures reduce the competitiveness of imports, thereby making domestic consumption more attractive. For example, tariffs (import taxes) raise the price of imports while quotas limit the amount of imports available.
Merit goods
- have social benefits - yet are under-consumed without government interventions They are goods or services which, when consumed, create positive spillover effects in an economy (e.g. education, training and health care). Merit goods are under-consumed so government intervention is often needed .
low unemployment vs inflation
- in theory, there is an inverse relationship between the level of unemployment and the rate of inflation For example, an attempt to reduce unemployment via the use of expansionary fiscal policy such as lowering taxes or increasing government spending can cause demand-pull inflation Similarly, when the government tries to control inflation by using deflationary policies such as higher taxes or higher interest rates (see Chapter 16), the resulting fall in both consumer spending and investment will result in job losses.
Causes of rise in demand
- increase in consumer income - rise in price of substitutes - fall in price of complements - increased advertising - change in weather/season
Causes of Fall in Market Supply
- increase in costs of production - change in weather/season - decrease in supply of resources - decrease in government subsidies
Why is high employment important?
- it raises living standards - increases economic growth - reduces income and wealth inequalities
Government interventions to reduces social costs
- laws and regulations - subsidies - taxes
causes of market failure
- production of goods and services have negative side affects on a third party -consumption of goods and services which have a positive spillover affect on a third party (e.g. merit goods) - production of goods and services have positive side affects on a third party e.g. first aid and coaching skills for employees
Factors of inelastic supply
- time to produce the product - storage of the product - costly to adjust supply - supply of a natural resource
demand factors that cause deflation
-Demand has fallen in the economy: this could be due to a number of reasons: higher direct taxes, higher interest rates etc. -During an economic recession, the consumption of goods and services fall as there is a low GDP and high levels of unemployment - this happened in Japan in recent decades = lower standard of living
Discuss when it might be desirable for a government to act as a producer of goods and services?
1. Merit goods (e.g education, health care) - These services would be under provided and under consumed if left to market forces. However, they have positive externalities. This means they benefit not only the person consuming the good or service, but third parties as well. For example, somebody receiving a vaccine for an infectious disease gains the benefit of not being infected, but the rest of society also benefits because they won't catch the disease from the vaccinated person. Therefore, it is desirable for the government to provide merit goods. 2. Public goods (e.g national defence)- The characteristics of public goods are: a) Non excludability- Nobody can be excluded from consuming the good or service. For example, if national defence is provided for person A nothing is stopping person B from consuming it. Therefore, no private individual will purchase national defence because there is nothing to stop free riders from benefiting. b) Non rivalness in consumption - Consumption by one person does not prevent their consumption by someone else. For example, by person A consuming the service of national defence it doesn't stop person B consuming it any differently. That is where the government has to step in.
A shift along the supply curve
A change in all non-price factors that affect the supply of a good or service will lead to a shift on the supply curve
A shift along the demand curve
A change in factors unrelated to price that affect demand will cause a shift in demand
Movements and shifts in demand - a change in price
A change in the price of a good or service causes a movement along the demand curve. A price rise will cause a decrease (contraction) in the quantity demanded of the product, whereas a reduction in price will cause an increase (expansion) in the quantity demanded, as shown in Figure 3.3.
A movement along the supply curve
A change in the price of a good or service causes a movement along the supply curve
Movements in supply
A change in the price of a good or service causes a movement along the supply curve. A price rise will cause an increase (expansion) in the quantity supplied ofa product, while a price fall will cause a decrease (contraction) in the quantity supplied
A movement along the demand curve
A change in the price of a good or service will cause a movement along the demand curve (price changes only)
Commercial Bank
A commercial bank is a retail bank that provides financial services to its customers, such as accepting savings deposits and approving bank loans. Examples of commercial banks are listed in Table 6.2. All commercial banks are responsible for maintaining the deposits o f their account holders. Their transactions are socially and legally governed by the central bank. Commercial banking started over 200 years ago when goldsmiths (metal workers specialising in precious metals such as gold) operated as banks. Banking itself can be traced as for back as 2000 BC when merchants in Assyria and Babylonia used grain Joans to farmers and other traders. Modern commercial banking using the internet (e-banking) did not start until 1995.
current account deficit
A current account deficit occurs when a country's financial outflows are greater than its financial inflows.
current account surplus
A current account surplus occurs when a country's financial inflows are greater than its financial outflows.
Corporation tax
A direct tax on the profits of businesses
What is another limitation of fiscal policy that is associated with political problems?
A final limitation of fiscal policy is its associated political problems. The political cycle (of re-electing political leaders and political panics) can cause artificial shocks to the business cycle. For example, expansionary fiscal policy might be used prior to a general election to boost the votes of the governing parry, rather than to tackle fundamental economic problems. Such practices can lead to higher government debts due to tax cuts and increased government spending.
Profit
A financial gain, esp. the difference between the amount earned and the amount spent in buying, operating, or producing something or An economic profit or loss is the difference between the revenue received from the sale of an output and the opportunity cost of the inputs used. In calculating economic profit, opportunity costs are deducted from revenues earned.
Piece rate
A fixed amount paid per item produced or sold Workers producing individual items in a factory (e.g $2 per garment completed)
foreign exchange market
A foreign exchange market is the marketplace where foreign currencies can be bought and sold .
Pricing and output policies in perfect competition
A high degree o f competition in a market can benefit consumers. T his is because they get good-quality products and good customer service, all at the right prices. In addition, competition brings about greater choice, higher output and more competitive prices
Define Monopoly, why are theses not so good for the economy?, what do they cause?
A market structure characterised by a single seller, selling a unique product in the market. In a monopoly market, the seller faces no competition, as he is the sole seller of goods with no close substitute. He enjoys the power of setting the price for his goods. 1. Since monopolies are lone providers, they can set any prices they choose. That's known as price-fixing, and they can do this regardless of demand because they know consumers have no choice. It's especially true when there is inelastic demands for goods and services. That's when people don't have a lot of flexibility. Gasoline is an example. Some drivers could switch to mass transit or bicycles, but most can't. 2. Not only can monopolies raise prices, but they also can supply inferior products. That's happened in some urban neighborhoods, where grocery stores know poor residents have few alternatives. 3. Monopolies lose any incentive to innovate or provide "new and improved" products. A study found that U.S. businesses have invested less than expected since 2000 due to a decline in competition. That was true of cable companies until satellite dishes and online streaming services disrupted their hold on the market. 4. Monopolies create inflation Since they can set any prices they want, they will raise costs to consumers. It's called cost-push inflation. A good example of how this works is the organization of petroleum exporting countries. The 12 oil-exporting countries in OPEC now control the price of 46 percent of the oil produced in the world.
mortgage
A mortgage is a secured loan for the purchase of a property.
An increase in demand
A movement along the demand curve is caused by price changes only. A change in all other (non-price) factors that affect demand, such as income levels, will cause a shift in demand. An increase in demand (rather than an increase in the quantity demanded) is represented by a rightward shift of the demand curve from D1 to D3 in Figure 3.4.
Explain the difference between an shift in the supply curve and movement in a supply curve, what must happen for each of these to occur.
A movement occurs when a change in quantity supplied is caused only by a change in price, and vice versa. A shift in a demand or supply curve occurs when a good's quantity demanded or supplied changes even though price remains the same.
Multinationals
A multinational corporation (MNC) is an organisation that operates in two or more countries. For example, Levis Strauss & Co. sells its products in over 55 OOO locations in 110 countries. It also has 1500 of its own retail stores across the globe.
Partnerships
A partnership is a business organisation owned by more than one person. In an ordinary partnership, there are between 2 and 20 owners, known as partners (the co-owners of the partnership). At least one of these partners will have unlimited liability, although it is usual practice for all the partners to share responsibility for any losses made by the business. The government docs allow some businesses, such as law and accountancy firms and health clinics, to operate with more than 20 partners.
Commission
A percentage of the value of products or services sold Real estate agents earning 1% of the value of each property that they sell
Recession
A phase in the business cycle that occurs when there is a fall in GDP for two consecutive quarters
Calculating the CPI or RPI
A price index is used to indicate the average percentage change in prices compared with a starring period called the base year. The CPI and RPI compare the price index of buying a representative basket of goods and services with the base year, which is assigned a value of 100. Price changes in the CPI and RPI are measured on a monthly basis bur reported for a 12-month period. Calculating changes in the CPI or RPI gives the rate of inflation. To do so, two steps are involved: • collection of the price data on a monthly basis • assigning the statistical weights, representing different patterns of spending over rime. The simplified example in Table 18.1, with three products in the representative basket of goods and services, shows how the total basket price is calculated. Assume 2012 is the base year, when the total basket price was $20. LOOK AT PAGE 194
A price maker
A price maker is a firm with significant market power, which means that it can control enough of the market supply to affect the price level.
Private Benefit
A producer's or supplier's benefits of providing goods or services. E.g. sales revenue
Private cost
A producer's or supplier's cost of providing goods or services. E.g. wages, machines
Stamp duty
A progressive tax paid on the sale of commercial or residential property.
Pure monopoly
A pure monopoly exists if only one firm supplies the whole market. In the USA, this would include the United Stares Postal Service (the only service provider of first class postage) and the Federal Reserve (the sole supplier of banknotes and coins).
Sole traders
A sole trader is a business owned by a single person, also known as a sole proprietorship. This person can employ as many people as needed, but remains the only owner of the business. Examples of sole proprietors are market traders, hairdressers, physiotherapists, and owners of small shops such as a bakery, cafe or stationery shop.
Stock exchange
A stock exchange (also known as a bourse) is an institutional marketplace for trading the shares of public limited companies. lt provides a platform for individuals, organisations and governments to buy and sell shares. Examples of stock exchanges arc the New York Stock Exchange (NYSE), London Stock Exchange, Frankfurt Stock Exchange, Shanghai Stock Exchange and Bombay Stock exchange. The efficient functioning of a stock exchange helps to create business and consumer confidence, thereby boosting investment opportunities in the economy.
Subsidies
A subsidy is financial assistance provided by a government to reduce the costs of production for firms. Subsidies are used to encourage output and consumption of certain goods and services. Governments often provide subsidies for educational services, employment purposes, public transport, tourism and agricultural output.
Windfall tax
A tax charged on individuals and firms that gain an unexpected one-off amount of money, such as a person winning the lottery or a firm gaining from a takeover bid
Carbon tax
A tax imposed on vehicle manufacturers or firms that produce excessive carbon emissions
Taxes
A tax is a levy or charge imposed by a government to raise costs of production and to reduce consumption of certain goods or services. Governments can use direct taxes (imposed on income, wealth or profits) to reduce income inequalities in the economy. They can also use indirect taxation (imposed on spending) to affect consumer expenditure. Indirect taxes include sales taxes and excise duties on items such as petroleum, alcohol, tobacco and air passenger travel. The government can also impose tariffs (import taxes) to discourage the purchase of foreign goods and services in order to protect domestic businesses and jobs. The government can then spend its tax revenues to fund items of public sector expenditure including: social security, national defence, law-and-order systems, transport, infrastructure, health care and education
Capital gains tax
A tax on the earnings made from investments such as buying shares and private property
Inheritance tax
A tax on the transfer of income and wealth such as property when pas1ed on to another person
What is another approach to correcting market failure
A third approach to correcting market failures is to use education and advertising. Many schools educate students about the negative side-effects of smoking and passive smoking. In many countries, cigarette packets must carry a government health warning that dearly explains the dangers of smoking. The Australian government has made it a legal requirement for cigarettes to be sold in packets covered in negative images about smoking. The images are graphic, aiming to educate and shock people in order to discourage them from smoking. If such methods are successful, the raised awareness of the dangers of smoking should reduce the demand for cigarettes (or any other demerit good)
wage-price spiral
A wage-price spiral occurs when trade unions negotiate higher wages to keep income in line with inflation but this simply causes more inflation as firms raise prices to maintain their profit margins.
consumer prices index
A weighted index of consumer prices in an economy over a period of time in order to measure the cost o living for an average household AWP (average weighted price)/ AWP (base) x 100
Absolute poverty
Absolute poverty exists when there is extreme, outright poverty. People in absolute poverty are undeniably poor. Their income, if any, is spent entirely on minimal amounts of food, clothing and shelter - that is, the basic human needs necessary for survival. For many, absolute poverty can mean being unable to eat and drink, and have clothing and shelter. There is more than one way to measure absolute poverty. The most common method is to calculate the number of individuals living below a certain level of income (called the income threshold or the poverty line). A common threshold for poverty is $1.25 a day-many people around the world still Jive below this amount, which means they are unable to buy enough food to survive.
What are the choices of the business organisations - Co - operative
Access to finance: Capital investment by members Liability: Limited Privacy: Financial accounts are prepared and audited but do not have to be made available to the general public Control: Controlled by directors (individuals) appointed by the government
What are the choices of the business organisations - Public corporation
Access to finance: Government funded Liability: unlimited Privacy: Financial accounts are prepared and audited but do not have to be made available to the general public Control: Controlled by directors (individuals) appointed by the government
What are the choices of the business organisations - sole trader
Access to finance: Owners capital Liability: Unlimited Privacy: Yes Control: Owner has full control
What are the choices of the business organisations - Partnership
Access to finance: Partners' capital Liability: unlimited Privacy: Yes Control: Partners share control
What are the choices of the business organisations - Public limited company
Access to finance: Shares sold to general public Liability: Limited Privacy: Financial accounts are prepared and audited but do not have to be made available to the general public Control: Divorce of control and ownership, run by directors of company
What are the choices of the business organisations - Private limited company (ltd)
Access to finance: Shares sold to private individuals Liability: Limited Privacy: Financial accounts are prepared and audited but do not have to be made available to the general public Control: Divorce of control and ownership, run by directors of company
Positive effects of trade unions
Act as a channel of communication between employers and employees. Through negotiations and collective bargaining, they help to solve disputes and settle pay claims efficiently. Offer legal support and advice to employees negotiate on behalf of their members with employees for better pay and working conditions which can, therefore, help to raise living standards Negotiate with the government for an increase in the minimum wage, which can also help to increase standards of living
Fringe Benefits (or perks)
Additional benefits, which have a monetary e.g. Pensions, health insurance, company car, laptop, mobile, phone, education for children, or membership of a health club
The advantages and disadvantages of imposing a tax on a good or service are...
Advantages It increases the price and therefore should decrease the quantity demanded. It creates tax revenue for the government which can be used on other goods and services Disadvantages The demand for cigarettes, alcohol and petrol (gas for a car) tends to be price inelastic which means that the increase in price may have little impact on consumption. The nicotine in cigarettes makes smoking highly addictive and therefore smokers will pay the higher price and consumption will change only slightly. The indirect tax will be regressive and have a greater impact on low-income earners than high-income
Advantages from the private sector in mixed economy:
Advantages from the private sector in mixed economy: - Consumer sovereignty - Quality and variety of goods - Efficiency - Automatic operation Advantages from the public sector in mixed economy: - Provision of public and merit goods - Government taxes people's income in an attempt to bridge the gap between the rich and the poor. - Government creates jobs for the employment - Encourage the consumption of goods that are beneficial for the consumers - Discourages the consumption of harmful goods by imposing taxes or passing legislation. - Finance the production of merit goods
Conserving resources versus using resources
All economic activities invoke social costs and benefits, at least to some extent, and every decision has an opportunity cost (see Chapter 1). For example, the decision to allow a firm to build a factory on a green field has a cost to the environment through the loss of green space, increased road traffic and potential pollution, but it also brings jobs to the area and creates business for related firms. Production and consumption of goods and services uses the Earth's resources and can cause damage to the environment. It is therefore important that economic development is sustainable, which means that development today does not compromise the lives of future generations so that they cannot meet their own needs. Therefore, there is a potential conflict between the production of goods in the short term and the conservation of resources in the long term.
Bonus
An additional lump sum of money paid during year, usually dependent upon performance Royal Bank of Scotland and Barclays paid paid 523 staff members more than $1.56m in bonuses in 2013
Mixed Economy
An economic system that combines the planned and market economic systems, with some resources owned and controlled by the private sector and others by the government.
Planned Economy
An economic system that relies on the government to allocate scarce resources. it is often associated with a communist political system that strives for social equality
Market Economy
An economic system that relies on the market forces of demand and supply (the price mechanism) to allocate resources
Exchange rate
An exchange rate is the price of one currency measured in terms of other currencies. For example, the exchange rate of the US dollar in terms of the pound sterling might be $1.5 = £1 (or $1 = £0.67).
sales tax
An indirect tax, such as VAT, charged on an individual's spending
Appreciation
Appreciation of a currency occurs when there is an increase in the value of the exchange rate relative to another currency operating in a floating exchange rate system.
Supply side policy
Are the long tern strategies aimed at increasing the productive capacity of the economy by improving the quality and quantity of factors of production.
Redistribution of income
As an economy grows, the gap between top and bottom income earners tends to widen. For example, huge bonuses are often awarded to executives in the finance industry. This causes greater income inequalities in the economy. The government might therefore intervene by using progressive taxes to redistribute income to low-income households. In some cases, the government could even cut taxes for low-income groups to improve their standard of living.
Economic growth vs redistribution of income and wealth
As an economy grows, there tends to be a widening income and wealth gap between the rich and the poor
Total costs
As the name suggests, the total costs of production arc the sum of all fixed and variable costs. The total cost line, starts at the same value as fixed costs because even when nothing is produced, fixed costs still ha,·e to be paid by the firm. Total costs = fixed costs + variable costs
Limitations of monetary policy
As with fiscal policy, there are time Jags to the reaction to interest rate changes in the economy. This can make the effectiveness of monetary policy less certain or even destabilising for the economy. Furthermore, economic activity is not totally and only dependent on interest rates. Other factors, such as consumer and business confidence levels, have an impact on gross domestic product.
Factors that affect the level of borrowing in an economy include the following:
Availability of fund s - Banks and other financial institutions lend money to individuals and firms in the form ofloans. The central bank (sec Chapter 6)ofa country conuols the amount of ftmds which arc available for borrowing by setting the cash reserve ratio (the percentage ofa bank's assets which must be kept in cash in bank vaults or with the central bank). A decrease in the cash reserve rate ratio means that more funds arc available for lending and an increase in the money supply can therefore lead to an increase in borrowing. • Credit cards - Credit allows people to purchase goods and services with deferred paymcm. People or firms take ownership ofthc goods and services immediately and must repay the amoum to the credit card company several weeks later - in other words, they 'buy now and pay later'. If the full amount owed to the credit card company is repaid in full each month then no interest is charged, but ifonly a portion is repaid then interest is charged on the remainder. !merest rates on credit card borrowing arc exucmely high: for example, the annual percentage rate charged on Citibank credit cards in 2013 was 35.81 per ccm. • Store cards - These are issued to regular customers of large retail stores in many countries to encourage spending. Store cards act as a credit card that can be used only in the individual retail outlet. Firms offer discounts and free gifts as an incentive for people to sign up for a store card. Customers can also accumulate loyalty points on the card, which can be used in the fumre to purchase goods and services in the store. Store cards can give people an incentive to o\·erspend and can raise their level ofdebt. If debts are cleared when payment is requested, no interest is charged - but just as in the case ofcredit cards, ifrepayments are not made then interest is charged on the outstanding debt. • \Vealth-Thewealthofapersonmayaffecttheirlevelofborrowing,asabank will be more willing to lend money to wealthier individuals or highly profitable firms. This is because they have valuable assets and so are more likely 10 repay the loan, whereas less wealthy customers have a higher risk ofdefaulting on the loan (being unable to repay their borrowing). To avoid bad debts (debts that cannot be repaid), banks often make sure that they have some guarantee ofgetting their money back. A large business may own se\'eral stores or have valuable assets that can be taken as collateral (security) for a Joan. In the case ofa mortgage, the property purchased provides security for the loan and ifthe borrower defaults on the Joan, the bank will rake ownership of the property.
Average costs
Average costs refer to the total cost of making one product - it is the unit cost of production. Average costs = total costs + output level Firms that operate on a large scale arc able to reduce their average costs of production. DO SOME EXAMPLE PRACTICE QUESTIONS - the page is 137 in the textbook! :)
Backward vertical integration
Backward vertical integration occurs when a firm from the secondary sector of industry merges with a firm from the primary sector, or a firm from the tertiary sector merges with a firm from the secondary sector. For example, a factory in China that makes chicken nuggets for McDonald's might buy a chicken farm. The chicken farm supplies the factory directly with live chickens and the eggs produced arc sold to McDonald's outlets for their breakfast products.
Bad debts
Bad debts occur when people and businesses cannot repay a loan.
Barriers to entry
Barriers to entry are the obstacles that prevent other firms from effectively entering the market. Examples are the existence of intellectual property rights, large advertising budgets of existing firms, and legal constraints to prevent wasteful competition.
Bartering
Bartering is the act of swapping items in exchange for other items through a process of bargaining and negotiation. For example, someone might trade five sacks of rice for one cow, or four chickens for a sheep.
Disadvantages of being a sole trader
Bears all the risks - There is no one else to share the burden. problems, decision making or responsibilities Has added workload and pressures from having to run the business as a sole proprietor - As the only person in the business, the sole trader often has to work long hours, especially during the early stages after the business has been set up Limited specialisation - Unlike large companies, sole traders cannot rely on the marketing, finance, production and human resource management expertise of others. This limits the extent to which sole proprietors can benefit from large scale specialisation and the division of labour Limited access to sources of finance - Being a small business, the sole proprietorship represents a high risk - This limits the extent to which the sole trader can raise finance from banks and other sources Lack of continuity - If the owner is sick or wishes to go on holiday. the business will struggle to continue. lf the owner dies, the business will cease to operate in its current legal form Has restricted ability to exploit economies of scale - Large businesses are usually able to enjoy economies of scale i.e . lower unit costs of production resulting from large-scale operations. This means that sole traders struggle to gain cost advantages and therefore have to charge higher prices for their products. Has unlimited liability - This means that if the business goes into debt and makes a loss, the sole trader is personally liable for repaying the debts, even if this means personal belongings have to be sold to do so. This is because there is no legal difference between the owner {the sole trader} and the business itself (the sole proprietorship)
Advantages of education and advertising to combat the problems of market failure include the following:
Behaviour and consumption patterns of individuals and firms change - there is a rise in the consumption of merit goods and a fall in the demand for demerit goods. For example, people learn about the dangers of smoking, so fewer people smoke. • Successful advertising may lead to a cultural change in the long term, such as healthier diets, an increase in use of electric cars, recycling, waste reduction and use of renewable energy.
External benefits
Benefits received by others without having to pay to those who produced them. E.g. trained workers
Benign deflation
Benign deflation is associated with an increase in productivity (often from the increased use of technology), which drives down prices.
There are various forms of foreign aid that can be used to tackle the problems of poverty - Bilateral foreign aid
Bilateral foreign aid - This is official financial assistance from one government to another, usually due to political and economic interests. It provides immediate access to aid.
Borrowing
Borrowing occurs when an individual, firm or the government takes out a loan from a bank or financial institution, paying it back over a period oftime with imerest. Borrowing leads to debt, which is manageable ifmomhly repaymems are affordable and interest rates are relatively low. An increase in imerest rates causes repayments to rise and this can affect the purchasing power ofindividuals, firms and governments.
Shifts in supply
By contrast, a change in all non-price fuctors that affect the supply of a good or service will lead to a shift in the supply curve. In Figure 3.8, a rightward shift of the supply curve from S1 to S2 is described as an increase in supply (rather than an increase in the quantity supplied) whereas a leftward shift ofthe supply curve from Si to SJ results in a decrease in supply (rather than a fall in the quantity supplied). For example, Japan's tsunami in March 2011, the country's worst natural disaster, reduced the supply of major manufacturers such as Sony, Panasonic, Toyota and Honda
Excess demand
By contrast, if the selling price of a product is set too low (i.e. below the equilibrium price), the demand will exceed the supply. This creates a shortage in the market, caused by the excess demand (see Figure 3.13). At a price of P1, the demand is Qd while supply is only Q, so demand exceeds supply. The excess demand causes prices to rise back to the equilibrium price of Pe.
Explain the term excess demand, give an example.
By contrast, if the selling price of a product is set too low, the demand will exceed the supply. This creates a shortage in the market, caused by the excess demand. At price of P1, the demand is Qd to rise back to the equilibrium price of Pe. When Apple launched its iPhone 5 in Hong Kong in late 2012, demand outstripped supply so much that the price of smartphone increased from HK $80000 - an increase of 43 per cent!
Inflation rate formula
CPI (current year) - CPI (previous year) /CPI (previous year) x 100
Inflation formula
CPI (current year) - CPI (previous year/ CPI (previous year)
Expansionary monetary policy
Category of monetary policy - that aims to boost economic activity by expanding the money supply, achieved mainly by lowering interest rates
Explain what happens to supply if there is a sales tax put in place?
Changes in a non-price factor that affects demand or supply will tend to cause a change in the equilibrium price and therefore quantity traded. For example, a government sales tax imposed on tobacco will shift the supply curve for cigarettes to the left. This raises the market-clearing price from p1 to p2 and reduce the equilibrium quantity traded from q to q2.
Co-operatives
Co-operatives are business organisations that are owned and run by their members (who may be employees or customers) and have a common aim of creating value for their members in a socially responsible way. The employees (members) work together towards a shared goal and each has a vote, so they can contribute to decision making. Co-operatives share profits between their members and they are distributed according to how much each person contributes to the co-operative. Co-operatives operate in many areas of business, such as retail shops, financial services, credit unions, child care services, housing and agriculture. For example, Canada has approximately 8500 co-operatives and credit unions, and more than 17 million co-operative members.
Collateral
Collateral means security for a loan,e.g. property in the case of a mortgage, or the car purchased in the case of a car loan.
Conglomerate integration
Conglomerate integration (also known as lateral integration or diversification) occurs when firms from different sectors of industry, which operate in unrelated areas of business, merge or are taken over by another firm. They may form a single company or be pan of a large group of companies. For example, if a clothing manufacturer merges with a chocolate producer, the two firms are in the secondary sector of industry but operate in different areas of manufacturing. They can take advantage of risk-bearing economies of scale (see below), as diversification spreads risk. Diversification spreads risks because the firm has a number of businesses in different sectors of industry and therefore a failing business, which is pan of a larger group, may be protected by the successful businesses within the group's larger portfolio. However, the conglomerate may become too diverse and this may cause problems with the management of capital and human resources. If a segment of the diversified firm is under-performing, it may drain resources from other areas of the business.
Conspicuous consumption
Conspicuous consumption occurs when people purchase goods and services that they feel increase their status or image. For example, a person may buy a very expensive car, yacht, diamond ring or designer handbag as a status symbol. Wealthy people tend to engage in conspicuous consumption.
Conspicuous consumption
Conspicuous consumption occurs when people purchase highly expensive goods and services due to status or a desired image.
Consumer co-operatives
Consumer co-operatives are co-operatives that are owned by the customers who purchase the goods or services. Examples arc child care, housing, health care services, telecommunications and utilities. The members of these co-operatives can get access to goods and services at prices usually less than those charged by a for -profit firm.
Consumer spending and income
Consumer spending - the amount that individuals spend on goods and services - largely depends upon their level of income. Most people exchange their labour services for wages or salaries, but people may also earn income from the other factors of production, for example: • interest on savings (return on capital) • rem earned from leasing property (return on land) • dividends (a share of a company's profits) from shares owned in a company (return on enterprise) • profits earned from running a business (return on enterprise).
Economic growth vs a balance of payments equilibrium
Consumer spending and business investments tend to be high during an economic boom. However, if this is fuelled by a significant rise in spending on imports relative to exports, this leads to a worsening trade deficit on the country's balance of payments.
Consumer spending
Consumer spending refers to the amount of household expenditure per time period.
The components of GDP are as follows:
Consumption expenditure (C) - This refers to the total spending on goods and services by individuals and households in an economy. Examples of consumer expenditure are the economy's spending on housing, transport, food, clothing and domestic. holidays. Investment expenditure (I) - This refers to the capital expenditure of firms which is used to further production and expand the economy's productive capacity. Examples are the spending on new machinery and the construction of new factories. Government expenditure (G) - This is the total consumption and investment expenditure of the government. Examples are the spending on infrastructure (such as rail and road networks) and the construction of new schools and hospitals. Export earnings (X)-This measures the monetary value of all exports sold to foreign buyers. For example, France exports a huge amount of wine, dairy products and fruits, so the earnings from these exports are calculated in the measure of GDP. Import expenditure (M ) - This measures the monetary value of the payments made for all imports. France imports a lot of cars, oil and smartphones. The spending on these items means that money leaves the French economy, so this must be deducted from its calculation of GDP. The difference between the value of a country's exports and imports (X - M) is called net exports.
Explain the difference between a merit and demerit good or service
Consumption of goods or services which cause a negative spillover effect on a third party. Such goods are known as demerit goods and include cigarettes, alcohol, gambling and driving a car. Consumption of goods or services which cause a positive spill effect on a third party. Such goods are known as merit goods and include education, health care and vaccinations.
Cost push inflation
Cost-push inflation is caused by higher costs of production, which makes firms raise their prices in order to maintain their profit margins.
costs of production
Costs are the payments made by firms in the production process. Examples of costs of production include: • wages and salaries paid to employees • rem paid to landowners for hiring of business premises • advertising expenses • purchases o fraw materials and components from suppliers • utility bills for telephone, gas and electricity services • dividend payments to shareholders (see Chapter 10) • taxes paid to the government based on the value of company profits made. Costs of production can be categorised in four different ways.
External cost
Costs inflicted on others not compensated by the producers. E.g. pollution
Aggregate supply
Deflation can be caused by higher levels o f aggregate supply, increasing the productive capacity of the economy. This drives down the general price level of goods and services while increasing national income. Such deflation is called benign deflation (non-threatening deflation). For example, supply-side policies such as investment in education and infrastructure higher productivity, improved managerial practices, technological advances and government subsidies for major industries all help to raise national income in the long run.
Define demand
Demand refers to both the willingness and ability of customers to buy a good or service.
Demand pull inflation
Demand-pull inflation is caused by higher levels of aggregate demand (total demand in the economy) driving up the general price level of goods and services. For example, during an economic boom, household consumption of goods and services increases due to higher GDP per capita and higher levels of employment.
Depreciation
Depreciation of a currency occurs when there is a fall in the value of the exchange rate relative to another currency operating in a floating exchange rate system.
Examples of supply side policies - Deregulation
Deregulation refers to the removal of barriers to entry, thereby making markets more competitive. For example, labour market reforms can make the labour force more competitive and more productive. Such reforms involve the removal of labor market imperfections, such as decreasing the power of trade unions and reducing the national minimum wage
Price inelastic demand
Describes demand for a product that is unresponsive to changes in price, mainly due to the lack of substitutes available
price elasticity of demand
Describes demand for a product that is unresponsive to changes in price, mainly due to the lack of substitutes available
Devaluation
Devaluation occurs when the price of a currency operating in a fixed exchange rate system is officially and deliberately lowered.
There are various forms of foreign aid that can be used to tackle the problems of poverty - Development aid
Development aid - This is official financial assistance from governments and agencies such as the World Bank to fund the economic development of a country, thus helping to alleviate poverty in the long run
How does the demographic of the population influence demand.
Different demographics want different things. Genders in countries may want different things, females may be open to barbie dolls and perfumes whereas men might favour other services and goods such as toy motorbikes etc. Age is also another factor that influences types of demands for example, if a country contains a larger population of elderly people are more prone to focusing on healthcare services than toys for children.
Diseconomies of scale
Diseconomies of scale occur when average costs of production start to increase as the size of a firm increases.
Disinflation
Disinflation occurs when the rate of inflation falls, but is above zero - prices are generally still rising, only at as lower rate.
Disposable income
Disposable income refers to the income earned by an individual after income tax and other charges such as pension contributions and trade union fees (see Chapter 8) have been deducted. It is therefore the amount of income a person has available to spend on goods and services. There is a positive relationship between the level of spending and the income earned - higher levels of disposable income usually lead to higher spending.
Dissaving
Dissaving occurs when people spend their savings.
Dumping
Dumping is the act of selling exports at artificially low prices. below those charged by domestic firms, and often less than the costs of production.
Money has the following characteristics:
Durability Objects used as money must withstand physical wear and tear Acceptability Everyone must be able to exchange the money for goods and services Divisibility To be useful, money must be easily divided into smaller denominations or units of value Uniformity Any two units of money must be uniform, that is, the same in terms of what they will buy/purchase Scarcity Money must be available only in limited quantities Portability People need to be able to take money with them as they go about their business *Use the acronym: SUPDAD to remember*
Durable good
Durable good: Is a good which lasts for a long time, not wearing out quickly and cannot be consumed completely during one use. For example, a fridge costing 300 dollars will last over 3 years, this makes it a durable good as it can withstand for a longer period of time.
Changes in earnings over a lifetime
Earnings change over a person's lifetime for the following reasons: • The level of education a person has tends to affect, in most cases, their earnings and earning potential (see Table 7.3). • Inexperienced workers, such as graduates in their first year of work, earn less than experienced workers. • Salaries and wages usually increase with experience and time spent working at a firm. • After workers reach the peak of their career, their salaries and wages tend to remain fairly constant. • After retirement, earnings full and people are dependent on their pensions and savings to cover their living expenses.
Economic growth
Economic growth is the increase in a country's gross domestic. product (GDP) over time. Achieving economic growth brings greater prosperity to an economy and therefore tends to raise the standard of living for most people. Economic growth can be achieved by increasing the quantity and/or quality of factors of production, such as through education and training. Discovering resources such as oil will increase the potential output of an economy. Economic growth is the increase in the level of national output - y is, the annual percentage change in GDP. Hence, in theory, an increase in any of the components of GDP (consumption, investment, government spending and net exports) can cause economic growth. An increase in the quantity and/or the quality of factors of production can also create economic growth, such as an increase in the labour supply or improvements in the state of technology. Economic growth increases the long-term productive capacity of the economy, shown by an outward shift of the production possibility curve
Economic growth vs the protection of the environment
Economic growth often leads to environmental problems such as land degradation, climate change, pollution and the depletion of non-renewable resources.
Economies of scale
Economies of scale occur when average costs of production fall as the size of a firm increases.
Measures and indicators of living standards
Economists believe that sustained economic growth is an important macroeconomic objective because it is the most practical measure of standards of living in a country. For example, China's phenomenal economic growth over the past three decades has Jed to an increase in the standard of living for the majority of its population. With an average growth of 10 percent per year, the average Chinese citizen would double their income every seventh year. The two main measures or indicators of living standards are GDP per head (or GDP per capita) and the Human Development Index (HDI). Real GDP per capita is a better measure of standards of living because HDI
Disadvantages of education and advertising to combat the problems of market failure include the following:
Education and advertising have an opportunity cost - in other words, the money could have been spent on something else deemed more beneficial to the economy. Not all advertising and education is effective. For example, shock advertising tactics may not necessarily work on smokers and may be ignored. It can take a Jong time to educate people and for the advertised message to be accepted and acted upon.
Embargo
Embargo - An embargo is a ban on trade with a certain country, often due to a trade dispute. An embargo rarely benefits local consumers, who suffer from a lack of choice and higher prices (due to the lack of supply). For example, Malaysia has imposed trade embargoes on the Philippines while the USA has trade embargoes with Cuba.
Advantages of co-operatives
Employees have a share in the business and therefore are interested in how it performs. This may lead to high levels of staff motivation and engagement in their work - employees also have a say in how the business is run (voting rights are equal between members) and how the capital in the business is used. This, too, may lead to higher levels of commitment and motivation - Productivity may be high as workers are motivated by the values of the co-operative and the desire to add value to their members and the wider community - Co-operatives tend to be run on socially responsible principles and therefore may create positive externalities that are enjoyed by the wider society
The consequences of inflation - Employers
Employers - Workers are likely to demand a pay rise during times of inflation in order to maintain their level of real income. As a result, labour costs of production rise and, other things being equal, profits margins fall. Those in highly skilled professions such as surgeons, doctors, pilots and barristers are in a strong bargaining position because their skills are in short supply and high demand. This can create a wage- price spiral whereby demand for higher wages to keep in line with inflation simply causes more inflation.
Some changing employment patterns in modern economies include:
Employment sector - As a country develops, the number of people employed in the primary industry tends to full and the majority of workers are employed in the tertiary sector. • Delayed entry to workforce - As more people study to tertiary education level, the average age of employees entering the workforce rises. Graduates could be aged around 25 by the time they complete their first degree and master's degrees. More females and mature students have also entered tertiary education, again limiting the potential size of the economy's workforce. Ageing population - This occurs when the average age of the population rises, partly due to lower birth rates and longer life spans in developed economies. The lower labour supply means that firms are more willing to employ older employees and hire people beyond their retirement age. • Flexible working patterns - Changes in the world economy have meant that firms need to be far more flexible in order to compete internationally. Examples of flexible working patterns include firms hiring more part-time staff, firms allowing employees to work from home, flexible working hours and outsourcing non-core functions (such as accounting, cleaning, security and JCT) to other service providers.
The advantages of public sector corporations include the following
Essential goods and services, such as housing and education, are under the control of state, ensuring adequate provision for the general public. Prices can be regulated by the government and therefore essential goods and services, such as health care made affordable to all. Governments can fund unprofitable services so that everybody has access to essential services such as postal services or bus services to remote areas of the country. Public corporations can generate revenue for the government.
The higher the price, the greater the supply! What are two reasons for this relationship?
Existing firms can earn higher profits if they supply more. New firms are able to join the marker if the higher price allows them to cover their production costs.
Use of fiscal policy
Expansionary fiscal policy is used to stimulate the economy, by increasing government spending and/or lowering taxes. For example, by increasing social security payments (such as unemployment benefits or state pensions), domestic consumption should increase. This type of fiscal policy is used to reduce the effects of an economic recession, by boosting gross domestic product and reducing unemployment. By contrast, contractionary fiscal policy is used to reduce the level of economic activity by decreasing government spending and/or raising taxes. For example, countries such as China and the USA have used property taxes to slow down escalating house prices. Contractionary fiscal policies are used to reduce inflationary pressures during an economic boom. Fiscal policy is also used to redistribute income and wealth in the economy. Some countries have quite high rates of income tax to reallocate resources from wealthier individuals to the poorer members of society.
External economies of scale
External economies of scale are economies of scale that arise from factors outside of the firm, such as the location of the firm, proximity to transport and availability of skilled workers.
Subsidy
Financial assistance from the government to a producer in order to reduce production costs and price to consumers.
Financial economies of scale
Financial economies of scale occur as large firms arc able to borrow money from banks more easily than small firms because they arc perceived to be Jess risky to financial institutions. A large firm will also have a greater number of assets that can act as security for a loan.
Fixed costs
Fixed costs are the costs of production that have to be paid regardless of how much a firm produces or sells. For example, salaries for senior managers, insurance payments and rem all have to be paid regardless of the firm's output level.
FDI
Foreign direct investment - refers to cross-border investment made by multinational companies and other investors.
Forward vertical integration
Forward vertical integration occurs when a firm from the primary sector of industry integrates with a firm from the secondary sector, or a firm from the secondary sector integrates with a firm from the tertiary sector. For example, Apple, Levi's and Replay all own shops in which to sell their manufactured products. Shell, the global oil company, owns its entire chain of production: oil mines, oil processing plants and the petrol stations where consumers purchase fuel for their cars.
Free trade
Free trade means that international trade can rake place without any forms of protection (barriers to trade), such as quantitative limits or taxes being imposed on exports.
Frictional unemployment
Frictional unemployment is transitional unemployment that occurs when people change jobs, due to the time delay between leaving a job and finding or starting a new one. Therefore, frictional unemployment always exists in the economy because it takes time for the labour market to match available jobs with the people looking for jobs.
What is the formula to calculate GDP?
GDP = C + I + G + (X - M )
GDP per capita
GDP per head (or GDP per capita) is the gross domestic product of a country divided by the population size. lt is a key measure of a country's standards of living.
Geographical mobility
Geographical mobility refers to the willingness and ability of a person to relocate from one part of a country to another for work.
Merit Goods
Goods and services that ought to be subsidised or provided free at the point of use so that consumption does not depend primarily on the ability to pay for the good or service. E.g. healthcare, education
Demerit goods
Goods or services which, when consumed, create negative spillover effects, e.g. cigarettes, gambling etc.
Government expenditure
Government expenditure is the total value of a government's consumption and investment spending and transfer payments, such as unemployment benefits and state pension schemes.
Direct taxes
Government levies imposed on income, profit and wealth such as income tax and inheritance tax (define)
Aims of government policies
Government policies tend to be aimed at achieving the five key macroeconomic (economy-wide) objectives: full employment (or reduced unemployment), controlled inflation (price stability), sustainable economic growth, the redistribution of income (lower income inequality) and balance of payments stability.
Competition law
Government regulation is used to prevent anti-competitive practices of private-sector monopolists. This helps to protect consumers and smaller firms that are less competitive. For example, in most countries, it is illegal for firms to engage in price fixing to raise prices and thus charge consumers unjustifiably high prices.
Regulation
Government regulations determine the boundaries within which private producers can operate. Examples are the use of employment legislation, consumer protection laws, environmental protection, competition laws and intellectual property rights.
Full employment (aims of government policies) (PERBF)
Government strive to reduce the unemployment rate - through capital infrastructure projects - They want to make the money outflow and inflow into an economy equal each other otherwise a surplus could result in inflation, spending more than they earn (deficit) could cause having to borrow money, sell assets and raise taxes.
Government influence on private producers
Governments influence private producers through the use of regulation, subsidies and taxation policies.
The governments influence on private producers
Governments influence private producers through the use of regulation, subsidies and taxation policies. Employment legislation - These regulations protect the interests and safety of employees. For example, private sector producers should comply with anti- discrimination laws which help to ensure that firms treat their workers fairly, regardless of their age, gender, race or religion. Consumer protection laws - These regulations require private -sector firms to provide truthful descriptions of their goods and services, which must also meet minimal quality standards. (think about demerit goods) Environmental protection - Laws exist to prevent or reduce the damage to the environment caused by private-sector firms, such as pollution and the depletion of scarce resources. Intellectual property rights - To encourage innovation and to safeguard the interest of producers, the government can use copyright, trademark and patent Jaws to protect the intellectual property of firms. These give private-sector firms legal protection against rival firms copying or imitating their products or inventions.
Government intervention
Governments try to solve market failure in a number of ways, such as by placing a tax on the price of a demerit good with the aim of reducing demand for the good.
Gross domestic product
Gross domestic product (GDP) measures the monetary value of goods and services produced within a country for a given period of time, usually one year.
GNI
Gross national income - is the total combination of all output of an economy stated by individual residents including a countries GDP
HIC
High income countries
The quality of land, labour and capital -
Higher quality resources tend to demand a higher price. For example, surgeons, pilots and barristers are in high demand due to their highly valued skills and qualifications. China, India, Vietnam and Thailand have good-quality land to grow rice, whereas Scandinavian countries do not have the natural climate to do so.
Horizontal integration
Horizontal integration occurs when two firms in the same sector of industry integrate together, by either a merger or a takeover.
Human capital investment
Human capital is the collective knowledge, skills and experiences of a country's workforce. Supply-side policies are used to improve the quantity and/or quality of the workforce in the economy. These policies can be used to create incentives to work. For example, government -funded retraining schemes can help the unemployed to improve their chances of finding paid employment. Increased government spending on education and training are further examples.
HDI
Human development index - Is a measure for standard of living
There are various forms of foreign aid that can be used to tackle the problems of poverty - Humanitarian aid
Humanitarian aid - This is philanthropic (charitable) financial assistance for saving lives and maintaining human dignity. It is often used in response to major crises such as natural disasters and outbreaks of infectious diseases. Examples include medical aid, food aid, and emergency relief assistance.
Hyperinflation
Hyperinflation refers to very high rates of inflation that are out of control, causing average prices in the economy to rise every rapidly.
Economic growth vs low inflation (conflicts between government aims)
If an economy grows due to excessive consumer demand, this will force prices to increase, thus creating inflation in the economy. Similarly, the government might choose to deflate the economy to control inflation, but this limits the ability to achieve economic growth. Therefore, it is rather difficult to achieve both macroeconomic objectives at the same time.
Excess supply
If price is set too high (above the market-clearing price), then supply will exceed demand, as shown in Figure 3. 12. This results in surplus production known as excess supply. In order for firms to get rid of their excess supply (shown by the distance between Q,and Q4), they will need to reduce price (from P1 to Pe). This is a key reason why leftover stocks of Christmas cards are reduced in price after 25 December and why unsold summer clothes go on sale during the autumn.
Explain the term excess supply, give an example.
If price is set too high (above the market-clearing price), then supply will exceed demand. This results in surplus production known as excess supply. In order for firms to get rids of their excess supply (shown by the distance between Qs and Qd), they will need to get rid of their excess supply and they will need to reduce the price.
Three special cases which are theoretical possibilities for PES:
If the PES of a product is equal to 0, then supply is perfectly price inelastic: that is, a change in price has no impact on the quantity supplied. This suggests that there is absolutely no spare capacity for suppliers to raise output, irrespective of increases in price (see Figure 4.10). • If the PES of a product is equal to infinity then supply is perfectly pr ice elastic: that is, the quantity supplied can change without any corresponding change in price. For example, a software developer selling products online can very easily increase supply to match higher levels of demand, without any impact on the price level. Due to the spare capacity that exists, suppliers are able to raise output at the current price level (see Figure 4.11).
The merits of supply-side policies
Improved balance of payments - Since supply-side policies can improve productivity and national output without increasing the general price level, the international competitiveness of the country should improve. For example, firms should become more productive and competitive, which will help to boost the economy's export earnings. Therefore, supply-side policies tend to improve a country's balance of payments Improved economic growth - Supply-side policies can be used to achieve sustainable economic growth by increasing the productive capacity of the economy. • Lower inflation - As supply-side policies increase the productive potential of the economy, they help to prevent the general price level from rising beyond control. • Lower unemployment - An increase in the economy's productive capacity will tend to increase national output, thereby creating jobs in the economy in the long term. Also, supply-side policies can help to reduce both frictional and structural unemployment
Capital intensive industries
In capital-intensive industries the use and cost of capital is more than that of any other factor of production. Examples are car manufacturing, soft drinks production and oil extraction. Capital-intensive production takes place if a firm spends more on capital costs than on any other factor of production. This will include the expenditure on capital equipment such as tools, equipment, machinery and vehicles. Capital-intensive firms, such as aircraft and motor vehicle manufacturers, therefore need a lot of money to fund their operations. This can act as a barrier to entry into the industry, since it is difficult for new firms to enter such industries. Despite the initially high costs of capital-intensive production, there are potentially huge cost savings in the form of technological economies of scale in the long run. Firms that become more capital intensive usually do so to increase the levels of output and productivity by mass producing their products. In this situation, unit costs of production are relatively low.
What is the difference between a shift in the demand curve and a movement along the demand curve?
In economics, demand is defined as the quantity of a product or service, that a consumer is ready to buy at various prices, over a period. Demand Curve is a graph, indicating the quantity demanded by the consumer at different prices. The movement in demand curve occurs due to the change in the price of the commodity whereas the shift in demand curve is because of the change in one or more factors other than the price.
The value of PES to firms
In general, it is preferable for firms to haw a high PES - to be highly responsive to changes in price (and other market conditions). This can help to make the firm more competitive and therefore to generate more sales revenue and profits. Firms can become more responsive to changes in market price in several ways, including: • creating spare capacity • keeping large volumes o f stocks (inventories) • improving storage systems to prolong the shelf-life of products • adopting or upgrading to the latest technology • improving distribution systems (how the products get to the customers) • developing and training employees to improve labour occupational mobility (to perform a range of jobs).
Differences in earnings between skilled and unskilled workers
In general, skilled workers earn more than unskilled workers due to their relatively higher demand and relatively lower supply.
Differences in earnings between male and female workers
In literally all countries, the average earnings of males differ from the average earnings of females. Table 7.8 shows the differences in mean gross annual earnings (average pre-tax income) between male and female workers in the UK. The figures are fur full-time workers. Possible reasons for the difference in male and female earnings include the following: • There are more women in pan-time work than men, so their earnings are lower on average. • Women rake career breaks to have children and therefore miss out on promotional opportunities. • Women may accept low-paid and part-time jobs, as hours are flexible and can fit in with childcare arrangements. • Women may face discrimination at work. However, times are changing for females, especially those in more economically developed countries such as the UK: • There are more females than males in the UK enrolled on veterinary science courses and in subjects associated with medicine at university
Public expenditure versus private expenditure
In many countries, governments provide certain goods and services free of charge to their citizens (see Chapter 2), who may have paid for them indirectly through personal taxation. Examples include education, health care, public libraries, parks, museums, public roads and motorways (highways), garbage or refuse collection, street lighting, street signs and national defence.
Changing social climate
In many countries, more women are entering the workforce and delaying having families while more men are looking after the home and children. As a result of falling birth rates, some countries have ageing populations. These factors affect the composition of the workforce. Such countries may have to rely on immigration to ensure that they have workers with the required skills in the future.
Welfare services
In mixed economic systems, the government provides social and welfare services to people in need. These include transfer payments such as unemployment benefits and state pension schemes for the elderly. The New Zealand government, for example, spends about NZ$12 billion ($9.88 bn) each year on transfer payments.
Flexible working patterns (changes in employment patterns)
In order for firms to compete internationally they need to be far more flexible when there are changes in the world economy For example: Firms allowing employees to work from home Allowing part time workers Flexible working hours etc.
Floating exchange rate systems
In the floating exchange rate system, the value of a currency is determined by the market forces of demand for the currency and supply of the currency. For example, overseas tourists buy (demand ) the foreign currency by selling their domestic currency. Countries that adopt this system allow the value of their currency to be determined by the market. Examples are Belgium, Chile, Luxembourg, Spain, Japan, New Zealand, Sweden and the United Kingdom. In a floating exchange rate system, there is an appreciation in the exchange rate if the exchange rate is rising against other currencies. By contrast, there is a depreciation of the exchange rate if its value falls against other currencies.
Policies to alleviate poverty
In theory, all governments a range of policies to alleviate poverty, although achieving this in practice is fur more difficult. Such policies can be categorised as fiscal, monetary and supply-side policies
Examples of how fiscal policy can impact the supply side o f the economy include:
Incentives to work - Cuts in income tax can be used to create incentives for people to seek employment and to work harder . Some economists argue that reducing social welfare assistance such as unemployment benefits can also create incentives for people to seek employment. government support for business start· ups can also create incentives for entrepreneurs and business creation. • Investment expenditure - Government capital expenditure on infrastructure (such as railroads, motorways, schools and hospitals) helps to boost investment in the economy. Lower rates of corporation tax can also help to attract foreign direct investment in the country, thereby boosting the economy's potential output. • Human capital expenditure - This refers to government expenditure on the workforce by investing in education and training. Such fiscal policies arc designed to boost the productivity of labor (or the human capital of the workforce). Human capital expenditure is often accompanied by government spending on health care and transportation networks, as these help to raise labour productivity
Income
Income is the total amount of earnings an individual receives in a period of time. It may consist of wages, interest, dividends, profits and rental income.
Custom duties
Indirect cross-border taxes on foreign imports
Indirect taxes -
Indirect taxes - These are taxes imposed on expenditure on goods and services. For example, countries such as Australia and Singapore use a goods and services tax (GST), whereas the European Union uses value added tax (VAT). Other examples are taxes on petrol, alcohol and cigarettes.
Other determinants of consumer spending
Inflation The general level of prices in the economy influences consumer spending because an increase in inflation reduces the purchasing power of individuals. Therefore, inflation tends to cause reduced spending, less savings and more borrowing, and vice versa Interest rates The interest rate refers to the cost of borrowing or lending money. An increase in interest rates (sec Chapter 16) may lead to decreased consumer spending, Jess borrowing and more saving because: • borrowing has become more expensive and therefore the demand for loans falls, which leads to less consumer spending • saving may become more attractive due to the higher return, so individuals may save more and spend Jess • if an individual has a loan or mortgage, the increase in interest repayments may lead to a decrease in demand for other goods and services, so spending falls. Confidence levels The level of personal spending in an economy is heavily influenced by the level of consumer and business confidence. During a recession or a period of low economic growth (see Chapter 20), people may prefer to save rather than spend as they lack confidence about the future of the economy - for example, fearing that they may lose their job. By contrast, during an economic boom or a period of high economic growth, people and firms feel confident about the future and therefore purchase more services. The sale of luxury items such as restaurant meals, spa treatments and foreign holidays increases. Firms may invest more in new equipment and technology because they feel confident about the future. This creates jobs and fuels spending, borrowing and savings. Age - A person's age impacts upon their level of consumer spending. A young single person may earn a relatively low income and may spend most of it on goods and services to support their lifestyle. As a person gets older, their earnings will typically rise and they may start to save a greater proportion of their income to buy a property or in anticipation of marriage and children. During the family stage of a person's life they will spend more of their income on their children but will also have to save to build up a pension to support them when they retire. They may also be saving fur their children's university education. After retirement, people dissave as they have no earned income and so must spend from their savings. The size of households - The average size of households has changed over time. In economically developed countries, birth rates are falling as people choose to marry and have children later in life. There has also been an increase in single households. This influences expenditure patterns as a family with three children will usually consume more goods and services than a single-person household.
demand pull inflation
Inflation caused by an increase in aggregate demand is called demand-pull inflation. This is also defined as the increase in price due to aggregate demand exceeding aggregate supply.
Cost-push inflation:
Inflation caused by an increase in the cost of production in an economy, which is pushed onto consumers. The cost of production could rise due to higher wage rate, higher indirect taxes, higher costs of raw materials, higher interest on capital etc.
Inflation
Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time.
Price stability (control of inflation)
Inflation refers to a persistent rise in the general level of prices in the economy. Low and sustainable rates of inflation are viral to achieving economic stability and social wellbeing. For example, inflation reduces the international competitiveness of a country as its prices will be relatively higher. This will lead to lower export sales, thus causing potential job losses. Inflation can be caused by excessive aggregate demand (total demand) in the economy. This is known as demand-pull inflation. By contrast, cost-push inflation is caused by higher costs of production.
Internal economies of scale
Internal economies of scale are economies of scale that arise from the internal organisation of the business-for example, financial, bulk- buying and technological economies of scale.
International specialisation
International specialisation occurs when certain countries concentrate on the production of certain goods or services due to cost advantages - perhaps arising from an abundance of resources.
International trade
International trade is the exchange of goods and services beyond national borders. It emails the sale of exports goods and services sold to overseas buyers and imports (foreign goods and services bought by domestic households and firms).
Invisible Imports
Invisible Imports refer to the spending on services provided by firms in overseas countries.
Invisible exports
Invisible exports refer to the earnings from selling services to foreign customers.
Foreign aid
Is a form of financial assistance for economic development from other countries or non-government organizations such as Oxfam and Unicef.nsfers to another, which can take the form of a gift, a grant or a loan.
Define Supply
Is the ability and willingness of firms to provide goods and services at given price levels. Firms will have more incentives to supply their products at higher prices - the higher the price, the greater supply tends to be.
Market clearing level
Is the price of a good or service at which quantity supplied is equal to the quantity demanded also called the equilibrium price.
Seasonal (Types of unemployment)
Is the regular and periodical changes in demand e.g. the retail companies tend to hire more staff during the Christmas season
Fiscal Policy
Is the use of taxation and government expenditure strategies to influence the level of economic growth and macroeconomic objectives (PERBF)
Sleeping partner
It is possible for a partnership to have a sleeping partner (or silent partner) who invests money in the partnership bur docs not rake part in the daily management of the business. It may also be possible for a partnership to be a limited liability partnership (LLP) where the partners have limited liability and the partnership has a legal identity separate from its owners. An example is KPMG, an accountancy firm that operates globally. The rules governing this type of partnership vary between countries.
Cyclical (Types of unemployment)
It is the most severe type of unemployment because it can affect every industry in the economy It is caused by a lack of aggregate demand which causes a fall in national income
PED, consumer expenditure and revenue changes
Knowledge of the price elasticity of demand for a product can be used to assess the impact on consumer expenditure and therefore sales revenue following changes in price. Sales revenue is the amount of money received by a supplier from the sale of a good or service. It is calculated by multiplying the price charged for each product by the quantity sold, i.e. Revenue = price x quantity demanded Note that this is not the same as profit, which is the numerical difference between a firm's sales revenues and its total costs of production. For example, if Lenovo sells 5000 laptops at $700 each in the first quarter of the month, its sales revenue is $3.5 million. Suppose that the computer maker reduces its price to $650 and the quantity demanded rises to 5200 units in the following quarter. Was this a good business decision? A quick calculation of PED reveals that the demand for Lenovo laptops is price elastic: • percentage change in quantity demanded = (5500 - 5000)/5000 x 100 = +10% • percentage change in price = ($650 - $700)/$700 x 100 = -7.14% • thus, PED= 1.4 This means the PED fur Lenovo laptops is price elastic. Hence a fall in price causes a relatively larger increase in the quantity demanded, so sales revenues should increase. This can be checked as follows: original sales revenue = $700 x 5000: $3 500000 new sales revenue = $650 x 5500 = $3 575 OOO difference in sales revenue= $3.575m - $3.5m = +75000 Given that demand Lenovo laptops in the above example is price elastic, a reduction in price was a sensible business decision. Therefore, it can be seen that knowledge ofPED fur a product can inform firms about their pricing strategy in order to maximise sales revenues.
define the factors of production (land, labour, capital, enterprise)
Land = natural resources e.g. raw materials (trees, ores, etc.) Labour = (work/productive effort of) human resources e.g. workers Capital = man-made resources eg. Tools, machinery, office/factory buildings Enterprise = (quality that entrepreneurs possess) willingness to take risks, start and run/operate a business, which involves combining and organizing resources in a firm to produce goods and services.
Why do small firms co-exist beside large firms?
Large firms arc able to take advantage of economies of scale (see below) and therefore their average costs of production arc lower than those of a small firm. In many economics there are small grocery stores alongside large supermarkets. Supermarkets provide customers with: • a wide choice of particular products, such as various types of yogurt, cheese or wine • a wide product range, as in one store you can buy fresh milk, a pair of shoes, a tea pot and a hair dryer. Examples of products and services provided by small shops are made-to-measure clothing and custom-made furniture. They tend to focus on smaller markets and may cater for specific tastes and for people with higher incomes.
Environmental protection
Laws exist to prevent or reduce the damage to the environment caused by private-sector firms, such as pollution and the depletion of scarce resources. For example, Japan's government has imposed several types of fishing ban to preserve the world's supply offish and whales. Regulation of carbon emissions also limits the potential damage to the environment caused by private producers.
Differences between private limited companies and public limited companies - Private limited companies
Legal status - Carries the initials 'Ltd' after its name in official business communication Buying shares - Shares are not available on an open stock exchange, thereby limiting the amount of funds Selling shares - Shares can only be sold to family, friends and employees with the prior approval of the majority of the shareholders; hence it can be difficult to sell shares in the company Minimum start-up share capital - $3.04 Number of shareholders - No upper limit, but likely to have far fewer shareholders than a public limited company Raising further finance - The scale of more shares in the company must first be approved by the directors
Differences between private limited companies and public limited companies - Public limited companies
Legal status - Carries the initials of 'PLC' after its name in official business communication Buying shares - Shares are tradable on a stock exchange, so general public can buy shares in the company Selling shares - Shares can be sold instantaneously to anyone via a stock exchange such as the London Stock Exchange or the New York Stock Exchange Minimum start-up share capital - $76219 or 50000 euros Number of shareholders - No upper limit, but likely to have far more shareholders than a private limited company Raising further finance - A subsequent 'share issue' can be used to sell more shares and raise more funds
income tax
Levied on personal incomes (wages, interest, rent and dividends). In most countries, this is the main source of tax revenues.
Limited liability companies
Limited liability companies arc owned by shareholders. The owners have the benefit of limited liability, which means that in the event of the company going bankrupt they would not lose more than the amount they had invested in the company - they cannot be forced to sell their personal belongings to repay the debts of the company. In legal terms, there is a divorce of ownership and control, since the owners (shareholders) are treated as separate legal entities from those who control and run the business (the directors and managers). Limited liability companies can raise finance by selling shares. However, a private limited company cannot sell shares to the general public whereas a public limited company can raise finance in this way. When a firm becomes a public limited company it offers shares to the general public in an Initial Public Offering (IPO) on a stock exchange. To attract investors the firm will publicise the IPO in newspapers and on media websites.
Define the nature of the economic problem (finite resources and unlimited wants)
Limited/finite resources + unlimited/infinite wants = SCARCITY of resources The basic economic problem is the scarcity of resources where there are too limited resources to satisfy unlimited wants.
Other pricing policies that might be used by firms include: Loss leader pricing
Loss leader pricing - This happens when the price is set below the costs of production, thus making a loss in the short run. Supermarkets often use loss leader pricing for some of their products (such as toilet tissue or carbonated soft drinks) in order to attract more customers to buy other products sold at the supermarket.
LIC
Lower income class
LMC
Lower middle class
Tax reforms
Lower taxes can create incentives for work (see Chapter 17), especially for people on low wage rates. Over time, this can provide a boost to consumption. Tax cuts can also encourage firms to invest in the economy, as they strive to maximise profits.
LEDCs
Lowest economically developed countries - with a lower standard of living
Multinational corporations suffer from the following disadvantages:
MNCs face an array of issues to deal with, such as different legal systems, tax regulations and environmental guidelines. The lack of local knowledge can also cause major problems for an MNC. The sheer size and geographic spread of an MNC makes it harder to manage the overall business. It becomes more difficult for managers to ensure everyone works well together and to the same standard. Effective communication can also be an issue if workers are located in countries with different languages, national cultures and time zones. Fluctuating exchange rates can make it difficult to measure and compare the value of an MNC's sales and profits in overseas markets. Multinational corporations have often been criticised for their cost-cutting practices, resulting in poor working conditions and low wages paid to workers in some countries. Since many MNCs earn far more revenue than the gross domestic product of the host country, they are often in a powerful negotiating position with foreign governments over location decisions and access to finance (government subsidies, grams and loans). While jobs might be created, MNCs can force local firms that are less competitive to close down. Their huge market power and ability to exploit economies of scale mean that local firms might struggle to compete. The over reliance on MNCs in low-income countries means that there are major consequences should an MNC choose to relocate its operations to another country. For example, in 2010 French supermarket chain Carrefour pulled out ofThailand, Malaysia and Singapore, creating unemployment in these countries. MNCs may be unsuccessful in a country as the goods and services offered may not appeal to local tastes and customs. For example, British retailer Tesco dosed all of its US 'Fresh & Easy' supermarkets in April 2013.
malign deflation
Malignant deflation is connected to weak demand that causes a downward spiral in prices.
Managerial economies of scale
Managerial economies of scale occur as large firms have the resources to employ specialists to undertake functions within the firm, such as accountants, engineers and human resources specialists. Managerial economies of scale occur as large firms have the resources to employ specialists to undertake functions within the firm: for example, accountants, engineers and human resources specialists. High salaries paid by large firms will attract experts.
Define Market Equilibrium
Market equilibrium is a market state where the supply in the market is equal to the demand in the market. The equilibrium price is the price of a good or service when the supply of it is equal to the demand for it in the market.
Explain the concept of market failure, when and why does it occur?
Market failure occurs when the production or consumption of a good service causes additional positive or negative externalities (spillover effects) on a third party not involved in the economic activity. In other words, the market forces of demand and supply fail to allocate resources efficiently.
Marketing economies of scale
Marketing economies of scale occur as big firms tend to have a large advertising budget and therefore can spend large amounts of money on promoting their products. For example, a Nike or IKEA advert exposes all products under the Nike brand and all products sold in IKEA in a cost-effective way.
Employees aims and objectives are to ...
Maximise profits Minimise costs Maximise sales
Employers aims are to...
Maximise wages/salaries Work in a safe and healthy environment Have good terms and conditions at work Maximise their non-wage benefits Enjoy job security
price elasticity of supply
Measures the degree of responsiveness of quantity supplied of a product following a change in its price
Consequences of inflation
Menu costs - Inflation impacts on the prices charged by firms. Catalogs, price lists, and menus have to be updated regularly and this is costly to businesses. Of course, workers also have to be paid for the time they take to reprice goods and services. Consumers - The purchasing power of consumers goes down when there is inflation - there is a fall in their real income because money is worth less than before. Therefore, as the cost of living increases, consumers need more money to buy the same amount of goods and services. Savers - Savers, be they individuals, firms or governments, lose out from inflation, assuming there is no change in interest rates for savings. This is because the money they have sa\'ed is worth less than before. Hence, inflation can act as a disincentive to save. ln turn, this leads to fewer funds being made available for investment in the economy. •Lenders - Lenders, be they individuals, firms or governments, also lose from inflation. This is because the money lent out to borrowers becomes worth less than before due to inflation.
Merit goods
Merit goods - These products are deemed to ha~·e social benefits yet are under-consumed without government intervention or provision. Examples are education, health care services, work-related training schemes and public libraries.
Describe how scarce resources are allocated in a mixed economy
Mixed economies may have a distinct private sector, where resources are allocated primarily by market forces, such as the grocery sector of the UK economy. Mixed economies may also have a distinct public sector, where resources are allocated mainly by government, such as defence, police, and fire services. In many sectors, resources are allocated by a combination of markets and panning, such as healthcare and, which have both public and private provision.
Allocation of resources of a mixed economy (characteristics)
Mixed economy is one that combines the characteristics of both command and free market economy. Some firms are privately owned and some are owned by the government. Some prices are determined by the market forces of demand and supply (price mechanism) and some are set by the government. Both consumers and the government influence what is produced. Since mixed economy combines the characteristics of both command and market economy. It also combines the advantages of the two systems.
Monetary (Types of unemployment)
Monetary policy - this refers to the use of interest rates to affect the level of economic activity. - by lowering interest rates, the cost of borrowing falls thus encouraging households and firms to spend and invest.
The functions of money
Money acts as a medium of exchange - For something to be considered as money it must function as a way to conduct trade. Money is widely recognized and accepted as a means of payment for goods and services. Money is a measure of value - Money is a unit of account, as it measures the market value of different goods and services. It is far more efficient for trading purposes to express the price of goods and services in dollars (or another monetary value) rather than using products such as cloth, shells, salt or livestock - all of which have been unsuccessful forms of money in history. Money is a store of value as it can be stored and used at a later date in the future. This means that money must be able to hold its purchasing power over time. Money therefore gives firms and households flexibility in the timing of their sales and their purchases, thus removing the urgency to trade straight away. Money is a standard of deferred payment - This means that money is used as the standard for future (deferred) payments of debt. For example, loans taken out today are repaid in money at some time in the foreseeable future. Both the US dollar and the euro have been widely accepted standards for settling international debts.
The meaning of money
Money is any commodity which can be used as a medium of exchange that is accepted for the purchase of goods and services. In today's modern society, money includes officially issued banknotes and coins (legal tender), gold and bank account deposits.
Disadvantages of monopoly
Monopolies have a number of disadvantages: • Private -sector monopolies can be inefficient in terms of resource allocation. In pursuit of profit maximisation, the monopolist can result the output of a product and/ or charge a higher price for it. This creates a Joss in the welfare of consumers (see Figure 13.2). • High barriers to entry prevent new firms from entering the market. This limits the degree of competition and ensures monopolists can continue to charge relatively high prices. • As there are no substitutes for the products supplied by monopolists, demand is price inelastic (sec Chapter 4). Howe\·er, as monopolists are price makers, they can charge higher prices to maximise profit from the relatively low PED (see Figure 4.6). • Imperfect knowledge about prices and products means that consumers may not necessarily make rational choices. For example, the confusing pricing policies used by utilities companies (gas, telephone, water and electricity) mean that customers find it troublesome to switch between suppliers, especially as they might not know if they would be better off. Thus, imperfect knowledge enables monopolists to maintain market power. • Monopolists may have less incentive to innovate than firms in competitive markets. Innovation is the commercial exploitation of an invention. The lack of competitive pressures means that monopolists can become complacent (as there is no need to be worried about competition), rather than focus on innovations to ensure their survival.
MEDCs
More economically developed countries - with a lower standard of living
There are various forms of foreign aid that can be used to tackle the problems of poverty - Multilateral foreign aid
Multilateral foreign aid - This is official financial assistance from more than one source, such as foreign governments, international organizations such as the World Bank, and non-governmental organizations such as Oxfam and Unicef.
Nationalisation
Nationalisation is the process of taking assets into state ownership - it is when the government takes over private-sector corporations. For example, this occurred during the global financial crisis of 2008- 09 when several banks were partially or entirely nationalised and taken into government ownership in the UK These have since been privatised - that is, sold back to private investors. For example, Northern Rock was nationalised on 22 February 2008 but sold to the Virgin Group on 1st January 2012.
Net exports
Net exports refers to the monetary value of the difference between a nation's exports earnings and its import expenditure.
Net income flows and transfers
Net income flows and transfers arc a record of a country's net income earned from capital flows. Examples include: • interest, profits and dividends paid to foreigners who own assets in the country • income earned on foreign assets owned by domestic residents and firms Examples of transfers include: • money spent on foreign aid • money sent home by people working abroad • taxes received by the government from foreign residents and firms • bank deposits held in overseas banks.
Occupational mobility
Occupational mobility refers to the ease with which a person is able to change between jobs. The degree of occupational mobility depends on the cost and length of training required to change profession.
Excess demand
Occurs when the demand for a product exceeds the quantity supplied (this happens when the price is set below the equilibrium price, resulting in shortages
Structural (Types of unemployment)
Occurs when the demand for products produced in a particular industry falls continually (often due to foreign competition)
Market Failure
Occurs when the market fails to allocate resources efficiently
Market failure
Occurs when the production or consumption of a good or service causes additional positive or negative externalities on a third party e.g. the production of oil may cause damage to the environment.
Excess supply
Occurs when the supply of a product exceeds the demand at certain price levels. This results in a surplus because the selling price is too high
Voluntary (Types of unemployment)
Occurs when workers choose not to work - usually exists in economies with relatively generous welfare benefits for the unemployed as well as high rates of income tax which thus creates disincentives to work at current market (equilibrium) wage rates
current account
One of the components of the balance of payments is the current account, which is a record of all exports and imports of goods and services between a country and the rest of the world. The current account is structured in three parts. - Visible trade balance - Invisible trade balance - Net income flows and transfers
define opportunity cost and analyse particular circumstances to illustrate the concept
Opportunity cost is the next best alternative (and it's benefit) forgone once a choice or decision has been made.
Overspecialisation
Overspecialisation occurs when an individual, firm, region or country concentrates too much on producing a very limited number of goods and services. This exposes the economic agent to a far higher degree of risk.
Calculating price elasticity of demand Price elasticity of demand is calculated using the formula:
PED = percentage change in quantity demanded/percentage change in price For example, if a cinema increases its ticket price from $10 to $11 and this leads to demand fulling from 3500 to 3325 customers per week, then the PED for cinema tickets is calculated as: • percentage change in quantity demanded= (3325-3500)/3500 x 100 = -5% • Percentage change in price = (11 - 10)/10 x 100 = +10% PED = -5/10 = -0.5
Calculating price elasticity of supply
PES = percentage change in the quantity supplied/percentage change in price For example, if the market price of beans increased from $2 per kilo to $2.20 per kilo, causing quantity supplied to rise from 10000 units to 10 500 units, then the PES is calculated as: • percentage change in quantity supplied = (10500-10000)/10000 x 100 = +5% • percentage change in price = ($2.20 - $2.0)/$2.0 x 100 = +10% - PES = +5%/+10% = 0.5 What this means is that the supply of beans is hardly affected by the change in price - supply relatively prices inelastic. Note that the value of PES is > 1.0 supply due to the law of supply - that is, an increase in price tends to increase the quantity supplied (and vice versa). The value of PES reveals the degree to which the quantity supplied of a product responds to changes in price. The calculation of PES generally has two possible outcomes: • If PES > 1.0 supply is price elastic, i.e. supply is responsive to changes in price (the percentage change in quantity supplied is greater than the percentage change in price) • If PES < 1.0 supply is price inelastic, i.e. quantity supplied is relatively unresponsive to changes in price (percentage change in quantity supplied is less than the percentage change in price)
Profit-related Pay
Payments related to the profits earned by a firm A partner in a law firm may receive 20% of the annual profits
Other pricing policies that might be used by firms include: Penetration pricing
Penetration pricing - This involves setting a low price in order to enter a new market. This pricing policy is often used by firms when launching new products in untested markets in order to gain market recognition and market share. It can help to give a product a competitive edge.
Determinants of supply
Price - Although price is regarded as the key determinant of the level of supply of a good or service, it is not the only factor that affects the quantity supplied. Non-price factors that affect that level of supply of a product include the following: Cost of Production - If the price of raw materials and the cost of other factors of production fall, then he supply curve will shift to the right, assuming all other things remain unchanged. Their is a an increase in supply at each price level as the costs of production fall and vice versa. Taxes - Taxes imposed on their supplier of a pricut add to the cost of production. Therefore the imposition of taxes on a product reduces its supply, shifting the supply curve to the left. Subsidies -Subsidies are a form of financial assistance from the government to help encourage output by reducing the costs of production. Subsides are usually given to reduce the costs of supplying goods and services that are beneficial to society as whole, such as education, training and healthcare. Technological progress - Technological advances such as automation computer and wireless internet mean that there can be greater levels of output at every price level. Hence, technological progress will tend to shift the supply curve to the right. Price and profitability of other products - Price acts as a signal to producers to move their resources to the provision of goods and services with greater levels of profit. For example, if the market price of corn falls while the price of rapeseed increases, then farmers are likely to reduce their supply of corn and raise their supply of rapeseed. Time - The shorter the time period in questions, the less time suppliers have to increase their output, so the lower the supply tends to be. Over time, output can be increased. For example, it is not possible for a farmer to increase the supply of agricultural products in a short time period. Weather - The supply of certain goods and services can also depend on the weather. Agriculture output will clearly depend on whether suppliers have favourable or unfavourable weather conditions. Similarly, some service providers may also limit or close their operations during adverse weather conditions thereby shifting the supply curve to the left. The number of producers in the industry - The more suppliers of a product there are in the industry, the easier it tends to be for firms to increase their output in response to a price increase. For example, there is plenty of competition in the restaurant trade, so suppliers will be highly responsive to increases in price. Hence, the greater the number of firms in an industry, the more price elastic supply tends to be. By contrast, high barriers to entry in the pharmaceutical industry mean that there are very few suppliers in the industry, so supply tends to be price inelastic.
Price discrimination
Price discrimination is the practice of charging different prices to different customers for essentially the same product. For example, public transport operators, theme parks and cinemas charge students different prices compared with other adults.
PED
Price elasticity of demand (PED) measures the degree of responsiveness of quantity demanded for a product following a change in its price. If a price change causes a relatively small change in the quantity demanded, then demand is said to be price inelastic: that is, buyers are not highly responsive to changes in price. For example, if the price of rice increases slightly, it is unlikely seriously to affect the demand for rice in countries like China, Vietnam and Thailand. By contrast, demand is said to be price elastic if there is a relatively large change in the quantity demanded of a product following a change in its price: that is, buyers are very responsive to changes in price. For example, a small rise in the price of Pepsi Cola is likely to reduce its demand quite drastically as customers switch to buying rival brands such as Coca-Cola.
PES (price elasticity of supply)
Price elasticity of supply (PES) measures the responsiveness of the quantity supplied of a product following a change in its price. Supply is said to be price elastic if producers can quite easily increase supply without a time delay if there is an increase in the price of the product. This can help to give such firms a competitive advantage, as they arc able to respond to changes in price. By contrast, supply is price inelastic if firms find it difficult to change production in a given time period when the market price changes.
Other pricing policies that might be used by firms include: Price skimming
Price skimming - This pricing policy involves a firm setting an initially high price in order to maximise profits and to recover its pre-launch costs, such as marketing and R&D (research and development). Price skimming is often used when selling new innovative products with few, if any, substitutes. The price is continually reduced (or 'skimmed') as competitors enter the market to launch rival products and compete for market share. While novelty for a new product can cause high demand and hence a high price, customers eventually look for newer versions or better alternatives. For example, when Apple launched the iPhone 4S it was priced at $399 in the USA, although the launch of the iPhone 5 in 2012 Jed to the price of the iPhone 45 fulling to just $99.
Price takers
Price takers are firms that set their price according to the market forces of demand and supply, rather than determining their own prices.
Price discrimination
Pricing strategy whereby firms charge different customers different prices for the same product because of differences in the value of their PED (price elasticity of demand) for the product
describe the terms primary, secondary and service (tertiary) sector in an economy
Primary - The primary sector includes the production of raw material and basic foods. Activities associated with the primary sector include agriculture (both subsistence and commercial), mining, forestry, farming, grazing, hunting and gathering, fishing, and quarrying. Secondary - The secondary sector of the economy includes industries that produce a finished, usable product or are involved in construction. Tertiary - The tertiary sector or service sector is the third of the three economic sectors of the three-sector theory. The others are the secondary sector, and the primary sector. The service sector consists of the production of services instead of end products
Producer co-operatives
Producer co-operatives exist when firms co-operate and support each other in several ways. For example, farmers might create a co-operative to buy equipment, fertiliser and seeds, and to marker and sell their produce collective!}'.
demonstrate how production possibility curves can be used to illustrate choice and resource allocation
Production Possibility Curves (PPC) Because resources are scarce and have alternative uses, a decision to devote more resources to producing one product means fewer resources are available to produce other goods. A Production Possibility Curve diagram shows this, that is, the maximum combination of two goods that can be produced by an economy with all the available resources.
Production
Production refers to the total output of goods and services in the production process.
Productivity
Productivity is a measure of efficiency that involves calculating the amount of output per unit of a factor input (such as output per worker or output per machine hour).
Productivity
Productivity is a measure of how well resources are used in the production process: that is, the economic efficiency of land, labour, capital and enterprise. For example, labour productivity measures the efficiency of the workforce in terms of output per worker. It can be improved by having a better-skilled workforce (through education and training) or by allowing workers to use better, more efficient technologies to increase their output. By contrast, the use of automation, such as the robotics and specialised computer equipment used in car manufacturing, can help to raise capital productivity without the need to hire more workers. Factors of production + productivity = production
The difference between productivity and production
Productivity is a measure of the degree of efficiency in the use of factor inputs in the production process. It takes an average measure of this efficiency, such as output per worker, revenue per sales person or output per machine hour. Alternatively, productivity can be measured as a ratio, such as the value of output compared with the cost of the inputs (factors of production). By contrast, production refers to the total output of goods and services in the production process. Production can be increased either by using more factor inputs or by raising the productivity of existing factors of production.
Substitutes
Products that are in competitive demand as they can be used in place of each other e.g. tea and coffee
Substitutes
Products that are in competitive demand as they can be used in place of each other; tea and coffee
Complements
Products that are jointly demanded e.g. tea and milk
Complements
Products that are jointly demanded e.g. tea and milk or the cinema and popcorn
Profit maximisation and business objectives
Profit maximisation is the goal of most private-sector firms. Profits arc maximised when the positive difference between a firm's sales revenues and its costs of production is at its greatest.
Formula to calculate profit
Profit= total revenue - total costs
Advantages of the planned system
Provision of merit goods: - Since government looks after the welfare of the general public, there will be provision of public and merit goods. - Equal distribution of income and wealth: Since people do not have freedom to own resources everyone has more equal spending power to buy goods and services. Employment : Everyone works for the government.
Public corporations
Public corporations (or public-sector organisations) are wholly owned by the government and are therefore funded through tax revenues. They are organisations that provide goods and services for the general public. Examples of public-sector organisations arc: water suppliers, sewerage providers, utilities (electricity and gas boards), the post office and state-owned news and broadcasting organisations (such as ABC in Australia). It should be noted that in the USA 'public corporation' is another term for a public limited company that can trade shares on the stock exchange. In the USA, public corporations are referred to as public-sector organisations.
The disadvantages of public sector corporations include the following:
Public corporations are funded using taxpayers' money, so there is an opportunity cost - in other words, the money could have been used for other purposes, such as welfare benefits, government debt repayment or to improve the economy's infrastructure. A public-sector corporation could be inefficient, as there is little incentive to maximise profits because the aim of the organisation is to provide a service to the general public. A public corporation may be a monopoly, so it could charge high prices and provide a poor service as it is nor subject to any competition.
Public goods
Public goods - These products are non-excludable and non-rivalrous in consumption. Examples are national defence, law and order, street lighting, flood control systems, public fireworks displays, lighthouses, online search engines and public roads.
Public services
Public services - In many countries, the government also directly provides other essential public services, such as postal services, public transport systems, the emergency services (fire, police and ambulance) and immigration services. In some countries, the government goes further to provide public utilities services (such as gas, electricity and telecommunications) and terrestrial television broadcasting services. These services are not run in the same way as they would be if private - sector firms were seeking to maximise profits.
Purchasing or bulk-buying economies of scale
Purchasing or bulk-buying economies of scale occur when the cost of raw materials falls as they are bought in large quantities thus reducing the average costs.
Demand
Quantity of goods and services that consumers are willing and able to buy at a given price at a given period of time
Real GDP
Real GDP refers to the value of national income (GDP) adjusted for inflation to reflect the true value of goods and services produced in a given year.
Recession
Recession occurs in the business cycle when there is a fall in GDP for two consecutive quarters.
Market structure
Refers to the key characteristics of a particular market, such as the number and size of firms in the market, the degree and intensity of price and non-price competition, and the nature of barriers to entry.
Regional specialisation
Regional specialisation occurs when certain areas concentrate on the production of certain goods or services. For example, Hollywood, in Los Angeles, is famous for its motion pictures industry.
Regional unemployment
Regional unemployment occurs when unemployment affects specific geographical areas of a country. While busy central business districts tend to have higher rates of employment, remote rural areas have relatively high rates of unemployment.
Production Possibility Curve
Represents the total amount of goods and services that can be produced in an economy (graph)
Research and development economies of scale
Research and development economies of scale occur as large firms may be able to fund research and development, and therefore can be innovative and create products that enable them to be leaders in their area of business. For example, GlaxoSmithKline is a large pharmaceutical company that invests heavily in research and development (R&D), spending around 15 per cent of its sales revenue (or around $6.26 billion) on it.
The disadvantages of imposing rules and regulations to correct market failures are as follows:
Restrictions cause underground (illegal) markets to develop where the good or service can be purchased, often at a very high price. • The government has no control over the quality of the goods produced in underground markets, which in some cases can be dangerous for consumption, as with illegally distilled vodka and tainted baby milk powder. • People break the rules: for example, under-age smokers and drinkers of alcohol can bypass the law by obtaining false identification cards. ln the case of smoking, people may choose to smoke outside buildings and therefore inflict second-hand smoke on people entering and leaving the building. • The fine or punishment for ignoring the ban must be enforced and set sufficiently high to discourage consumption of the good or service.
Revaluation
Revaluation occurs when the price of a currency operating in a fixed exchange rate system is officially and deliberately increased.
What is the formula to calculate the total revenue?
Revenue is often referred to as sales revenue or sales turnover. It is calculated by using the formula: Revenue = price x quantity sold
Revenues
Revenue refers to the money payable to a business from the sale of its products. For example, Nike and Adidas receive most of their revenues from the sale of sports apparel and sports equipment.
Unitary elasticity
Revenue remains constant at every possible price
Revenue
Revenue, in economics, the income that a firm receives from the sale of a good or service to its customers. Technically, revenue is calculated by multiplying the price (p) of the good by the quantity produced and sold (q).
Risk-bearing economies of scale
Risk-bearing economies of scale occur as large firms tend to produce a range of products and operate in many locations. This diversity spreads risks as weak sales in one country can be supported by strong sales in another. Samsung makes a range of products and if one product is experiencing decreasing sales then this loss can be balanced by increased sales of another product.
Salary
Salaries are paid monthly at a fixed value, so are fixed costs Full-time job (e.g. teachers, shop managers and nurses)
Savings
Saving occurs when a person puts away pan of their current income for future spending. Reasons for saving include the following: • A person may decide to sacrifice current spending so that they have funds to spend in the future. For example, people may saYc for a holiday or for their retirement. Parents may save money for their children's education. • A person may choose to save a portion oftheir income in a bank or other financial institution in order to earn imcrest. Banks also provide a secure place for depositing savings. • A person may save for precautionary reasons so that they have money put aside in case of an emergency, such as an accident, job loss or unforeseen event in the future.
Savings ratio
Savings ratio refers to the proportion of household income which is saved instead of consumed in an economy.
Seasonal unemployment
Seasonal unemployment is caused by regular and periodical changes in demand for certain products. For example, fruit pickers are in high demand during the summer months while retailers tend to hire more temporary workers during the Christmas season (the busiest time of the year for most retailers).
The advantages of limited liability companies are as follows:
Since shareholders have limited liability, it is usually easier to raise a large amount of finance from selling shares. For example, the Agricultural Bank of China raised a record $22 billion its initial public offering in the summer of2010. • The vast sum of money that can be raised from selling shares allows limited liability companies to enjoy the benefits of being large, such as economies of scale (see Chapter 14), market power and market presence/dominance. • Additional finance can be raised through a share issue, which is the process of selling more shares in the company. In 2010, Brazil's state oil company Petrobras' raised $70 billion in the world's largest share issue.
Features of monopoly include:
Single supplier - As its name suggests, a monopolist is the sole supplier of a product in a given market. This is due to high barriers to entry (see below), which result in a lack of substitutes. • Price maker (or price setter) - The monopolist has significant market power, controlling enough of the market supply (see Chapter 3) that it can charge higher prices yet produce lower output than would be the case if it faced real competition. • Imperfect knowledge - A monopolist is able to protect its prestigious position because customers and rivals have imperfect knowledge, partly as a result of the monopolist's ability to protect its trade secrets. • High barriers to entry - A monopolist can remain so only if in the long run there are wry high barriers to entry. These obstacles effectively prevent other firms from entering the market. Examples include: economies of scale of existing firms, ownership of essential resources, the existence of intellectual property rights (namely, patents, trademarks and copyrights), advertising expenditure and legal barriers to entry.
Elastic Demand
Small change in price cause large change in quantity demanded, PEd > 1
Elastic Supply
Small change in price cause large change in quantity supplied, PEs > 1
Inelastic Demand
Small change in price cause small change in quantity demanded, PEd < 1
Inelastic Supply
Small change in price cause small change in quantity supplied, PEd < 1
Interpreting PED calculations
So what does a PED value of -0.5 actually mean? The cinema ticker example suggests that the demand for cinema tickers is price inelastic (i.e. relatively unresponsive to changes in price). This is because a 10 per cent increase in the price (from $10 to $11) only caused quantity demanded to drop by 5 per cent (from 3500 tickers per week to3325 ). The value of PED is negative due to the law of demand - an increase in the price of a product will rend to reduce its quantity demanded (see Chapter 3). The inverse relationship between price and quantity demanded also applies in the case of a price reduction - that is, a price fall rends to lead to an increase in the quantity demanded. The calculation of PED generally has two possible outcomes: • If the PED for a product is less than l (ignoring the minus sign), then demand is price inelastic (i.e. demand is relatively unresponsive to changes in price). This is because the percentage change in quantity demanded is smaller than the percentage change in the price (see Figure 4.1). • If the PED for a product is greater than 1 (ignoring the minus sign), then demand is price elastic (i.e. demand is relatively responsive to changes in price). This is because the percentage change in quantity demanded is larger than the percentage change in the price of the product (see Figure 4.2).
How to calculate social costs
Social costs = private costs + external costs
Capital investment
Some supply-side policies focus on the importance of investment in new technologies, infrastructure and research and development (R&D), thus contributing to the economic development of an economy. In the Jong run, capital investment helps to increase the productive capacity and productivity of the economy. Expenditure on new technologies and R&D can help to generate new products for consumption, such as smartphones, tablet computers and environmentally friendly cars. On an international scale, innovation can also be a good source of competitive advantage for a country.
Specialisation
Specialisation occurs when individuals, firms, regions or countries concentrate on the production of a particular good or service. e.g. Individuals - People might specialise, for example, as accountants, bankers, construction workers or engineers. Specialisation allows workers to become more skilled and efficient at their jobs, thus increasing the quantity and quality of the goods or services being provided. Firms - McDonald's, Burger King, KFC and Pizza Hut specialise in the output of fast food • Regions - Silicon Valley in northern California, USA, specialises in the provision of high-tech information communication technologies; London, Tokyo and Shanghai are financial districts; Paris and Milan are major world cities for fashion and design. These are examples of regional specialisation. • Countries - Bangladesh and India are major producers and exporters of textiles; Scotland is famous for its whisky; Thailand and Vietnam specialise in the production of rice; and Caribbean countries such as Jamaica and Tobago specialise in tourism.
Specialisation of labour
Specialisation of labour occurs when a worker becomes an expert in a particular profession, such as a landscape architect, a psychiatric nurse, an electrical engineer or an economics professor. Specialisation of labor can also occur when a worker becomes an expert in a part of a production process. Examples are supermarket checkout operators, waiters serving people in a restaurant, and factory workers who operate machinery.
strike
Strike Trade union members refuse to work,i.e they stop working Production of goods and services ceases temporarily and this has an immediate impact on the firm Workers do not get paid when they do not work. so they lose wages/earnings
Supply side policies
Supply side policies are long-term strategies aimed at increasing the productive capacity of the economy by using policies to improve the quality and/or quantity of factors of production. This means that the economy can produce more goods and services at all price levels This can be shown as an outward shift of the country's production possibility curve
Alternative business objectives - Businesses have a variety of objectives and do not necessarily strive to maximise profit. Other business objectives include:
Survival - While business survival is a vital objective for new businesses, even well-established firms will need to focus on this, especially during unfavourable trading times. To survive in the long run, firms need to earn a profit. • Market share - TI1is refers to a firm's sales revenue as a proportion of the industry's total sales revenue. An increase in sales revenues will, other things being constant, lead to greater market share for the firm. Higher market share has several advantages, such as economics of scale and customer loyalty. • Image and reputation - Businesses might aim to improve how the general public perceives them. A bad image can turn suppliers and customers against the firm's products and services. For example, German car-maker BM\V recalled 720000 cars worldwide in 2013 due to potential electrical problems. Resolving such problems, although costly to BMW, presents problems for the firm in the long run. Ethical objectives - This refers to the moral principles (values and beliefs) that guide business activity. These objectives focus on what is considered to be socially responsible. Ethical businesses strive to improve the treatment of workers, customers, shareholders and the natural environment. Not-for-profit organisations such as charities aim to provide services to enhance the welfare of people in society.
Differences in earnings between industrial sectors
Table 7.10 shows that workers in the agricultural, fishery and forestry industries in 2012 earned the lowest wages in the UK with the exception of occupations in accommodation and food services, which generally offer unskilled work. The main reason fur the low earnings in these industries is that the products produced, such as fish and food products, have a low sales value. In general, as the value of a good or service increases, so does the wage of the person who produces it. Table 7.10 also shows that occupations in the finance, insurance, information and communication industries typically earn the highest wages. These tertiary sector occupations produce services of a higher value than those in the primary sector. A rise in the price of minerals and metals in recent years may help to explain the high earnings of people working in mining and quarrying. Skilled trades such as electricians and gas technicians have been in short supply in recent years in the UK, partly due to the lengthy training period required, and this may have led to increased earnings for workers in these occupations. People in tertiary sector professions tend to have high earnings because to become a fully qualified accountant, doctor or lawyer requires postgraduate level study, professional examinations and many years of experience. The reward for this time and effort is higher wages, which attract people to those professions. In many economies, students have to take out loans for university and postgraduate training and they ·would only be prepared to do this because of the potential reward of high future earnings.
Tax avoidance
Tax avoidance is the legal act of minimising payment of taxes, such as by avoiding spending on items with a large sales tax.
Tax evasion
Tax evasion is the illegal act of not paying the correct amount of tax, perhaps due to a firm under-declaring its profits.
Technical economies of scale
Technical economies of scale occur as large firms can afford to purchase expensive pieces of machinery and automated equipment for the manufacturing process.
balance of payments
The balance of payments is a financial record of a country's transactions with the rest of the world for a given time period, usually over I year. This includes the country's trade in goods and services with other countries. In theory, the balance of payments must always balance over time. This is because a country, like an individual, can only spend (on imports, for example) what it earns (from export earnings, for example.)
Balance of payments stability (aims of government policies) (PERBF)
The balance of payments is a record of a countries financial transactions with other nations
Balance of payments stability
The balance of payments is a record of a country's financial transactions with other nations. This includes the money flows into and out of a country from the sale of exports and the purchase of imports. If the money inflows exceed the inflows, then a balance of payments surplus exists. If the outflows exceed the inflows, the country has spent more than it has earned, so a balance of payments deficit occurs. While a deficit drains money from the country, a balance of payments surplus can be inflationary in the long run due to the excess amount of money entering the country. Governments therefore tend to aim to achieve a balance of payments equilibrium.
Private benefits
The benefits of production and consumption enjoyed by a firm/individual/government e.g. The car owner enjoys the benefit of having private transport.
Causes of deflation
The causes of deflation can be categorised as either demand or supply factors. Deflation is a concern if it is caused by falling aggregate demand for goods and services (often associated with an economic recession and rising levels of unemployment).
causes of deflation
The causes of deflation can be categorized as either demand or supply factors Aggregate supply in higher levels causes deflation, increasing the productive capacity of the economy This drives down the general price level of goods and services whilst increasing the national income Deflation can also be caused by lower levels of aggregate demand in the economy, driving down the general price level of goods and services in the economy due to excess capacity
Central bank
The central bank of a country is the monetary authority that oversees and manages the nation's money supply and banking system. Examples of central banks are the European Central Bank (for the Eurozone countries), the USA's Federal Reserve, the Bank of England, the People's Bank of China and the Reserve Bank of India. These banks are responsible for overseeing the monetary policies of their respective countries, including being responsible for the nation's entire money supply and the manipulation of interest rates to affect the economy.
Consequences of current account surpluses
The consequences of a country having a current account surplus include the following: • Employment - A sustained current account surplus can be desirable, as higher export sales help to create jobs. However, a consequence oft his is that job losses are created in other countries. • Standards of living - A favourable current account balance means the country reaches a higher income because domestic firms have a competitive advantage in the products they export. This can lead to a higher standard of living. • Inflationary - Higher demand for exports can lead to demand-pull inflation (see Chapter 18). Therefore, the current account surplus can diminish the international competitiveness of the country over time as the price of exports rises due to inflation. • Higher exchange rate - The higher demand for exports can cause the currency to appreciate in value. Subsequently, foreign buyers will find it more expensive to import goods into their countries.
Consumer price index
The consumer price index (CPI) is a common method used to calculate the inflation rate. It measures price changes of a representative basket of goods and services (those consumed by an average household) in the country. For example, items such as staple food products, clothing, petrol and transportation are likely to be included.
Marginal Social Cost
The cost to society of producing/consuming one more unit of a good
Current account
The current account is a component of the balance of payments that records all exports and imports of goods and services and net income flows and transfers with other countries between a country and the rest of the world.
The demand for labour
The demand for labor is a derived demand. This means that labor is demanded for the goods and services it produces and not for itself. For example, bakers are demanded for the bread they bake, not for the sake of hiring bakers.
Dependency ratio
The dependency ratio is a comparison of the number of people who are not in the labor force with the number of people in acth'C paid employment. For economists, the dependent population will typically include all those aged between O and 14 (those below the school leaving age) and those aged 65 and abo.•e (those abo,'C the retirement age). However, it also includes full-time students and the unemployed. The dependency ratio measures the dependent population as a proportion of the working population: that is, the total active Jabour force (those aged between 15 and 65). It is therefore calculated using the formula: Dependency ratio = dependent population + working population The higher the dependency ratio, the greater the tax burden on the working population to support those who are nor economically active (nor in active paid employment). The dependency ratio can rise due to several reasons, such as: • high birth rates, mainly in less economically developed countries • a higher compulsory school leaving age, thus keeping school students as part of the dependent population for longer • social changes such as workers entering the labor force at a later stage due to the demand for higher education, or more people choosing early retirement (thus reducing the size of the working population).
trade balance or balance of trade
The difference between a country's total export earnings and its total import expenditure. The trade balance is the largest component of the current account. It is often referred to as net exports. Therefore, the current account is calculated as follows: Current account = visible trade balance + invisible trade balance + net income flows and transfers Net income flows and transfers = income flows and transfers earned overseas - income flows and transfers sent overseas
Disadvantages of mixed economy
The disadvantages of both the systems are minimized: Provision of harmful goods is minimized Drugs are made illegal Taxes are imposed on cigarettes. Government can fine firms polluting the environment. Government also looks onto the functioning of the firms that are not behaving in the interest of consumers. Government also tries to prevent monopolies being built were necessary.
Market equilibrium
The equilibrium price (also known as the market-clearing price) is determined where the demand for a product is equal to the supply of the product. This means that there is neither excess quantity demanded nor excess quantity supplied at the equilibrium price (see Figure 3.9).
Equilibrium wage rate
The equilibrium wage rate is determined when the wage rate workers are willing to work for equals the wage rate that firms (employers) are prepared to pay: that is, the demand for labour is equal to the supply of labour.
The role of government in an economy
The government plays a key role as a producer of goods and services and as an employer.
Redistribution of Income (aims of government policies) (PERBF)
The government wants to close the wage gap between levels of income. As such they may intervene by imposing progressive taxes
The quantity (or availability) of land, labour and capital
The greater the availability of factors of production, the lower their cost tends to be, and hence the higher their demand. For example, the relatively large size and availability of the workforce in India and China has boosted the demand for labour from multinationals seeking to expand their operations. In general, the greater the quantity of a factor of production, the lower its cost tends to be.
Economic growth
The increase in the level of national output overtime i.e the annual percentage change in GDP (the total value of goods produced and services provided in a country during one year.)
Shift in Demand
The increase or decrease in market demand due to factors other than price
Shift in Supply
The increase or decrease in market supply due to factors other than price
Invisible trade balance
The invisible trade balance is a record of the export and import of services (intangible products), such as banking, insurance, shipping and tourism. It is sometimes called the balance of trade in services. For example, American tourists in France would represent export earnings (or an invisible export) for the French economy. By contrast, French customers who fly on American Airlines represent an invisible import for the country.
labor supply
The labor supply in an economy consists of people who are of working age and who are willing and able to work. This docs nor include those who are in full-time education or those who do not work by choice, such as housewives or househusbands.
Labour force participation rate
The labour force participation rate is the percentage of the working population that is working, rather than unemployed.
What are the two reasons for this inverse relationship (between supply and demand)? What is the relationship called?
The law of demand states that people will buy more at a lower price and by less at higher price. The law of demand states that quantity demanded increases with fall in price and diminishes when price increases, other thing being equal.
What does the term market supply mean?
The market supply curve is the sum of all supply at each price level. Suppose that a price of $300,000 Airbus is willing and able to supply 300 aircraft per time period while its rival Boeing supplies 320 aircraft. At this price, the total market supply is 620 per time period.
The optimum population
The optimum population exists when the output of goods and services per head of the population is maximised
External benefits
The positive side-effects of production or consumption incurred by third parties, for which no money is paid by the beneficiary (a person who is entitled to receive benefits) e.g. the sight of a well-kept garden gives pleasure to those who walk past it, the trees
The role of trade unions
The primary role of a trade union is to protect the interests of its members. Examples of labour union roles and responsibilities include: • bargaining with employers for pay rises and better terms and conditions • ensuring that equipment at work is safe to use (supported by health and safety legislation) and that workers are given sufficient training to enable them to perform their role at work safely • ensuring members are given legal advice when necessary • giving support to members when they are made redundant • providing financial and legal support to workers who may have been unfairly dismissed or disciplined • persuading the government to pass legislation in favour of workers, such as law's covering minimum wages, maximum working hours, pension rights and the retirement age.
Private costs
The private costs of production and consumption are the actual costs of a firm, individual or government. For example, the driver of a car pays for the insurance, road tax, petrol and cost of purchasing the car.
Price Mechanism
The process by which prices rise or fall as a result of changes in demand and supply
replacement fertility rate
The replacement fertility rate is the number of children whom the average women must have to replace the existing population and maintain a stable population size.
Expenditure patterns between income groups
The richer people spend, save and borrow more amounts than the poor. The poor spend more proportion of their disposable income, especially on necessities, than the rich. The poor save less proportion of their disposable income in comparison with the rich.
Extension and Contraction in Market Demand
The rise and fall of quantity of market demanded due to change in price
Extension and contraction of supply
The rise and fall of quantity of market supply due to change in price
Base year
The starting year, used to calculate price index
What is the definition of an economy?
The state of a country or region in terms of the production and consumption of goods and services and the supply of money.
tax burden
The tax burden is the amount of tax that households and firms have to pay. This can be measured in three ways. For a country, the tax burden is measured by calculating total tax revenues as a proportion of gross domestic product (GDP). For individuals and firms, the tax burden can be measured by the absolute value of tax paid or by the amount of tax paid as a proportion of their income or profits.
The business cycle
The term business cycle (also known as the trade cycle) describes the fluctuations in economic activity in a country over time. These fluctuations create a long-term trend of growth in the economy
standards of living
The term standard of living refers to the social and economic wellbeing of individuals in a country at a point in time. Living standards can vary within a country and between countries, whether they are developed or developing countries.
aggregate demand
The total demand for goods and services within a particular market.
Social benefits
The true or full benefits of consumption or production: that is, the sum of private benefits and external benefits. (private benefits + external benefits)
Expansionary fiscal policy
The use of government spending (an increase in government spending raises aggregate demand directly), taxation (lowering taxes) and the transfer of payments to stimulate aggregate demand For example, if the government lowers income tax, then the disposable income increases which leads to higher consumption (buying more products)
Visible trade balance - current account
The visible trade balance is a record of the export and import of physical goods. It is also known as the balance of trade in goods. It is the trade in goods, such as raw materials, semi-manufactured products and manufactured goods. Visible exports are goods that are sold to foreign customers, with money flowing into the domestic economy. For example, the export of Toyota cars results in an inward flow of money to Japan's visible balance. Visible imports are goods bought by domestic customers from foreign sellers, such as Japanese residents buying German-made cars. This results in money flowing out of the Japanese economy.
visible trade balance
The visible trade balance is are cord of the export and import of physical goods.
Positive wealth effect
The wealth of an individual is measured by the amount of assets they own minus their liabilities (the amount they owe). When the value of assets, such as property and other investments, increases there is said to be a positive wealth effect. This causes people to spend more and, in some cases, causes owners of assets to borrow against the value of their assets such as residential or commercial property. Alternatively, if the value of an asset decreases, the wealth effect can become negative . For example, a severe recession can cause some people to experience negative equity - when the value of their secured Joan or mortgage exceeds the value of the property.
Supply
The willingness and ability of firms to provide a good or service at given prices
Demand
The willingness and the ability of customers to pay a given price to buy a good or service
Enterprise zones
These are areas with relatively high rates of unemployment where the government creates financial incentives for firms to relocate. These incentives include tax rebates and reduced regulations in order to attract private-sector investments. Enterprise zones are common in the UK, USA, China and India.
Craft unions
These are the oldest type of labour unions, which were originally formed to organise workers according to their particular skill. For example, engineers and primers formed their own unions, as did carpenters, plasterers and electricians. Craft unions try to restrict membership to only those with the panicularskills.
'White collar' unions
These labour unions recruit professional, administrative and clerical staff (salaried workers) and other non-manual workers. They are common in teaching, banking, the civil service and local government.
Externalities (spillover effects)
These occur when the actions of a firms/individuals have either a positive or negative effect on third parties
Employment legislation
These regulations protect the interests and safety of employees. For example, private sector producers should comply with anti- discrimination laws which help to ensure that firms treat their workers fairly, regardless of their age, gender, race or religion.
Consumer protection laws
These regulations require private -sector firms to provide truthful descriptions of their goods and services, which must also meet minimal quality standards. Firms that provide demerit goods and services such as gambling, tobacco and alcohol are also heavily regulated to protect consumers. For example, cigarette advertising is banned in countries such as South Africa, Pakistan and Australia. Tobacco advertising has been banned throughout Singapore since 1971. In most countries, cigarette packaging must also carry highly noticeable health risk warnings.
General unions
These trade unions are usually prepared to accept anyone into membership regardless of the place they work, the nature of their work or their industrial qualifications. These labour unions have a very large membership of unskilled workers. The Transport and General Workers' Union (TGWU ) is a very large general union in the United Kingdom. Its members include drivers, warehouse workers, hotel employees and shop workers. In Australia the largest general union is called the Australian Workers' Union.
Industrial unions
These trade unions represent all workers in their industry, irrespective oftheir skills or the type ofwork done. An oil workers' Jabour union would include workers involved in exploration, extraction, storage, refining and any other jobs associated with the oil industry. The United Amo Workers Union of the United States (UAW) is an example ofan industrial union.
Other pricing policies that might be used by firms include: Promotional Pricing
This commonly used pricing policy involves firms temporarily reducing their prices to attract more customers. Promotional pricing can be used to clear excess stock when a product is being withdrawn from the market or to boost demand for products in a new market. This pricing policy is often used to encourage brand loyalty (when customers stick to a certain brand due to their personal preference) and can thus increase the firm's market share in the long run.
Other pricing policies that might be used by firms include: Cost-plus pricing
This involves working out the average cost of each unit of output and then adding a certain amount or certain percentage on top to earn profit. For example, if the cost of producing a commercial aeroplane is $120 OOO and the firm wants a 100 per cent profit margin, the selling price will be $240000. Whilst cost-plus pricing is easy to calculate, the price setter must ensure that the chosen price is still competitive.
Human Development Index (HDI)
This is a composite indicator of living standards in a country, obtained by measuring three dimensions of human development: • Health care - this indicator measures life expectancy at birth. The better the health care in a country, the greater social and economic wellbeing tends to be. • Education - this indicator measures the mean years of schooling and the expected years of schooling in the country. • Income levels - the higher the national income (or GDP) of a country, the greater human development tends to be.
non-durable good
This is a good which lasts for a limited amount of time and can be consumed completely during one use. E.g. An apple.
Market equilibrium
This is determined where the demand for a product is equal to the supply of a product
Other pricing policies that might be used by firms include: Competition-based pricing
This occurs when a firm sets its price according to the prices being charged by its rivals. This allows the firm to be competitive in terms of price, but also means it may need to rely on non -price factors to maintain its market share. For example, many airline companies will set similar prices for their flights but choose to compete on other aspects of their service such as baggage allowance, amount of leg room (space), flight times and connection times, the quality of the food, the variety of their in-flight entertainment, and the overall level of customer service.
Unemployment
This occurs when people of working are are both willing and able to work but cannot find employment, For example younger students or people over 65
Classical (Types of unemployment)
This occurs when real wage rates are set above the market clearing level such as the case of the national minimum wage - this leads to an excess supply of labour as the number of jobs seekers exceeds the demand for labour
Regional (Types of unemployment)
This occurs when unemployment affects specific geographical areas of a country
Monetary Policy
This refers to the use of interest rates to affect the level of economic activity
direct taxes
This type of tax is paid from the income, wealth or profit of individuals and firms. Examples are taxes on salaries, inheritance and company profits.
Intellectual property rights
To encourage innovation and to safeguard the interest of producers, the government can use copyright, trademark and patent Jaws to protect the intellectual property of firms. These give private-sector firms legal protection against rival firms copying or imitating their products or inventions. Recent high-profile cases include Apple versus Samsung smartphone battles (see the Activity below) and Cadbury versus Nestle on whether you can copyright a colour.
Trade unions have a number of aims ...
To improve the pay of its members. To improve the working conditions and the working practices of its members. To support the training and the professional development of its members. To ensure that their members' interests are considered by the employers when any decision is made which will affect the workforce.
Deed of partnership
To prevent potential misunderstandings and conflict, most partnerships draw up a legal contract between the partners, known as a deed of partnership. The contents of this agreement include the names of all partners, the amount of capital invested by each partner, their responsibilities, voting rights, arrangements for dismissing a partner or approving a new partner, and how profits are to be shared between the owners.
Trade protection
Trade protection refers to the use of trade barriers to restrain foreign trade, thereby limiting overseas competition. There are a variety of restrictive government measures designed to discourage imports and to prevent competition in domestic markets.
Go-slow
Trade union members complete their work very slowly. Productivity and efficiency fall Morale may drop as a result of low targets and productivity.
Sit-in
Trade union members turn up to work and occupy the premises but do not undertake their normal work. Production of goods and services ceases temporarily and this has an immediate impact on the firm. There is a loss in Wages and,as consequence, living standards fall
collective bargaining
Trade unions act as a means of communication and negotiation between employers and employees through a process called collective bargaining. This occurs when a trade union representative, who is voted into the position by colleagues, negotiates on be half of the union's members (the workers)with the employer for better pay and working conditions. A collective voice is more powerful than each worker negotiating individually with the employer. Trade unions can therefore be an effective means of communication between the employer and employees.
Negative effects of trade unions
Trade unions are often portrayed in the media as having a negative role in an economy when they take industrial action which results in lost productivity. Strikes are the most extreme form of industrial action and can cause serious disruption to the wider economy. From an employer's point of view, a trade union"s demands for better pay and working conditions for ill workers may increase the costs to the firm and therefore reduce profits. However, others might argue that increases in pay and improvements in working conditions lead to a better motivated workforce and thus an increase in productivity and profits
The basis for wage claims
Trade unions normally base claims for higher wages on one or more of the following : • A rise in the cost of living due to inflation (see Chapter 18) has reduced the real income of trade union members. • Workers in comparable occupations have reached a wage increase. • The increased profits in the industry justify a higher return to labour. • The productivity of labour has increased, again possibly justifying an increase in wages.
fixed exchange rate system
Under the fixed exchange rate system, the government intervenes in foreign exchange markets to maintain its exchange rate at a predetermined level. The main advantage of fixing exchange rates is that it reduces uncertainties for international trade. This allows firms, both foreign and domestic, to be certain about future costs and prices, thereby encouraging international trade and exchange.
Progressive taxation
Under this tax system, those with a higher ability to pay are charged a higher rate of tax. This means that as the income, wealth or profit of the taxpayer rises, a higher rate of tax is imposed. Examples of progressive taxation are income tax, capital gains tax and stamp duty. MAKE SURE YOU CAN DRAW THIS ON A GRAPh
unemployment
Unemployment occurs when people of working age are both willing and able to work but cannot find employment. The United Nation's International Labour Organisation (ILO) states the lower age limit for employment as 15 years old.
Full employment (or low unemployment)
Unemployment refers to people who are out of work, but who are of working age, are physically and mentally able to work, and are actively looking for work. Governments strive to reduce the unemployment rate - the proportion of a country's workforce who are unemployed.
disadvantages of the market system
Unequal distribution of the income and wealth: Those who can own factors of production such as land and capital will be richer than those who don't as they will have greater spending power. Thus, there will be an unequal distribution of income and wealth between people who have the money and people who don't. Failure to provide certain goods and services: In a free market economy, production is only undertaken if there's profit to be made. There are some goods that are not profitable as it is difficult to charge a price for it and restrict consumers from enjoying the benefits of these products without paying for them. E.g. street lightning defense, vaccination Provision of harmful goods: Market economy may encourage the consumption of harmful goods. Since firms are motivated by profits, they can produce harmful goods for which people are willing to pay a high price such as cigarettes and drugs. Harmful effects of producing goods may be ignored: Firms in the market economy do not take the social costs to society of producing goods such as air pollution and noise. Monopolies : Since there is less or no government intervention in the market economy there is no restriction to stop firms from growing into monopolies.
UNDP
United nations development programme - a programme that promotes sustainability, equality etc. for lower economically developed countries
UMC
Upper middle class
Variable costs
Variable costs are costs of production that change when the level of output changes. Examples are the costs of raw materials or components needed to build houses - the more houses that are built, the higher these variable costs become. The total variable cost line starts at the origin because when there is no output, no variable costs are incurred.
Vertical integration
Vertical integration occurs when a firm from one sector of industry merges with, or is taken over by, a firm from another sector of industry. There are two types of vertical integration: backward and forward.
Wage determination
Wages are determined by the interaction of demand for labour and the supply of workers in an industry. For example, the combination of the high demand (ability and willingness to pay) for, and the low supply of, neurosurgeons means their pay is very high.
Wages
Wages are paid hourly or Weekly, so are a variable cost to firms Part time workers in a shop or restaurant (e.g. $7 per hour)
Uneconomic use of resources
When social costs exceeds social benefits
What is the relationship between goods and services and demand? Why is this an inverse relationship?
When the price goes up, the quantity demanded goes down. Although, when the price goes down, the quantity demanded goes up.
Deflation
While the prices of goods and services tend to rise, the prices of some products actually fall over time. This is perhaps due to technological progress or a fall in consumer demand for the product, both of which can cause prices to fall. Deflation is defined as a persistent fall in the general price level of goods and services in the economy - in other words, the inflation rate is negative.
Work-to-rule
Work-to-rule Trade union members literally work to fulfil the minimum requirements of their job and will not do anything outside what is written in their contract of employment. Bus drivers drive extremely slowly and stop at every bus stop regardless whether there are any passengers who wish to get on or off. A schoolteacher does not take part in any extracurricular activities or refuses tomelty with students outside of lesson time Workers are meeting their contractual responsibilities and therefore cannot be disciplined
Worker co-operatives
Worker co-operatives are co-operatives set up, owned and organised democratically by the employees. Examples include small shops, cafes, printers and other business enterprises. Mondragon Corporation is a Spanish co-operative that produces food and industrial products. It is one of the largest business organisations in Spain with approximately 50 OOO members.
Differences in earnings between private and public sector workers
Workers in the private and public sectors tend to earn different wages. In theory, people in the private sector can earn more than workers in the public sector. In many countries, salaries in the public sector are typically less than those which can be earned in the private sector, but public-sector jobs are more secure and arc accompanied by a pension in retirement. Examples of public-sector jobs are teachers, nurses, police officers, fire service officers and civil servants. Private-sector jobs typically have higher earning potential as private individuals and firms strive for profit maximisation However, this comes with more risk as jobs are Jess secure in the private sector and workers often have to save up for their own pensions in retirement.
Share options
Workers receive shares in the firm so they have an incentive to work hard so that the firm is profitable e.g. Public limited companies
Disadvantages Of The planned Economy:
Wrong Goods: Since planners decide what o produce, the goods that consumers want may not be produced thus there is no consumer sovereignty. Poor quality of goods: As there is no competition amongst firms and neither are they motivated by profits poor quality of goods might be produced? Inefficiency: Planners are not only costly, but they also decide which production method to choose. This production method may not be the cheapest as profits play no part in the allocation of resources. Shortages and surpluses: Planning failure might lead to resources wasted and consumers want not fulfilled.
Youth unemployment
Youth unemployment affects members of the working population aged 21 and below. They have relatively fewer skills and less experience, so they are the most likely to be affected during an economic downturn.
Public Goods
a commodity or service that is provided without profit to all members of a society, either by the government or a private individual or organization.
Price elasticity in Supply
a measure of the responsiveness of supply to price changes
proportional taxation
a tax system that deducts a larger proportion of tax at all levels of income
Progressive taxation
a tax system that deducts a larger proportion of tx as a person's income level increased e.g. income tax and capital gains tax
free riders
are people who take advantage of the goods or services provided by the government but have not contributed to government revenue through taxation.
Stocks
are the raw materials, components and finished goods (ready for sale) used in the production process.
social benefits
are the true (or full) benefits of consumption or production: that is, the sum of private benefits and external benefits.
Social costs
are the true (or full) costs of consumption or production: that is, the sum of private costs and external costs.
Contractionary fiscal policy
category of fiscal policy - set to combat inflationary pressures by reducing the level of economic activity i.e. cutting government spending and raising taxes
contractionary monetary policy
category of monetary policy that aims to slow down economic activity by increasing interest rates to cut spending and investment in the economy
Disequilibrium price
demand and supply are not equal, surplus or a shortage/pressure for price to change
Perfectly price inelastic
demand/supply remains constant whatever the price
perfect competition
describes a market where there is immense competition due to the absence of barriers to entry. This means there are many small firms competing in the market, none of which has any power to influence market supply or price. A real world example is the wet markets (fresh food markets) commonly found in Asian countries such as Hong Kong, Singapore, South Korea, Taiwan and Macau.
Functions of money
describes the role that money plays in the economy: money is a medium of exchange, a store of value and a measure of value (or unit of account).
Changes in a non-price factor that affects demand or supply will.......
e.g. IF THERE IS AN IMPOSITION OF TAX Changes in a non-price factor that affects demand or supply will tend to cause a change in the equilibrium price and therefore quantity traded. For example, in Figure 3.10, a government sales tax imposed on tobacco will shift the supply curve for cigarettes to the left. This raises the market-clearing price from P1 to P2 and reduces the equilibrium quantity traded from Q1 to Q2. IN CONTRAST - FAVOURABLE WEATHER CONDITIONS In contrast, favourable weather conditions will shift the supply of agricultural output outwards to the right (see Figure 3.11). The increase in supply reduces the equilibrium price of agricultural output from P1 to P2 but increases the quantity traded from Q1 to Q2.
What is the importance of exchange rates
find the answer to this dumb, irritating question lol #cba
Fiscal policy (Policies to deal with unemployment)
fiscal policies - this is the use of taxation and government spending policies to influence the level of economic activity - it can be used to tackle unemployment caused by demand side issues such as cyclic and structural unemployment The use of expansionary fiscal policy (tax cuts and increased government spending) can boost aggregate demand and real national income as shown in figure 19.6.
Indirect taxes
government levies imposed on expenditure, e.g. sales taxes, customs duties and excise duties on production.
Price Signal
information conveyed to consumers and producers, via the price charged for a product or service, which provides a signal to increase supply and/or decrease demand for the priced item
Tax
is a charge imposed by governemt to raise costs of production and to reduce consumption of certain goods or services (demerit goods)
Monopoly
is a market structure where there is only one supplier of a good or service, with the power to affect market supply or prices.
subsidy
is a sum of money given by the government to a producer to reduce the costs of production or to a consumer to reduce the price of consumption.
national minimum wage
is the lowest amount a firm can pay its workers, as set by the government. Any firm that pays workers less than the legal minimum wage is breaking the law.
The market supply curve
is the sum of all supply at each price level
Excise duties
lndirect in land taxes imposed on certain goods and services, such as alcohol, tobacco and petrol.
market structure
market structure refers to the key characteristics of a particular market. These features include the number and size of firms in the market, the degree and intensity of price and non-price competition, and the nature of barriers to entry. The two extreme marker structures in economics arc perfect competition and monopoly.
Unlimited liability
means that if a business goes bankrupt, the owner(s) is (are) personally liable for the debts, even if it means that personal belongings have to be sold.
Limited liability
means that in the event of a company going bankrupt the owners would not lose more than the amount they had invested in the company.
Derived demand
means the demand for labour is not demanded for itself but for the goods and services labor is used to produce.
Price discrimination
occurs when firms charge different customers different prices for essentially the same product because of their differences in PED.
unitary price elasticity
occurs when the percentage change in the quantity demanded (or supplied) is proportional to the change in the price, so there is no change in the sales revenue
Technological (Types of unemployment)
occurs when workers lose their jobs due to firms opting to use capital intensive technologies - this can cause large scale unemployment e.g. supermarkets placing in self serving counters.
To calculate average weighted price
percentage x average price of goods = AWP
demonstrate the principle of equilibrium price and analyse simple market situations with changes in demand and supply
practice questions on this in the textbook :) it should be chapter 2
The market demand curve
refers to the sum of all individual demand for a product. It is found by adding up all individual demand at each price level. For instance, suppose that a cinema charges $10 for its movie tickets and the demand from male customers totals 500 per week while 400 females purchase tickets at that price per week. The market demand for cinema tickets at $10 per ticket is therefore 900 tickets per week.
Employment
refers to the uses of factors of production such as labour in the economy. e.g. people working in the tertiary sector
Regressive taxation
tax system that deducts a smaller proportion of tax as a person's income increase e.g. sales taxes and custom duties
consumer price index (CPI) vs retail price index (RPI)
the RPI includes the cost of housing (eg mortgage payments) whereas the CPI doesn't the RPI excludes low income pensioners and 'very high' income households (it's argued that they don't represent the average household) Method of calculation: the RPI is calculated using the arithmetic mean, whereas the CPI is calculated using the geometric mean
Opportunity cost
the cost of the next best option foregone when making an economic decision
Deflation
the persistent fall in the general price level of goods and services (ie.the inflation rate is negative)
Price elasticity in Demand
the responsiveness of demand to price changes
Social benefits
the sum of private benefits and external benefits.
Social cost
the sum of private costs and external costs.
aggregate supply
the total supply of goods and services available to a particular market from producers.
Gross Domestic Product (gdp)
the total value of goods and services produced in a period of time - often annually
Frictional (Types of unemployment)
the transitional unemployment that occurs when people change jobs this is due to the fact that there is a time delay for the labor market to match available jobs with the people looking for jobs
Labour intensive industries
the use and cost of labour is proportionately higher than the cost of other factors of production. Examples are teaching, psychiatry, sports coaching and management consultancy. Labour-intensive production can be very expensive . For example , in private fee - paying schools and health clinics, labor costs account for the largest proportion of production costs, so the price charged to customers is relatively high. Labor intensive production processes tend to be used to produce individual or personalised products (such as a Hollywood movie or a custom-made wedding dress) on a relatively small scale.
Infinitely price inelastic
there is unlimited demand but at only one price
Supply side policies (Types of unemployment)
these government strategies are used to deal with imperfection in the labor market and to reduce unemployment caused by supply-side factors - these policies are aimed at addressing frictional, voluntary and classical unemployment examples: Investment in education and training - this helps unemployed people to gain new skills so they can find employment e.g. retraining structurally unemployed manufacturing workers to help them find work in the tertiary sector
unemployment rate
unemployment rate = number of unemployed/workforce x 100 unemployment rate = number of unemployed/number of unemployed + employed + self-employed
Functions of the commercial bank
• Accepting deposits - Commercial banks accept deposits from their customers, including private individuals, businesses and governments. Examples include sight deposits (which are payable on demand) and time deposits (which are deposits that are payable after a fixed time period such as 6 months or a year). Time deposits tend to attract higher rates of interest for deposit holders than sight deposits. Businesses deposit their cash in commercial banks for the convenience of their own financial operations, such as paying their suppliers and employees. • Making advances - Commercial banks provide advances (loans) to their customers. These advances include overdrafts (a banking service that allows registered customers to withdraw more money than they actually have in their account) and mortgages (long-term secured Joans for the purchase of assets such as commercial and residential property). • Credit creation - This describes the process by which banks increase the supply of money in an economy by making money available to borrowers. Credit allows the borrower (or debtor) to gain purchasing power (money) now with the promise to pay the lender (or creditor) at a future time. Credit creation enables commercial banks to generate considerable additional purchasing power from their cash deposits. While central banks can print money, they do not create credit; this is a key function that distinguishes commercial banks from other financial institutions, such as insurance companies and investment banks.
The level of savings is affected by the following factors:
• Age - In many modern economics, people from about the age of25 stanto save for their future. They will be likely to haYc secured permanent employment and paid offany student loans. The amount a person will save is influenced by the amount ofsupport a goYcrnmcm gh-cs its citizens in terms ofold-age pensions and health care provision. Ifpeople have to fund their own health care and pensions, they will haw to save more during their working Jives. • Attitude to saving- As c\·cry person is different, they each haYc a different attitude to saving. For example, in the USA and the UK many consumers borrow to fund expenditure by using credit cards to make purchases or by getting Joans to buy large item such as cars. In other coumrics, such as Japan, the use ofcredit cards is low. The Chinese also tend to be cautious and conservative with money, so like to sa\·c for a 'rainy day' (unforeseen emergencies). • Consumer and business confidence - If people and firms ha\·c confidence in the performance ofthe economy, the level ofsavings will usually fall as people will be more willing to spend money. Savings tend to rise during recessions when consumers are feeling less optimistic about the future. • Interest rates - A rise in interest rates means that people with existing debts haw higher repayments to make to the lender. This will therefore reduce their level of spending in other areas. At the same time, people may save more in a bank to rake advantage of the higher rate of return. \\'hen interest rates are low, people ha\·c a disinccmh·c to save and may choose to spend their money instead or find an alternative means of increasing the value of their savings - by purchasing shares in a firm, for example.
Advantages of monopoly
• As monopolists control market supply, they operate on a very large scale , thus benefiting from huge economies of scale (see Chapter 14) - that is, lower average costs of production. This means that monopolists can actually supply larger quantities of output and at lower prices. This market power can be a source of international competitiveness against foreign competitors. • Monopolists ha\·e the financial resources to invest in innovation. Research and development expenditure can help to generate new ideas, products and production processes. Innovation can therefore act as a source ofprofit and improve the productive capacity ofthe economy. For example, Apple's innovative products, such as the iPhone and iPad, have made the company the most valuable business on the planet. Only Boeing and Airbus have the financial resources to commercialise passenger aircraft such as the 787 Dreamliner and A380. • Some monopolies can eliminate wasteful competition. For example, it makes more economic sense to have one monopoly supplier of postal services in a town, state or country rather than allowing private-sector firms to compete to provide such services. This is because profit-seeking firms may not have much of a financial incentive to provide services to remote areas of the country and a single provider can gain huge economies of scale. The same applies to suppliers of water pipes, railway tracks, telephone lines and electricity grids.
Advantages of partnerships are the following
• As partnerships tend to be small businesses, there tend to be good working relationships with both colleagues and customers. One of the potential drawbacks of being a large organisation is the lack of clear communication between staff, because there are simply too many of them • As there are up to 20 owners, a partnership is usually able to raise far more capital than a sole trader. • Similarly, as there are more owners, the business can benefit from having more ideas and expertise. Most partnerships can therefore benefit from specialisation and division of labour. • Like sole traders, the business affairs of partnerships are kept confidential. Again, only the tax authorities need to know about the financial position of the business. This makes the partnership an appropriate form of organisation for businesses such as private health care providers, accountancy firms and law firms, as they need to keep their business affairs confidential. • There is more continuity than for the sole trader, as the partnership can remain in business if a pharmacy is ill or goes on holiday. • In some cases, additional finance can be raised from silent partners. These partners simply invest in the business without raking an active role in the running of it.
The disadvantages of partnerships include the following:
• As there is more than one owner, there might be disagreements and conflict between the owners. This can undoubtedly harm the running of the partnership. • Although the business can operate on a larger scale than a sole trader, any profits made must be shared between all the owners. • In most cases, the partners have unlimited liability. Although it is possible to have limited liability partnerships, limited liability usually applies only to sleeping partners, as they are not directly involved in the daily running of the partnership and so are nor personally liable for any debts incurred.
An increase in the exchange rate will have the following effects on the balance of payments, employment, inflation and economic growth:
• Balance of payments - !fa currency appreciation has a larger impact on exports than imports (that is, there is a net full in the value of exports), then the balance of payments will worsen. This is because a strong currency will make it more difficult for exporters to sell their goods and services in overseas markets. • Employment - A fall in net exports and deteriorating profits will, in the long run, cause job losses in export-oriented businesses. This will therefore cause unemployment in the economy. Greece and Spain suffered from high unemployment in 2012- 13 due to the strength of the euro, with unemployment reaching record levels of 26.8 per cent and 26.1 percent respectively. In Spain, youth unemployment (among those aged 21 and below) reached a historic high of 55 per cent. • Inflation - Lower levels of spending in the economy, caused by higher unemployment, will rend to reduce the rate of inflation. In addition, if the country relies heavily on certain imports, such as oil or food supplies, then the higher exchange rate will help to reduce the general price level even further. • Economic growth - In the long run, economic growth is likely to fall due to the combination of lower export sales and higher unemployment caused by the higher exchange rate.
The consequences of inflation - Borrowers
• Borrowers - By contrast, borrowers tend to gain from inflation as the money they need to repay is worth Jess than when they initially borrowed it - in other words, the real value of their debt declines due to inflation. For example, if a borrower takes out a mortgage at 5 per cent interest but inflation is 3.5 per cent, this means the real interest rate is only 1.5 percent.
The consequences of inflation -
• Business confidence levels - Inflation also causes business uncertainty. The combination of uncertainty and the lower expected real rates of return on investment (due to higher costs of production) rends to lower the amount of planned investment in the economy.
Causes of exchange rate fluctuations
• Changes in demand for exports -An increase in the demand for exports, perhaps due to improved quality or successful advertising, will also increase the demand for the country's currency. Therefore this increases the exchange rate. • Changes in demand for imports -An increase in the demand for imports, perhaps due to an increase in the competitiveness of foreign firms, will raise the value of the foreign currency in order to facilitate the purchase of foreign goods and services. • Prices and inflation - An increase in the price of goods and services caused by domestic inflation will tend to decrease the demand for exports. This will therefore tend to cause the exchange rate to full in value. • Foreign direct investment (FDI) - Globalisation and the economic activity of multinational companies mean that investment in overseas production plants requires the use of foreign currencies. For example, Nissan's car manufacturing plant in India requires the Japanese car-maker to buy Indian rupees to pay for the materials, labour and other production costs. Thus, inward FDI will boost the demand for a currency. By contrast, outward FDI will increase the supply of a currency. • Speculation - Foreign exchange traders and investment companies move money around the world to take advantage of higher interest rates and variations in exchange rates to earn a profit. As huge sums of money arc involved (known as 'hot money'), this can cause exchange rate fluctuations, at least in the short nm. Speculators might also Jack confidence in certain economics and therefore withdraw their investments, thereby depreciating the currency. • Government intervention - All the above factors can affect the exchange rate under a freely floating exchange rate system. In addition, government intervention in the foreign exchange market can affect the exchange rate.
Classical unemployment
• Classical (real-wage) unemployment occurs when real wage rates are set above the market-clearing level, such as in the case of a national minimum wage. This leads to excess supply of labour, as the number of job-seekers exceeds the demand for labour.
Reasons for increased average costs of production include the following:
• Communication issues may arise when a firm becomes toO large. There may be too many branches to control and communicate with effectively, and decision making may be slow due to the number of people in the communication chain. This may lead to increased costs of production. • A merger between two firms may be unsuccessful due to a clash of cultures, so it may be beneficial to demerge. In 2010 the Fosters Group, which produces beer, sold off its Jess profitable wine business as the merger had not brought about benefits of economies of scale. The demerger allowed Fosters to focus on beer production again. • It may be necessary to employ more employees for all the branches of the firm, or a new factory may need to be built to accommodate the increased level of production. This will add to total costs of production and average costs of production may rise. • Workers within a large organisation may find it difficult to feel part a large firm, so this may lead to a lack of motivation and reduced productivity. Thus average costs will tend to rise. • The business may become too diverse and start to operate in areas in which it has less expertise. Reduced control and co-ordination may cause costs to increase. Again, this can lead firms to demerge.
The disadvantages of limited liability companies include these:
• Companies have to file their financial accounts and have these audited (checked) by an external accountant. This is both time consuming and potentially expensive. • These completed documents can be accessed and examined by all shareholders and the general public - the affairs of the business cannot be kept private. • Companies are more administratively difficult, time consuming and expensive to set up compared with sole proprietorships and partnerships. • The preparation, publication and distribution of company annual reports to shareholders can be highly expensive. The internet has gone some way to reducing this cost to companies that offer online annual reports (although shareholders can demand a printed versions of the report).
The changing size and structure of the population also has effects on an economy. It has an impact on the what?
• Consumers - The demand for goods and services changes with variations in population trends. Customers have different demands based on their age, gender, religion, ethnic group and family size. For example, elderly people in a country with an ageing population might spend proportionately more of their money on health care and related products. By contrast, parents of young children might spend more of their income on housing, education, clothing, family vacations and toys. Firms will seek to exploit these changes in demand for different goods and services. • Firms - The demand for, and supply of, Jabour will change following Jong·term changes in population trends. For example, rapid population growth should increase the future supply of labor. By contrast, the combination of low birth rates and net emigration will reduce the future supply of workers in the country. • Government - A growing population can bring about benefits if it means the government is able to collect more tax revenues from a larger workforce. However, it can also mean added pressure for the government to provide more public services, welfare benefits and state pensions. As a result, many governments have introduced compulsory pension savings schemes and have raised official retirement ages. • The economy - Continual population growth puts more pressure on an economy's scarce resources. This can lead to inflationary pressures or an increase in the demand for imports if the country cannot produce enough to meet the needs and wants of the population. For example, land in prime locations is scarce, so a larger population in these areas is likely to force land prices to soar. Inflation can create problems for the economy (see Chapter 18) and cause economic growth to slow. • The natural environment - An increase in the size of a population also puts strain on the environment. Non-renewable resources are depleted in the production process and the increased level of production also puts strain on the natural environment. For example, pollution and traffic congestion are by-products of overpopulated regions of the world.
The consequences of inflation - Consumers
• Consumers - The purchasing power of consumers goes down when there is inflation - there is a fall in their real income because money is worth less than before. Therefore, as the cost of living increases, consumers need more money to buy the same amount of goods and services.
The advantages ofimposing rules and regulations to correct market failures are as follows:
• Consumption of the good or service may be reduced. • Awareness of the negative impacts of demerit goods (such as drinking and driving) may change the behavior of people in the long term. • Awareness of the positive impacts of consumption of merit goods (such as education) is raised.
However, there arc also costs of backward vertical integration in the example:
• Costs of running the farm in the primary sector increase total costs as more land, labour and capital resources arc required. • Transport costs increase for the integrated firm as raw materials were previously delivered by external suppliers.
Consequences of exchange rate fluctuations - these affect stakeholders in numerous ways
• Customers have greater purchasing power when the exchange rate increases. • Exporters face more difficult trading conditions when the exchange rate increases. This is because the price of their goods and services will become more expensive for foreign customers. Importers potentially gain from a strong dollar because this makes it cheaper for US firms to import raw materials, components and finished goods from abroad.
Cyclical unemployment,
• Cyclical unemployment, also known as demand deficient unemployment, is the most severe type of unemployment because it can affect every industry in the economy. It is caused by a lack of aggregate demand, which causes a full in national income.
Higher productivity is important for an economy for several reasons:
• Economies of scale - Higher levels of output, whether through capital-intensive or labor-intensive methods of production, help to reduce unit costs of production These cost-saving benefits can be passed on to consumers in the form of lower prices. For example, the mass production of flat-screen televisions and digital cameras has made these products much more affordable to many customers around the world. In addition, cost savings from higher productivity levels can help firms to earn more profit on each item sold. • Higher profits - Productivity gains are a source of higher profits for firms. These efficiency gains can be reinvested in the business to fund research and development or used to expand the operations of the business. Either way, higher profits help to fund the long-term survival of the firm. • Higher wages - Highly productive firms that enjoy cost savings and higher profitability can afford to pay higher wages to their workers, especially if they become more efficient. Such firms also tend to attract the best workers, as people prefer to work for firms with better prospects and profitability. • Improved competitiveness - Productive firms can gain advantages beyond economies of scale. For example, they are more efficient, so they can compete more effectively on a global scale. Samsung's efficiency gains during the late 2000s ensured that the South Korean company took market share from Nokia and Apple to become the market leader in the smartphones industry. • Economic growth - Productivity is a source of economic growth because it increases the productive capacity of an economy, thus shifting its production possibility curve outwards (see Chapter 1). This helps to raise employment and standards of living in the economy. Higher wages, from improved efficiency of firms and higher labour productivity, also mean that the government collects more tax revenues to fund its expenditure on the economy
Benefits of specialisation
• Efficiency gains - Specialisation makes better use of scarce resources. As a result, productivity increases, thereby increasing the country's gross domestic product. Taiwan and South Korea, for example, have been able to raise their standards of living by specialising in the production of manufactured consumer electronic devices. • Economies of scale - Specialisation increases national output and global trade. Therefore, firms are able to enjoy cost-saving benefits from large-scale operations, known as economies of scale. This can help to keep prices down and therefore helps to keep inflation under control. • Improved competitiveness - Specialisation helps to enhance international trade and exchange. Competitive prices also improve the international competitiveness of a country, thereby boosting its economic growth. After all, specialisation and trade are essential for improving a country's standard of living
Government interference in the labor market
• Employment rights - governments impose laws to protect the rights of workers and employers, and these laws vary between countries. Laws are designed to prevent discrimination against workers due to gender, race, religion and disability, and also to protect the rights of employers and their ability to hire and fire workers. • Trade union legislation - Governments can reduce the powers of trade unions in order to make labour markers more flexible and efficient This happened in the UK during the 1980s when Margaret Thatcher was prime minister, and many countries have followed her lead. Trade unions now have less bargaining power and are less powerful generally.
Disadvantages of economic growth
• Environmental consequences - High rates of economic growth can create negative externalities such as pollution, congestion, climate change and land erosion (sec Chapter 2). Such environmental impacts can damage the wellbeing of people and their quality of life in the long run. • The risk of inflation- If the economy grows due to excessive demand in the economy, there is the danger of demand-pull inflation. This can lead to prices of goods and services rising to unstable levels, with negative consequences on the economy such as a decline in the country's international competitiveness. • Inequalities in income and wealth- Although a country might experience economic growth, not everyone will benefit in the same way. Economic growth often creates greater disparities in the distribution of income and wealth - the rich get richer and the poor get relatively poorer, creating a widening gap between rich and poor. • Resource depletion - Economic growth often involves using up the world's scarce resources at rates that arc not sustainable. For example, deforestation and overfishing have led to problems in the ecosystem.
The consequences of inflation - Exporters
• Exporters - The international competitiveness of a country tends to fall when there is domestic inflation. In the long run, higher prices make exporters less price competitive, thus causing a drop in profits. This leads to a fall in export earnings, lower economic growth and higher unemployment.
Why might some people not be geographically mobile
• Family commitments - People may not want to relocate as they want to be near their family and friends. There may be other commitments such as schooling arrangements for children (it can be highly disruptive to the education of children who have to move to a school in a different town or country). • Costs of living may vary between regions - If costs of living are too high in another location, it may be uneconomical for a person to relocate there. For example, a bus driver may find it impossible to relocate from the countryside to the city because house prices are much higher in the city and therefore they would nor be able to purchase a home. By contrast, a banker may be offered a relocation allowance to move to another city and his or her potential earnings are much higher, so the banker has greater geographical mobility than the bus driver.
how do firms grow internally?
• Firms can grow by increasing the number of branches (stores) within a particular country or by opening branches in different countries. They can also expand by selling their products in a greater number of countries and can finance this expansion using profits earned within the business. Coca-Cola now sells its cola drink in all but two countries in the world: North Korea and Cuba. • Firms can grow by franchising. l11is means that an individual or a firm purchases a licence from another firm to trade using the name of the parent company. The Subway sandwich chain, established in the USA, has approximately 14 1 stores in the United Arab Emirates (UAE) and this expansion is due to franchising. • Firms may attract investment from larger businesses. For example, the sandwich chain Pret a Manger funded its expansion through investment in the company by the fast-food giant McDonald's. Innocent, originally a small UK-based fresh fruit juice and smoothie manufacturer, is now large enough to supply supermarkets in the UK and some overseas shops through investment funding from Coca-Cola, which owns 90 per cent of the drinks company. • Takeovers - A firm can instantly increase its size by buying a majority stake (share) in another business. For example, Microsoft bought Skype in 2011 and the purchase enabled the software giant to gain a larger share of the internet communications industry. Takeovers can be hostile, which means that the firm being taken over does not agree to the buyout. Takeovers can also be agreeable to both firms. • Mergers - Two firms can merge together to form one new company. For example, the MTRC and KCRC railway companies in Hong Kong merged in 2007 to become one company, which now is the only provider of railway and underground railway services in Hong Kong. They haw formed a natural monopoly and any fare increases must be approved by the government.
The consequences of inflation - Fixed income earners
• Fixed income earners - During periods of inflation, fixed income earners (such as pensioners and salaried workers whose pay do not change with their level of output) see a fall in their real income. Thus, they are worse off than before as the purchasing power of their fixed income declines with higher prices. Even if employees receive a pay rise, the rate of inflation reduces its real value. For example, if workers get a 4 per cent pay rise but inflation is 3 per cent, then the real pay increase is only I percent.
What are the ways to measure standards of living in a country?
• GDP per capita - In general, the higher the level of an individual's income, the better off he or she is. However, this figure is an average of the population and does not reveal anything about inequalities in income and wealth. • The cost of living - While some countries like Japan and Hong Kong have a high GDP per capita, their cost of living is very high, so this tends to adjust the standards of living downwards. In other countries, like Vietnam and Nicaragua, the opposite happens. • Material wealth - This indicator looks at ownership of consumer durable goods by the average person, such as cars, jewellery, televisions, mobile phones, washing machines and home computers. - This is measured as a percentage of the population. - In theory, the higher the percentage of the population with material wealth, the better the standard of living tends to be. • Health indicators - These look at a range of measures related to health care provision, such as life expectancy, infant mortality rates (the number of children who die each year per thousand of the population), the number of patients per doctor and the average food intake per person. • Education indicators - These measures look at educational attainment in terms of literacy rates (the percentage of the population who can read and write) and the proportion of people who graduate from high school and tertiary education. • Social and environmental indicators - These quality of life measures look at the impact that societal norms and the natural environment have on standards of Jiving. Such indicators include the level of stress, the average hours worked in a week, the number of days off from work each year, traffic congestion, pollution levels and crime rates.
Arguments against protectionism - Despite the merits of protectionism, there are potential drawbacks:
• Government intervention distorts market signals and therefore can lead to a global misallocation of resources. For example, domestic consumers may not be able to purchase lower-priced imports which arc of higher quality than those produced domestically. Protected firms and industries can become roo reliant on the government and thus become inefficient. • Protection can lead to increased costs of production due to the lack of competition and of incentives to be efficient or innovative. Domestic producers may need to pay higher prices for viral imported raw materials and components, so this could lead to imported inflation, thus leading to higher domestic prices. • Other countries are likely to react by retaliating and imposing their own trade barriers.
Determinants on demand
• Habits, fashion and tastes - Changes in habits, fashion and taste can affect the demand for all types of goods and services. Products that become fashionable (such as smartphones) enjoy an increase in demand, whereas those that become unfashionable (such as last season's clothes) experience a fall in the level ofdemand. Luxury fashion brands from France are highly popular amongst women in China. Income - Higher levels if income mean that customers are able and willing to buy more goods and services. For example, the average person in america has a higher level of demand for goods and services that the average person in vietnam of turkey. Substitutes and Complements - Substitutes are goods and services that can be used instead of each other, such as coca cola or pepsi and tea or coffee. If the price of a product falls, then it is likely the demand for the substitute will also fall. Compliments are products that are jointly demanded such as tennis balls and tennis rackets or cinema movies and popcorn. If the price of a product increases, then the demand for its complement is likely to fall. Advertising - Marketing messages are used to inform, remind and persuade customers to buy a firm's products. Companies such as coca cola, mcdonalds, apple and samsung spend hundreds of millions of dollars each year on their advertising to buy a firm's products. Price of the product - If the price is higher for that product there is a more than likely chance the demand will be lower. If the price is lower more people will buy the product Government Policies - Rules and regulations such a the imposition of taxes on tobacco and alcohol will affect the demand for certain products. Sale taxes cause prices to increase, thereby reducing the level of demands. By contrast, governments subsidies for educational establishments and energy-efficient car-makers encourage more demand for education and environmentally friendly cars due to the relatively lower prices. • Substitution - This is the key determinant ofthe PED for a good or service. In general, the greater the number and availability ofclose substitutes there are for a good or service, the higher the value ofits PED will tend to be. This is because such products are easily replaced if the price increases, due to the large number of close substitutes that are readily available. By contrast, products with few substitutes, such as toathpicks, private education and prescribed medicines, have relatively price inelastic demand.
The uses of price elasticity of demand
• Helping firms to decide on their pricing strategy - for example, a business with price inelastic demand for its products is likely to increase its prices, knowing that quantity demanded will be hardly affected. Therefore, the firm will benefit from higher revenue from selling its products at a higher price. • Predicting the impact on firms following changes in the exchange rate - for instance, firms that rely on exports will generally, benefit from lower exchange rates (as the price of exports become cheaper) and thus will become more price competitive. l11is assumes that the PED for exports is elastic, of course. • Price discrimination - this occurs when firms charge different customers different prices for essentially the same product because of differences in their PED. For example, theme parks charge adults different prices from children and they also offer discounts for families and annual pass holders. • Deciding how much of a sales tax can be passed on to customers - for example, products sud1 as alcohol, tobacco and petrol are price inelastic in demand, so government taxes on these products can quite easily be passed on to customers without much impact on the quantity demanded. • Helping governments to determine taxation policies - for example, the government can impose heavy taxes on demerit goods (see Chapter 5) such as petrol and cigarettes, knowing that the demand for these products is price inelastic. While demerit goods are harmful to society as a whole, the high level of taxes on such products does not significantly affect the level of demand (with minimal impact on sales revenues and jobs), but the government can collect large sums of tax revenues.
Causes of current account surpluses - A surplus on the current account can occur due to a combination of two factors:
• Higher demand for exports - This could be caused by an improvement in manufacturing competitiveness, perhaps due to higher labour productivity in the domestic economy. Another factor is higher incomes in overseas markets, meaning that foreign households and firms have more money to spend on the country's exports. A third cause of higher demand for exports is a lower exchange rate which makes exports less expensive for foreign buyers. • Reduced demand for imports - Domestic buyers rend to buy fewer imports if they are more expensive or of lower quality than those provided by domestic firms. For example, a lower exchange rare means the domestic currency can buy less foreign currency, so this makes it more expensive to buy imports. Another reason is that inflation in overseas countries causes imports to be more expensive, so individuals and firms buy more home-produced goods and services.
The impact of taxation on economic agents and the economy
• Impact on price and quantity - The imposition of a sales tax will shift the supply curve of a product to the left (see Chapter 3) due to the higher costs of production. This will increase the price charged to customers and reduce the quantity produced and sold. • Impact on economic growth - Taxation tends to reduce incentives to work and to produce. By contrast, tax cuts can boost domestic spending, thus benefiting businesses and helping to create jobs. Nevertheless, tax revenues are essential to fund government spending (for the construction of schools, hospitals, railways, airports, roads and so on), which fuels economic growth. • Impact on inflation - As taxation tends to reduce the spending ability of individuals and the profits of firms, it helps to lessen the impact of inflation (see Chapter 18). By contrast, a cut in taxes boosts the disposable income of households and firms, thus fuelling inflationary pressures on the economy. • Impact on business location - The rate of corporation tax and income tax will affect where multinational businesses choose to locate. For example, high corporation tax rates in Argentina (35 per cent), Pakistan (35 per cent) and Cameroon (38.5 per cent) can put off some companies thinking of locating in these countries. As a result, foreign direct investment in these countries might be lower than otherwise. By contrast, it might be easier to attract workers in low income tax countries such as Bulgaria (10 per cent), Macedonia (10 per cent), Belarus (12 percent) and Hong Kong (15 per cent). • Impact on social behaviour - Taxation can be used to alter social behaviour with the intention of reducing the consumption of demerit goods (see Chapter 5). For example, taxing tobacco and alcohol should, in theory, reduce the demand for such products. Taxes are also used to protect the natural environment by charging those who pollute or damage it. For example, countries such as the UK and China tax cars based on the engine size because vehicles with larger engines tend to cause more pollution. • Impact on incentives to work - if taxes arc too high, this can create disincentives to work. Impact on tax avoidance and tax evasion - Some taxes are preventable. T ax avoidance is the legal act of not paying taxes: for example, non-smokers do not pay tobacco tax and non-overseas travellers do not pay air passenger departure taxes. However, tax evasion is illegal as it refers to non-payment of taxes due, perhaps by a business under-declaring its level of profits. High levels of taxation will tend to encourage both tax avoidance and tax evasion. By contrast, low rates of taxation create fur fewer incentives for households and firms to defraud the government. Impact on the distribution of wealth - The use of taxes can help to redistribute income and wealth from the relatively rich to the poorer members of society.
The consequences of inflation - Importers
• Importers - Imports become more expensive for individuals, firms and the government due to the decline in the purchasing power of money. Essential imports such as petroleum and food products can cause imported inflation (higher import prices, forcing up costs of production and thus causing domestic inflation). Hence, inflation can cause problems for countries without many natural resources.
Advantages of economic growth
• Improved standards of living - Economic. growth tends to lead to a higher standard of living fur the average person. Higher income levels in a country enable people to spend more money to meet their needs and wants. This helps to eliminate absolute poverty in the country. • Employment - Economic growth leads to higher levels of employment in the economy. This helps to raise consumption and encourages further investment in capital, helping to sustain economic growth. • Tax revenues- Economic grow this associated with higher levels of spending in the economy. This generates more tax revenues for the government. For example, the government can collect more from sales taxes (on consumption), corporation tax (on the profits of firms) and import taxes. Hence, there are more funds for the government to use to sustain the growth of the economy.
However, perfect competition is a theoretical possibility only and in reality the vast majority of markets are imperfect. For example:
• Inmost industries, there are market leaders (those with a high market share) who have significant power to influence the market supply and hence prices. An example is Apple and Samsung, which dominate the tablet computer industry. Hence, these firms are price makers (or price setters) rather than price takers. • In reality, barriers to entry exist in virtually all markets. For example, there may be legal entry barriers to some industries, such as the professional qualifications needed to practise law and medicine, or the high setup costs to enter other markets, such as the airline or pharmaceutical industries. • Consumers and suppliers arc likely to have imperfect knowledge rather than perfect knowledge. This means that customers and rival firms do not have easy access to information about the products and the prices being charged by competitors. For example, mobile phone network providers use very confusing pricing packages for their services. Similarly, banks offer a variety of interest rate charges for their various types of loan. • Firms are likely to produce differentiated products, rather than homogeneous ones. For example, sports apparel firms such as Adidas and Nike use branding, different product designs, colours and slogans to differentiate their products. Many successful and large businesses develop memorable slogans (catchphrases) as a form of product differentiation
Determinants of productivity
• Investment - This is the expenditure on physical capital such as machinery, vehicles and buildings. For example, investment in the latest technologies generally helps workers to do their jobs better - that is, to produce more output and of better quality. The degree of investment in turn is determined by the level of interest rates. In general, the higher the interest rate, the more expensive capital expenditure will be, thus discouraging investment in the economy. • Innovation - This refers to the commercialisation of new ideas and products. The invention of tablet computers and smartphones has transformed the way many people work, as they are able to conduct their business while mobile rather than at the office. Such innovations have increased the speed of work, improved communications and enhanced organisation at work. Thus, innovation helps to boost productivity. • Skills and experience - The productivity of labour is determined by its quantity and quality. The latter can be increased by improving the skills and experience of the labour force. Education and training, tor example, enhance the human capital (skills and experience of the workforce) in the economy, thus boosting productivity. • Entrepreneurial spirit - Entrepreneurs take risks in the production process in the pursuit of profit. They plan and organise the various factors of production in the production process. Productivity is dependent on the drive (motivation) of entrepreneurs, such as their willingness and ability to exploit new business opportunities. • Competition - This creates an incentives for firms to be more productive. Without competition, firms might Jack the incentive to be efficient or innovative (sec the Exam Practice below). By contrast, competition forces firms to be more efficient, thus helping to boost the economy's overall productivity.
The consequences of inflation - Lenders
• Lenders - Lenders, be they individuals, firms or governments, also lose from inflation. This is because the money lent out to borrowers becomes worth less than before due to inflation.
Non-wage factors that influence an individuals choice of occupation
• Level of challenge - does the job require thinking skills or is it repetitive and boring? • Career prospects - will there be progression within the firm or will a person have to change jobs to be promoted? • Level of danger involved - is the job dangerous? For example, some people face a high degree of risk at work, such as lifeboat rescue teams, fire fighters, window cleaners and scaffold erectors. The length of training required - Some jobs require few skills, such as cleaners and shop assistants. By contrast, other jobs require years of training, such as electrical engineers, plastic surgeons, pilots, lawyers and dentists. • The level of education required - Some jobs require no or minimal education whereas other jobs require post-graduate levels of education (such as university professors). • Recognition in the job - does the worker get praise and recognition for their performance at work? !fa worker feels respected at work, they may be motivated to work harder. • Personal satisfaction gained from the job - This is important because if a worker feels satisfied and happy in their work, they may work harder and stay in the job longer. Voluntary work might be carried out by people who are happy to work for no pay, as the reward they get is the personal satisfaction of working for a charity, such as taking care of the elderly or sick. • The level of experience required - Some jobs require no or minimal experience whereas other jobs require a minimum amount of experience (such as judges and Jaw-makers).
Other factors that affect the size of a population, and hence the potential growth of the population, include the following:
• Life expectancy - This measures the number of years an average person in the country is expected to Jive. The longer the life expectancy, the greater the population size tends to be. • Social changes - In economically developed countries, women are choosing to haw children at a later age, partly due to the high cost of raising have a professional career. In China, the one- child policy has significantly reduced the population growth of the world's most populous country. • Natural disasters, diseases and war - These unpredictable events can cause a significant change in population size.
Less economically developed countries have common characteristics. Explain these:
• Low GDP per capita - For economists, this is probably the key characteristic of developing countries. GDP per capita is calculated by dividing the gross domestic product of a country by its population to find the income level of the average person. The lower the GDP per person, the poorer the country rends to be. • Low life expectancy - Life expectancy measures the number of years that the average person in a country is anticipated to live for, based on statistical trends. The lower the life expectancy, the poorer the country rends to be. • Low literacy rates - Literacy rates measure the proportion of the population aged 15 and above who can read and write. Low-income countries have insufficient investment in education and training, so their literacy rates rend to be low. This has major consequence for employment, production and productivity, thus negatively impacting on the GDP of the country. High-income countries have 100 per cent literacy rates whereas low-income countries have very low literacy rates e.g. Chad. • High population growth - Population growth measures the annual percentage change in the population of a country. Poorer countries tend to have high population growth rates for many reasons: a lack of family planning and sex education, poor access to contraception and cultural norms (it is common and widely accepted to have many children in some countries and cultures). • Poor infrastructure - Infrastructure refers to the system of transportation and the communications networks necessary for the efficient functioning of an economy, such as buildings, mass transportation, roads, water systems, technology systems including the internet, airports and power supplies. • Low foreign direct investment - The lack ofcapital resources also limits the ability ofa country to create income and wealth. Foreign direct im·estment (FDI) refers to cross-border investment made by multinational companies and other investors. Poor coumries, with their lack ofeconomic growth and poor infrastructure, do not tend to attract FDI due to the expected high risks and low financial returns. • Poor health care - Insufficient investment in health services hinders the ability of a country to develop. Health care expenditure per capita is low in LEDCs. Their governments are unable to provide preventive and curative health care services for the mass population. • Low labour productivity - Labour productivity is a measure of the efficiency of labour in the production process, such as output per worker (see Chapter 11). Due to the combination of low literacy, low capital investment and poor health care, labour productivity in LEDCs also tends to be low. • High public debt - Public debt refers to the money owed by the government (public sector). In general, LEDCs are far more likely to borrow money to finance their public sector expenditure, so the higher the public debt, the lower a country's standard of living tends to be. This is because the government will need to repay its loans, along with interest payments, rather than using the funds for investment in the economy. - However, the huge impact of the global financial crisis has harmed MEDCs and not only LEDCs • Reliance on primary-sector output - Low-income countries tend to over-rely on the production and export of primary-sector output, such as agricultural products. These tend to ha\'e poor terms of trade in comparison with the export of manufactured products or tertiary-sector services. • Corruption - A final characteristic ofLEDCs is their high degree of corruption. There are huge opportunity costs of civil war, dishonest government officials, fraudulent behaviour and the purchase of arms and weapons. - Corruption therefore hinders economic development and results in hugely unequal income distribution.
The consequences of inflation - Low income earners
• Low income earners - Inflation harms the poorest members of society far more than those on high incomes. Low income earners tend to have a high price elasticity of demand (see Chapter 4) for goods and services. By contrast, those on high incomes and accumulated wealth, such as hip-hop artists (see Table 18.3), are not so affected by higher prices.
Monetary policies These policies arc used to control the money supply by manipulating interest rates and exchange rates:
• Low interest rates can encourage borrowing and investment to increase spending in the economy. In the long nm, this can help to create more jobs and alleviate the problems of poverty. • Low exchange rates can encourage export sales as the price for foreign buyers is lower. As higher export earnings help to boost GDP, this can also help to create more jobs and wealth in the economy over time.
A deficit on the current account can occur due to a combination of two factors:
• Lower demand for exports - This could be caused by a decline in manufacturing competitiveness, perhaps due to higher labor costs in the domestic economy. Another factor is declining incomes in foreign markets, perhaps due to an economic recession. This means households and firms have less money available to spend on another country's exports. A third cause of lower demand for exports is a higher exchange rate. This makes exports more expensive for foreign buyers, so it reduces the volume and value of exports. • Increased demand for imports - Domestic buyers tend to buy more imports if they are cheaper or of better quality. For example, a higher exchange rate means the domestic currency can buy more foreign currency, so this makes it cheaper to buy imports. Alternatively, domestic inflation means that imports are relatively cheaper, so more domestic residents and firms will tend to buy foreign goods and services.
The advantages of being a multinational company include the following:
• MNCs operate on a very large scale, so they are able to exploit economies of scale. This means that the MNC can pass on cost savings to customers in the form of lower prices, thereby enhancing its international competitiveness. • Through job creation, MNCs are able to help improve standards of living in the countries where they operate. For example, Walmart, the world's largest retailer, employs over 2.1 million people worldwide. • By operating in overseas markets, MNCs are able to generate more profit by selling to a larger customer base. • MNCs are able to spread risks by operating in overseas markets. For example, adverse trading conditions in one pan of the world can be offset by more favourable circumstances in other pans of the world. • By producing in a foreign country, a MNC is often able to avoid any trade restrictions. For example, Japan's Honda is able to avoid import taxes in the European Union because it has manufacturing plants in the UK, Belgium, Italy and France. • The MNC can set up factories in new markets and benefit from lower transport costs. For example, the Japanese car manufacturers Honda, Nissan and Toyota all have factories in China - the world's largest market for private cars. • Multinationals might choose to move or expand operations in foreign countries to benefit from lower rates of corporation tax. For example, corporation tax rates in Japan, Australia and the UK are far higher than those in Hong Kong, Singapore and Bahrain.
The consequences of inflation - menu costs
• Menu costs - Inflation impacts on the prices charged by firms. Catalogues, price lists and menus have t o be updated regularly and this is costly t o businesses. O f course, workers also have to be paid for the time they take to reprice goods and services.
Other possible causes of inflation are:
• Monetary causes of inflation are related to increases in the money supply (see Case Study on Zimbabwe) and easier access to credit, e.g. loans and credit cards. • Imported inflation occurs due to higher import prices, forcing up costs of production and therefore causing domestic inflation.
Disadvantages of specialisation
• Overspecialisation in a region can cause structural and regional unemployment. -- Countries that over specialise also suffer the most during an economic downturn, as they do not have a variety of goods and services that they can rely on to survive. - High labour turnover occurs if lots of workers choose to leave their jobs in search of more challenging and less boring ones. In a country that has a labour turnover rate of 12.5 per cent, one worker in every eight changes jobs each year. The higher this rate, the more expensive it is for the economy, as firms have to continually hire and train workers. Industries that suffer from high labour turnover tend to pay low wages to low-skilled workers, such as those working in call centres, retailing, catering (including fast-food restaurants), supermarkets and hotels. • Low labour mobility - Low-skilled and poorly paid workers tend to receive little training, so they may not dewlap the necessary skills to find alternative jobs. Again, this can lead to structural unemployment. Highly skilled workers, such as pilots, software developers, financial advisers and attorneys can also find it extremely difficult to change to alternative professions and careers. Job specialisation also makes cross-functional training difficult - in other words, workers only haw a narrow understanding of the overall business. By contrast, cross-functional training would help to make workers more versatile and expand their skills. This lack of labour market flexibility can reduce the economic efficiency and international competitiveness of the country. Lack of variety for consumers~ Specialisation often leads to standardised, mass-produced goods. An example is Foxconn, which manufactures the iPhone and iPad for Apple. These de,,ices Jack variety and only come in one o f two colours. Domestic customers may look at alternative imported products from foreign suppliers, thereby reducing the competitiveness of domestic firms that overspecialise. • Cost ~ Firms that employ workers with highly specialised skills tend to face very high salary demands. Furthermore, this can have a negative impact on the profits of firms and potentially reduce their competitiveness
Factors affecting the choice of business organisation
• Ownership - Does the owner want to be in complete control of the business? Can the owner(s) afford to risk having unlimited liability? Do they want to be held accountable to the shareholders of the company? • Control - How many people will own the business? Do they want complete privacy of their financial accounts? Do the owners prefer to work alone or with others, perhaps to share the workload? • Sources of finance - How much money is needed to set up the business? Do the owners have the necessary money to start the business or arc additional funds required? Are the owners prepared to share the profits in return for greater sources of finance to fund the organisation's business operations? • Use of profits - Does the owner want to keep all the profits of the business? Are the profits going to be reinvested in the business or distributed to shareholders?
Supply-side policies These policies are used to boost the long-run productive capacity of an economy. For example:
• Policies to reduce unemployment, because unemployment is a major cause of poverty and inequality. Examples include government incentives to attract foreign direct investment and government-funded job creation and retraining schemes. • Policies to increase the quantity and quality of education in the economy. Over time, this will help to improve the human capital and productive capacity of the country. • Sustained economic growth, which helps to create more income and wealth for the country. This can then be redistributed to the deprived and underprivileged members of society. • Labour market reforms to improve the efficiency and productivity of the workforce The introduction of a national minimum wage, or imposing a higher minimum wage rate, can improve the standards of living for low income households.
Market failure may be caused by the following:
• Production of goods or services which cause negative side-effects on a third party. For example, the production of oil or the construction of offices may cause damage to the environment and a loss of green space. • Production of goods or services which cause a positive spillover effect on a third party. An example is training programmes, such as first-aid or coaching skills for employees, which create benefits that can be enjoyed by others. • Consumption of goods or services which cause a negative spillover effect on a third party. Such goods are known as demerit goods and include cigarettes, alcohol, gambling and driving a car. • Consumption of goods or services which cause a positive spillover effect on a third party. Such goods are known as merit goods and include education, health care, and vaccinations. • Failure of the private sector to provide goods and services such as street lighting, road signs and national defense due to a lack of a profit moth-e. Such goods and services are known as public goods • The existence of a firm in a monopoly market (see Chapter 13) that charges prices which are too high and exploits customers.
Fiscal policies These policies are used to redistribute income and wealth by using a combination of taxation and government spending policies. For example:
• Progressive tax system to reduce the wide gap between the rich and poor members of the country. Higher-income groups pay a higher percentage of their incomes in tax, with the tax proceeds being used by the government to support the lower-income groups or those without any income. • Government transfer payments give the unemployed and disadvantaged financial assistance to meet their basic needs. Examples of transfer payments are unemployment benefit, state pension funds for the elderly and child benefit (to reduce child poverty). This helps to provide a social safety net to ensure that every citizen has access to basic necessities. • Government provision of basic services such as health care services, education and housing. This helps to improve access to such basic services for everyone and narrows the gap between the rich and the poor.
Reasons for trade protection
• Protectionist measures help to protect infant industries (new, unestablished businesses) from foreign competition. • Protection from free trade can also help to protect domestic jobs. In extreme cases, fierce competition from foreign rivals can even force domestic firms out of business. • It prevents foreign countries from dumping their goods in the domestic economy. Dumping occurs when foreign firms sell their products in large quantities at prices deliberately below those charged by domestic firms, often even below the cost of production. This clearly gives the foreign firms an unfair price advantage, so protectionist measures may be needed. • Protection can also be a source of government revenue. • Protection might also be required to overcome a balance of payments deficit - Protectionist measures to restrict imports would help to deal with this imbalance. In terms of strategic arguments, the government might use protectionism to safeguard the country against being too dependent on goods and services from other countries. For instance, if a war were to break out then protectionist measures give the country the ability and capacity to produce all the goods and services that it needs, rather than having to rely on foreign countries.
Protectionist measures
• Protectionist measures such as tariffs and quotas (see Chapter 26) can be used to safeguard domestic jobs from the threat of international competition. For example, the Japanese government imposes up to 778 per cent import taxes on rice - the highest rate in the world - in order to protect agricultural jobs in the country.
Examples of external economies of scale
• Proximity to related firms - Tirupur in India is renowned for textile and garment manufacturing. A garment manufacturer will benefit from having firms that produce zippers, buttons, thread and fabrics located nearby, as this will give it easy access to its suppliers and reduce transport costs. • Availability of skilled labour - In Tirupur there is a pool of skilled machinists and pattern cutters. This should make recruitment of textile workers with the necessary skills relatively easy. • The reputation of the geographical area - This provides a firm with free publicity and exposure. For example, Silicon Valley in California, an area with a worldwide reputation for software creation and the development of information technology systems, has a large number of suitable skilled workers. • Access to transport - Manufacturing firms benefit from being located near to major road networks, pons and cargo facilities. A cafe or restaurant will benefit from being close to other shops, public transport links and parking facilities. China has interested heavily in developing its infrastructure to facilitate efficient transportation of finished goods to ports and airports. l11is gives it a competitive advantage over India, where road and rail networks are less developed.
The limitations in using HDI to measure standards of living:
• Qualitative factors - the HDI ignores qualitative measures affecting standards of living, such as gender inequalities and human rights. • Income distribution - the HDI does not take account of inequitable income distribution, thus being less accurate in measuring Jiving standards for the 'average' person. • Environmental issues - the HDI ignores environmental and resource depletion resulting from economic growth. • Cultural differences - although the HDI is a composite indicator, it ignores cultural differences and interpretations of the meaning of standards of living.
Types of trade protection - Quotas
• Quotas - An import quora sets a quantitative limit on the sale of a foreign good into a country. For example, the Indonesian government imposes import quotas on fruits and vegetables from Thailand. The quota limits the quantity imported and thus raises the market price of foreign goods
Functions of a stock exchange include the following:
• Raising share capital for businesses - As a marketplace for buying shares, the stock exchange provides public limited companies with the facility to raise huge amounts of finance for business growth and expansion. This is done by selling shares in the company to the general public. Share capital (the money raised from selling shares in the company) is the main source of finance for public limited companies. Many businesses decide to 'go public' by selling their shares on a stock exchange for the first time - a practice known as an initial public offering (IPO). Popular IPOs are heavily over subscribed (the quantity demanded outstrips the quantity supplied) and this forces up the share price. Existing companies that are listed on a stock exchange can raise more share capital by selling additional sales in a share issue (or a share placement). However, by issuing more shares, ownership and control of the company become weakened. • Facilitating company growth - In addition to making an IPO (initial public offering), existing companies can choose to sell additional shares to raise funds to finance their growth. T his process is known as a share issue. For example, Petrobra's - Brazil's largest oil company - managed to raise $70 billion from selling additional shares to the general public in September 2010. The stock exchange also functions to facilitate the growth of companies through mergers and acquisitions • Facilitating the sale of government bonds - Gm·ernments can raise capital to fund their development projects via the stock exchange, which sells securities known as bonds (a type of loan). Bondholders do not ha\·e ownership rights, but earn interest based on the number of bonds bought and the prevailing interest rate. Government bonds can be bought and sold through the stock exchange by the general public, such as individuals, companies and other governments. The finance raised is often used to fund infrastructure projects such as the construction of motorways (higln\'ays), sewage and water treatment systems, and public housing projects. • Price mechanism for trading shares - Share prices are generally determined by the relati\'e forces of demand and supply (see Chapter 3). Price fluctuations and the valuation of share prices are handled by the stock exchange. This function of the stock exchange provides important and up-to-date information to both buyers and sellers in the stock market. - Safety of transaction - All companies that trade on a stock exchange are regulated. The share dealings of public limited companies are defined in accordance with the country's legal framework. This helps to boost the level of confidence in buying and selling shares. Thus, this function of a stock exchange can have a large impact on the economic growth prospects of a count!)' as it facilitates capital formation (investment).
There are three main limitations of using fiscal policy to control the level of economic activity: problems with the timing (time Jags), conflicting macroeconomic objectives and political considerations. There are three problems with the timing of fiscal policy:
• Recognition lags - There is a time lag in recognising that government intervention is needed to affect the level of economic activity. This is because governments do not necessarily know if the economy is growing too fast (or declining too quickly). • Administrative lags - There is a time delay between recognising the need for fiscal policy intervention and actually implementing appropriate action, such as approving tax changes or alterations to the government budget. • Impact lags - There is a time lag between implementing fiscal policy and seeing the actual effects on the economy. A cut in income tax, for example, will take time to have a significant impact on the spending habits of households. A second limitation of fiscal policy is that of conflicting macroeconomic objectives (sec Chapter 15). For example, the use of expansionary fiscal policy can certainly help to achieve economic growth, but a combination of tax cuts and increased government spending can fuel domestic inflation. By contrast, contractionary fiscal policy can help to control inflationary pressures but might cause unemployment in the economy.
a current account deficit is generally considered to be unfavourable for the economy for the reasons outlined below:
• Reduced aggregate demand - A trade deficit means the economy is spending more money on imports than it receives from the export of goods and services. This can cause aggregate demand in the economy to fall, thus triggering a recession • Unemployment - As the demand for labour is a derived demand, a fall in aggregate demand is likely to cause unemployment in the economy. Workers may also have to take a pay cut in order to correct the deficit. For example, the UK has experienced a decline in manufacturing jobs as there has been a fall in the demand for British exports of coal, steel, textiles and motor vehicles. • Lower standards of living- If the current account deficit is caused by a negative balance on net income flows and transfers, this means monetary outflows exceed monetary inflows for the country. An economy with less income is likely to suffer from lower standards of living. In addition, to cut the current account deficit, households and firms may need to reduce their spending. • Increased borrowing- Just like an individual cannot spend more than he or she earns in the Jong run, countries need to borrow money or attract foreign investment in order to rectify their current account deficits. In addition, there is an opportunity cost of debt repayment, as the government cannot use this money to stimulate economic growth. • Lower exchange rate - A fall in demand for exports and/or a rise in the demand for imports (causing the current account deficit) reduces the exchange rare. While a lower exchange rate can mean exports become more price competitive, it also means that essential imports (such as oil and foodstuffs) will become more expensive. This can lead to imported inflation
The consequences of inflation - Savers
• Savers - Savers, be they individuals, firms or governments, lose out from inflation, assuming there is no change in interest rates for savings. This is because the money they have saved is worth less than before. For example, if interest rates average 2 per cent for savings accounts in a country but its inflation rate is 3 per cent, then the real interest rate on savings is actually - I per cent. Hence, inflation can act as a disincentive to save. In turn, this leads to fewer funds being made available for investment in the economy.
The consequences of inflation - Shoe leather costs
• Shoe leather costs - Inflation causes fluctuations in price levels, so customers spend more time searching for the best deals. This might be done by physically visiting different firms to find the cheapest supplier or searching on line. Shoe leather costs represent an opportunity cost for customers.
• Structural unemployment
• Structural unemployment occurs when the demand for products produced in a particular industry falls continually, often due to foreign competition. There are sectorial and long-term changes in demand for the products of certain industries. The UK, for example, has suffered from structural unemployment in shipping, textiles, coal mining and car manufacturing. Those who suffer from structural unemployment usually find it quite difficult to find a new job without retraining.
Types of trade protection - Subsidies
• Subsidies - Governments can provide subsidies (lump-sum payments or cheap loans to domestic producers) to help local firms to compete against foreign imports. Subsidies lower the costs of production for home firms, thereby helping to protect local jobs. For example, the European Union subsidises its farmers to encourage agricultural output
Whether firms choose more capital- or labour-intensive production methods depends on several related factors:
• T he cost of labour compared with the cost of capital - Firms will tend to choose more capital-intensive methods of production if labour costs are relatively high (assuming that it is possible to substitute factors inputs in the production process),and vice versa. • The size of the market - Capital-intensive production tends to take place for mass-market products such as soft drinks, passenger vehicles and consumer electronics. Labour-intensive methods are often used for personalised services, such as a private tutor, counsellor, adviser, instructor or coach. • The firm's objectives - Profit-maximisers operating in mass markets tend to opt for capital-intensive production methods in order to minimise their unit costs of production. Other firms might choose to use labour-intensive methods as they operate on a smaller scale or to safeguard jobs. Black & Decker, operating in Shenzhen, China, uses labour-intensive production methods to create jobs in the special economic zone (see Chapter 16), benefiting from tax incentives from the government.
Types of trade protection - tariffs
• Tariffs -A tariffs a tax on imports. Tariffs increase the costs of production to importers, thus raising the price of foreign goods in the domestic market and lowering the amount of products imported
Technological unemployment
• Technological unemployment occurs when workers Jose their jobs due to firms opting to use capital-intensive technologies. This can cause large scale unemployment in certain industries. For example, supermarkets in Europe introduced self-service checkouts in 2009. Their huge success and cost savings for supermarkets and other retailers mean that fewer workers need to be hired.
The benefits of backward vertical integration in the previous example include the following:
• The firm in the secondary sector has control over the quality of raw materials with which it is supplied. • There is no wastage as all produce from the primary sector can be used. • The price of raw materials falls as the manufacturer docs not have to pay another (external) firm for the raw materials.
Bartering and the need for exchange
• The key problem with a barter system is the need for a double coincidence of wants - the person with chickens must find a trader who wants chickens in exchange for their sheep. As two people engaged in a trade must both want what the other person is offering, bartering is highly inefficient. • A second problem with bartering is that of divisibility - half a sheep or two-thirds of a chicken is not very useful for traders. • A third problem is that of portability - compare the portability of a sheep or fish with that of paper money (banknotes). The problems associated with bartering meant that countries around the world eventually developed the use of commodity money, such as cowry shells, grain and cloth. For much of history, precious metals such as gold and silver have served a monetary role.
The factors that influence the demand for labour include the following:
• The level of total demand in the economy (known as aggregate demand) - During a boom or period of economic growth, the demand for goods and services, and therefore the demand for labor to produce them, is higher than during a recession or period of declining growth. • An increase in the productivity of labor (output per worker m·er a period of time) - The demand for workers increases as their productivity increases through training and changes to production methods (see Chapter 11). For example, allowing workers to make suggestions about how their working practices can be improved and putting the suggestions into practice can motivate workers, as they feel empowered to make changes. Recognition of workers' achievements can also be motivational and increase productivity. Consider how praise from your teachers or parents can impact upon your own attitude to learning! • The cost of labor as compared with the cost of machinery and technology that could replace the labor - Although technology and machinery are expensive to purchase in the short run, they can save money for the business in the Jong run. For example, many firms have replaced security guards with security cameras. Cameras are cheaper in the Jong run and they do nor need toiler breaks, although they do break down occasionally! Car manufacturers use robotic equipment and machinery that can operate 24 hours a day.
The size of a firm can be measured in the following ways:
• The number of employees - In 2013, GlaxoSmithKline, a large pharmaceutical company, had over 100000 employees. A small local grocery shop may have only five employees. • The size of the market (market share) - For example, Hertz, Enterprise and Budget car hire companies collectively had 95 per cent of the car hire market in the USA in 2013. Nestle dominates the food and beverages market in Pakistan, as it is the leading company in milk production and related products including yogurt, milk powder and butter. It also dominates the bottled water market in Pakistan. • The capital employed in a firm - This is the difference between the assets of a firm (what it owns) and its liabilities (what it owes). For example, in January 2013 Walmart's capital employed was $203.1 billion, making it the world's largest retailer. • The sales turnover (sales revenue) of the firm. This is measured by multiplying the unit price of a product by the quality sold (see Chapter 12). For example, in 2012 ExxonMobil had sales turnover of $433.5 billion and was the world's largest firm by this measure.
Four key functions of the central banks
• The sole issuer of banknotes and coins - In almost every country, the central bank has the sole right to issue legal tender in its own coum11·: in other words, it is the only authority that can prim banknotes and mint coins. This helps to bring uniformity to, and improves public confidence in, the country's monetary system. One rare exception to this function is in Hong Kong where three commercial banks (Standard Chartered, HSBC and Bank ofChina) have note-issuing rights, although the Hong Kong Monetary Authority maintains overall control of the country's banking system, including the circulation of banknotes and coins. • The government's bank - The central bank operates as a banker to the government, performing the same functions as a commercial bank does for its customers. Hence, as the government's bank, it maintains the bank accounts of the central government, such as receiving deposits from the government, making short-term loans to the government and making payments for items of government expenditure (see Chapter 16). The central bank also manages public-sector debt and represents the government in the international financial markets, such as foreign exchange. TI1is has become an important function o central banks because such intervention can help to stabilize the external value of a nation's currency (see Chapter 24). • The bankers' bank- The central bank acts as the bank for other banks in the country. This function includes overseeing the cash reserves of commercial banks. This means that all banks in the country must have their accounts with the central bank, enabling the central bank easily to manage the claims made by banks against each other. For example, payment made by a Citibank customer writing a cheque to another customer with an HSBC account goes through the central bank's clearing system - the central bank debits the account of the Citibank customer and credits the account of the HSBC customer. This cheque clearing function of the central bank reduces the need for cash withdrawals, thus enabling commercial banks to function more efficiently. In addition, it also allows the central bank to have a better overview ofthe liquidity position (the ability to convert assets into cash) of the coumry's commercial banks. • The lender of last resort - Given that the authorities require all commercial banks to keep a certain percentage of their cash balances as deposits with the central bank, these cash reserves can be used by the country's banking system during financial emergencies. This function helps to build public confidence in the country's banking system. For example, ifa certain commercial bank fuces temporary financial difficulties, it can, as a last resort, seek financial assistance from the central bank. This helps to ensure the bank does nor collapse, protects jobs and thus safeguards the nation's banking system and economic welfare.
Consequences of unemployment
• The unemployed suffer from stress, low self-esteem, homelessness, depression and other health problems. In extreme cases, unemployment has led to suicide. • Family and friends may also suffer from lower incomes and this often leads to arguments and even separation or divorce. • The local community can suffer if there is mass unemployment - for example, there may be poverty, falling house prices (and hence asset values) and increased crime rates in the neighbourhood. • Firms lose out as there arc lower levels of consumer spending, investment and profits. Business failures and bankruptcies arc more likely to occur during periods of high unemployment. • The government may face higher expenditure on welfare benefits and health care for the unemployed. Prolonged periods of high unemployment can lead to increased government debts. • Taxpayers stand to Jose due to the opportunity costs of unemployment - the expenditure projects forgone due to increased spending on unemployment and welfare benefits. • The economy suffers from being less internationally competitive, due to falling levels of spending and national output.
Disadvantages of specialisation for the individual include the following:
• The work may become repetitive and boring. • Workers may become alienated, especially those specialising in low-skilled work. • The production process may become overspecialised - that is, roo dependent on an individual worker or group of workers. • The workers may become unskilled in other areas - in other words, there is a lack of flexibility.
The main characteristics of firms in perfect competition are as follows:
• There arc many buyers and sellers in the industry, none of which has any significant market power to influence the market supply or demand • Hence, firms arc said to be price takers - the price they charge is determined by the market forces of demand and supply rather than firms setting their own prices. • As there are literally no barriers to entry in perfect competition, there is freedom of entry to, and exit from, the market. • Firms produce a homogeneous product. This means that the products being sold are identical, such as bananas or strawberries being sold in fresh fruit markets. • Both buyers and sellers have perfect knowledge. This means that customers and firms have case of access to information about the product and the prices being charged by competitors.
For public limited companies, there are further potential drawbacks. These include the following:
• There are high costs in complying with the rules and regulations of the stock exchange. • There is a potential threat of takeover by a rival company that purchases a majority stake in the business (as shares are openly available for purchase on the stock exchange ). • As they tend to be the largest form of business organisation, there is the possibility that they will become too large to manage efficiently and therefore will suffer from diseconomies of scale - that is, higher average costs of production (see Chapter 14). • The firm is subject to fluctuations in value caused by investor speculation (buying and selling of shares to make a profit) on the stock market.
However, the potential costs or drawbacks include the following:
• There may be duplication of resources and therefore some workers may be made redundant - that is, Jose their jobs. Redundancies can cause anxiety, lead to demotivated staff and cause a decrease in productivity. • The newly formed larger firm may face increasing costs arising from diseconomies of scale (see below). • The combined firm may suffer from a culture clash if the two businesses are very different. This may initially cause communication and organisational problems.
Voluntary unemployment
• Voluntary unemployment occurs when workers choose not to work. Voluntary unemployment usually exists in economies with relatively generous welfare benefits for the unemployed as well as high rates of income tax, thus creating disincentives to work at current market (equilibrium) wage rates.
Advantages of specialisation for the individual (worker) include the following:
• Workers become experts in their field, so their productivity increases. • The quality of the product or service increases. • Workers can become very skilful, so their earning potential may increase.
Advantages of a national minimum wage
• Workers receive a fair wage for an hour's work and are not exploited by employers. • Unemployed people may have an incentive to work, as the wage may be more attractive than relying on welfare payments • Low-income earners may have more money to spend and this may increase consumption in the economy, thus easing any fears that higher wage {costs of production} might cause unemployment
Disadvantages of a national minimum wage
• Workers who earn more than the minimum wage {perhaps due to their seniority) may request a higher wage rate to maintain the wage differential between them and workers who earn less than they do. For example, when cleaners in an office receive a pay rise as a result of increase in the NMW, other office staff may ask for a wage increase to maintain the difference between their wages and that of the cleaners This causes an even larger increase in the cost of labor for firms. • Unemployment might increase because firms could face higher wage bills as a result of increased wage rates. Therefore, their demand for labor (ability and willingness to employ workers) will fall. Alternatively, firms might purchase machinery and equipment to reduce the number of workers required. This might cause technological unemployment in the economy
Other examples of external costs are:
• air pollution caused by fumes from a factory • noise pollution from a night club • cigarette smoke • litter • too much advertising, which causes visual blight.
Possible reasons for declining trade union membership in some countries include:
• changing government legislation, which seeks to reduce union influence • a decline in manufacturing, which is traditionally unionised • growth in part time employment, as pan-time workers are less likely to join a trade union • firms independently agreeing fair terms and conditions with their employees without negotiating with trade unions • an increase in unemployment (see Chapter 19) • an increase in employment in small firms, as it is more difficult to organise unions within such firms • an increase in the number of self-employed people (people who work for themselves and nor for a firm), who are therefore nor trade union members.
The secondary functions (or general utility functions) of commercial banks include:
• collecting and clearing cheques on behalf of their clients • offering additional financial services, such as tax advice, foreign exchange dealings and the buying and selling of shares • providing safety deposit boxes for customers to safeguard highly valued possessions, including items of jewelry and important documents such as wills • providing money transfer facilities, such as transferring money to an overseas bank account or paying various bills, such as telephone, electricity, gas and water bills • providing credit card fucilities for the convenience ofcustomers - both private individuals and commercial clients • providing internet banking facilities, such as online bill payments, online bank transfers between bank accounts and the online purchase of shares and foreign currencies.
Firms can deal with a higher or strong exchange rate in a number of ways, such as:
• cutting export prices to maintain their price competitiveness against foreign rivals, which means the domestic firms will have to accept lower profit margins • seeking alternative overseas suppliers of cheaper raw materials and components. • improving productivity (efficiency) gains to keep average labor costs under control • focusing on supplying more price inelastic and income inelastic products because customers become less sensitive to exchange rate fluctuations. • focusing on non-price factors that are important to overseas customers, such as brand awareness and social responsibility. • relocating production processes overseas, where costs of production are relatively low and where operations are less exposed to exchange rate fluctuations.
The two combined businesses can benefit from:
• getting an increased market share • gaining skilled employees from one another • operating with fewer employees (as there is no need to hire two finance departments, for example), so this may reduce costs • raking advantage of economies of scale.
Possible reasons for increasing trade union membership in some countries include:
• growth in manufacturing jobs, as manufacturing industry is typically unionised • an increasing number of workers experiencing low pay and poor working conditions in manufacturing • an increasing wealth gap and higher costs of living, which have caused workers to petition for higher wages and better working conditions.
The United Nations defines overall poverty as 'a lack of income and productive resources to ensure sustainable livelihoods'. This includes:
• hunger and malnutrition • ill health and mortality from illness • limited or lack of access to education and other basic services • homelessness and inadequate housing • unsafe environments • social discrimination and exclusion.
Labour force participation rate is influenced by...
• the number of full-time and pan-time workers in the labor force • the number of women in the workforce • the age distribution of the workforce • the official retirement age of the country.
The disadvantages of government provision of goods and services are that:
• there is an opportunity cost, as the money could have been spent on something else, such as paying off government debt or possibly lowering the rate of taxation • goods and services that are free of charge may be over-consumed, so long queues or shortages may arise (for example, the waiting list for a hip replacement operation in a government hospital may be very long) • in the case of a shortage of supply due to excess demand, it can be difficult to decide who should be able to take advantage of the free government service • some people (known as free riders) arc able to take advantages of free goods and services without contributing to government revenue through paying taxes.
Individuals and firms may borrow for different reasons, including:
• to fund cxpensh-e items, such as a car, a motorcycle or an overseas holiday • to purchase property or land, such as a factory, office or home • to start up a new business • to fund large projects such as a business expansion in foreign countries • to fund private and tertiary education • to fund current expenditure in the C\"Cnt of job losses or economic decline.
Co-operatives around the world follow the values and principles set out by the International Co-operative Alliance. These are:
• voluntary and open membership • democratic member control • member economic participation • autonomy and independence • education, training and information • co-operation among co-operatives • concern for community.