Microeconomic Decision makers

• Why do we need money?

  To support specialisation and exchange. Specialisation is the product of division of labour
• Exchanging goods or services for another is called Bartering
• Problems of Bartering

  • Fixing a rate of exchange
  • Finding Someone to swap with
  • Trying to save
• Functions of Money: A medium of exchange, a unit of account, a store of value and a means of deferred payment.
• Money must be:

  • Acceptable
  • Durable
  • Portable
  • Divisible
  • Scarce
• Money encourages specialisation by making trade easier. This allows an economy to increase its national output and income and let people live a higher quality of living.
• Financial assets are non-physical assets such as bank deposits, shares, bonds and other financial claims that have value
• Liquid assets are financial assets which can be converted into cash easily. An example of a liquid asset is bank deposits.
• Physical assets are physical products, such as commercial or residential properties that have value and therefore contribute to wealth.
• Inflation is a general increase in prices and the fall in the purchasing value of money
• interest rate is a proportion of a loan that borrowers pay lenders
• Monetary policies are a set of actions to control a nation’s overall money supply and achieve economic growth
• A debt is a sum of money that is owed
• Loans are a sum of money that an individual or company borrows from a lender, usually a bank
• A bond is a form of loan where an investor lends money to a company or government and they agree to pay them back on a specific date
• Some assets fufill the functions of money better than others. For example, cash is a good medium of exchange but antiques are not
• Some assets can be converted into cash more easily than others. For example, savings can be converted into cash quicker than a house
• Some assets retain their value on conversion to cash better than others. Money in savings accounts hold their value because banks reward those who save with them with periodic payments or interest, whereas cars lose their value over time
• The velocity of circulation is the number of times money is exchanged in a given period of time
• If the velocity of circulation increases, it means that total spending and economic activity is rising
• Financial institutions are business organisations that specialise in lending money, trade and exchanging money
• Banks are financial institutions which accept deposits from savers and make loans to borrowers
• Banks attract deposits by paying customers interest on their money
• Interest rate represents the cost of borrowing money
• Banks make money by charging fees for financial services, interest on loans and making investments
• A bank may charge fees for

  ATM withdrawals, exchanging/transferring foreign currencies, storing valuables, providing property or travel insurance, issuing debit or credit cards
• A bank can use money deposited by customers to invest in the shares of other businesses. If the shares increase in value, the bank will make profit
• There are 5 types of banks.

  Commercial banks

  Credit unions

  Mutual Societies

  Investment Banks

  Islamic Banks
• A commercial bank is a financial institution that accepts deposits, offers checking account services, makes loans, and offers basic financial products like savings accounts
• A credit union is a cooperative organisation, created by the members and for the members to help with low cost loans for members who live on low income
• Mutual Socities specialised in providing mortgages to buy property
• Investment banks help large businesses raise finance to fund their operations and expand their business by helping them issue stocks
• An Islamic Bank provides banking facilities which conform to Sharia Law. They do not charge interest but instead can earn profit by the fees it charges its customers for services
• The role of the central bank is

  • it issues notes and coins for the nations currency
  • It manages payments to and from the government
  • it manages national debt
  • it supervises the banking system, holding deposits and transferring funds of banks
  • it is the lender of last resorts
  • It manages the nation‘s gold reserves
  • It operates the nation’s monetary policies
• disposable income is the amount of money people have left after income related taxes have been deducted
• A rise in income taxes will reduce disposable income.
• The more disposable income a person has, the greater their potential consumer expenditure
• increasing prices will reduce the purchasing power of disposable income
• Utility is the total satisfaction or benefit derived from consuming a product or service
• patterns of consumer expenditure are different even with similar incomes, because everyone's tastes are different