Economics IGSE Syllabus 2020 - 2021
Introduction to Economics
What is Economics?
Economics is the social science that studies the production, distribution, and consumption of goods and services.
Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics analyzes basic elements in the economy, including individual agents and markets, their interactions, and the outcomes of interactions. Individual agents may include, for example, households, firms, buyers, and sellers. Macroeconomics analyzes the entire economy (meaning aggregated production, consumption, savings, and investment) and issues affecting it, including unemployment of resources (labour, capital, and land), inflation, economic growth, and the public policies that address these issues (monetary, fiscal, and other policies).
The discipline was renamed in the late 19th century primarily due to Alfred Marshall from "political economy" to "economics" as a shorter term for "economic science". At that time, it became more open to rigorous thinking and made increased use of mathematics, which helped support efforts to have it accepted as a science and as a separate discipline outside of political science and other social sciences.The ultimate goal of economics is to improve the living conditions of people in their everyday life.
Economic analysis can be applied throughout society, in business, finance, health care, and government. Economic analysis is sometimes also applied to such diverse subjects as crime, education, the family, law, politics, religion,social institutions, war, science, and the environment
Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics analyzes basic elements in the economy, including individual agents and markets, their interactions, and the outcomes of interactions. Individual agents may include, for example, households, firms, buyers, and sellers. Macroeconomics analyzes the entire economy (meaning aggregated production, consumption, savings, and investment) and issues affecting it, including unemployment of resources (labour, capital, and land), inflation, economic growth, and the public policies that address these issues (monetary, fiscal, and other policies).
The discipline was renamed in the late 19th century primarily due to Alfred Marshall from "political economy" to "economics" as a shorter term for "economic science". At that time, it became more open to rigorous thinking and made increased use of mathematics, which helped support efforts to have it accepted as a science and as a separate discipline outside of political science and other social sciences.The ultimate goal of economics is to improve the living conditions of people in their everyday life.
Economic analysis can be applied throughout society, in business, finance, health care, and government. Economic analysis is sometimes also applied to such diverse subjects as crime, education, the family, law, politics, religion,social institutions, war, science, and the environment
The Basic Economic Problem
Section 1 - The Nature of the Economic Problem
All societies face the economic problem, which is the problem of how to make the best use of limited, or scarce, resources. The economic problem exists because, although the needs and wants of people are endless, the resources available to satisfy needs and wants are limited.
Limited resourcesResources are limited in two essential ways:
The Basic Problem - Scarcity
Scarcity, or limited resources, is one of the most basic economic problems we face. We run into scarcity because while resources are limited, we are a society with unlimited wants. Therefore, we have to choose. We have to make trade-offs. We have to efficiently allocate resources. We have to do those things because resources are limited and cannot meet our own unlimited demands.
Without scarcity, the science of economics would not exist. Economics is the study of production, distribution, and consumption of goods and services. If society did not have to make choices about what to produce, distribute, and consume, the study of those actions would be relatively boring. Society would produce, distribute, and consume an infinite amount of everything to satisfy the unlimited wants and needs of humans. Everyone would get everything they wanted, and it would all be free. But we all know that is not the case. The decisions and trade-offs society makes due to scarcity is what economists study. Why are certain decisions made and what is the next best alternative that was forgone?
Limited resourcesResources are limited in two essential ways:
- Limited in physical quantity, as in the case of land, which has a finite quantity.
- Limited in use, as in the case of labour and machinery, which can only be used for one purpose at any one time.
The Basic Problem - Scarcity
Scarcity, or limited resources, is one of the most basic economic problems we face. We run into scarcity because while resources are limited, we are a society with unlimited wants. Therefore, we have to choose. We have to make trade-offs. We have to efficiently allocate resources. We have to do those things because resources are limited and cannot meet our own unlimited demands.
Without scarcity, the science of economics would not exist. Economics is the study of production, distribution, and consumption of goods and services. If society did not have to make choices about what to produce, distribute, and consume, the study of those actions would be relatively boring. Society would produce, distribute, and consume an infinite amount of everything to satisfy the unlimited wants and needs of humans. Everyone would get everything they wanted, and it would all be free. But we all know that is not the case. The decisions and trade-offs society makes due to scarcity is what economists study. Why are certain decisions made and what is the next best alternative that was forgone?
Section 2 - Factors of Production
What Are Factors of Production? Factors of production are the inputs needed for the creation of a good or service. The factors of production include land, labor, entrepreneurship, and capital
The factors of production are resources that are the building blocks of the economy; they are what people use to produce goods and services. Economists divide the factors of production into four categories: land, labor, capital, and entrepreneurship.
The first factor of production is land, but this includes any natural resource used to produce goods and services. This includes not just land, but anything that comes from the land. Some common land or natural resources are water, oil, copper, natural gas, coal, and forests. Land resources are the raw materials in the production process. These resources can be renewable, such as forests, or nonrenewable such as oil or natural gas. The income that resource owners earn in return for land resources is called rent.
The second factor of production is labor. Labor is the effort that people contribute to the production of goods and services. Labor resources include the work done by the waiter who brings your food at a local restaurant as well as the engineer who designed the bus that transports you to school. It includes an artist's creation of a painting as well as the work of the pilot flying the airplane overhead. If you have ever been paid for a job, you have contributed labor resources to the production of goods or services. The income earned by labor resources is called wages and is the largest source of income for most people.
The third factor of production is capital. Think of capital as the machinery, tools and buildings humans use to produce goods and services. Some common examples of capital include hammers, forklifts, conveyer belts, computers, and delivery vans. Capital differs based on the worker and the type of work being done. For example, a doctor may use a stethoscope and an examination room to provide medical services. Your teacher may use textbooks, desks, and a whiteboard to produce education services. The income earned by owners of capital resources is interest.
The fourth factor of production is entrepreneurship. An entrepreneur is a person who combines the other factors of production - land, labor, and capital - to earn a profit. The most successful entrepreneurs are innovators who find new ways produce goods and services or who develop new goods and services to bring to market. Without the entrepreneur combining land, labor, and capital in new ways, many of the innovations we see around us would not exist. Think of the entrepreneurship of Henry Ford or Bill Gates. Entrepreneurs are a vital engine of economic growth helping to build some of the largest firms in the world as well as some of the small businesses in your neighborhood. Entrepreneurs thrive in economies where they have the freedom to start businesses and buy resources freely. The payment to entrepreneurship is profit.
MONEY IS NOT A FACTOR OF PRODUCTION
You will notice that I did not include money as a factor of production. You might ask, isn't money a type of capital? Money is not capital as economists define capital because it is not a productive resource. While money can be used to buy capital, it is the capital good (things such as machinery and tools) that is used to produce goods and services. When was the last time you saw a carpenter pounding a nail with a five dollar bill or a warehouse foreman lifting a pallet with a 20 dollar bill? Money merely facilitates trade, but it is not in itself a productive resource.
Remember, goods and services are scarce because the factors of production used to produce them are scarce. In case you have forgotten, scarcity is described as limited quantities of resources to meet unlimited wants. Consider a pair of denim blue jeans. The denim is made of cotton, grown on the land. The land and water used to grow the cotton is limited and could have been used to grow a variety of different crops. The workers who cut and sewed the denim in the factory are limited labor resources who could have been producing other goods or services in the economy. The machines and the factory used to produce the jeans are limited capital resources that could have been used to produce other goods. This scarcity of resources means that producing some goods and services leaves other goods and services unproduced.
The factors of production are resources that are the building blocks of the economy; they are what people use to produce goods and services. Economists divide the factors of production into four categories: land, labor, capital, and entrepreneurship.
The first factor of production is land, but this includes any natural resource used to produce goods and services. This includes not just land, but anything that comes from the land. Some common land or natural resources are water, oil, copper, natural gas, coal, and forests. Land resources are the raw materials in the production process. These resources can be renewable, such as forests, or nonrenewable such as oil or natural gas. The income that resource owners earn in return for land resources is called rent.
The second factor of production is labor. Labor is the effort that people contribute to the production of goods and services. Labor resources include the work done by the waiter who brings your food at a local restaurant as well as the engineer who designed the bus that transports you to school. It includes an artist's creation of a painting as well as the work of the pilot flying the airplane overhead. If you have ever been paid for a job, you have contributed labor resources to the production of goods or services. The income earned by labor resources is called wages and is the largest source of income for most people.
The third factor of production is capital. Think of capital as the machinery, tools and buildings humans use to produce goods and services. Some common examples of capital include hammers, forklifts, conveyer belts, computers, and delivery vans. Capital differs based on the worker and the type of work being done. For example, a doctor may use a stethoscope and an examination room to provide medical services. Your teacher may use textbooks, desks, and a whiteboard to produce education services. The income earned by owners of capital resources is interest.
The fourth factor of production is entrepreneurship. An entrepreneur is a person who combines the other factors of production - land, labor, and capital - to earn a profit. The most successful entrepreneurs are innovators who find new ways produce goods and services or who develop new goods and services to bring to market. Without the entrepreneur combining land, labor, and capital in new ways, many of the innovations we see around us would not exist. Think of the entrepreneurship of Henry Ford or Bill Gates. Entrepreneurs are a vital engine of economic growth helping to build some of the largest firms in the world as well as some of the small businesses in your neighborhood. Entrepreneurs thrive in economies where they have the freedom to start businesses and buy resources freely. The payment to entrepreneurship is profit.
MONEY IS NOT A FACTOR OF PRODUCTION
You will notice that I did not include money as a factor of production. You might ask, isn't money a type of capital? Money is not capital as economists define capital because it is not a productive resource. While money can be used to buy capital, it is the capital good (things such as machinery and tools) that is used to produce goods and services. When was the last time you saw a carpenter pounding a nail with a five dollar bill or a warehouse foreman lifting a pallet with a 20 dollar bill? Money merely facilitates trade, but it is not in itself a productive resource.
Remember, goods and services are scarce because the factors of production used to produce them are scarce. In case you have forgotten, scarcity is described as limited quantities of resources to meet unlimited wants. Consider a pair of denim blue jeans. The denim is made of cotton, grown on the land. The land and water used to grow the cotton is limited and could have been used to grow a variety of different crops. The workers who cut and sewed the denim in the factory are limited labor resources who could have been producing other goods or services in the economy. The machines and the factory used to produce the jeans are limited capital resources that could have been used to produce other goods. This scarcity of resources means that producing some goods and services leaves other goods and services unproduced.
Homework & Classwork
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Semester 1
Section 1: The basic Economic Problem
1. The nature of the economic problem
2. The factors of production
3. Opportunity cost
4. Production Possibility Curve
Section 2: The allocation of resources
5. Microeconomics and macroeconomics
6. The role of markets in allocating resources
7. Demand
8. Supply
9. Price determination
10. Price Change
11. Price elasticity of demand
12. Price elasticity of supply
13. Market economic system
14. Market Failure
15. Mixed economic system
Semester 2
Section 3: Microeconomics decision makers
16. Money and banking
17. Households
18. Workers
19. Trade unions
20. Firms
21. Firms and production
22. Firms' costs, revenue and objectives
23. Market structures
Section 1: The basic Economic Problem
1. The nature of the economic problem
2. The factors of production
3. Opportunity cost
4. Production Possibility Curve
Section 2: The allocation of resources
5. Microeconomics and macroeconomics
6. The role of markets in allocating resources
7. Demand
8. Supply
9. Price determination
10. Price Change
11. Price elasticity of demand
12. Price elasticity of supply
13. Market economic system
14. Market Failure
15. Mixed economic system
Semester 2
Section 3: Microeconomics decision makers
16. Money and banking
17. Households
18. Workers
19. Trade unions
20. Firms
21. Firms and production
22. Firms' costs, revenue and objectives
23. Market structures
Chapter 11/12: Price Elasticity of Demand/ Price Elasticity of Supply
elasticity.ppt | |
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Price Elasticity of Demand - Quiz
http://textbook.stpauls.br/Microeconomics/page_102.htm
Chapter 13 - Market Economic Systems
Economic systemsThere are two basic solutions to the economic problem as described by Paul Samuelson, namely those based on free markets and those based on central panning.
Free market economies
Markets enable mutually beneficial exchange between producers and consumers, and systems that rely on markets to solve the economic problem are called market economies. In a free market economy, resources are allocated through the interaction of free and self-directed market forces. This means that what to produce is determined consumers, how to produce is determined by producers, and who gets the products depends upon the purchasing power of consumers. Market economies work by allowing the direct interaction of consumers and producers who are pursuing their own self-interest. The pursuit of self-interest is at the heart of free market economics.
Command economies
The second solution to the economic problem is the allocation of scarce resources by government, or an agency appointed by the government. This method is referred to as central planning, and economies that exclusively use central planning are called command economies. In other words governments direct or command resources to be used in particular ways. For example, governments can force citizens to pay taxes and decide how many roads or hospitals are built.
Command economies have certain advantages over free market economies, especially in terms of the coordination of scarce resources at times of crisis, such as a war or following a natural disaster. Free markets also fail at times to allocate resources efficiently, so remedies often involve the allocation of resources by government to compensate for these failures.
Command economies have certain advantages over free market economies, especially in terms of the coordination of scarce resources at times of crisis, such as a war or natural disaster. Free markets also fail at times to allocate resources efficiently, so remedies often involve the allocation of resources by government to compensate for these failures.
CommunismThe benefits of command economies over free market capitalism became the central economic idea of German philosopher and economist, Karl Marx, who advocated state ownership of the means of production – namely, land and capital. He also predicted the eventual collapse of capitalism. The real value of an economic activity, Marx argued, could always be traced back to labour rather than capital, and hence capitalism’s pursuit of higher profits though the accumulation of capital was always at the expense of labour, who would increasingly have to produce more and more output to satisfy the needs of capitalists.
According to Marx, when the ‘reality’ of this sets in, labour would realise it was being exploited and would rise up and overthrow ther capitalist ‘masters’. While the ideas of Marx seem out of touch with the reality of history, Marx’s economic theories are widely studied and still influential.
Mixed economiesThere is a third type of economy involving a combination of market forces and central planning, called mixed economies.
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.
Mixed economists
In contrast to the unregulated free market approach, and that of centrally planned command economies, the majority of economists favour come form of government intervention to make capitalism work better, rather than to prevent it working at all.
These include Keynesian economists, whose name is derived from British economist, John Maynard Keynes, and modern Libertarian Paternalists, including Richard Thaler, who are influenced by behavioural economics.
Keynes laid down the basic ground rules for state intervention in markets, and was, perhaps, the most influential economist of the 20th Century.
Thaler has been instrumental in the emergence of behavioural economics, and the use of experimentation to show how behaviour can be nudged towards more effective actions and outcomes.
These groups are pragmatic in that while accepting that capitalism is the most effective system on which to base a modern economy, it requires considerable intervention at significant times.
In reality, all economies are mixed, though there are wide variations in the amount of mix and the balance between public and private sectors. For example, in Cuba the government allocates the vast majority of resources, while in Europe most economies have an even mix between markets and planning.
Economic systems can be evaluated in terms of how efficient they are in achieving economic objectives.
Free market economies
Markets enable mutually beneficial exchange between producers and consumers, and systems that rely on markets to solve the economic problem are called market economies. In a free market economy, resources are allocated through the interaction of free and self-directed market forces. This means that what to produce is determined consumers, how to produce is determined by producers, and who gets the products depends upon the purchasing power of consumers. Market economies work by allowing the direct interaction of consumers and producers who are pursuing their own self-interest. The pursuit of self-interest is at the heart of free market economics.
Command economies
The second solution to the economic problem is the allocation of scarce resources by government, or an agency appointed by the government. This method is referred to as central planning, and economies that exclusively use central planning are called command economies. In other words governments direct or command resources to be used in particular ways. For example, governments can force citizens to pay taxes and decide how many roads or hospitals are built.
Command economies have certain advantages over free market economies, especially in terms of the coordination of scarce resources at times of crisis, such as a war or following a natural disaster. Free markets also fail at times to allocate resources efficiently, so remedies often involve the allocation of resources by government to compensate for these failures.
Command economies have certain advantages over free market economies, especially in terms of the coordination of scarce resources at times of crisis, such as a war or natural disaster. Free markets also fail at times to allocate resources efficiently, so remedies often involve the allocation of resources by government to compensate for these failures.
CommunismThe benefits of command economies over free market capitalism became the central economic idea of German philosopher and economist, Karl Marx, who advocated state ownership of the means of production – namely, land and capital. He also predicted the eventual collapse of capitalism. The real value of an economic activity, Marx argued, could always be traced back to labour rather than capital, and hence capitalism’s pursuit of higher profits though the accumulation of capital was always at the expense of labour, who would increasingly have to produce more and more output to satisfy the needs of capitalists.
According to Marx, when the ‘reality’ of this sets in, labour would realise it was being exploited and would rise up and overthrow ther capitalist ‘masters’. While the ideas of Marx seem out of touch with the reality of history, Marx’s economic theories are widely studied and still influential.
Mixed economiesThere is a third type of economy involving a combination of market forces and central planning, called mixed economies.
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.
Mixed economists
In contrast to the unregulated free market approach, and that of centrally planned command economies, the majority of economists favour come form of government intervention to make capitalism work better, rather than to prevent it working at all.
These include Keynesian economists, whose name is derived from British economist, John Maynard Keynes, and modern Libertarian Paternalists, including Richard Thaler, who are influenced by behavioural economics.
Keynes laid down the basic ground rules for state intervention in markets, and was, perhaps, the most influential economist of the 20th Century.
Thaler has been instrumental in the emergence of behavioural economics, and the use of experimentation to show how behaviour can be nudged towards more effective actions and outcomes.
These groups are pragmatic in that while accepting that capitalism is the most effective system on which to base a modern economy, it requires considerable intervention at significant times.
In reality, all economies are mixed, though there are wide variations in the amount of mix and the balance between public and private sectors. For example, in Cuba the government allocates the vast majority of resources, while in Europe most economies have an even mix between markets and planning.
Economic systems can be evaluated in terms of how efficient they are in achieving economic objectives.
economics_chapter_13_revision_checklist.pdf | |
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Chapter 14 - Market Failure
What is Market Failure?In a market where there is equilibrium, the resources are allocated in the best possible manner and there is 'allocative efficiency'.
Allocative efficiency is when situation where Marginal cost is equal to Marginal revenue.
However, this is not possible in the real world. Market failure exists when the resources are not allocated efficiently. Community surplus is not maximised and thus there is market failure. From a community's point of view, producer surplus is not equal to consumer surplus.
Market failure is thus caused by
Market Failure
What is market failure?
Market failure occurs when freely-functioning markets, fail to deliver an efficient allocation of resources. The result is a loss of economic and social welfare. Market failure exists when the competitive outcome of markets is not efficient from the point of view of society as a whole. This is usually because the benefits that the free-market confers on individuals or businesses carrying out a particular activity diverge from the benefits to society as a whole.
There are many instances when the free market fails to deliver an efficient allocation of resources.
Market failure results in
CAUSES OF MARKET FAILURE
Markets can fail because of:
1. Negative externalities (e.g. the effects of environmental pollution) causing the social cost of production to exceed the private cost.
2. Positive (or beneficial) externalities (e.g. the provision of education and health care) causing the social benefit of consumption to exceed the private benefit
3. Imperfect information means merit goods are under-produced while demerit goods are over-produced or over-consumed
4. The private sector in a free-markets cannot profitably supply to consumers pure public goods and quasi-public goods that are needed to meet people’s needs and wants
5. Market dominance by monopolies can lead to under-production and higher prices than would exist under conditions of competition
6. Factor immobility causes unemployment hence productive inefficiency
7. Equity (fairness) issues. Markets can generate an ‘unacceptable’ distribution of income and consequent social exclusion which the government may choose to change
HOW MARKET FAILURE CAN BE CONTROLLED?
Options for government intervention in markets
There are many ways in which intervention can take place – some examples are given below
Government Legislation and Regulation
Parliament can pass laws that for example prohibit the sale of cigarettes to children, or ban smoking in the workplace.
The laws of competition policy act against examples of price-fixing cartels or other forms of anti-competitive behaviour by firms within markets.
Employment laws may offer some legal protection for workers by setting maximum working hours or by providing a price-floor in the labour market through the setting of a minimum wage.
Regulation may be used to introduce fresh competition into a market – for example breaking up the existing monopoly power of a service provider.
Fiscal Policy Intervention
Fiscal policy can be used to alter the level of demand for different products and also the pattern of demand within the economy.
1. Indirect taxes such as changes in VAT and excise duties can be used to raise the price of demerit goods and products with negative externalities designed to increase the opportunity cost of consumption and thereby reduce consumer demand towards a socially optimal level.
2. Subsidies to consumers will lower the price of merit goods such as grants to students to reduce the internal costs of staying on in full-time education and subsidies to businesses employing unemployed workers on the New Deal programme. They are designed to boost consumption and output of products with positive externalities – a subsidy causes an increase in market supply and leads to a lower equilibrium price (see the separate revision focus article on producer subsidies).
3. Tax relief: The government may offer financial assistance such as tax credits for business investment in research and development. Or a reduction in corporation tax designed to promote investment and employment.
4. Changes to taxation and welfare payments can be used to influence the distribution of income and wealth – for example higher direct taxes on rich households or an increase in the value of welfare benefits for the poor to make the tax and benefit system more progressive.
Allocative efficiency is when situation where Marginal cost is equal to Marginal revenue.
However, this is not possible in the real world. Market failure exists when the resources are not allocated efficiently. Community surplus is not maximised and thus there is market failure. From a community's point of view, producer surplus is not equal to consumer surplus.
Market failure is thus caused by
- Abuse of monopoly power
- Lack of public goods
- Under provision of merit goods
- Overprovision of demerit goods
- Environmental degradation
- Inequality in distribution of wealth
- Immobility of factors of production
- Problems of information
- Short termism
Market Failure
What is market failure?
Market failure occurs when freely-functioning markets, fail to deliver an efficient allocation of resources. The result is a loss of economic and social welfare. Market failure exists when the competitive outcome of markets is not efficient from the point of view of society as a whole. This is usually because the benefits that the free-market confers on individuals or businesses carrying out a particular activity diverge from the benefits to society as a whole.
There are many instances when the free market fails to deliver an efficient allocation of resources.
Market failure results in
- Productive inefficiency: Businesses are not maximising output from given factor inputs. This is a problem because the lost output from inefficient production could have been used to satisfy more wants and needs
CAUSES OF MARKET FAILURE
Markets can fail because of:
1. Negative externalities (e.g. the effects of environmental pollution) causing the social cost of production to exceed the private cost.
2. Positive (or beneficial) externalities (e.g. the provision of education and health care) causing the social benefit of consumption to exceed the private benefit
3. Imperfect information means merit goods are under-produced while demerit goods are over-produced or over-consumed
4. The private sector in a free-markets cannot profitably supply to consumers pure public goods and quasi-public goods that are needed to meet people’s needs and wants
5. Market dominance by monopolies can lead to under-production and higher prices than would exist under conditions of competition
6. Factor immobility causes unemployment hence productive inefficiency
7. Equity (fairness) issues. Markets can generate an ‘unacceptable’ distribution of income and consequent social exclusion which the government may choose to change
HOW MARKET FAILURE CAN BE CONTROLLED?
Options for government intervention in markets
There are many ways in which intervention can take place – some examples are given below
Government Legislation and Regulation
Parliament can pass laws that for example prohibit the sale of cigarettes to children, or ban smoking in the workplace.
The laws of competition policy act against examples of price-fixing cartels or other forms of anti-competitive behaviour by firms within markets.
Employment laws may offer some legal protection for workers by setting maximum working hours or by providing a price-floor in the labour market through the setting of a minimum wage.
Regulation may be used to introduce fresh competition into a market – for example breaking up the existing monopoly power of a service provider.
Fiscal Policy Intervention
Fiscal policy can be used to alter the level of demand for different products and also the pattern of demand within the economy.
1. Indirect taxes such as changes in VAT and excise duties can be used to raise the price of demerit goods and products with negative externalities designed to increase the opportunity cost of consumption and thereby reduce consumer demand towards a socially optimal level.
2. Subsidies to consumers will lower the price of merit goods such as grants to students to reduce the internal costs of staying on in full-time education and subsidies to businesses employing unemployed workers on the New Deal programme. They are designed to boost consumption and output of products with positive externalities – a subsidy causes an increase in market supply and leads to a lower equilibrium price (see the separate revision focus article on producer subsidies).
3. Tax relief: The government may offer financial assistance such as tax credits for business investment in research and development. Or a reduction in corporation tax designed to promote investment and employment.
4. Changes to taxation and welfare payments can be used to influence the distribution of income and wealth – for example higher direct taxes on rich households or an increase in the value of welfare benefits for the poor to make the tax and benefit system more progressive.
Chapter 14 - Questions | |
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Chapter 15 - Mixed Economic Systems
Economy: an area where people and firms produce, trade and consume goods and services. This can vary in size- from your local town to your country, or the globe itself.
Resource allocation: the way in which economies decide what goods and services to provide, how to produce them and for who to produce them for. These questions- what to produce, how to produce, and for whom to produce for- are termed ‘the basic economic questions’. In short, resource allocation is the way in which economies solve the three basic economics questions.
*(Public sector refers to everything in govt. ownership and control, while private sector refers to everything owned and controlled by private individuals).
Economic Systems:There are three main types of economic systems- three ways in which resources are allocated.
Primary sector: this involves the use/extraction of natural resources. Examples include agricultural activities, mining, fishing, wood-cutting, oil drilling etc.
Secondary sector: this involves the manufacture of goods using the resources from the primary sector. Examples include auto-mobile manufacturing, steel industries, cloth production etc.
Tertiary sector: this consist of all the services provided in an economy. This includes hotels, travel agencies, hair salons, banks etc.
*Market: any set of arrangement that brings together all the producers and consumers of a good or service, so they may engage in exchange. Example: a market for soft drinks.
*Public goods: goods that can be used by the general public, from which they will benefit. Their consumption can’t be measured, and thus cannot be charged a price for (this is why a market economy doesn’t produce them). Examples are street lights and roads.
*Merit goods: goods which create a positive effect on the community. Examples are schools, hospitals, food. The opposite is called demerit goods.
*Capital- intensive production: where more capital (machinery/equipments) is made use of rather than labour. An example is a modern car manufacturing plant
*Labour-intensive production: where more labour is made use of rather than capital. An example is agricultural activity.
Resource allocation: the way in which economies decide what goods and services to provide, how to produce them and for who to produce them for. These questions- what to produce, how to produce, and for whom to produce for- are termed ‘the basic economic questions’. In short, resource allocation is the way in which economies solve the three basic economics questions.
*(Public sector refers to everything in govt. ownership and control, while private sector refers to everything owned and controlled by private individuals).
Economic Systems:There are three main types of economic systems- three ways in which resources are allocated.
- The Market* Economic System: (a.k.a free market economic system). Here, all decisions are made by private individuals; that is, there is no government intervention or involvement in resource allocation. (There are virtually no economies in the world who follow this-there is a government control everywhere, though USA does come close).
Features:
1. All resources are owned and allocated by private individuals. No govt. control exists.
2. Thus, profit is the main-motive
3.The demand and supply (covered in the next section) fixes the price of products. This is called price mechanism.
4.What to produce is solved by producing the most-demanded goods for which people spend a lot, as their only motive is to generate a high profit.
5. How to produce is solved by using the cheapest yet efficient combination of resources– capital or labour- in order to maximise profits.
6. For whom to produce is solved by producing to people who are willing and able to pay for goods at a high price.
Advantages:
1. A wide variety of quality goods and services will be produced as different firms will compete to satisfy consumer wants and make profits. Quality is ensured to make sure that consumers buy from them. There is consumer sovereignty.
2. Firms will respond quickly to consumer changes in demand. When there is a change in demand, they will quickly allocate resources to satisfying that demand, so as to maintain profits.
3. High efficiency will exist. Since producers want to maximise profits, they will use resources very efficiently (producing more with less resources).
4. Since there is no govt. control, there are no taxes on goods and servicesand income. So consumers have more income to consume, and producers can cheaply produce.
Disadvantages:
1. Only profitable goods and services are produced. Public goods* and some merit goods* for which there is no demand may not be produced, which is a drawback and affects the economic development.
2. Firms will only produce for consumers who can pay for them. Poor people who cannot spend much won’t be produced for, as it would be non-profitable.
3. Only profitable resources will be employed. Some resources will be left unused. In a market economy, capital-intensive* production is favoured over labour- intensive* production*(because it’s more cost-efficient). This can lead to unemployment.
4. Harmful (demerit) goods may be produced if it is profitable to do so.
5. Negative impacts on society (externalities) may be ignored by producers, as their sole motive is to keep consumers satisfied and generate a high profit.
6. A firm that are able to dominate or control the market supply of a product is called a monopoly. They may use their power to restrict supply from other producers, and even charge consumers a high price since they are the only producer of the product and consumers have no choice but to buy from them.
7. Due to high competition between firms, duplication of products may take place, which is a waste of resources.
- Planned Economic System: Here, all decisions are made by the government. They decide what to produce, how to produce and for whom to produce. Example: North Korea.
Features:
1. All resources are owned and allocated by the govt. They also fix the prices.
2. Profit is not the main motive- social welfare is.
3. They produce goods that will be most beneficial to the social welfare of the economy.
4. Efficiency may not be the highest priority as profit isn’t a motive. Thus they could use inefficient production methods to produce the goods.
5. Goods will be produced for all people- mainly those with poor incomes. Rich people may demand for luxury goods, which the govt. might not be interested in producing.
Advantages:
1. As it’s a welfare-motive economy, it will produce necessities(food/water/clothes), public goods and merit goods.
2. Negative externalities will be controlled and reduced.
3. Prices are kept low, so it’s affordable for everyone.
4. Low unemployment can exist as the govt. aims at full employment.
5. Since there is no competition, duplication of products is eliminated.
Disadvantages:
1. Consumer sovereignty is low as the govt. decides what to produce.
2. Lack of profit motive may lead to firms being inefficient.
- Mixed Economic System: Here, both the market and planned economy co-exist.Examples include almost all countries in the world (India, UK, Brazil etc). This is because it overrides all the disadvantages of both the market and planned economies.
Features:
1. Both the public and the private sector exists.
2. Planning and final decisions are made by the govt. while the market system can determine allocation of resources along with the public organizations.
Advantages:
1. The govt. can provide public goods, necessities and merit goods. The private businesses can provide most-demanded goods (luxury goods, superior goods). Thus, everyone is provided for.
2. The govt. will keep externalities, monopolies, harmful goods etc. in control.
3. The govt. can provide jobs in the public sector (so there is better job security).
4. The govt. can also provide financial help to collapsing private organizations, so jobs are kept secure.
Disadvantages:
1. Govt. taxes will be imposed, which will raise prices and also reduce work incentive.
2. Govt. laws and regulations can increase production costs and reduce production.
3. Public sector organizations will still be inefficient and will produce low quality goods and services.
Primary sector: this involves the use/extraction of natural resources. Examples include agricultural activities, mining, fishing, wood-cutting, oil drilling etc.
Secondary sector: this involves the manufacture of goods using the resources from the primary sector. Examples include auto-mobile manufacturing, steel industries, cloth production etc.
Tertiary sector: this consist of all the services provided in an economy. This includes hotels, travel agencies, hair salons, banks etc.
*Market: any set of arrangement that brings together all the producers and consumers of a good or service, so they may engage in exchange. Example: a market for soft drinks.
*Public goods: goods that can be used by the general public, from which they will benefit. Their consumption can’t be measured, and thus cannot be charged a price for (this is why a market economy doesn’t produce them). Examples are street lights and roads.
*Merit goods: goods which create a positive effect on the community. Examples are schools, hospitals, food. The opposite is called demerit goods.
*Capital- intensive production: where more capital (machinery/equipments) is made use of rather than labour. An example is a modern car manufacturing plant
*Labour-intensive production: where more labour is made use of rather than capital. An example is agricultural activity.
Chapter 15 Homework | |
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Chapter 16 - Money and Banking
MoneyWhat is money?
A medium of exchange of goods and services.
Why do we need money?
We need money if we are to exchange goods and services with one another. This is because we aren’t self-sufficient- we can’t produce all our wants by ourselves. Thus, there is a need for exchange.
In the past, barter system (exchanging a good or service for another good or service) prevailed. This had a lot of problems such as the need for the double coincidence of wants (if the person wants a table and he has a chair to exchange, he must find a person who has a table to exchange and also is willing to buy a chair), the goods being perishable and non-durable, the indivisibility of goods, lack of portability etc.
Thus the money we use today are in the form of currency notes and coins, which are durable, non-perishable, divisible (can be divided into 10’s, 50’s , 100’s etc), portable and is generally accepted.
The functions of money:
Banks and Stock ExchangesBanks are financial institutions that act as a intermediary between borrowers and savers.
Commercial banks are those banks that have many retail branches located in most cities and towns. Example: HSBC. While there is only one central bank that governs all other commercial banks in a country. Example: The Reserve Bank Of India (RBI).
Functions of a commercial bank:
A stock exchange is a business organization that enables individuals, companies and the government to buy and sell shares* on the global stock market. It is the most important source of finance for most businesses. Example: New York Stock Exchange (NYSE).
Functions of stock exchange:
*Shares: A unit of ownership in a company. Companies issue shares to the public through stock exchanges. Individuals can buy theses shares through the stock exchange (invest in the company) and be an owner of the company. The company gets more finance (capital) and the individual (shareholder) gets ownership (he will get part of the profits the company makes-dividends).
A medium of exchange of goods and services.
Why do we need money?
We need money if we are to exchange goods and services with one another. This is because we aren’t self-sufficient- we can’t produce all our wants by ourselves. Thus, there is a need for exchange.
In the past, barter system (exchanging a good or service for another good or service) prevailed. This had a lot of problems such as the need for the double coincidence of wants (if the person wants a table and he has a chair to exchange, he must find a person who has a table to exchange and also is willing to buy a chair), the goods being perishable and non-durable, the indivisibility of goods, lack of portability etc.
Thus the money we use today are in the form of currency notes and coins, which are durable, non-perishable, divisible (can be divided into 10’s, 50’s , 100’s etc), portable and is generally accepted.
The functions of money:
- Money is a medium of exchange, as explained above.
- Money is a measure of value. Money acts as a unit of account, allowing us to compare and state the worth of different goods and services.
- Money is a store of value. It holds its value for a long, long time, allowing us to save it for future purposes.
- Money is a means of deferred payment. Deferred payments are purchases on credit- where the consumer can pay later for the goods or service they buy.
Banks and Stock ExchangesBanks are financial institutions that act as a intermediary between borrowers and savers.
Commercial banks are those banks that have many retail branches located in most cities and towns. Example: HSBC. While there is only one central bank that governs all other commercial banks in a country. Example: The Reserve Bank Of India (RBI).
Functions of a commercial bank:
- Accepting deposits of money and savings.
- Aid customers in making and receiving payments.
- Giving loans to businesses and private individuals.
- Buying and selling shares on customer’s behalf.
- Providing insurance (protection in the form of money against damage/theft of personal property).
- Exchanging foreign currencies.
- Providing financial planning advice.
- It issues notes and coins for the nation’s currency.
- It manages all payments relating to the government.
- It manages national debt. Central banks can issue and repay public debts on the government’s behalf.
- It supervises and controls all the other banks in the whole economy, even holding their deposits and transferring funds between them.
- It is the lender of ‘last resort’ to commercial banks. When other banks are having financial difficulties, the central bank can lend them money to prevent them from going bankrupt.
- It manages the country’s gold and foreign currency reserves. These reserves are used to make international payments and adjust their currency value (adjust the exchange rate).
- It operates the monetary policy in an economy.(This will be explained in a later chapter)
A stock exchange is a business organization that enables individuals, companies and the government to buy and sell shares* on the global stock market. It is the most important source of finance for most businesses. Example: New York Stock Exchange (NYSE).
Functions of stock exchange:
- It brings together buyers and sellers of stocks(shares)
- It provides information on the market prices of stocks.
- It supervises the conduct of firms of brokers that buy and sell shares on behalf of investors.
*Shares: A unit of ownership in a company. Companies issue shares to the public through stock exchanges. Individuals can buy theses shares through the stock exchange (invest in the company) and be an owner of the company. The company gets more finance (capital) and the individual (shareholder) gets ownership (he will get part of the profits the company makes-dividends).
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Chapter 17 - Households
Payments for labour:
When the wage increases, the demand for labour contracts , and vice versa.
Labour supply is the supply of labour available and ready to work in a industry at a given wage rate. When the wage rate increases, the supply of labour extends,and vice versa.
We also know that as the no.of hours worked increases, the wage rate also increases. However, when a person get to a very high position and his wages/salary increases highly, his no. of hours may decrease. This can be shown in this diagram, called a backward bending labour supply curve
Just like in a demand and supply curve analysis, labour demand and supply will extend and contract due to changes in the wage rate. Other factors that cause changes in demand and supply of labour will result in a shift in the demand and supply curve of labour.
Factors that cause a shift in the labour demand curve:
EarningsWhy would a person’s wage rate change overtime?
As a beginner, the individual would have a low wage rate since he/she is new to the job and has no experience. Overtime, as his/her experience increases and skills develop, he/she will earn a higher wage rate. If he/she gets promoted and has more responsibilities, his/her wage rate will further increase. When he/she nears retirement age, the wage rate is likely to decrease as their productivity and skills are likely to weaken.
Wage differentials
Why do different jobs have different wages?
Why do wages differ between people doing the same job?
- Time-rate wage: wage given based on the no. of hours the employee has worked. An overtime rate can be given to workers who has worked extra no. of hours, which will be usually 1.5 times or even twice the normal time rate.
- Piece-rate wage: wage given based on the no. of output produced. The more output a employee produced, the more wage he earns. This is used in industries where output can be easily measured and gives employees an incentive to increase productivity.
- Salary: monthly payments made to workers, usually managers, office staff etc in non-manual jobs (work that is done with electronic devices and uses mental skills rather than being physically done with the use of hands).
- Performance-related payments: payments given to individual workers or teams of workers who have performed very well. The commission given to salespersons for selling to a targeted no. of customers comes under performance-related pay.
- Wage factors: The wage conditions of a job/firm such as the pay rate, the prospect for performance-related pay, bonus etc will be considered by the individual before he chooses a job.
- Non-wage factors: This will include:
1. Hours of work
2.Holiday entitlement
3. Promotion prospects
4. Quality of working environments
5. Job security
6. Fringe benefits (free medical insurance, company car, price discounts etc)
7. Training opportunities
8. Distance from work to home
9. Pension entitlement
When the wage increases, the demand for labour contracts , and vice versa.
Labour supply is the supply of labour available and ready to work in a industry at a given wage rate. When the wage rate increases, the supply of labour extends,and vice versa.
We also know that as the no.of hours worked increases, the wage rate also increases. However, when a person get to a very high position and his wages/salary increases highly, his no. of hours may decrease. This can be shown in this diagram, called a backward bending labour supply curve
Just like in a demand and supply curve analysis, labour demand and supply will extend and contract due to changes in the wage rate. Other factors that cause changes in demand and supply of labour will result in a shift in the demand and supply curve of labour.
Factors that cause a shift in the labour demand curve:
- Consumer demand for goods and services: The higher the demand of the product, the higher the demand for labour.
- Productivity of labour: the more productive the labour is, the more the demand for labour.
- Price and productivity of capital: Capital is a substitute resource for labour. If the price of capital were to lower and it’s productivity to rise, firms will demand more of capital and labour demand will fall- shift to the left.
- Non-wage employment costs: Wages are not the only cost to a firm of employing workers. Sometimes, employment tax, welfare insurance for each employee etc will have to be paid. If these costs increase, firms will demand less labour.
- Advantages of an occupation: The different advantages a job can offer to employees will affect the supply of labour- the people willing to do that job. Example: If the no. of hours worked in the airline industry increases, the labour supply there will shift to the left.
- Availability and quality of education and training: is quality training and education for a particular job, say pilots, is lacking, then the labour supply for it will be low. When new education and training institutes open, the labour supply will rise- shift to the right.
- Demographic changes: the size and age structure of the population in an economy can affect the labour supply. The labour supply curve will shift to the right when more people come into a country from outside (immigration) and the birth rate increases ( more young people available for work).
EarningsWhy would a person’s wage rate change overtime?
As a beginner, the individual would have a low wage rate since he/she is new to the job and has no experience. Overtime, as his/her experience increases and skills develop, he/she will earn a higher wage rate. If he/she gets promoted and has more responsibilities, his/her wage rate will further increase. When he/she nears retirement age, the wage rate is likely to decrease as their productivity and skills are likely to weaken.
Wage differentials
Why do different jobs have different wages?
- Different abilities and qualifications: when the job requires more skills and qualifications, it will have a higher wage rate.
- Risk involved in the job: risky jobs such as rescue operation teams will gain a higher wage rate for the risks they undertake.
- Unsociable hours: people who have night shifts and work at other unsociable hous are paid more than other workers.
- Lack of information about other jobs and wages: Sometimes people work for less wage rates simply because they do not know about other jobs with higher wage rates.
- Labour immobility: the ease with which workers can move between different occupations and areas of an economy is called labour mobility. If labour mobility is high, workers can move to jobs with a higher pay. Labour immobility causes people to work at a low wage rate because they can’t move to the jobs with a higher wage.
- Fringe benefits: jobs which offer a lot of fringe benefits have low wages. But sometimes, the highest-paid jobs are also given a lot of fringe benefits, to attract skilled labour.
Why do wages differ between people doing the same job?
- Regional differences in labour demand and supply: For example, if the labour demand in an area for accountants is very high, the wage rate will be high; whereas, in an area of low labour demand for accountants, the wage rates will be low.
- Fringe benefits: some firms which pay a lot of fringe benefits, will pay less wages, while firms (in the same industry) which pay less fringe benefits will have higher wages.
- Discrimination: Workers doing the same work may be discriminated by gender, race, religion or age.
- Length of service: Some firms provide extra pay for workers who have worked in the firm for a long long time, while other firms may not. There is a wage differential.
- Local pay agreements: Some national trade unions may agree a national wage rate for all their members- therefore all their members (labourers) will get a higher wage rate than those who do the same job but are not in the trade union.
- Public-private sector pay gap: public sector jobs usually have a high wage rate. But sometimes public sector wages are lower than that of private sector’s because low wages can be compensated by the public sector’s high job security and pension prospects.
- Skilled and unskilled workers: Skilled workers have a higher pay than unskilled workers, because they are more productive and efficient and make lesser mistakes.
- Gender pay gap: Men are usually given a higher pay than women. This is because women tend to go for jobs that don’t require as much skills as that required by men’s jobs (teaching, nursing, retailing); they take career breaks to raise children, which will cause less experience and career progress (making way for low wages); more women work part-time than full-time. Sometimes, even if both men and women are working equally hard and effectively, discrimination can occur against women.
- International wage differentials: developed countries usually have a high wage rates due to high incomes, large supply of skilled workers, high demand for goods and services etc; while in a less-developed economy, wage rated will be low due to a large supply unskilled labourers.
Chapter 17 - Households | |
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Chapter 18 - Workers
- The market for labor in an economy will consist of all those people willing and able to supply themselves for work and all the people and organizations willing and able to employ them
- The higher the wage rate in a particular labor market, the more expensive it is to employ workers and the less will tend to be demanded
- The higher the wage rate in a particular labor market, the more labor will be supplied
- At very high wage rates, it is possible to have both more wage income and more leisure and the supply curve will be back bending
- Consumer Demand for Goods and Services: if consumer demand rises, firms may expand output in response. This will tend to increase their demand for labor.
- Increasing Productivity [Growth]: if labor becomes more productive and adds more value to output over and above their wage cost, then firms may demand more labor
- Changes in Price and Productivity of Capital: if machinery and equipment become cheaper or more productive, labor may be replaced by capital-intensive techniques
- Changes in Other Employment Costs: if the government adds more employment costs e.g. social security contributions or health/safety regulations it may become unprofitable to keep too much labor
- Fringe Benefits/Net Advantages
- Demographic Changes: changes in size and age distribution of the population in a country will also cause changes in labor supply to different occupations
- Education and Training: changes in the level and type of education and training courses offered can increase the supply of workers with different skills
- For jobs which are difficult to enter because of certain natural abilities, education or finance, supply will be inelastic
- For jobs which require few skills, supply of labor will be elastic
- Different abilities and qualifications: people with skills that are very short in supply relative to the demand for those skills will tend to be offered very high wages e.g. actors, doctors
- “Dirty” jobs: workers must be paid more in order to attract them towards these jobs, these are called compensating differentials e.g. nighttime guards paid more than daytime
- Unsociable hours
- Satisfaction: certain jobs are thought by some people to be very satisfactory even without high pay e.g. nurses
- Lack of information about jobs and wages: they simply do not know about better-paid jobs
- Immobility: do not want or cannot afford to move to a different area/occupation
- Fringe benefits: lower wages but higher perks
- Experience
Wage Differentials and Occupational Mobility
- If labor was mobile, it would be easier to move from one job to another
- There would be a greater movement of labor from lower-wage to higher-wage jobs
- The supply of low-wage jobs would decrease, therefore increasing wages
- The supply of high-wage jobs would increase, therefore reducing wages
- This way the wage differentials would decrease
- Regional Differences in Labor Market Conditions
- Length of Service: loyalty, experience, skill
- Local Pay Agreements: national trade unions may agree a national wage rate for their members
- Non-Wage Rewards: income is lower, benefits are higher
- Discrimination: sex, race, age, religion
- Public-Private Sector
- Skilled/Unskilled Workers
- Industrial Wage Differentials
- Gender pay gap:
Differences in the occupational distribution of men and women. Women often work in lower paying occupations.
Women often take career breaks
More women work part-time than full-time in comparison to men
The pay gap has decline during the past two decades in developed countries
- Real income and consumer spending on goods and services is far higher in developed countries and hence, the countries with low economic development tend to have fewer industries and generally a low demand for labor in the secondary and tertiary sectors
- Less developed countries have large potential labor forces but skill levels are relatively low
EmployeesEmployers
Comply with terms and conditions of their employmentComply with terms and conditions of their contract of employment
Comply with health and safety regulationsNot to discriminate
Receive at least the legal minimum levels of sick and maternity pay and redundancy compensationProvide a healthy and safe working environment and any necessary equipment
Receive at least 4 weeks paid holiday per year and minimum rest periods each dayComply with legal rights of employees e.g. leaves, breaks, holidays
Not to have to work more than 48 hours a weekThe right to legally terminate employment and to defend their actions at an employment tribunal
Protection against unfair dismissal and the right to defend their actions at an employment tribunal
- Protect rights of employees and employers
- Outlaw and regulate the restrictive practices of powerful trade unions and employers
- Raise wages of very low-paid workers through national minimum wage law
- Reduce unemployment
- Stop discrimination
- Wages consist of:
basic wage
bonuses
overtime - Wages tend to be paid weekly in the form of cash either by time rate or by piece rate for manual work
- Net wages refer to the amount that remains from the gross wages after deductions of:
income tax
national insurance contribution
contribution to firms pension scheme
- Time rate:
per hours worked
all workers receive the same income
used when output cannot be measured
used when quality is more important than quantity
used when there is no effort between effort and pay
easy to calculateworkers get paid the same amount no matter how much work is done
worker is guaranteed a certain amount of wage provided the hours workedthere is no monitoring incentive to work hard
- Piece rate:
per units produced
encourage efforts by providing higher wages to successful workersencourage workers to speed up so quality may be ignored
workers may impair their health by working too hard
Salaries
- Salaries tend to be paid monthly directly to the workers’ account for non-manual work
- The movement of labor from one geographical area (area of high unemployment) to another area (area of high vacancies)
- Barriers to Mobility:
ignorance/ lack of information provided
cost of movement
availability of housing
social ties: unwilling to leave family/friends
- Measures to Improve Geographical Mobility:
More job centers in depressed areas
Financial incentives to attract/motivate firms
Grant workers financial aid towards moving costs
Provide knowledge of vacant jobs
- The movement of labor from one occupation to another. It is the willingness and ability of a worker to change jobs.
- Barriers to Occupational Mobility:
natural ability required for a specific job
education and training level
finance
technical progress: if there is a change in the techniques of production
age
willingness
- Measures to Improve Occupational Mobility:
government provides information on opportunities
setting up training and retraining centers
- higher and more flexible output: easier to meet the constant change in the demands for goods and services of the population
- lower inflation: quick response to changes in demand is able to influence inflation
- lower unemployment
- technological advances: by labor being trained and retrained
Factors Affecting Individuals Choice of Occupation
- Wage factor: how much money is being offered
- Non-wage factor:
opportunity for promotion
job security
satisfactory work
varied work
pleasant working conditions
fringe benefits
- A fall in demand for unskilled workers
- Increase in demand for skilled workers who know about technology
- Wages for unskilled workers fall whereas skilled workers rise
- Training
- Rewarding: performance-related pay and bonuses
- Encouraging
- Improving job satisfaction
Chapter 18 - Homework | |
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Chapter 19 - Trade Unions
TRADE UNIONS
Work-to-ruleComply with every rule and regulation at work in order to slow down production
G0-slowDeliberately working slow
Sit-inRefuse to leave place of work
StrikeRefuse to work
Picketing/ProtestingRefusing to allow anyone inside the workplace
- Trade unions exist primarily to promote and protect the interests of their members with the purpose of improving their wages and working conditions
- In return, members will pay a small fee to belong to the union
- Open Shop: firms can employ both unionized and non-unionized labor
- Closed Shop: all workers must be part of the union
- Single Union Agreement: one union represents the views of all the workers
- Defending their employee rights and jobs
- Securing improvements in working conditions
- Less hours of work
- Better health and safety regulations
- Improving pay and other benefits
- Improving sick pay, pensions etc.
- Encouraging firms to increase worker participation in decision making
- Developing and protecting the skills of union members
- They negotiate with and put pressure on employers on behalf of all their members to secure these aims
- General Unions: people from many different occupations and industries e.g. commercial workers
- Industrial Unions: people from the same industry e.g. telecommunications
- Craft Unions: people with the same skills across different industries e.g. artists
- Non-manual Unions: people with professional occupations e.g. doctors
- The process of negotiating over pay and working conditions between the unions and employers is known as collective bargaining
- Collective bargaining, however, may sometimes fail to reach an agreement
- Official action may be taken, where workers have the backing of the union
- Unofficial action may be taken, where workers are not backed by their union
Work-to-ruleComply with every rule and regulation at work in order to slow down production
G0-slowDeliberately working slow
Sit-inRefuse to leave place of work
StrikeRefuse to work
Picketing/ProtestingRefusing to allow anyone inside the workplace
- Arbitration may be necessary to handle some disputes if collective bargaining fails and industrial action is threatened/takes place
- This involves employers and unions agreeing to let an independent body help them reach an agreement
Chapter 19 - Homework | |
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Chapter 20 - Firms
Business OrganizationsSole Trader/Sole ProprietorshipA business organization owned and controlled by one person. Sole traders can employ other workers, but only he/she invests and owns the business.
Advantages:
PartnershipsA partnership is a legal agreement between two or more (usually, up to twenty) people to own, finance and run a business jointly and to share all profits.
Advantages:
Joint-stock companiesThese companies can sell shares, unlike partnerships and sole traders, to raise capital. Other people can buy these shares (stocks) and become a shareholder (owner) of the company. Therefore they are jointly owned by the people who have bough it’s stocks. These shareholders then receive dividends (part of the profit; return on investment), according to the amount of capital they invest.
The shareholders in companies have limited liabilities. That is, only their individual investments are at risk if the business fails or leaves debts. If the company owes money, it can be sued and taken to court, but it’s shareholders cannot.
The companies have a separate legal identity from their owners, which is why the owners have a limited liability. These companies are incorporated.
Companies also enjoys continuity, unlike partnerships and sole traders. That is, the business will continue even if one of it’s owners retire or die.
Shareholders will elect a board of directors to manage and run the company in it’s day-to-day activities. In small companies, the shareholders with the highest percentage of shares invested are directors, but directors don’t have to be shareholders.
Shareholders with more than 50% value of the shares will have the upper hand in all decision-making and control. The more shares a shareholder has, the more their voting power.
These are two types of companies:
Private Limited Companies: One or more owners who can sell its’ shares to only the people known by the existing shareholders (family and friends). Example: Ikea.
Public Limited Companies: Two or more owners who can sell its’ shares to any individual/organization in the general public through stock exchanges (see topic 3.1 – Money and Finance). Example: Verizon Communications
Advantages:
A summary of everything learned until now, in this section, in case you’re getting confused:
Multinational Corporations (MNCs)A multinational is a firm that has business operations in more than one country, but will usually have its headquarters based in it’s country of origin. They are all usually joint-stock companies. Example: Wal-Mart Stores Inc.
Advantages:
Cooperatives:Business organization owned and controlled by a group of people, to undertake an economic activity, to their mutual benefit. Anyone can become a member and invest small amounts of capital. They have a strict policy of one person one vote. Thus, the amount of investment doesn’t determine voting powers, unlike companies.They have limited liability.
There are mainly two types of co-operatives:
Worker Cooperatives: Owned by their workers, who are the members. For example: farming co-operatives where farmers pool in money to buy equipments and equally share business profits.
Retail Cooperatives: Retailing businesses run for the benefit of their consumers. All profits made by the business goes to it’s consumers, who are the members.
Public Sector Organizations (Public Corporation)All organizations owned and controlled by the government (all of the above are owned by private individuals). They deliver essential services such as healthcare, education, street-lights and roads.They are usually given at low costs or sometimes freely and do not aim to make a profit. Instead they aim at providing cost-effective services that are funded by tax revenue. Businesses under the public sector are called public corporation.
Public corporations’ profits are either reinvested into the business for improvement or used by the government to fund their activities. They also have limited liability in the sense that when debts exist, the corporation can be sued, but the government can’t, because they are a incorporated business (has separate legal identity)
Public corporations are run by a board of directors, chosen by a govt. minister to run and manage the corporation and they are accountable to the minister .
Nationalization and PrivatizationNationalization is the transfer of ownership of an entire industry from the private sector to the public sector.
Why are private firms nationalized?
Why are public firms privatized?
Advantages:
- Easy to set up: there are very few legal formalities involved in starting and running a sole proprietorship. A less amount of capital is enough by sole traders to start the business. There is no need to publish annual financial accounts.
- Full control: the sole trader has full control over the business. Decision-making is quick and easy, since there are no other owners to discuss matters with. This will also eliminate possibilities of conflicts among owners.
- Sole trader receives all profit: Since there is only one owner, he/she will receive all of the profits the company generates.
- Personal: since it is a small form of business, the owner can easily create and maintain contact with customers, which will increase customer loyalty to the business and also let the owner know about consumer wants and preferences.
- Unlimited liability: if the business has bills/debts left unpaid, legal actions will be taken against the investors, where their even personal property can be seized, if their investments don’t meet the unpaid amount. This is because the business and the investors are the legally not separate (unincorporated).
- Full responsibility: Since there is only one owner, the sole owner has to undertake all running activities. He/she doesn’t have anyone to share his responsibilities with. This workload and risks are fully concentrated on him/her.
- Lack of capital: This is a major disadvantage to sole proprietorship. As only one owner/investor is there, the amount of capital invested in the business will be very low. This can restrict growth and expansion of the business. Their only sources of finance will be personal savings or borrowing or bank loans (though banks will be reluctant to lend to sole traders since it is risky).
- Lack of continuity: If the owner dies or retires, the business dies with him/her.
PartnershipsA partnership is a legal agreement between two or more (usually, up to twenty) people to own, finance and run a business jointly and to share all profits.
Advantages:
- Easy to set up: Similar to sole traders, very few legal formalities are required to start a partnership business. A partnership agreement/ partnership deed is a legal document that all partners have to sign, which forms the partnership. There is no need to publish annual financial accounts.
- Partners can provide new skills and ideas: The partners may have some skills and ideas that can be used by the business to improve business profits.
- More capital investments: Partners can invest more capital than what a sole trade only by himself could.
- Conflicts: arguments may occur between partners while making decisions. This will delay decision-making.
- Unlimited liability: similar to sole traders, partners too have unlimited liability- their personal items are at risk if business goes bankrupt
- Lack of capital: smaller capital investments as compared to large companies.
- No continuity: if an owner retires or dies, the business also dies with them.
Joint-stock companiesThese companies can sell shares, unlike partnerships and sole traders, to raise capital. Other people can buy these shares (stocks) and become a shareholder (owner) of the company. Therefore they are jointly owned by the people who have bough it’s stocks. These shareholders then receive dividends (part of the profit; return on investment), according to the amount of capital they invest.
The shareholders in companies have limited liabilities. That is, only their individual investments are at risk if the business fails or leaves debts. If the company owes money, it can be sued and taken to court, but it’s shareholders cannot.
The companies have a separate legal identity from their owners, which is why the owners have a limited liability. These companies are incorporated.
Companies also enjoys continuity, unlike partnerships and sole traders. That is, the business will continue even if one of it’s owners retire or die.
Shareholders will elect a board of directors to manage and run the company in it’s day-to-day activities. In small companies, the shareholders with the highest percentage of shares invested are directors, but directors don’t have to be shareholders.
Shareholders with more than 50% value of the shares will have the upper hand in all decision-making and control. The more shares a shareholder has, the more their voting power.
These are two types of companies:
Private Limited Companies: One or more owners who can sell its’ shares to only the people known by the existing shareholders (family and friends). Example: Ikea.
Public Limited Companies: Two or more owners who can sell its’ shares to any individual/organization in the general public through stock exchanges (see topic 3.1 – Money and Finance). Example: Verizon Communications
Advantages:
- Limited Liability: this is because, the company and the shareholders have separate legal identities.
- Raise huge amounts of capital: selling shares to other people (especially in Public Ltd. Co.s), raises a huge amount of capital, which is why companies are large.
- Public Ltd. Companies can advertise their shares, in the form of a prospectus, which tells interested individuals about the business, it’s activities, profits, board of directors, shares on sale, share prices etc. This will attract investors.
- Required to disclose financial information: Sometimes, private limited companies are required by law to publish their financial statements annually, while for public limited companies, it is legally compulsory to publish all accounts and reports. All the writing, printing and publishing of such details can prove to be very expensive, and other competing companies could use it to learn the company secrets.
- Private Limited Companies cannot sell shares to the public. Their shares can only be sold to people they know with the agreement of other shareholders. Transfer of shares is restricted here. This will raise lesser capital than Public Ltd. Companies.
- Public Ltd. Companies require a lot of legal documents and investigations before it can be listed on the stock exchange.
- Public Limited Companies must also hold an Annual General Meeting (AGM), where all shareholders are informed about the performance of the company and company decisions, vote on strategic decisions and elect board of directors. This is very expensive to set up, especially if there are thousands of shareholders.
- Public Ltd. Companies may have managerial problems: since they are very large, they become very difficult to manage. Communication problems may occur which will slow down decision-making.
- In Public Ltd. Companies, there may be a divorce of ownership from control: The shareholders can lose control of the company when other large shareholders outvote them or when board of directors control company decisions.
A summary of everything learned until now, in this section, in case you’re getting confused:
Multinational Corporations (MNCs)A multinational is a firm that has business operations in more than one country, but will usually have its headquarters based in it’s country of origin. They are all usually joint-stock companies. Example: Wal-Mart Stores Inc.
Advantages:
- Reach more consumers globally, increasing sales.
- Avoid trade barriers and import tariffs by setting up operations in countries that impose them. This will reduce costs.
- Minimize transportation costs of exporting by locating operations in the countries where products are sold.
- Minimize wage costs by locating operation in countries with low wage costs.
- A large scale of production will lower it’s average costs (economies of scale, explained later in the syllabus).
- They increase investments in the country (direct inward investments), which will contribute to the development and growth of the economy.
- They provide jobs and incomes for local workers.
- They bring in new knowledge and skills, which will be beneficial in increasing productivity of domestic (local) firms.
- They will have to pay taxes on their profits to the host country, help raising govt. revenue.
- They may exploit workers: In economies with a low wage, multinationals may pay employees far less than what they do in other countries. They may also provide poor health and safety measures in less-developed economies.
- Natural resources may be exploited: As multinational use up more resources for production, natural resources (land) such as water and wood may get exhausted. They may even damage the environment.
- Profits maybe switched to origin countries, to avoid taxation. This is called repatriation of profits, This will reduce any possibilities of the govt. gaining more tax revenue from them.
- They can use their power and reputation to obtain subsidies and tax deductions form the govt.: Because they provide lots of jobs and incomes, governments encourage multinationals to locate there. This would be unfair to other local firms.
- Local competition may be threatened: Domestic firms will find it hard to keep up with multinationals and they lose a lot of customers to these MNCs, forcing them to close down.
Cooperatives:Business organization owned and controlled by a group of people, to undertake an economic activity, to their mutual benefit. Anyone can become a member and invest small amounts of capital. They have a strict policy of one person one vote. Thus, the amount of investment doesn’t determine voting powers, unlike companies.They have limited liability.
There are mainly two types of co-operatives:
Worker Cooperatives: Owned by their workers, who are the members. For example: farming co-operatives where farmers pool in money to buy equipments and equally share business profits.
Retail Cooperatives: Retailing businesses run for the benefit of their consumers. All profits made by the business goes to it’s consumers, who are the members.
Public Sector Organizations (Public Corporation)All organizations owned and controlled by the government (all of the above are owned by private individuals). They deliver essential services such as healthcare, education, street-lights and roads.They are usually given at low costs or sometimes freely and do not aim to make a profit. Instead they aim at providing cost-effective services that are funded by tax revenue. Businesses under the public sector are called public corporation.
Public corporations’ profits are either reinvested into the business for improvement or used by the government to fund their activities. They also have limited liability in the sense that when debts exist, the corporation can be sued, but the government can’t, because they are a incorporated business (has separate legal identity)
Public corporations are run by a board of directors, chosen by a govt. minister to run and manage the corporation and they are accountable to the minister .
Nationalization and PrivatizationNationalization is the transfer of ownership of an entire industry from the private sector to the public sector.
Why are private firms nationalized?
- To control large powerful firms, especially those providing essential products, such as electricity and gas.
- To protect employment in large firms which may be on the verge of closing down.
- To protect public services. Private firms may be charging too high a price for essential services in order to maintain profits. Nationalized firms can provide these even at a loss.
Why are public firms privatized?
- To increase efficiency of a particular industry, since the private sector is profit-motive.
- To raise money for other government projects (by selling firms to private individuals, the govt. gets money)
Chapter 20 - Homework | |
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Chapter 21 - Firms and Production
ORGANIZING PRODUCTION
Secondarymanufacturing industries
Tertiaryservices or selling industries
Aims of Production
Labor Productivity
Reasons for Expansion/Growth of Firm
Advantages
Controls quality and quantity
Reduction of cost
Economies of scale
Economies of scale
Promotion of own products
Economies of scale
Market share increases
Security
Rationalization
Less competition
Demand SideSupply Side
Local natureManagerial diseconomies
Nature of commodityLack of capital
Taste and need of consumerUnwilling to bare risk
Special skill required
Diseconomies of scale
- Production is the making of goods and services to satisfy human wants
- By combining the resource inputs to produce outputs consumers want and are willing and able to buy, productive activity adds value to resources
- Productivity refers to the amount of output that can be produced from a given input of resources
- The aim of any business is to combine its resources in the most effective way (most output at lower cost).
- Productivity will increase if more output can be produced with fewer resources.
- Production is a chain of economic activities linking many different firms together, from the primary to the tertiary industry
Secondarymanufacturing industries
Tertiaryservices or selling industries
Aims of Production
- Maximized Profit
- Cover costs
- Provide public service
- Provide charity
- NGOs
- Growth
- Survival
- Adding Value
- Labor intensive firms have a larger proportion of labor employed than capital employed
- Capital intensive firms have a larger proportion of capital employed than labor employed
- The demand for labor or capital will depend on:
Amount of production- the higher the demand, the more factors of production employed
Price of labor as compared to capital and vice versa
Productivity of labor as compared to capital and vice versa
- Firms will employ more of the factor of production which produces productively
- Factor substitution is the replacement of resources
- Labor and capital are not perfect substitutes and the ability of their substitution will very much depend on the nature of the product and the production processes being used
- Technology has a major hand in deciding due to the new products, services, materials, methods and efficiency it brings with it
Labor Productivity
- Labor productivity is measured by dividing output by number of employees or total revenue divided by number of employees
- Total Output (or Revenue)/ Number of Employees
- The result of this determines how much, on average, each employee is earning/producing, therefore determining their productivity
- Nonetheless, it is very had to measure productivity with this formula as you cannot measure quality of the goods
- Also, some organizations may not produce physical output therefore making it difficult to measure productivity
- Train workers
- Reward workers
- Encourage employees to buy company shares
- Job satisfaction
- New and improved machinery
- Sustainable/Lean manufacturing
- Many of these tend to raise the cost of employing labor in the short run
- However, in the long run, average costs will fall and profits will tend to rise, therefore increasing demand for the goods/services
- Output Produced
- Revenue Earned
- Capital/Labor Employed
- Scale of Production
- The Size of Market may be:
small
local
- May want to produce wide variety of goods
- May supply luxury items
- Personal service demanded
- Firm could make component parts
- Independency wanted
- After sales service required
- Flexibility needed
- Limited capital to expand
- Financially assisted by government
- Personal choice
- Many small firms may join together and achieve economies of scale
Reasons for Expansion/Growth of Firm
- Reduce average cost
- Larger market share
- More security
- To meet an increasing demand
- Internal growth:
Extending market
Increasing range of products
- External growth:
Merger: two or more firms agree to join under one new enterprise
Takeover: one company buys more than 50% of the shares of another company
- Backward Vertical Integration:
One firm joins another in the same industry at a previous stage of production (integration with supplier)
Advantages
Controls quality and quantity
Reduction of cost
Economies of scale
- Forward Vertical Integration:
One firm joins another in the same industry at a later stage of production (integration with retailers)
Economies of scale
Promotion of own products
- Horizontal Integration:
firm joins with another firm in the same industry at same stage of production (integration with competitor)
Economies of scale
Market share increases
Security
Rationalization
Less competition
- Conglomerate Integration:
Firm joins another at same stage of production but in a different industry
- Diseconomies of scale
- Monopolies
- Increased
- Managerial problems
- Rationalization causes unemployment
Demand SideSupply Side
Local natureManagerial diseconomies
Nature of commodityLack of capital
Taste and need of consumerUnwilling to bare risk
Special skill required
Diseconomies of scale
Chapter 21 - Homework | |
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File Type: | docx |
Chapter 22-Firm Cost/ Revenue and Objectives
The sizes of firms can be measured in a number of ways:
Growth of FirmsWhen a firm grows, it’s scale of production (amount of output) increases. Firms can grow in to ways: internally or externally.
Internal Growth/Organic Growth
This involves expanding the scale of production of it’s existing operations. This can be done by purchasing more machinery/equipment, opening more branches, selling new products into the market, expanding business premises, employing more workers etc.
External Growth
This involves two or more firms joining together to form a large business. This is called integration. This can be done it two ways: mergers or takeovers.
A takeover or acquisition happens when a company buys enough shares of another firms that they can take full control. This can happen without the owners’ agreement. The firm taken over loses it’s identity and become a part of what is known as the holding company. A well-known example would be Facebook’s acquisition of WhatsAapp in 2014.
A merger occurs when the owners of two or more companies agree to join together to form a firm.
Integration can happen in three ways:
Scale of ProductionAs discussed in the last topic, as a firm’s scale of production (output) increases it’s average costs decrease. Cost saving from a large-scale production is called economies of scale.
Internal economies of scale are decisions taken within the firms that can bring about economies (advantages). Some internal economies of scale are:
External economies of scale occur when firms benefit from the entire industry being large. The may include:
Diseconomies of scale occur when a firms grows too large and average costs start to rise. Some common diseconomies are:
A firm that doubles all it’s inputs (resources) and is able to more than double it’s output as a result experiences an increasing returns to scale.
A firm that doubles all it’s inputs and fails to double it;s output as a result experiences a decreasing or diminishing returns to scale.
Why do some firms remain small?
- Number of employees: The more the no.of workers employed, the larger the business is likely to be. But this is not true in many cases, especially in capital-intensive industries, where more capital is used than labourers (and the firm is still large)
- Capital employed: this is the money invested in the business in productive assets (machinery, factory, stock of raw materials, money to pay wages etc) to produce goods and services and generate revenue. The more the capital employed in a firm, the larger their production will be and larger their size. However, labour intensive industries, where more labourer are used than capital can also be large.
- Market share: Market share is the total market sales a firm is able to capture.
Market share =(Total sales of firm’s product / Total market sales of product) * 100. (For example, Coca-cola has the highest market share in the fizzy drinks market) The higher a firm’s market share, the larger the firm is likely to be. But, this depends on the size of the market itself. For example, a local salon will have a high market share, since the market is only a local town, but it is still a small business. - Organization: The internal organization- how the departments are organized- can tell a lot about it’s size. Large firms will have different specialized departments and people under them (purchasing, marketing, finance, production etc), while in a smaller business, the owners and employees share all the work among them.
Growth of FirmsWhen a firm grows, it’s scale of production (amount of output) increases. Firms can grow in to ways: internally or externally.
Internal Growth/Organic Growth
This involves expanding the scale of production of it’s existing operations. This can be done by purchasing more machinery/equipment, opening more branches, selling new products into the market, expanding business premises, employing more workers etc.
External Growth
This involves two or more firms joining together to form a large business. This is called integration. This can be done it two ways: mergers or takeovers.
A takeover or acquisition happens when a company buys enough shares of another firms that they can take full control. This can happen without the owners’ agreement. The firm taken over loses it’s identity and become a part of what is known as the holding company. A well-known example would be Facebook’s acquisition of WhatsAapp in 2014.
A merger occurs when the owners of two or more companies agree to join together to form a firm.
Integration can happen in three ways:
- Horizontal Integration: integration of firms engaged in the production of the same type of good at the same level of production. Example: a cloth manufacturing company merges with/takes over another cloth manufacturing company.
- Vertical Integration: integration of firms engaged in the production of the same type of good but at different levels of production (primary/secondary/tertiary). Example: a electronics manufacturing company merges with/takes over a electronic retail business.
Forward vertical integration: when a firm integrates with a firm that is at a later stage of production than theirs. Example: a dairy farm integrates with a cheese manufacturing company.
Backward vertical integration: when a firm when a firm integrates with a firm that is at an earlier stage of production than theirs. Example: a chocolates selling firm integrates with a chocolate manufacturing company. - Lateral/Conglomerate integration: occurs when firms producing different type of products integrates. They could be at the same or different sage of production. Example: a housing company integrates with a dairy farm. Thus, the firm can produce a wide range of products.
Scale of ProductionAs discussed in the last topic, as a firm’s scale of production (output) increases it’s average costs decrease. Cost saving from a large-scale production is called economies of scale.
Internal economies of scale are decisions taken within the firms that can bring about economies (advantages). Some internal economies of scale are:
- Purchasing economies: Large firms can be buy raw materials and components in bulk because of their large scale of production. Supplier will usually offer price discounts for bulk purchases, which will cut purchasing costs for the firm.
- Marketing economies: Large firms can afford their won vehicles to distribute their products, which is much cheaper than hiring other firms to distribute them. Also, the costs of advertising is spread over a much large output in large firms when compared to small firms.
- Financial economies: Banks are more willing to lend to lend money to large firms, since they are more financially secure (than small firms ) to repay loans. They are also likely to get lower rates of interest. Large firms (companies) also have the ability to sell shares to raise capital that do not have to be repaid. Thus, they get more money at lower costs.
- Technical economies: Large firms are more financially able to invest in good technology, skilled workers, machinery etc which are very efficient and cut costs for the firm.
- Risk-bearing economies: Large firms with a high output can sell into different markets (even overseas). They are able to produce a variety of products (diversification in production). This means that their risks are spread over a wider range of products or markets; even if a market or product is not successful, they have other products and markets to continue business. Thus, costs are less.
External economies of scale occur when firms benefit from the entire industry being large. The may include:
- Access to skilled workers: Large firms can recruit workers trained by other firms. For example: when a new training institution for pilots and airline staff opens, all airline firms can enjoy economies of scale of having access skilled workers, who are more efficient and productive and cuts costs.
- Ancillary firms: They are firms that supply and provide materials/services to larger firms. When ancillary firms such as a marketing firm locates close to a company, the company can cut costs by using their services more cheaply than other firms.
- Joint marketing benefits: When firms in the same industry locates close to each other, they may share an enhanced reputation and customer base.
- Shared infrastructure: A development in the infrastructure of an industry or the economy can benefit large firms. Examples: More roads and bridges by the govt. can cut transport costs for the firms, a new power station can provide cheaper elctricity for firms.
Diseconomies of scale occur when a firms grows too large and average costs start to rise. Some common diseconomies are:
- Management diseconomies: Large firms have a wide internal organization with lots of managers and employees. This makes communication difficult and decision-making very slow. Gradually, it leads to inefficient managerial running of the firms and increases costs.
- Too much output may require a large supply of raw materials, power etc. which can lead to shortage and halt production, increasing costs.
- Large firms may use automated production with lots of capital equipment. Worker operating these machines may feel bored in doing the repetitive tasks, and thus demotivated and less cooperative. Many workers may leave or others could go on strikes, stopping production and increasing costs.
- Agglomeration diseconomies: this occurs when firms merge/acquire too many different firms producing different products, and the managers and owners can’t coordinate and organize all activities, leading to higher costs.
- More shares sold into the market and bought means more owners coming into the business. Having a lot of owners can lead to a lot of disputes and conflicts among themselves.
- A lot of large firms can face diseconomies when their products become too standardized and less of a variety in the market.This will reduce sales and profits and increase average costs.
A firm that doubles all it’s inputs (resources) and is able to more than double it’s output as a result experiences an increasing returns to scale.
A firm that doubles all it’s inputs and fails to double it;s output as a result experiences a decreasing or diminishing returns to scale.
Why do some firms remain small?
- The size of their market is small: Business like hairdressers, restaurants, cafés, hotels that provide personalized goods and services, can only supply to a small market.
- Access to capital is limited, so owners can’t grow the firm.
- Owner(s) prefer to stay small: A lot of entrepreneurs don’t want to take risks by growing the firm and they are quite satisfied with running a small business.
Chapter 22 - Homework | |
File Size: | 72 kb |
File Type: | docx |
Chapter 23 - Market Structures
MARKET STRUCTURES
Variety of same goodsLack of capital for research and development
Consumers are in chargeLack of variety
Low prices
Fast response in supply
Efficient
Revenue Curve for Perfect Competition
Marginal Cost=Average CostProductive Efficiency
Marginal Cost= Average RevenueAllocative Efficiency
Average Cost=Average RevenueNormal Profit
Monopoly
Economies of ScaleHigh prices
Investment possibilities and research & development powerLow output
Abnormal profits encourage them to produceBarriers
Natural monopoliesLarge profits with no efficiency
Could pass on low cost to consumersNo incentive for efficiency
Less consumer choice
Low product qualityRevenue Curve for Monopoly
Average Cost > Average RevenueLoss
Marginal Cost= Marginal RevenueMinimize loss
Summary
Perfect CompetitionMonopoly
Number of FirmsinfiniteOne
Market PowerLowHigh
Elasticity of DemandVery elasticInelastic
Product DifferentiationNoneNone
Excess ProfitsNoYes
Productive EfficiencyYesNo
Allocative EfficiencyYesNo
Profit Maximization ConditionP=MC=MRMC=MR
Pricing PowerPrice takerPrice setter
- Market structure describes how a market is organized in terms of number of producers and sellers
- Increase customer base
- Increase sales
- Expand market share (proportion of total volume sold or total sales revenues)
- Achieve product superiority
- Enhance image
- Maximize profits
- Many firms selling homogenous items
- Best use of scare resources
- Low prices due to high competition
- Small market shares
- Cannot make own prices
- Elasticity/Flexibility
- No government restrictions
- Perfect knowledge of market
- Many substitutes
- Price taker
Variety of same goodsLack of capital for research and development
Consumers are in chargeLack of variety
Low prices
Fast response in supply
Efficient
Revenue Curve for Perfect Competition
- Demand= Marginal Revenue= Average Revenue
Marginal Cost=Average CostProductive Efficiency
Marginal Cost= Average RevenueAllocative Efficiency
Average Cost=Average RevenueNormal Profit
Monopoly
- Situation where a single company of single seller owns all or nearly all of the market for a specific good
- Only one seller
- Many barriers to enter and exit the market
- Price setter
- Inelastic demand
- Abnormal profits
- One firm can produce cheaper than two separate firms and thus a natural monopoly is set up and the fixed cost is so high that no one else tries to enter the market
- Brand loyalty from customers
- Firm owns its own resources and has copyrights thus not allowing competitors
- Legal monopoly policies such as licenses, nationalization and franchises
- Dumping: sells product at a loss
- Obliges retailer to only purchase from them
- Price fixing
- Limit pricing
- Tie products together which would not normally be purchased together
Economies of ScaleHigh prices
Investment possibilities and research & development powerLow output
Abnormal profits encourage them to produceBarriers
Natural monopoliesLarge profits with no efficiency
Could pass on low cost to consumersNo incentive for efficiency
Less consumer choice
Low product qualityRevenue Curve for Monopoly
- There is no productive or allocative efficiency
- It always makes abnormal profits
Average Cost > Average RevenueLoss
Marginal Cost= Marginal RevenueMinimize loss
Summary
Perfect CompetitionMonopoly
Number of FirmsinfiniteOne
Market PowerLowHigh
Elasticity of DemandVery elasticInelastic
Product DifferentiationNoneNone
Excess ProfitsNoYes
Productive EfficiencyYesNo
Allocative EfficiencyYesNo
Profit Maximization ConditionP=MC=MRMC=MR
Pricing PowerPrice takerPrice setter
Chapter 23 - Homework | |
File Size: | 72 kb |
File Type: | docx |
Chapter 24 - Role of Governments
Debate Video - HE Datuk Zahairi Baharim
https://vimeo.com/manage/440260431/general
Date: 21st July 2020
Time: 1:15pm- 2:00pm
IGCSE Economics Debate
(Role of Governmets)
Chief Judge : H.E. Datuk Zahairi Baharim - Ambassador of Malaysia to Myanmar
Ms.Ling Yi Quek - Resident Partner at Danton’s Law
Moderators : Mr. Basil Jipani - School Management [Royal British International School]
Adjudicators : Mr. Prash Nandwani & Mr. Darren Smillie [Royal British International School]
Debate Topic: Whether or not governments should be involved in certain activities, i.e. whether an activity would be best left as it is? (Population White - Paper - Should the Myanmar Government have an active role in encouraging the immigration of foreign talent (Encouraging and enabling Foreign Talent & Businesses to come to Myanmar, or NOT)
Team A [FOR]; Manjeet, Alice & Dominic
Team B [Against]: Sandy, Melody & Max
Ref: https://www.mofa.gov.mm
https://myanmar.gov.mm/en/ministry-of-planning-finance
Debate Structure:
* The first speaker on the FOR team presents arguments in support of the resolution. (5 minutes)
* The first speaker on the AGAINST team presents arguments opposing the resolution. (5 minutes)
* The second speaker on the FOR team presents further arguments in support of the resolution, identifies areas of conflict, and answers questions that may have been raised by the opposition speaker. (5 minutes)
* The second speaker on the AGAINST team presents further arguments against the resolution, identifies further areas of conflict, and answers questions that may have been raised by the previous affirmative speaker. (5 minutes)
BOTH TEAMS - Turn by Turn
(3 minutes)
BOTH TEAMS - Closing Statement
Post - Debate Discussion and Assessment
When the formal debate is finished, time will be allowed for debriefing and discussion. Members of the audience will be given an opportunity to ask questions and to contribute their own thoughts and opinions on the arguments presented. Members of the debate teams may also wish to reflect on their performance and seek feedback from the audience, including the teachers.
Time: 1:15pm- 2:00pm
IGCSE Economics Debate
(Role of Governmets)
Chief Judge : H.E. Datuk Zahairi Baharim - Ambassador of Malaysia to Myanmar
Ms.Ling Yi Quek - Resident Partner at Danton’s Law
Moderators : Mr. Basil Jipani - School Management [Royal British International School]
Adjudicators : Mr. Prash Nandwani & Mr. Darren Smillie [Royal British International School]
Debate Topic: Whether or not governments should be involved in certain activities, i.e. whether an activity would be best left as it is? (Population White - Paper - Should the Myanmar Government have an active role in encouraging the immigration of foreign talent (Encouraging and enabling Foreign Talent & Businesses to come to Myanmar, or NOT)
Team A [FOR]; Manjeet, Alice & Dominic
Team B [Against]: Sandy, Melody & Max
Ref: https://www.mofa.gov.mm
https://myanmar.gov.mm/en/ministry-of-planning-finance
Debate Structure:
* The first speaker on the FOR team presents arguments in support of the resolution. (5 minutes)
* The first speaker on the AGAINST team presents arguments opposing the resolution. (5 minutes)
* The second speaker on the FOR team presents further arguments in support of the resolution, identifies areas of conflict, and answers questions that may have been raised by the opposition speaker. (5 minutes)
* The second speaker on the AGAINST team presents further arguments against the resolution, identifies further areas of conflict, and answers questions that may have been raised by the previous affirmative speaker. (5 minutes)
BOTH TEAMS - Turn by Turn
- The opposing team begins with the rebuttal, attempting to defend the opposing arguments
(3 minutes)
BOTH TEAMS - Closing Statement
- Each team gets a second rebuttal for closing statements with the affirmative team having
- There cannot be any interruptions. Speakers must wait their turns. The teacher may need
Post - Debate Discussion and Assessment
When the formal debate is finished, time will be allowed for debriefing and discussion. Members of the audience will be given an opportunity to ask questions and to contribute their own thoughts and opinions on the arguments presented. Members of the debate teams may also wish to reflect on their performance and seek feedback from the audience, including the teachers.
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