Tutor Led Workshop 2

• Factors of Production


  • Land
  • Labour
  • Capital
  • Enterprise
• Physical space required


  • Fields for agriculture
  • Factory for manufacturing
  • Shop for retail
  • Office space
• The workforce


  • Skilled workers
  • Unskilled workers
  • Mixture of skilled and unskilled workers
• Money invested in plant and equipment required

  • Production machinery
  • Computer equipment
• Enterprise


  The 'know how', knowledge or ability to use the other three factors of production
• There are four kinds of inputs in any economic activity. These are used to satisfy the needs of consumers
• Economy types


  • Planned economy
  • Market economy
  • Mixed economy
  • Open economy
• Planned economy


  Economic activity is carried out according to a plan under government control. The workforce is for the collective good of society, not for individual gain.
• Market economy


  Supply and demand allocates resources through the market (consumer goods, labour, money and capital goods). The market clearing price is the price consumers are willing to pay and what suppliers will accept for them.
• Mixed economy


  National priorities taken into account. Government can make more informed decisions regarding investment and the allocation of economic resources. Reduced individual choice, increased bureaucracy.
• Open economy


  Free Trade - an open relationship with outside countries. Few barriers to trade controls or foreign exchange.
• Who controls the factors of production?

  • The Government
  • Privately owned - businesses and individuals
  • The Government and private sector
  • Either the Government or the private sector or a combination
• Objectives


  • Collective good of society
  • Supply and demand allocates resources
  • National priorities taken into account
  • Free Trade
• Advantages


  • Reduced individual choice
  • Increased bureaucracy
  • Provides greater choice
  • Competition drives down prices
  • Increased economic stability - laws protect consumers and financial help can be offered to businesses
• Disadvantages


  • No taxation in a pure market economy
  • Businesses focus on profits, less regard for individuals and the environment
  • Harmful products could be produced if profitable
  • Greater inequality
  • Disposable income reduced by taxation
• Demand Shock - Event that affects demand for goods and services in economy
• Supply Shock - Event that influences production capacity and costs in economy
• Monetary Policy


  Adjusting interest rates (to control inflation) and the money supply to manage fluctuations in economic activity. Monetary policy is often the responsibility of a country's Central Bank.
• Fiscal Policy


  Governments attempt to manage fluctuations in economic activity through taxation and expenditure. These measures are known as stabilisation policies.
• Monetary Policy Examples


  • Decrease the base rate of interest
  • Increase the base rate of interest
  • Inject money into the economy - quantitative easing
• Fiscal Policy Examples


  • Increase the personal tax allowance
  • Increase the rate of VAT
  • Increase spending on the NHS
  • Decrease spending on education
• Interest Rates as a policy tool

  Discouraging spending and reducing level of aggregate spending. Consumers encouraged to save. Mortgage payments rise, leaving less disposable income for homeowners. The higher cost of credit deter borrowing and, hence, spending. The level of corporate investments decline due to higher borrowing costs. The corporate sector may lose confidence in the economy and become pessimistic about future prospects.
• Interest Rates as a policy tool

  Higher interest means greater interest income for savers. Thus, they may increase their spending. Demands for higher wages could arise out of the need to make higher mortgage payments. Higher interest rates attract capital inflows. This would lead to an appreciation in the exchange rate, making imports cheaper and more attractive. This will contribute to the balance of payments deficit. Lower demand could result in higher unemployment and lower tax income for the government. Unemployment benefits may, therefore, increase. Low investment would now mean poor prospects for future economic growth.
• Key Economic Factors


  • Government Fiscal Policy
  • Monetary Policy
  • Inflation
  • Consumer spending
  • Business Investments
  • Foreign trade and foreign exchange rates
• The job of the central bank is to improve general economic welfare by managing and reducing systematic risk.
• Instability in any of the five central bank objectives (low and stable inflation, high and stable real growth, stable financial market and institutions, stable interest rates, stable exchange rate) poses a systematic or economy-wide risk.
• It is probably impossible to achieve all five of the central bank's objectives simultaneously. Tradeoffs must be made.
• Functions of Central Banks

  • Acting as banker to the banking system
  • Acting as banker to the government
  • Managing the National Debt
  • Regulating domestic banking system
  • Acting as lender of last resort
  • Setting the official short-term interest rate
  • Controlling the money supply
  • Issuing notes and coins
  • Holding the nation's gold and currency reserves
  • Providing a depositors' protection scheme for bank deposit
  • Influencing the value of the nation's currency
• Monetary Policy Committee (MPC)


  The MPC's main focus is to meet the inflation target set by the Chancellor each year. The MPC holds monthly meetings, gauging all factors that influences inflation such as exchange rates, rate of economic growth, consumer borrowing and spending, and wage inflation. The MPC makes a decision about whether to raise or lower the 'base rate' of interest based on these factors.
• Financial Policy Committee (FPC)


  Established in June 2011 as a response to the 2007/8 financial crisis. Monitors the stability and resilience of the UK financial system and its powers to tackle risks. It gives direction and recommendations to the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).
• Quantitative Easing (QE)


  The central bank injects money into the economy by buying assets such as government and corporate bonds. This increases the amount of money the government and private sector institutions have, boosting asset prices and liquidity, and encouraging further spending.
• The Federal Reserve (the Fed) is the central banking system of the United States.
• The Federal Open Market Committee (FOMC) promotes price stability and economic growth, meets every 6-weeks to assess the economic health, and decides whether the Fed funds rate should be altered.
• The FOMC Chairman is appointed by the US President and acts as lender of last resort to the US banking system, which can help stop 'Contagion'.
• The European Central Bank (ECB) sets the monetary policy for the Eurozone, with the goal of maintaining internal price stability.
• Members of the Board of Governors

  • 7 members appointed by the US President
  • 5 Presidents from the 12 Federal Reserve Banks
• Federal Open Market Committee (FOMC)


  Promotes price stability and economic growth
• FOMC


  1. Meets every 6-weeks to assess economic health

  2. Decides if the Fed funds rate should be altered

  3. Calls emergency sessions if required
• In 2015, the Fed raised interest rates for the first time since the 2008 Financial Crisis
• FOMC Chairman


  • Appointed by the US President
  • Acts as lender of last resort to US banking system
  • Can help stop 'Contagion'