Microeconomic Decision

Makers
Money and Banking
Functions of money

 Medium of Exchange: accepted as means of payment

 Unit of account: for placing a value on goods/services

 Store of value: can save money since it keeps its value

 The Standard for Deferred Payment: borrowers can borrow

money and pay it back later

Characteristics of money

 Acceptability: Anything can be used as money as long as it’s

generally accepted

 Durability: Good money must be hard-wearing

 Portability: It should be easy to carry around

 Divisibility: Must be able to divide it into smaller values

 Scarcity: Should be limited in supply to create value

Commercial Banks

 Accepting deposits of money and savings

 Helping customers make and receive payments

 Making personal and commercial loans

 Buying and selling shares for customers

 Providing insurance

 Operating pension funds

 Providing financial and tax planning advice

  Exchanging foreign currencies

Central Banks

 Printing notes & minting coins that are legal tender

 Destroying torn notes & worn-out coins

 Setting interest rates

 Lender of last resort: if a bank needs cash in a hurry, they can

borrow from the central bank

 Supervising monetary policy: heads of the central bank hold

meetings with officials from other banks to determine interest rates

and the quantity of money in the economy

 Banker for commercial banks & the government:

o Government accounts & spending are carried out with the

central bank

o Helps government to borrow money

o The total amount the government owes is the national debt

 Manage international financial system: governments of

different nations lending each other money

Households
Influences on Spending, Saving and Borrowing

 Disposable income: amount of income left to spend or save after

direct taxes have been deducted

 Spending: enables a person to buy goods/services to satisfy their

needs/wants

 Saving: involves delaying consumption

o As interest rates rise, people may save more

  Borrowing: allows a person to increase their spending, enabling

them to buy goods they cannot afford now

 People with low disposable incomes may spend less in total than

people with high incomes

 But will tend to spend all or most of their income meeting their basic

needs

Spendi Savin Borrowin

Increase in…
ng g g
Real income ↑ ↑ ↑
Direct tax ↓ ↓ ↕
Wealth ↑ ↓ ↑
Interest rates ↓ ↑ ↓
Availability of saving
↓ ↑ ↓
scheme
Availability of credit ↑ ↓ ↑
Consumer confidence ↑ ↓ ↑

Workers
 Entry: Young employees will receive low earnings due to a lack of

work skills and experience; they can become an apprentices or join

a management training scheme to become more skilled

 Skilled workers: the more skilled a worker is, the more

opportunities he has for increasing his earnings; bonuses will be

given a higher rate of overtime paid

 End-of-career employees: if workers keep updating their skills,

they will continue to have opportunities to increase wages; however,

when they stop this, their demand will fall & income will diminish,

finally reaching a stop when retired

Factors that influence the choice of occupational

 Level of Challenge

 Career Prospects

 Level of Danger involved

 Length of training required

 Level of education required

 Recognition in the job

 Personal satisfaction gained from the job

 Level of experience required

Why firms change demand for labour

 Changes in consumer demand for products

 Changes in the productivity of labour

 Changes in price and productivity of capital

 Changes in non-wage employment costs

Why labour supply might change

 Changes in net advantages of an occupation

 Changes in provision and quality of education and training

 Demographic changes

Factors that Cause Occupational Wage Differentials

 Different abilities and qualifications

 ‘Dirty jobs’ and unsociable hours

 Job satisfaction

 Lack of information about jobs and wages

 Labour immobility

 Fringe benefits
Factors that cause wage differentials in the same job

 Regional differences in supply and demand of labour

 Length of service

 Local pay agreements

 Non-monetary agreements

 Discrimination

Specialisation

 Division of labour: The production process is broken up into a

series of different tasks

 Specialization: workers concentrate on a few tasks and then

exchange their product for other goods/services

Advantages for Individual Disadvantages for Individual

Employees can make the best
use of their talents/skills and Doing the same job or repetitive
increase them by repeating tasks is tedious and stressful
tasks.
Individuals must rely on others to
Employees can produce more
produce goods and services they
output and reduce business
want but cannot produce
costs
themselves
Many repetitive tasks can now be
More productive employees done by machines, leading to the
can earn higher wages unemployment of low-skilled
workers.

Trade Unions
 An organization of workers formed to promote & protect the interest

of its members concerning wages, benefits & working conditions

Functions

 Negotiating wages & benefits with employers

 Defending employee rights and jobs

  Improving working conditions

 Improving pay and other benefits, including holiday entitlement,

sick pay and pensions

 Encouraging firms to increase worker participation in business

decision-making

 Developing skills of union members by providing training and

education courses

 Supporting members taking industrial action

Types of Trade Unions

 General Unions: represent workers across many different

occupations

 Industrial Unions: represent workers of the same industry

 Craft Unions: represent workers with the same skill across

different industries

 Non-manual unions/Professional unions: represent workers in

non-industrial and professional occupations

Collective Bargaining

 Process of negotiating wages and other working conditions between

trade unions and employers

 A trade union will be in a strong bargaining position to negotiate

higher wages and better conditions if:

o It represents most or all of the workers in a firm

o Union members provide goods/services that consumers need,

which have few alternatives

Industrial Action
  Industrial action is taken when collective bargaining fails to result in

an agreement

 Taking industrial action can help a union force employers to agree

to their demands

 Industrial actions:

o Overtime ban: workers refuse to work more than their

normal hours

o Work to rule: workers deliberately slow down production by

complying with every rule & regulation

o Go slow: workers deliberately work slowly

o Strike: workers protest outside their workplace to stop

deliveries/non-unionized workers from entering

Impact of Trade Unions

Possible Advantages Possible Disadvantages

Could help to bring about It might cause lack of flexibility
minimum working standards in working practices
This could be major problem as
Could help keep pay higher
fashions change very quickly
Could help maintain
This could lead to some firms
Employment/enhanced job
going out of business
security
Could lead to improvement in
Workers made redundant
health and safety
Workers will need to pay union
membership fees.

Firms
Classification of Firms

 Primary Sector - Extracting raw materials from the earth (fishing,

mining, farming and more)

  Secondary Sector - Manufacturing Goods (Construction, Refining and

more)

 Tertiary Sector - Service Sector (Retail Shops, Lawyers and more)

Public and Private Sector

 Private Sector firms are owned and run by private individuals and

owners. The main objective of this sector is to earn profit.

 The government owns Public Sector firms, and their main aim is to

provide services.

Size of Firms

 Number of employees: less than 50 are classified as small

 Amount of capital employed: large firms invest a lot in fixed

assets such as machinery & equipment

 Market share: relative size of firms compared by percentage share

of total market supply/revenue

 Organization: large firms may be divided into many departments

& be spread over many locations

Small Firms

Advantages Disadvantages
The size of the market is Markets cannot raise enough capital to
small expand their business
Consumers like tailored
goods/services
Governments provide help
Types of Economies and Diseconomies of Scale

Economy of Scale Diseconomy of Scale

Cost savings due to increased Rising costs because a firm has
scale of production become too large
 Economy of Scale Diseconomy of Scale
Management: larger firms must
Financial: larger firms often manage so many different
have access to cheaper sources departments in different locations,
of finance making communication/ decision-
making difficult
Marketing/Selling: fixed costs
such as advertising and Labour: demotivated workers
transportation are spread across lead to a decrease in productivity
a larger number of products, due to boring, repetitive tasks
lowering per-unit cost
Excess Agglomeration: A
Technical: larger firms invest in company takes over or merges
specialized production with too many other firms
equipment and highly skilled producing different products,
workers; they develop new making it hard for business
products owners and managers to co-
ordinate all activities
Risk-bearing: the ability to
spread risk over many investors
& reduce market risks by selling
a range of products in different
locations
Purchasing: when raw
materials are bought in bulk,
suppliers may provide bulk
discounts, lowering per unit cost
of production
Integration

 Growth often involves integration with other firms

 Takeover: a company acquires ownership & control of another a

company by purchasing its shares

 Merger: two or more firms agree to form an entirely new company

& issue new shares

Types of Integration

 Horizontal integration: occurs between firms at the same stage

of production producing similar products

  Vertical integration: occurs between firms at different stages of

production

o Forward: taking over the firm at a later stage of production

o Backwards: integration is the opposite

 Lateral integration or conglomerate merger: occurs with firms

at same stage of production but different products

Firms and Production

Demand for “Factors of Production”

 Demand for goods & services by consumers: higher demand =

more labour/capital firms will need

 Price of labour & capital: higher cost = less labour & capital

demanded

o Firms may also decide to substitute labour for more capital

and vice versa

 Productivity of labour & capital: more output/revenue labour &

capital helps to produce, more profit will generate over & above the

cost of employing them

 Capital-intensive Production: where the use and cost of capital

are higher than other factors of production

 Labour-intensive Production: where the cost of labour is higher

than other factors of production

 Labour-intensive production method primarily involves labour,

whereas capital-intensive methods primarily involve machinery

Productivity & Production

 Productivity: the ratio of output to input

  Labour Productivity:

=Total OutputNumber of LabourOutput per Labour=Number

of LabourTotal Output

 Capital Productivity:

=Total Output ValueValue of CapitalValue per Capital=Value

of CapitalTotal Output Value

 Productivity refers to the efficiency of a business, whereas

production refers to output only.

Firms’ Costs, Revenue and Objectives

 Fixed Costs: Costs that have to be paid regardless of the output,

e.g. interest on loans

 Variable Costs: Costs that change with the output. The higher the

output, The higher the variable costs

 Breakeven: where total revenue = total cost

 Total Revenue: the total receipts a seller can obtain from selling

goods or services to buyers

 Average Revenue: the revenue generated per unit of output sold

Average Fixed Cost=Average Fixed Cost=FixedCosts/Output

Average Variable Cost=Average Variable Cost=Variable Cost

s/Output

Total Variable Cost=Total Variable Cost=Variable Costs×Out

put

Total Cost=Total Cost=Total Variable Cost+Total Fixed Cost

Average cost=Average cost=(Total Cost)/Output

Total Revenue=Total Revenue=Price Per Unit×Quantity Sold

Profit or Loss=Profit or Loss=Total Revenue−Total Cost

Objectives of firms

 Survival

 Social welfare

 Profit maximisation

 growth

Market Structure
Competitive Markets

 Businesses will charge the same price, a minimum price they can

charge without going out of business

 Price will be equivalent to the lowest average cost of producing

goods

 The average cost of production would be the same as the average

revenue for selling

 No firm would risk charging more than the market price

 A business would be a price taker; the market price

Monopoly Markets
  Firms with monopolistic powers control all of the market shares

 Able to influence the price; price makers

 Can restrict competition with artificial barriers to entry & other

pricing strategies

 One firm controls the entire market supply

 May use predatory pricing to force competing firms out

 Other firms deterred from competing due to a lack of capital

Advantages of Monopolies

 It avoids duplication & wastage of resources

 Economics of scale: benefits can be passed to consumers

 High profits can be used for research & development

 Monopolies may use price discrimination, which benefits the

economically weaker sections of the society

 Monopolies can afford to invest in the latest technology &

machinery to be efficient & avoid competition

Disadvantages of Monopolies

 May supply less & charge higher prices

 May offer less consumer choice and lower quality products than if

they had to compete with other firms

 They may have higher production costs because they are poorly

managed

 Restrict competition using barriers to entry

Barriers to entry

Natural Artificial
Cost savings from large- Predatory pricing strategies to force
 Natural Artificial
scale production smaller firms out
Preventing suppliers from selling
Lots of capital equipment materials & components to other firms
that other firms can’t afford by threatening to switch to rival
suppliers
Large customer base built Forcing retailers to stock & sell only
up over years their product
Developed advanced
products or processes that
are protected by patents