Flashcards · 0455 · Topic 3

Microeconomic decision makers flashcards

48 cards on Topic 3, subtopics 3.1 to 3.8. Pick a subtopic or study them all.

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3.1 Money and banking

Money: Anything generally accepted in payment for goods, services and debts.
The four functions of money: Medium of exchange; measure of value (unit of account); store of value; standard for deferred payment.
Why is barter inefficient?: It needs a double coincidence of wants: each trader must have what the other wants at the same time. It also needs many exchange ratios: with n goods, n(n − 1) ÷ 2 ratios, so 7 goods need 21 ratios but only 7 money prices.
Characteristics of good money: Acceptable, durable, portable, divisible, scarce (limited in supply), uniform and secure (hard to copy).
Functions of a central bank: Issues notes and coins; banker to the government; banker to commercial banks; lender of last resort; runs monetary policy (key interest rate, money supply); holds foreign currency reserves; supervises banks.
Functions of a commercial bank: Accepts deposits (current and savings accounts); lends (loans, mortgages, overdrafts); provides payment services (cards, transfers); aims to make a profit.

3.2 Households

Disposable income and saving: Disposable income: income after tax and other deductions. Saving: disposable income not spent.
Saving ratio formula. Disposable income 3,200, saving 400: find the ratio: Saving ratio = saving ÷ disposable income × 100. 400 ÷ 3,200 × 100 = 12.5%.
What happens to household spending, saving and borrowing when the rate of interest rises?: Borrowing costs more, so fewer households borrow and repayments rise. Saving earns more, so some save more. Spending on goods and services falls. The size depends on existing debt and confidence.
How does a rise in income affect household spending and saving?: Spending rises and saving rises; richer households usually save a bigger share of income. Lower-income households save less and may borrow to pay for necessities.
How does confidence affect households?: High confidence about jobs, income and prices: more spending and borrowing, less saving. Low confidence: more saving, less spending and borrowing. Income gives the ability to spend; confidence gives the willingness.
Why do saving and borrowing differ between households?: Differences in income, age and life stage, family size, attitudes to risk, wealth and access to credit.

3.3 Workers

Wage and non-wage factors in the choice of occupation: Wage factors: pay rate, overtime, bonuses, commission. Non-wage factors: job security, hours, working conditions, promotion, training, holidays, pension, interest in the work, location and travel cost.
Derived demand (for labour): Demand for workers that comes from demand for the goods they make.
Labour market: what happens to the wage and employment when demand for the product rises, and when fewer people are qualified for the job?: Product demand rises: labour demand shifts right; wage and employment rise. Fewer qualified people: labour supply shifts left; wage rises, employment falls.
A minimum wage of 14 is set. At 14, labour demanded is 800 and labour supplied is 1,100. Equilibrium wage is 12. What happens?: The floor is above equilibrium, so it binds. A surplus of labour appears: 1,100 − 800 = 300 unemployed. A minimum wage set below equilibrium would have no effect.
Why are skilled workers usually paid more than unskilled workers?: Training lowers the supply of skilled workers; their output is more valuable, so demand for them is high; they often have stronger bargaining power.
Division of labour: one advantage and one disadvantage for workers and for firms: Workers: quicker and more skilled at one task, but boredom and narrow skills. Firms: more output and lower unit costs, but production stops if one group is missing, and morale may fall.

3.4 Trade unions

Trade union: An organisation of workers that aims to protect and improve members' pay and conditions.
Collective bargaining: The union and the employer negotiating pay and conditions for all members together.
Three roles of a trade union: Collective bargaining on wages, hours and conditions; protecting employment (resisting redundancy, pushing for safety); influencing government (minimum wage, employment law).
What makes a trade union strong?: A high share of workers as members; scarce skills; a profitable employer; low unemployment; supportive laws; rising demand for the product; unity among members.
One advantage and one disadvantage of trade unions for firms: Advantage: one partner to negotiate with, and better communication with staff. Disadvantage: higher costs, disruption from strikes, slower change.
Pay rises 5% while prices rise 4%. What is the approximate real pay rise?: Real change = 1.05 ÷ 1.04 − 1 ≈ 0.96%, so just under 1%. A nominal rise is not the same as a real rise.

3.5 Firms

Three ways of classifying firms: By sector: primary (raw materials), secondary (manufacturing, construction), tertiary (services). By ownership: private sector or public sector. By relative size: measured by employees, turnover, capital employed, output or market share.
Why do small firms survive?: Small or local markets; customers want personal or craft products; little scope for economies of scale; the owner prefers control; niche markets or supplier roles.
Internal vs external growth of a firm: Internal (organic): selling more, opening branches, launching products; slower but lower risk. External: merger or takeover; faster but higher risk.
Horizontal, vertical and conglomerate mergers: Horizontal: same industry, same stage of production. Vertical: same industry, different stage (backward towards suppliers, forward towards customers). Conglomerate: unrelated industries; spreads risk.
Economies vs diseconomies of scale: Economies of scale: average cost falls as output rises. Diseconomies of scale: average cost rises as output rises. Average cost = total cost ÷ output.
Name four internal economies of scale and two internal diseconomies: Economies: technical, purchasing (bulk buying), financial (cheaper loans), managerial, marketing, risk-bearing. Diseconomies: poor communication, slow decisions, low motivation, coordination problems.

3.6 Firms' production

Derived demand (for a factor of production): Demand for a factor that comes from demand for the product it helps to make.
Four influences on a firm's demand for factors of production: Demand for the product; the prices of different factors (firms shift towards the cheaper one); availability of the factor; productivity of the factor.
Labour-intensive vs capital-intensive production: Labour-intensive: uses a lot of labour compared with capital (personal services, craft goods). Capital-intensive: uses a lot of machinery and equipment compared with labour (standard goods in large quantities).
Why might a firm choose capital-intensive production?: Labour is dear; demand is large and steady; speed or exact repeatability is needed; finance is available. It has high fixed cost but low cost per extra unit, so it wins at high output and loses at low output.
Production vs productivity: Production: total output of goods and services. Productivity: output per unit of input, such as output per worker. Production can rise while productivity falls.
A factory makes 3,600 units with 30 workers, then 4,000 units with 25 workers. Find the change in productivity: Before: 3,600 ÷ 30 = 120 per worker. After: 4,000 ÷ 25 = 160 per worker. Change = (160 − 120) ÷ 120 × 100 = +33.3%.

3.7 Firms' costs, revenue and objectives

Fixed cost vs variable cost: Fixed cost (FC): stays the same whatever the output (rent, insurance). Variable cost (VC): changes with output (raw materials, packaging, power for machines).
Formulae for total cost, average total cost, average fixed cost and average variable cost: TC = FC + VC. ATC = TC ÷ output (= AFC + AVC). AFC = FC ÷ output. AVC = VC ÷ output.
FC 1,200, VC 2,400 at an output of 600. Price is 7.50. Find TC, ATC and profit: TC = 1,200 + 2,400 = 3,600. ATC = 3,600 ÷ 600 = 6 per unit (AFC 2 + AVC 4). TR = 7.50 × 600 = 4,500. Profit = 4,500 − 3,600 = 900.
Describe the shapes of the AFC, AVC and ATC curves: AFC slopes down and never touches the axis (the same FC spread over more units). AVC is U-shaped. ATC is U-shaped and above AVC; the gap between them is AFC, so it narrows as output rises.
Total revenue, average revenue and profit: TR = price × quantity sold. AR = TR ÷ quantity sold (equal to the price if all units sell at one price). Profit = TR − TC. Revenue is not profit.
Four objectives of firms: Survival (new or struggling firms); profit maximisation (largest TR − TC); growth (accept lower profit now to become larger); social welfare (charities, social enterprises, state-owned firms).

3.8 Market structure

Competitive market: A market with a high number of firms selling similar products.
Monopoly: A market with one firm, or one firm with a very large share, protected by barriers to entry.
Effect of a high number of firms on price, quality, choice and profit: Price: lower, because firms compete and customers can switch. Quality: higher or well maintained. Choice: wider. Profit: lower, because competition holds prices down and high profit draws in new firms.
Characteristics of a monopoly: One firm or a very large market share; barriers to entry (high start-up cost, patents, legal protection, control of resources); few or no close substitutes; price-setting power; potential for long-lasting high profit.
Two advantages and two disadvantages of monopoly: Advantages: economies of scale lower unit cost; profit can fund research and development; a natural monopoly avoids duplicate networks. Disadvantages: higher price and lower output; less choice; less pressure to improve quality or cut costs.
A firm sells 4,200 units in a market of 6,000. Find its market share: Market share = firm sales ÷ market sales × 100 = 4,200 ÷ 6,000 × 100 = 70%.