Economics

• Price Elasticity of Demand (PED):

  • Inelastic demand: Percentage change in price is greater than percentage change in demand
  • Elastic demand: Percentage change in demand is greater than percentage change in price
  • PED formula: (% change in quantity demanded) / (change in price)
  • PED > 1 = elastic, PED < 1 = inelastic
• Factors affecting PED:

  • Availability of substitutes
  • Time consumers have to find a cheaper substitute
  • Percentage of income spent on product
  • If the product is a necessity
• Price Elasticity of Supply (PES):

  • PES formula: (% change in quantity supplied) / (% change in price)
• Factors affecting PES:

  • The mobility and availability of factors of production
  • Spare production capacity
  • The steeper the gradient of the graph, the more elastic the supply is
• Market Economic System:

  Advantages:

  • Wide variety of goods and services are produced
  • Firms respond quickly to consumer needs and wants
  • Innovation
• Disadvantages:

  • Products are sold at high prices
  • Demerit goods may be produced to earn profit
  • Non-profitable goods may not be produced
  • Market failures cause misallocation or inefficient allocation of resources
• Problems of Market Economy:

  • Public good won't be provided
  • Merit goods will be few in amount
  • Oversupply of demerit goods
  • Exploitation of consumers and employees
  • Factor immobility restricts reallocation of resources
  • Products with external benefits can be underprovided
• Government Intervention to Market Failure:

  • Provision of goods and services
  • Subsidies
  • Indirect tax
  • Price controls
  • Price ceiling
  • Price floor
• Problems created by Government Intervention:

  • May take a long time for impact
  • Encourage smuggling
  • Tax and subsidies can distort price signals and incentives
  • Regulations increase production costs
  • Interventions may be politically biased
• Money and Banking:

  • Problems of barter: Fixing a rate of exchange, finding someone to swap with, trying to save
• Functions of money:

  • Medium of exchange
  • Unit of account
  • Store of value
  • Means of deferred payment
  • Installment payments
• Characteristics of good money:

  • Acceptability
  • Portability
  • Durability
  • Divisibility
  • Scarcity
• Ways firms can increase factor productivity:

  • Train workers to improve skills
  • Provide bonuses and fringe benefits
• Factors affecting production methods:

  • Capital intensive production:
  • Advantages:
  • Allows for mass production
  • Constant efficiency
  • Can work long hours
  • Disadvantages:
  • Expensive to maintain
  • Not suitable for niche markets or handmade products that require customization
  • Risk of machine malfunctions
  • Labour intensive production:
  • Advantages:
  • Suitable for handmade products
  • Less risk of malfunctions
  • Easy to observe product quality
  • Disadvantages:
  • Inconsistent efficiency
• • Workers may demand higher wages
  • Limited period of work
• Factors determining demand for factors of production:

  • Demand for products
  • Cost of factors of production
  • Factor prices
  • Factor availability
• Objectives of firms:

  • Profit maximisation
  • Growth
  • Survival
  • Social welfare and environmental objectives
• Market structures:

  • Competitive markets:
  • Characteristics:
  • No monopolies
  • Perfect information
  • Similar product prices
  • Wide range of substitutes
  • Price takers
  • Low barriers to entry and exit
  • Competition types:
  • Price competition
  • Non-price competition (product differentiation)
  • Monopoly markets:
  • Characteristics:
  • One seller controls the market
  • High barriers to entry
  • Price maker
  • Earn abnormal profits
• Competitive pricing strategies:

  • Destruction pricing: Reduces prices to force competitors out of the market
  • Follow-the-leader pricing: Follows the pricing of the largest market share holder
• Monopoly disadvantages:

  • Less consumer choice
  • Low output, high prices
  • X-inefficiency
  • Lower product quality
• Artificial barriers to entry:

  • Destruction pricing
  • Restricting supply to competition
  • Tying or bundling products
• Trade union aims:

  • Negotiate improvements and fringe benefits with employers
  • Defend employee’s rights
  • Improving work conditions
  • Improve pay and other benefits
  • Encourage firms to increase workers’ involvement in decision making
  • Support dismissed members
  • Develop skills of union members
  • Provide social and recreational amenities for members
  • Influencing government policies to protect jobs
• Types of trade unions:

  • General unions: represent workers from different occupations
  • Industrial unions: represent workers in the same industry
  • Credit unions: represent workers with the same skill across different industries
  • Non-manual unions & professional associations: represent workers in non-industrial and professional occupations
• Types of union representation:

  • Closed shop: every employee in the workplace has to be a member of the trade union
  • Open shop: firm can employ unionized and non-unionized workers
  • Single union agreement: an employer agrees to the employees having one single trade union
• Single union advantages (employer):

  • Time saved, only one union to negotiate with
  • Avoids conflicts between different unions
  • Easier to implement changes
  • Reduce industrial disputes
• Types of industrial action:

  • Overtime ban: workers refuse to work more than their normal hours
  • Work to rule: workers slow down production by complying with every rule
  • Go slow: workers slow down the production process
  • Strike: workers refuse to work
• Implications of industrial actions:

  • Business suffer higher losses and lose output, clients can leave and go to rival firms
  • Union members do not receive wages during a strike, some may even lose their jobs
  • Consumers may be unable to obtain goods and services
  • The reputation of an economy might be stained by industrial actions
• Arbitration:

  • A referee settles an agreement between both parties
  • Used to resolve industrial actions
• Advantages of trade union:

  • Workers can negotiate wants and needs with their employer
  • Protect wages and fringe benefits
  • Prevent discrimination and exploitation at work
  • Provide training and education courses
  • Firms maintain and protect skill level of employees
  • Provide a single point of contact for employer and trade union representative
  • Improve labor productivity
  • Governments have a single point of contact to discuss economic issues
  • Reduce inequality in society
  • Economic growth
  • Increase labor mobility in the economy
• Disadvantages of trade union:

  • Workers have to pay for membership
  • More productive workers may be unable to negotiate pay raise individually
  • In closed shop unions, employees have no choice but to join
  • Increased production costs for firms
  • Industrial actions and better working conditions
  • Increased unemployment rates and low demand for labor in the economy
  • Trade unions may contribute to rising wage inflations
  • Industrial actions can result in a stain on the economy’s reputation
• The government as an employer:

  • Creates public sector businesses
  • Public sector businesses need employees
  • People get jobs
• The government as a producer:

  • May own its own factors of production
• The government as a provider:

  • Provides public goods and public services to the people
• The government as a consumer:

  • Spends for the benefit of the people
• The government as a law maker and regulator:

  • Implements and removes restrictions
  • Sets minimum wage, price floors, and price ceilings
• The government as a tax setter and collector:

  • Decides tax rates
• Local, regional, and national government:

  • Division of government roles between different parts of the country
• Macroeconomic aims of the government:

  • Economic growth
  • Low rates of unemployment
  • Balance of international trade and payments
  • Low rate of inflation
  • Reduce income inequality
• Possible conflicts between macroeconomic aims:

  • Low unemployment and low inflation
  • Low unemployment rates lead to more jobs, more money, more purchasing power, more demand, rising prices (inflation)
  • Low unemployment and balance of payments stability lead to high employment, more money, more purchasing power, more imports, balance down the drain
• Fiscal policy:

  • Balanced budget: public expenditure = public revenue
  • Budget surplus: public expenditure < public revenue
  • Budget deficit: public expenditure > public revenue
  • Public sector borrowing requirement: The amount of money a government needs each year to finance any shortfall of public revenues below public expenditure
  • National debt: The total amount of money borrowed by a country’s government over a period of time