LAST MINUTE REVISION

GUIDE
Balakumar.R.J
UNIT -3-

CONTENTS

 Functions of money, commercial banks, central banks and stock exchange

 Labour market and trade unions
 Division of labour
 Income spending saving and borrowing
 Business organization
 Demand for factors of production
 Labour intensive and capital intensive
 Production and productivity
 Costs and revenue
 Profit maximization and other goals
 Market structures
 Size of firms
 Integrations
 Economies and diseconomies of scale

MONEY

FUNCTIONS OF MONEY CHARACTERISTICS OF MONEY

 Medium of exchange  Acceptability
 Measure of value (unit of account)  Durability
 Store of value  Portability
 Standard for deferred payment  Divisibility
 Scarcity

BANKING AND STOCK EXCHANGE

FUNCTIONS OF FUNCTIONS OF CENTRAL FUNCTIONS OF STOCK

COMMERCIAL BANKS BANKS EXCHANGE
 Accepting deposits (  Issuing notes and  Enable individual to buy
current account, saving  printing money  and sell shares
account and fixed  Bankers bank Enable business to buy
deposit accounts)  and sell shares
 Banker to government
 Making Payments  Set interest rate Enable government to
(cheques, credit card, raise finance through
debit card, standing  Control money supply
Lender of last resort issuing securities
order, direct debit,  Enable business
foreign exchange, ATM, expansion eg
Giro credit etc.) integration and
 Lending money ( loans takeover.
and overdraft)
 Shows country’s
economic performance

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LABOUR MARKET

FACTORS AFFECTING

DEMAND FOR LABOUR SUPPLY OF LABOUR

 Wages  Wages
 Productivity  Working population
 Demand for product (derived demand)  Total population
which means factors are demanded due  Other wage and non-wage influence
to high demand for goods
 Education and skill level

INDIVIDUAL CHOICE OF OCCUPATION

WAGE FACTORS NON-WAGE FACTORS

 Basic pay  job satisfaction
 Overtime  type of work/working conditions
 Bonus  working hours
 Commission  size of the firm
 Piece rate/time rate  career prospects/opportunity for
promotion

fringe benefits
 number/length of holidays
 pension scheme
 job security

location of job/distance and time to travel

CHANGES IN EARNINGS FOR AN INDIVIDUAL OVER THEIR LIFE TIME

 Entry to the work force, wages usually low

 Skilled , experience, promotion will increase wage
 End of career or with retirement, wages fall

DIFFERENCE IN EARNINGS

DIFFERENT GROUP OF REASONS FOR THE DIFFERENCE

WORKERS
Skilled vs Unskilled  Skilled workers are greater in demand compared with unskilled
workers which push up their wages.
 Skilled workers are less in supply compared with unskilled
workers which may again push up their wages.

Skilled workers are more productive compared with unskilled
workers.
Male vs Female 
Male workers receives higher wages than female on average
 Female workers are less productive on an average (due to
 maternity break)
Some occupations, female workers are high in demand such
 as modeling, cabin crew.
In some occupations, supply of female workers is higher- for
 example in Maldives, Teaching and nursing.
Public vs Private sector Differences in demand and supply may cause difference in
wages- for example in some countries, government demand
more of the workers and in other occupations, supply of
workers in private sectors are high.

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  Job securities in both sector might make a difference
 Overtime and job satisfaction in both sectors might make a
difference.

Relative strength of trade union in one sector might make a
difference

Skills needed and training period might make a difference
 Type of work in different sector might make a difference.
Primary vs Secondary vs  In primary sectors, wages are lower since the level of training
Tertiary sector required is relatively less.
 Level of output and income from primary production is also
less
 Secondary sector occupation receives higher wages than
primary because level of training required is more
 The demand for the secondary work is also high because
secondary productions are greater than primary production.
 Secondary jobs are subject to different payment scheme such
as piece rates which might push up their wages.
 However, tertiary occupation receives higher wages on
average compared with secondary because secondary jobs
are repetitive.
 Tertiary occupations receives higher wages because level of
training and demand for services are now a days higher than
any other sector.
 However, type of work, relative trade union strength can also
make a manufacturing worker receiving a higher wage
compared with a tertiary sector worker.
Demand and supply
GENERALLY 
Education and training

Risky jobs

Special talents

Payment scheme

Trade union power


TRADE UNION

An association of workers formed to protect and promote the interest of their members mainly through
collective bargaining.
Collective bargaining is the official negotiations between trade union officials and employer.

FUNCTIONS OF TRADE UNION  they exist to protect the interests of their

members

gain appropriate wage/salary increases;
 idea of collective bargaining
 job security
 working conditions/health and safety
 dismissal/redundancy
Possible influence on government at
national level.

WHY SOME NOT BELONG TO A TRADE  union doesn’t exist in a particular line of
UNION? work
 person is self-employed
 cost of annual fee/subscription is

 expensive
worker doesn’t agree with views/actions
of union
employees are satisfied with their pay
and working conditions

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  They are illegal in some countries.

ADVANTAGES TO THE WORKER  a trade union will provide a worker with

more collective strength
 this could be helpful in negotiating wage
rises
 improvements in worker conditions
 a trade union may provide a member with
a range of other benefits , e.g. training/
subsidized part-time education courses
 in some countries trade unions provide
members with unemployment benefits
 a trade union may influence a
government , e.g. to increase a minimum
wage which workers can benefit from

DISADVANTAGES TO THE WORKER  the trade union(s) in a particular industry

may not be very powerful especially if
membership is low
 finance is limited
 the cost of membership may be
expensive

there may be difficulties in being a trade
union member in some countries/some
governments discourage trade union
membership
 industrial action can be disruptive
 a worker may not receive an income

while on strike
a worker may lose her/his job as a result
of industrial action
ADVANTAGES TO THE FIRM  may encourage more workers to apply
for jobs as they may expect better
working conditions/job security
Reduce the cost of negotiations
 Provides a channel of communication
 Promote training
 Help to reduce conflicts
DISADVANTAGES TO THE FIRM  May push up the wages and total cost
 May reduce flexibility
 May take industrial action

ADVANTAGES TO THE /GOVERNMENT  Improve pay and living standard of

ECONOMY workers
 Reduce government cost of regulating
the labour market
DISADVANTAGES TO THE /GOVERNMENT  Create unemployment
ECONOMY  Create inflation
 Reputation problems
 Revenue of firms decrease

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DIVISION OF LABOUR

A technique of breaking down the production into a large number of specialized tasks

ADVANTAGES DISADVANTAGES
 Increased productivity  Monotony and boredom
 Saving time  Loss of other skills
 More employment  Risk of unemployment
 Automation
 Practice makes perfect

INCOME SPENDING, SAVING AND BORROWING

Types of Income

 Original income: - The total amount of money earned by an individual from all the sources.
 Disposable income: - The total income left for spending and saving after all deductions such
as income tax, insurance, pension etc. are deducted and social security benefits are added.
 Real income: - The purchasing power of money income which means the total quantity of
goods and services money income can buy.

REASONS FOR SPENDING  Disposable income

 Credit facilities
 Lower interest rates
 Education and health
 Inflation and expected future price
REASONS FOR SAVING  Higher interest rates
 Disposable income
 A fear that income may fall in future
 Higher education
 Future purchase
 Unforeseen expenses
REASONS FOR  Lower income
BORROWING  Financial difficulties
 Spending beyond their means
 Lower interest rates on borrowing
 Immediate purchases
 Ability to repay
 Able to provide more security
 Needs money for a short period of time

INCOME AND EXPENDITURE PATTERN

LOWER INCOME EARNERS HIGH INCOME EARNERS

 Spends most of their income, some  Spends a low % of their income on food
people spend all. and basic necessities. But actual amount
 Spends a high % of their income on food spend will be more.
and basic necessities.  Spends more % of their income on
 Spends less % of their income on luxuries and entertainment
luxuries and entertainment  Can save a high % of their income.
 Save very less % of their income. But  Though they spend a less % of income
some lower income earners cannot save. on food, actual income spend will always
 Though they spend a high % of income be more compared with poor
on food, actual income spend will always
be less compared with rich.

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BUSINESS ORGANISATION

Private sector: - A part of the economy where all the economic activities are owned and controlled by
private individuals
Public sector: - A part of the economy where all the economic activities are owned and controlled by
government.
Nationalization:- changing the ownership of a business from private sector to government.

Privatization :- changing the ownership of a business from government to private sector

SOLE TRADER

FEATURES ADVANTAGES DISADVANTAGEs

 Any
is business that  Firms are usually small, and  Sole trader has no one to
owned & controlled by easy to set up share responsibility
one person.  Generally a small amount of  Sole trader often work long
 They do not have capital is needed to hours & difficult to take
separate legal entity commence holidays
from its owner.  The wage bill is usually low  Expansion is difficult since
 Sole trader has unlimited since less employee limited capital
liability.  It is easier to keep overall  Risk of unlimited liability
 Profits and losses of the control  Sole trader receives all the
business are borne by  Sole trader receives all the profits. Similarly he or she
the owner. profits will receives all the losses
 Sole trader finds very also
easy to start the
business.

PARTNERSHIP

FEATURES ADVANTAGES DISADVANTAGEs

 Businesses owned by  Partnership has shared  Partners have unlimited
two or more people responsibility liability
 A contract called  Capital is more since  There can be disputes
‘deed’ is usually the maximum limit for among partners
drawn up the partners are 20  The distribution of
 Partners has  Better ideas can be profits can cause
unlimited liability brought by the problems
 Profits and losses are discussion among  There could be
shared by the partners difficulties if one partner
There is less time dies
partners 
pressure on individual Individual
 Capital is usually  do partners
partners
larger than sole trader Better not have control on the
 administration business
and financial system
than sole traders.

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PRIVATE LIMITED COMPANIES

FEATURES ADVANTAGES The DISADVANTAGEs

 The company name  liability of the  Capital is less than
must display the word  shareholders is limited public limited since
pvt ltd. The company has they can’t quote their
 The company is not separate legal shares in the stock
allowed to advertise existence from exchange
about its shares in the management t &owners  They can’t issue shares
stock exchange The employees also  to general public
 
 The shares are not can buy shares The shares are not
sold to stock  The company continues freely transferable
exchange, but they despite the death of any Divorce of ownership
sell shares to their shareholders and control may create
friends and family  They have to pay less conflicts.
members  Setting
corporation tax than up requires
 There is no minimum
value of shares that plc’s much legal formalities
have to be sold when
starting the company
 usually are
These
smaller than public
limited companies

Formation of companies

 Promoters with the help of a lawyer submit two documents (memorandum of association&
articles of association) to registrar of companies
 Memorandum of association includes external information of the company and articles of
association includes internal information
 Statutory declaration is issued by the registrar which indicates that the documents are true
 After that certificate of incorporation is issued to start the business. However, public limited
companies should obtain certificate of trading.

PUBLIC LIMITED COMPANIES

FEATURES ADVANTAGES DISADVANTAGEs

 Company must  Shares can be  Decision take longer
display plc ltd after its advertised and sold in and there can be
name the stock exchange disagreement
 Company must be  Shares are freely  Profits are shared among
registered with the transferable number of people
registrar of companies  Shareholders have Published accounts
They have to obtain limited liability  have to be prepared
the certificate of Cheaper and easy
   Expenses are high
trading to sell shares borrowings and bulk when setting up the
to general public buying company
Shares are freely  Capital is larger than They might experience
 transferable and they
private limited 
can quote in the stock
companies difficulty in
exchange
management
Shareholders
limited liability
 have

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COOPEARTIVE SOCIETIES

FEATURES ADVANTAGES DISADVANTAGEs

 These are voluntary  The formation is very  The amount of capital is
associations formed simple compared to limited
by group of members other companies  Management problems
 Any person who is  Life of the co-operative can arise due to lack of
interested can society is not affected talent
become a member by the life of its  There can be disputes
 One member has one members among members
vote irrespective of  The liability is limited  They usually depend on
his or her shares  Membership is open to government
 Profits are distributed any body  Lack of motivation
among members  Government usually
according to the share provides assistance to
capital co-operative societies
 Members select a
management
committee to control
the business
Consumer

cooperatives,
producer
cooperatives are
some of the types.

PUBLIC CORPORATION

FEATURES ADVANTAGES DISADVANTAGEs

 The public  No interference from  It is very difficult and
corporation is owned the government for the time-consuming to set
by government day to day running up a public corporation
 Corporation are  It enjoys flexibility because a special law
managed by board of  It can, therefore, has to be passed in the
directors appointed by maintain continuity of Parliament.
government The policy and operations.  It is very difficult to
 primary motive of  A public corporation change the objects and
the corporation is can employ powers because the
public service rather professional managers special law has to be
than private profits. It amended by the
 The special law by Parliament or the State
is, however, expected
which by which it is legislature.
to operate in a
created can be tailor
business-like manner.
made to meet the  There are frequent
Its initial capital are debates and

provided by specific needs of the
discussions on the
government particular situation. reports and working of
public corporations
 be can
It sued sue
and can
and enter Emphasis on service
into contracts in its own 
name. motive and lack
of
incentive may further
reduce the profitability
of operations.

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MULTINATIONALS

FEATURES ADVANTAGES OF ADVANTAGES TO DISADVANTAGES

BEING HOST TO HOST
 Companies that  Reduce  Employment  Social cost
operate and transport  Increase export  Profits taken
produce in cost and favourable back to
different  Avoid trade BOP home
countries  barriers and  Economic  Few
 Headquarters in Easy
 one country  growth employment
cheap labour opportunities
and land  Tax revenue
Usually large Transfer of for locals
public limited  Huge profits technology  If they leave,
companies a huge
 Sell shares to disadvantag
general public e to the
through stock economy
exchange  Disrupt local
business
DEMAND FOR FACTORS OF PRODUCTION

 Demand for the final goods

 Price of each factor
 Price of the final good

LABOUR INTENSIVE AND CAPITAL INTENSIVE

 Using more labours than machines in the production process is known as labour intensive
 Using more machines than labours in the production process is known as capital intensive

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PRODUCTION AND PRODUCTIVITY

 Any activity designed to satisfy human want is production

 Measure of efficiency of production is productivity

COSTS AND REVENUE

COSTS/REVENUE MEANING DIAGRAM

FIXED COST Costs of fixed factors which do not TC
changes with the output such as Cost
rent, insurance etc. VC
Costs of variable factors which
VARIABLE COST changes with the output such as
wages, electricity etc.
Sum of fixed and variable cost FC

TOTAL COST TC= FC+VC Output

AVERAGE FIXED The total fixed cost per unit
AFC= TFC/OUTPUT
COST The total variable cost per unit
AVERAGE
AFC= TVC/OUTPUT ATC
VARIABLE COST Cost
The total cost per unit.
AVERAGE COST AVC
AC= TC/OUTPUT

AFC
Output

TOTAL REVENUE Total money received from sales Breake

ven
TR= Price x quantity point
AVERAGE Revenue received from each unit. Cost
REVENUE AR = TR/OUTPUT TR
PROFIT The positive difference between
total revenue and total cost TC
PROFIT= TR-TC
AVERAGE Profit received from each units Output
PROFIT AP= TP/OUTPUT
BREAKEVEN A point of no profit or loss
TR=TC

PROFIT MAXIMISATION

A principle of increasing the total profit by maximizing the difference between total cost and total
revenue.
OTHER BUSINESS GOALS

 Growth
 Sales
 Survival
 Welfare
 Charities

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MARKET STRUCTURES

PERFECT COMPETITION
CHARACTERISTRICS ADVANTAGES DISADVANTAGES
 Many buyers and Lower
 prices  Limited choice of goods
 sellers More
 competition  Not able to experience
 Selling homogenous Higher
 output economies of scale
 No profits in the long
 products Responsive
 to
 Perfect knowledge consumers
 demand run
 Might not be innovative
 No barrier to entry Innovative

Price taker Perfect knowledge compared with a
Profit can be made in monopoly
the short run, normal
profit (TR=TC) in the
long run

MONOPOLY
CHARACTERISTRICS ADVANTAGES DISADVANTAGES
 Single supplier of a  Larger firm  Usually higher prices
 good/service  Economies of scale  Limited supply
 Price maker  Possible lower prices  May not improve the
 Huge barriers to entry  High quality goods quality

Abnormal and  Innovation Influence government
supernormal profits  Huge tax revenue

DIFFERENCES BETWEEN

MONOPOLY PERFECT COMPETITION

 Single supplier  Many sellers
 Price maker  Price taker
 Not homogenous products  Homogenous products
 No perfect knowledge  Perfect knowledge
 Huge barriers to entry  No barrier to entry
 Supernormal profit  Normal profit

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FIRMS

HOW TO MEASURE SIZE

 Market share/ Level of profit

 Type of business
 Capita
 Employees

WHY FIRMS GROW? HOW FIRMS GROW? SMALL FIRMS

 to earn more  Internal Growth:- Firm expand its  Limited demand

profit existing production without joining to  Flexibility
to enjoy another firm  Owners wish
economies of  Issuing shares  Specialist series
scale  Retained profits  Personal services
 to obtain more  Opening new branch
market share  Advertising
  External Growth: - Firm expand its
security
production by a merger/integration or
take over.
 Takeover is an acquisition of
majority shares of another
company
 Merger/integration is joining
together of two firms to
become one.

INTEGRATION

HORIZONTAL VERTICAL LATERALL/CONGLOMERATE

 Joining together of  Joining together of firms  Joining together of two
two firms in the same in different stages of firms producing entirely
stages of production. production. different products
For example joining to  There are two types of  For example a
two banks. vertical integration restaurant buys a
 Can spread the risk and namely vertical forward bookshop
increase output Costs and back ward
 can be reduced Higher  Vertical forward means
profits can be achieved. joining together of one

firm to another firm
which is in the later
stage of production
 For example an oil
extracting factory buys
a petrol station
 Vertical backward
means joining together
of one firm to another
firm which is in the
earlier stage of
production
 For example an oil
refining factory buys
another factory
extracting oil
This ensures control
 over market and
suppliers.

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ECONOMIES AND DISACONOMIES OF SCALE

ECONOMIES OF SCALE
Advantages of large scale production which results due to lower average costs
Internal economies of scale External economies of scale
Advantages which results due to the growth Advantages which results due to the industrial
of the firm growth
 Technical  Easy supply of raw materials
 Managerial  Skilled labours
 Financial  Established institution
 Marketing/commercial  Specialist services
 Risk bearing
Internal diseconomies of scale External diseconomies of scale
Disadvantages which results due to the Disadvantages which results due to the industrial
growth of the firm growth
 Difficult to manage  Congestion
 Communication problems  Increased price of raw materials,
 Technical problems transport etc.
 Lack of motivation

RETURNS TO SCALE

 INCREASING RETURNS TO SCALE

When inputs are doubled, output is more than doubled
 DECREASING RETURNS TO SCALE
 When inputs are doubled, output is less than doubled
 CONSTANT RETURNS TO SCALE
When inputs are doubled, output is constant

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