economics standard grade revision notes
DESCRIPTION
ECONOMIC FACTORSTRANSCRIPT
Factors of Production
Economics Standard Grade Revision Notes
Economics
Standard Grade Revision Notes
TopicPage
1Economic Systems ..3
2Production ...7
3Consumption ...15
4Market Mechanisms ...17
5Money, Finance and Banking 25
6International Trade 28
7Public Finance 33
8Economic Growth ..37
9Inflation ...39
10Regional Disparities ...41
11Unemployment 42
Economic Systems
What is Economics?
Economics is study of how peoples wants and needs are satisfied.What is the difference between a want and a need?
Wantsomething people like but can live withoutNeedsomething people will require in order to survive
Give an example of a want and a needWantcomputer, fashion items, cars
Needclothes, shelter, food, water
What is an Economy?
An economy is the part of society involved in
MakingorDistributingorConsumingGoods and Services
producing
transportingusing up
Defining a Good or a ServiceGood Item that can be seen eg food, clothes
Service Help/assistance to improve life eg education, transport, lighting
Scarcity, Choice and Opportunity CostChoices have to be made in every economy as factors of production are scarce.
Society has to choose what to produce, for whom and how it should be produced.
When a choice is made between two goods, the opportunity cost of the good chosen, is the good that is now done without.What does scarce mean?
Resources are scarce if there are not enough of them to satisfy everyones wants so a charge is made for them
What is a Free Good?
Good that is not scarce and a charge is not made for it eg water, air, sunlight
What are the Factors of Production?
These are the scarce resources used to make goods/services
LandNaturalProvided by nature eg fields, minerals, the sea, trees
LabourHumanWorkersTrainingExample
Skilledtrained long termengineer
Semi-skilledshort term trainedhairdresser
Unskilleduntrained
labourer
CapitalMan-madeEquipment, machinery, transport system
EntrepreneurHumanPerson who puts the Land, Labour and Capital together in the hope of making a profit.
Economic Systems - Mixed EconomyThese differ according to the way resources are allocated by answering the following questions
What to produce?
How to produce?
For whom to produce?
What is a Mixed Economy?
Government makes some decisions; consumers/producers make the rest.
Advantages of Mixed Economy
essential services education, police, medicine provided
consumer choice available
producer profits an incentive to go into business
Disadvantages of Mixed Economy
some resources go to unallocated eg unemployment,
differences between rich and poor people,
limits to provision of government resources
Other Economic Systems in the world
Market economy = Free market system
Examples - America, Japan
Planned economy = communist system
Examples - Cuba, North Korea
How does the private sector allocate resources?
It follows the Price Mechanism:Market conditionEffect on profitsAction by Supplier
Good selling wellIncreasing
Raise priceProduce more
Good not selling well due to higher priceDecreasingLower priceProduce less
How does the public sector allocate resources and output?The Government makes decisions as to which merit goods to provide. A merit good is provided by the government as it is judged to be good for people regardless of their desire for it or ability to pay for it. It would be under-provided in a Free Market system.
education
health
The government will be limited by budgetary considerations ie the amount of tax revenue it can or wants to bring in but it will also provide some public goods. A public good is one that would not be provided in a free market system and which is free for all to use regardless of whether they have paid for it or not. It would not be provided at all in a Free Market system eg
street and traffic lighting police
What is Production?
Creation of goods and services to satisfy wants.
Difference between Goods and ServicesGood is an item that can be seen eg food, clothes and which satisfies a want
Service is help/assistance to improve life eg education, transport, lighting
Definitions of Consumer Goods and Capital Goods
Consumer goods give pleasure or satisfy wants.
They can be durable (long lasting) or non-durable (single-use). Consumer services are non-durable.
Capital (Producer) Goods help to produce other goods and services eg a machine is a capital good.
Free Good one you do not have to pay for eg air
Scarce good one you do have to pay for
Merit Good one seen by government as desirable but which would be too expensive for most people if provided by free market.
Public Good - is one that would not be provided in a free market system and which is free for all to use regardless of whether they have paid for it or not
Private Good Made for profit and cannot be consumed or used by those who have not paid for it.
Resources used in Production
What are the Factors of Production?
These are the scarce resources used to make goods/services
LandNaturalProvided by nature eg fields, minerals, the sea, trees
LabourHumanWorkers:
Skilledtrained long termengineer
Semi-skilledshort term trainedhairdresser
Unskilleduntrained
labourer
CapitalMan-madeEquipment, machinery, transport system
EntrepreneurHumanPerson who puts the Land, Labour and Capital together in the hope of making a profit.
How Mobile are Factors of Production?
The most mobile factors are the human ones and there are 2 types of mobility:
Geographical. People are willing and able to move between regions or areas in order to take a new job. They often have to move home. Reasons why individuals may not be geographically mobile:
Cost and upheaval of moving
House prices in other areas are too dear
Children settled at schools
Occupational. People are willing and able to move between types of jobs or occupations e.g. an unemployed coal miner becomes a salesman.
Reasons why individuals are not occupationally mobile:
An unemployed miner doesnt necessarily have the skills to use computers Lack of confidence Cant be bothered
Lack of education
Lack of trainingThe Chain of Production (Types of Industry)
PrimarySecondaryTertiary
Extracting raw materialsManufacturing goods for sale using raw materialsServices
Coal miningCar manufctureSelling cars
Changes in UK production between 3 sectors
De-industrialisation refers to the change in the balance of the UK economy between the output of different types of industry. In the UK and other advanced economies there is now less primary industry and more tertiary industry.
The UK has experienced the loss or decline of a number of established secondary industries e.g. shipbuilding, mining. These have been replaced by a growth in the tertiary service sector e.g. leisure facilities, retail. People generally have more time and disposable income to spend on these options.
Costs and RevenueCosts of Production and Profit
Production can only be sustained if a profit is made. To calculate profitability information on costs is collected in a schedule and then plotted on a graphCost Schedule for firm producing ornaments
OutputFixed CostsVariable CostsTotal
Costs
050050
105050100
205095145
3050135185
4050200250
50 50270320
Fixed Costs. Expenses to be paid no matter how many goods made eg insurance. They are identified by a horizontal line across the graph (eg at 50)
Variable Costs. Expenses which vary according to number of goods produced eg raw material. They start at 0 and increase to right as output increases.
Total Costs. Fixed and Variable costs added together. The total cost curve starts at the level of fixed costs and increases to the right as output increases
Average Costs. Total Costs divided by number of goods produced
Revenue. Amount of money received from selling goods
Total Revenue. Selling price multiplied by number of goods sold. The Total Revenue curve increases to the right as output is sold.
Average Revenue. Total Revenue divided by number of goods sold
Breakeven Point. Where Total Revenue equals Total Costs. It is where the Total Revenue curve crosses (equals) Total Costs curve (eg output of 10)
Profit. Total Revenue less Total Costs. It is any amount of output sold greater than break even point (eg output of 11 or more)
Average Costs
The cost per unit of output. It is equal to total cost divided by output. Average costs fall as output increases until the optimum lowest point. They then start rising again as the output increases above the most efficient level.
Cost Schedule for firm producing toys
OutputFixed
CostsVariable
CostsTotal
CostsAverage
Costs
101020303
201025351.75
301030401.333333
401045551.375
501070801.6
6010951051.75
70101251351.928571
Economies of Scale
The Scale of a business depends on the number of goods and services produced. Large scale is a high level of production e.g. 100 cars a week. Small scale could be 10 cars per week. The benefits gained from producing on a large scale are called economies of scale. They result from average costs falling as production numbers rise.Production Methods and Processes
Specialisation - Division of Labour
The Division of Labour is a system whereby workers concentrate on performing a few tasks and then exchange their production for other goods and services. This is also known as specialisation.
To:AdvantagesDisadvantages
employees Workers become more skilled
May be better paid as their expertise is rewarded
Work may be boring
Workers detached from final production
May eventually be replaced by machinery
employers Costs of production fall
Time is saved
Worthwhile buying machinery
Greater cost of training workers
People depend too much on each other
consumers More goods and services produced
Quality of goods improves
Products are all the same
The Growth of Firms and IndustriesGrowth means that the business is becoming larger. Growth may be an objective for the business in order to keep up with competition
achieve economies of scale and cut costs
get access to wider or newer markets
secure outlets for goods that are already set up by another firm
How do Firms Grow?Internal Growth
This means growing without joining with another business. The firm could
build new premises
take on more employeesExternal Growth
Merger. Two firms join together and have equal ownership.
Takeover. One firm takes over another firm and has the ownership of that business. It is probably against the wishes of the other business.
1 Forward Vertical Integration. A business takes over or merges with a business at the next stage of production
2 Conglomerate Integration. This occurs when a business merges with another that produces a completely different product. 3 Backward Vertical Integration. A business takes over or merges with a business at the previous stage of production 4 Horizontal Integration. Two businesses at the same stage of production merge.
Benefits of Growth
Increased profits
Increased market share
Gain new ideas from the other business
Avoid having to compete with the other business
Gain from economies of scale (page)
The new business may not need all of the workers. They could remove some workers to become efficient and make more profit
Problems of Growth To:EmployeesPossible job losses and job insecurity
Employers
There may be two sets of managers who are unable to agree on the best direction for the company. This could cause many problems.
The businesses may have different objectives and targets
It costs a lot of money to merge with or takeover another business
Consumers
Possibly less choice in the market and possibly higher prices to pay
Why do firms switch production abroad? Wages might be lower
Other governments might give financial incentives
Factory costs might be lower
More suitable pool of labour available
Patterns of Consumption in UK Individuals
In recent years many individuals have experienced an increase in their disposable income (the money they have to spend after tax and essential payments). Many people are also choosing to retire or go part time at an earlier age.Consequently growth areas of consumer expenditure include
Leisure Services e.g. holidays, eating out
Technology e.g. mobile phones, computers
Leisure Goods e.g. TVs, gardening equipment
Age and Consumption
An individuals pattern of consumption depends upon their age
Age of PersonSize of IncomeSpending Habits
Young Small Will spend almost everything on consumer goods
Adult (of working age)
BiggestWill spend some, save some and borrow to spend on
Housing
Food
Children
Heating
Cars
Holidays
Old
SmallWill spend almost everything on
Food
Housing
Heating
Saving and BorrowingWhy do people save?
To buy a good in the future e.g. a car
In case something goes wrong e.g. lose job
To gain interest from the bank To plan for retirementWhere do People save?
Place to saveAdvantagesDisadvantages
BanksCan get cash out quicklyLowest rate of interest
Building SocietiesBetter rate of interestMore difficult to get money out
Credit UnionsHighest rate of interest Have to apply in advance to get money out.
Why do people borrow?
To buy a house
To buy a large expensive item e.g. a car
Because something has gone wrong
To start a business
Where can People borrow Money
Source AdvantagesDisadvantages
BankCan negotiate a set interest rate over timeMust keep paying rate of interest even if interest rates fall.
Building SocietyCan get a mortgage to buy a houseMust keep payments up or will lose the house
Credit UnionWill lend to people who do not have well paid jobsMust have a deposit saved with Union before you can borrow
Credit Card Quick and easy to make purchase
You can buy goods without using your own money Will pay highest rate of interest back on debt
Debt can easily accumulate as credit card companies give generous credit limits so that people will borrow up to them.
What is Demand?
The amount that an individual or individuals are willing to buy at any given price.
Effective Demand. This means that people actually have the money to make the purchases e.g. we could all claim to demand a BMW at 80,000. But, how many of us actually have that amount of money?
Individual demand is demand of one consumer
Market demand is Demand of all consumers added together (aggregate demand). Information on individual demands is collected on a schedule and then drawn up as a graph.
Demand schedule for flowerpots
Price (pence)
Number demanded
14100
12120
10140
8160
6180
4200
The Demand Curve
This shows the relationship between demand and price.
The Law of Demand (the Relationship between Demand and Price)
As the price falls, demand extends (rises) and the point on the demand curve moves down to right
As the price rises, demand contracts (falls) and the point on the demand curve moves up to left
Conditions of Demand (Relationship between Demand and Non-Price Factors)INCREASE IN DEMAND (for reasons other than price)
An increase in demand (possibly due to increased advertising) has forced the price upwards. Suppliers will take advantage of this and sell more goods.
Revenue from Sales
An increase in demand will lead to an increase in revenue as more will be demanded at a higher price. In the graph above the following happened:
PriceQuantity Demanded Revenue (Price x Quantity Demanded)
0.4010040
0.5015075
Due to a good advertising campaign, quantity demanded for the good increased and the price rose by 10p. This small rise in price led to an increase in revenue of 35.00.Conditions of Demand (non-price factors affecting demand)
ConditionChange in ConditionEffect on DemandDemand curve shifts:
IncomeIncrease +Increase +up to right
Decrease -Decrease -down to left
AdvertisingIncrease +Increase +up to right
Decrease -Decrease -down to left
Tastes and fashion
Increase +Increase +up to right
Decrease -Decrease -down to left
Price of Complementary good
cars/petrolIncrease +Decrease -down to left
Decrease -Increase +up to right
Price of Substitute good
butter/margarineIncrease +Increase +up to right
Decreases -Decrease -down to left
Weather
ice creamHot weather Increase +up to right
Cold weatherDecrease -down to left
Population size
Increase +Increase +up to right
Decrease -Decrease -down to left
What is Supply?
The amount of goods that producers are willing to supply/sell at a given price.
Law of Supply (Relationship between Supply and Price)
As the price rises, supply extends (rises) and the point on the supply curve moves up to right
As the price falls, supply contracts (falls) and the point on the supply curve moves down to left
In short, supply increases as price increases and supply decreases as price decreases. This is because producers are aiming to make profit.
* If the good is sold at a high price they will make more profit.* If it is sold at a low price they will either make very little profit or even a loss
Supply Curve
Information on individual suppliers is collected on a schedule and then drawn up as a graph.
Supply Schedule for Ice Cream cones
Price ()
Number supplied
0.5100
0.75150
1200
1.25250
Supply CurveThis shows the relationship between supply and price
Conditions of Supply (non-price factors affecting supply)
Supply can increase due to other factors. In the example below producer(s) have increased their supply of a good because raw materials are cheaper and they believe that they can make more profit on each good. The supply curve has SHIFTED from S1 to S2.
The table below shows the effects of changes on non-price factors on supply.
Conditions of Supply (non-price factors affecting supply)
ConditionChange in ConditionEffect on SupplyEffect on
profitSupply curve
shifts
Weather
PotatoesDry weatherIncrease +Increase +Out to the right
Wet weatherDecrease -Decrease -In to the left
Costs of Production
WagesIncrease +Decrease -Decrease -In to the left
Decrease -Increase +Increase +Out to the right
Availability of Resources
Milk for ice creamDecrease -Decrease -Decrease -In to
the left
Increase +Increase +Increase +Out to the right
Technical Progress
EquipmentImprovement
Increase +Increase +Out to the right
Deterioration
Decrease -Decrease -In to
the left
Markets
The Equilibrium Price
Suppliers and Consumers determine the price at which a good is sold as seen on this graph
The Price Mechanism
Changes in market price result from changes in supply and demandMarket eventCondition of DemandEffect on
Demand
Effect on
Market PriceEffect on
Supply
Health scare
Change in tasteDecrease -Decrease -contraction
Economy
improves
Increase in IncomeIncrease +Increase +extension
Competitor
cuts pricesSubstitute goodDecrease -Decrease -contraction
Good weather
WeatherIncrease +
Increase +extension
Market EventCondition of SupplyEffect on SupplyEffect on Market PriceEffect on Demand
Bad weatherWeatherDecrease -Increase +contraction
New production techniqueTechnical progressIncrease +Decrease -extension
The Market for Labour
What influences the total amount of labour available to UK firms?
Changes in size of population of working age
Percentage of population actively interested in working
Ability to recruit migrant workers
What do Firms take into account when trying to find labour?
The real wage rate being offered
The wages being offered in alternative jobs
Skills/education required to be able to do the job
Availability of migrant workers
Risk to health doing the job
Ability to offer pensions or career progression
How does a Firm decide how many people to employ?
Wages are a Variable Cost. All firms try to operate at the lowest point on the average cost curve.
If they employ too many people the average costs will stop falling and start rising.
What is the Difference between Wages and Earnings?
Wages are the payment given to a worker by an employer.
Earnings are these wages added to any of the following:
income renting property
interest from savings in the bank
dividends from shares.
What is the Difference between Wages and Take-home Pay?
Take-home pay is less than wages as tax, national insurance and pension contributions are deducted from wages by employers and the rest given as take-home pay to employees.
Why do some jobs pay more than others?
Paid for risk-taking
Working unsocial hours
More qualifications required
More skills required
Some jobs creates more revenue for firm
The Nature of Money
What is money?
It is the legal tender most commonly in use in a country.
Money is used for the following Functions:
1. It can be used as a means of exchange or to buy resources2. It is a measure of value e.g. 1 mars bar = 40p3. It is a store of value e.g. it keeps its value
What are the Characteristics of Good Money?
1. It should be acceptable2. It should be durable and hard-wearing3. It should be portable and easy to carry4. It should be divisible i.e. you can give change5. It must be scarceDifferent forms of payment for goods and services.
Cash is the most acceptable form of payment Cheque (backed up by a cheque card) transfers money out of your bank account to the sellers bank account within a week
Debit Card transfers money out of your bank account to the sellers bank account immediately Credit Card allows you to temporarily borrow from credit card company and pay at the end of the month.
FinanceReasons why firms need to borrow money
To start up
To buy equipment
To expand into new premises
To take-over other companies
Due to an unexpected crisis
The main sources of borrowing for firms
SourceAdvantageDisadvantage
Bank Loan
(short term loan) Can raise a lot of money Can receive the money quite quickly Needs to be repaid
Will have to pay interest as well
Mortgage
(long-term loan e.g. 25 years) Can raise even more money Have 25 years to repay Will have to repay far more than the initial loan A long term commitment
Selling shares Can raise lots of money
Doesnt necessarily have to be repaid Shareholders becoming part owners of the business Shareholders will expect annual dividends
Banking
How to Banks make a Profit?
Lend savers money to borrowers are a higher rate of interest than they offer to the savers.
Invest savers money on the stock market
Apply bank charges to customers accounts for transfers and overdrafts.A Commercial Bank offers Services to its customers
Keep money safely for customers Lend money to customers Help customers make payments (through cheques, cards and money transfers) Give financial advice to businesses and personal customers. Sell insurance and share dealingNature and Purpose of Trade
Why do Countries trade with each Other?
To obtain goods that they cannot produce themselves
To increase choice for their consumers
To obtains goods at a cheaper price than what they can produce themselves
To make more revenues and profits. It an extra place in which to sell their goods
Countries specialise in the production of goods and services at which they are better.
To exploit a comparative or absolute advantage.
What is Absolute Advantage?
Where one producer is better at producing a product than another producer.
What is Comparative Advantage?
Where one country can produce a good at a relatively cheaper cost in terms of other goods than another producer.
In recent years the UK had a comparative advantage in a number of manufacturing industries such as textiles or motorcycles. This was because the UK had lots of natural resources and raw materials, trained workers and lots of relevant machinery.
However, now this advantage has been lost to other areas of the world particularly Asia. They have extremely cheap labour, new technology and low transport costs.
UKs comparative advantage now may well be in
financial services (insurance/banking)
tourism
music
media
Why might a government restrict imports into a country?
Protects UK businesses from extra competition
Helps new UK businesses to develop before they face competition
Helps protect UK jobs
Prevents foreign countries dumping lots of cheap imports into the UK Prevents imports of harmful or desirable goods
Common Trade Barriers
Tariffs or Import Duties. These are taxes on imported goods. They raise the price to customers and make them less attractive
Quotas. These are limits on the quantity of a product that can be imported into a country e.g. 100,000 cars
Regulations. This includes laws and safety guidelines
Problems with Trade Barriers
Protectionism keeps UK firms away from genuine competition. They may become lazy and inefficient
If the UK puts up trade barriers then other countries are likely to retaliate.
Trade barriers increase the cost of trading. For example, a tariff would mean that UK firms and consumers may have to pay more for imports of raw materials or consumer goods
Free Trade
Trade without any trade barriers between countries
Benefits of Free Trade
Forces UK firms to produce quality goods and services as they face much foreign competition
Encourages firms to export and import. Greater choice for consumers and a higher standard of living
What is the European Union?A political and economic union of over 27 member states.What does the European Union do?
Ensures free trade between member countries therefore there are no tariffs or quotas placed on imports
Allows individuals and businesses to move freely between countries.
Encourages safety standards to be the same between each countries
Moves towards similar business laws and rules in each member country
What is the Social Charter?
This is an attempt to have minimum standards for workers in all 27 countries. These include:
Maximum hours to work in an hour
Minimum pay
Holiday rights
Maternity / Paternity leave
Benefits of the EU Single Market
Treats the area as one large trading block almost like an individual country instead of 15 separate countries and this should
Encourage trade
Create jobs
Improve standards of living
Avoids trade barriers between its members
Ensure sound working conditions
Provide a market of 380 million customers for firms to sell to
Recording International Trading Activity
What is an Export?Goods and services sold to foreigners by UK firms. The money received will enter into the UK.Visible Export. Actual goods which are sold to foreigners by UK firms e.g. tables, TVs, vehicles.
Invisible ExportServices which are sold to foreigners by UK firms e.g. banking, insurance, tourism.
. What is an Import?
Goods and services bought by UK residents and firms from foreigners. The money paid will leave the UK and go into the foreign country.
Visible Import. Actual goods bought by UK residents or firms e.g. tables, vehicles
Invisible Import. Services bought by UK residents and firms e.g. banking and tourism.
The Balance of Payments
The purpose of the balance of payments is to record of all UKs financial dealings with foreignersCurrent Account. The part of the balance of payments accounts where the value of exports and imports is recorded.
Why does UK usually have Deficit on its Current Account?
Decline in manufacturing therefore fewer goods to export
Lots of imports of goods from abroad
Cheaper to import
High exchange rate . This makes it more difficult to export but easier to import
Loss of comparative advantage in many goods
A boom in the UK means that consumers and businesses have more money to spend on imports.National and International CurrenciesWhat is an Exchange Rate?The price at which one currency is bought and sold for another e.g.A 1 coin can be sold to buy $1.50 or 134 yen or 1.10 Euros.
Countries which have the Euro as their currency are part of the Eurozone.
Changes in the Value of the
The value of the changes daily against other currencies. It could become stronger or it could become weaker.
Strong Pound. A strong or an increase in the value of the makes it more difficult for exporters to sell their goods abroad as foreigners have to pay more in order to buy our goods. A strong could result in:
AdvantagesDisadvantages
Cheaper holidays abroad for UK citizens
cheaper costs as it is cheaper to import raw materials reduced cost push inflation
Fewer tourists from abroad as it is more expensive to buy in UK
slower economic growth
unemployment (because exports are too dear to sell abroad)
a deficit on the balance of payments (because imports are much cheaper)
Weak Pound. A weak or a fall in the value of the makes it more expensive to import raw materials or other goods from abroad. It may result in
AdvantagesDisadvantages
More foreign tourists able to afford to spend in Britain
Good for UK businesses which compete against foreign imports as people are less likely to import goods from abroad. More expensive for UK person to have a foreign holiday
Bad for businesses who import raw materials
May cause cost push inflation
Government Expenditure
What does the Government spend its Income on?
In a mixed economy the Government makes decisions as to which merit goods to provide.
A merit good is provided by the government as it is judged to be good for people regardless of their desire for it or ability to pay for it eg
education
health
The government will be limited by budgetary considerations ie the amount of tax revenue it can or wants to bring in but it will also provide some public goods. A public good is one that would not be provided in a free market system and which is free for all to use regardless of whether they have paid for it or not eg
street lighting
police
In addition the government makes transfer payments paying:
Adult benefits eg housing, jobseekers allowance
Child benefit
Pensions
What is the difference between capital and current expenditure?
Current expenditure is recurring spending on items that are consumed and only last a limited period of time. They are items that are used up in the process of providing a good or service. In the case of the government, current expenditure would include wages and salaries expenditure on consumables - stationery, bandages and so on.
Capital expenditure is spending on assets. It is the purchase of items that will last and will be used time and time again in the provision of a good or service. In the case of the government, examples would be the building of a new hospital, the purchase of new computer equipment or networks, building new roads
Public Provision of goods, services and transfer payments Arguments:
ForAgainst
Scope for economies of scale and savings due to large purchases The most up to date service could not be provided by government
More investment available as government can choose to concentrate its wealth on key areas The state sector is generally less efficient than private sector as it has got no profit motives.
Good education will increase economic growth The bureaucracy costs are generally high in state sectors.
Government Income
What is Taxation?
Taxation is money paid to the Government by individuals and businesses. This money is usually spent by the Government on essential services such as health or education. Governments collect taxes in order to: collect money to pay for Government expenditure.
influence buying patterns.
help redistribute income between individuals.
manage the economy.
Increasing the level of income tax will help reduce inflation. This is because people pay more tax, have less disposable income and buy fewer goods.
Decreasing the level of income tax will help increase growth and reduce unemployment. This is because people pay less tax, have more disposable income and buy more goods.
Are some Taxes Fairer than Others?
Progressive Tax. A tax where the higher the income of the taxpayer, the larger the percentage of their total income paid in tax. Eg Direct TaxesRegressive Tax. A tax where higher income earners pay a lower percentage of their income in tax compared to low income earners eg Indirect TaxesTypes of Taxes
Direct Tax. A tax placed directly on an individual or business
Income tax - taken out of an individuals wage
Corporation tax - paid by businesses out of their profits
National Insurance taken out of an individuals wage
Indirect Tax. A tax placed on a good or service VAT - this is put onto the price of most goods and services, usually 17.5%
Council tax - paid on the value of an individuals property
Excise duty - extra tax imposed on certain products e.g. petrol, cigarettes and alcohol Prescription charge
Government BudgetingThe budget is an opportunity for government to: alter its spending programme
alter the level and pattern of taxes raise or lower or leave unchanged its need to borrow.Budget Deficit. This is when the government spends more in a year than is raised from tax revenue. It might do this to increase demand for and spending on goods and services and may result in
reduced unemployment
increased inflation.
Budget Surplus. This is when the government raises more in tax revenue than it spends. It may do this to reduce demand and curb consumer spending. It may lead to
lower inflation.
higher unemployment
Government BorrowingWhere income from taxation is not enough to fund a governments budget plans, it can borrow.
How does the Government Borrow?
It can sell
Treasury Bills which it repays within a short time
National Savings certificates
Government Securities
All of which earn interest for the lender.The National Debt
This is the total amount a government owes to
Its own citizens
Lenders from abroad
Sometimes the amount the government owes is so large it has to borrow more just to make the interest payments.
How to we know if the Economy has Grown?This is measured by the yearly change in Gross Domestic Product (GDP). It is usually expressed as a % change. GDP can be measured in 3 different ways.
The total production (output) of all businesses The total incomes and profits in the country The total of all spending by individuals and businesses
How does the Economy Grow?Growth results from anything which allows the country to produce more goods and services eg More business investment
Better productivity
Better machinery
Improved training
Better skills
New technology
New ideas
Increased efficiency
Costs and Benefits of Economic Growth
CostsBenefits
Extra production could cause extra pollution
Exhaustion of non renewable resources like oil
Only the rich may gain the benefits
The poor stay poor and inequality increases
Greater stress on workers to produce more goods More income for society
Should create jobs
Could reduce the number of poor people More goods produced and probably more choice for customers and businesses Higher standard of living
What does Standard of Living Mean?
How well off an individual or nation is at a point in time. We can measure the nations standard of living by its level of GDP.To measure the individuals standard of living we look at: Average Income level
Number of material goods owned by people e.g. cars, TVs, mobiles
Quality of life e.g. stress, congestion, crime rates
Number of holidays per year.
And
Number of patients per doctor
Infant mortality rates
% of the population that can read or write
Average food intake per person
What is Inflation?General increase in level of prices over defined time period eg a year. It is expressed as a percentage. If prices increase by 5%, consumers can buy 5% less goods. Inflation leads to a fall in the buying power of money.What Effect does Inflation have on purchasing power of money?
Makes exports less competitive
Makes imports more attractive
Wages do not buy as many goods as the goods are more expensive
Makes planning difficult
Deters savings
Who Suffers in the Economy when there is Inflation?
All wage earners find their wages buy less and may need to keep asking for pay increases to match price rises. This can cause problems at work If people are on fixed incomes e.g. pensioners or students. They will be worse off because they will be able to buy fewer goods The costs to businesses may increase. They may cutback on production and this may increase employment.
If the prices of UK goods increase too much then people and businesses may start to import more goods from abroad because they are cheaper. Increasing prices make goods more expensive to export this could lead to a fall in exports.
Measuring Inflation
RPI Retail Prices Index
Each month 150,000 prices collected in 180 locations in UK. This basket of goods includes food, household goods, services charges, house prices. Prices are then averaged using weightings and the rate of price changes in then calculated from this.
The CPI Consumer Prices Index is calculated in a similar way but does not include house prices.
What is the difference between real and money price?Inflation erodes the real value of money. If inflation increases by 10% but wages increase by only 5% then the worker can buy 5% less goods than before. In real terms the workers buying power has been reduced.
What are Regional Inequalities or Disparities?
Within the UK there are many different types of regions. Some are quite wealthy others are quite poor in comparison, therefore the standard of living will vary between regions.How are disparities between regions identified?
Availability of social amenities eg leisure centre
Availability and quality of housing
Average income levels of local population
Percentage of population unemployed
Percentage of business premises lying vacant
Condition of infrastructure eg roads
Reasons why some regions are more attractive to businesses than others.
Quality transport links
Cheap land for sale
Skilled workforce available for hire
Good quality premises
Demand for goods
What can governments do to Overcome Disparities
Invest money into struggling areas e.g. roadbuilding project Give grants to businesses who locate in certain area Lower taxes for firms willing to come to the area
Subsidise cheaper rents for firms in these areas
Spend money on improving colleges or training to give workers relevant skills
Invest in leisure/social facilities to reduce crime
What is Unemployment
Any resource - human, natural or manmade - which is not being used in the production of goods and services, is said to be unemployed
Unemployment generally refers to those people able to work who are without a job.
Unemployment increases when aggregate (market demand) falls as less goods are demanded.How is Number of Unemployed Measured?
Those people willing and able to work and are without a job. They must also be eligible to claim benefits and choosing to claim benefits.What Causes Unemployment?
1Recession
A period where economic growth slows down and the level of output may actually decrease and unemployment is likely to increase. During a Recession:
Firms may lose confidence and reduce investment. Businesses cut back on production Some businesses may go bankrupt Consumers spend less money. Individuals may save rather than spend. Individuals may lose their jobs More money is spent by the Govt on unemployment benefits Less money is collected by the Govt in income tax and VAT2Threat from Imports
Imported goods pose a threat to UK employment resulting in:
UK employers have to be more efficient to compete with cheaper goods. They may choose to do this by employing fewer people in order to keep costs down.
UK employers who cannot compete may go out of business UK employers may choose to look for new products or move into different markets
3Lack of Mobility of Labour
There are 2 types of labour mobility:
Occupational means ability to move between professions
Geographical means ability to move between geographical areas
The immobility labour can contribute to unemployment as people may refuse
to retrain to update their skills
to move area when a firm relocates or may not apply for suitable jobs in another area
Problems and Costs of Unemployment to the Individual:
Unemployed WorkerEmployed Workers
Loss of earnings Lack of self esteem Reduced spending power Loss of skills and employabilty May have to pay extra tax to cover increased unemployment benefits Loss of job security they may fear losing their jobs. May have to accept pay cuts to keep their jobs
How can Government reduce Unemployment?
Government can give support to struggling industries in order to try to save jobs e.g. airline industry
Provide more training and education to the unemployed. This could help improve computer skills and communication. These people will become more confident and employable. Make more information available in job centres. Reduce unemployment benefits to make lower wage jobs more attractive
Try to bring the country out of a recession. The Government needs to try to create demand in the economy. It could;
Have projects such as roadbuilding
Cut interest rates to encourage spending
Cut income tax to encourage spending Give grants to businesses to produce goods
1 Economic Systems
1 Economic Systems
1 Economic Systems
1 Economic Systems
2 Production
2 Production
2 Production
2 Production
2 Production
2 Production
2 Production
3 Consumption
3 Consumption
4 Market Mechanisms
Shape of Demand curve
The Demand curve slopes downwards from left to right. As price falls more quantity is demanded and as price rises less is demanded.
4 Market Mechanisms
4 Market Mechanisms
4 Market Mechanisms
Shape of Supply Curve
The Supply curve upwards slopes from right to left. As price rises more quantity is supplied and as price falls less is supplied.
4 Market Mechanisms
Difference between Output and Supply
Output is the amount produced by suppliers. Supply is the amount of goods that producers are willing to supply/sell at a given price. Suppliers may hold back some output in reserve for a time when prices may rise.
4 Market Mechanisms
Equilibrium price and output
Where quantity demanded = quantity supplied
Where demand curve crosses over supply curve
4 Market Mechanisms
EMBED Excel.Chart.8 \s
5 Money, Finance and Banking
5 Money, Finance and Banking
5 Money, Finance and Banking
6 International Trade
6 International Trade
6 International Trade
6 International Trade
6 International Trade
7 Public Finance
7 Public Finance
7 Public Finance
7 Public Finance
8 Economic Growth
8 Economic Growth
9 Inflation
9 Inflation
10 Regional Disparities
11 Unemployment
11 Unemployment
11 Unemployment
4 Market Mechanisms
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There are several ways in which businesses can join, merge or integrate together.
2
_1330933909.xlsChart2
505010070
5095145140
50135185210
50200250280
50270320350
50420
490
Fixed Costs
Variable Costs
Total Costs
Total Revenue
Output
costs
Costs
Sheet1
Demand schedule for flowerpots
Price (pence)Number demanded
14100
12120
10140
8160
6180
4200
Supply Schedule for Ice Cream cones
Price ()Number supplied
0.5100
0.75150
1200
1.25250
Demand and Supply for Beer
Price ()Quantity DemandedQuanitity SuppliedPrice ()
11041
2952
3863
4774
5685
6596
1
2
3
4
5
6
7
8
9
10
05050
105095
2050135
3050200
4050270
5050
1001010
145207.25
185306.1666666667
250406.25
320506.4
Cost Schedule for firm producing toys
OutputFixed CostsVariable CostsTotal CostsAverage Costs
101020303
201025351.75
301030401.3333333333
401045551.375
501070801.6
6010951051.75
70101251351.9285714286
770
140
210
280
350
420
490
0
100
200
300
400
500
Sheet1
0
0
0
0
0
0
Quantitiy demanded
Price (pence)
Demand curve for flowerpots
Sheet2
0
0
0
0
Quantity supplied
Price ()
Supply curve for Ice Cream cones
Sheet3
00
00
00
00
00
00
Demand
Supply
Demand and Supply for Beer
0000
0000
0000
0000
0000
00
0
Fixed Costs
Variable Costs
Total Costs
Total Revenue
Output
costs
Costs
0
0
0
0
0
0
0
Average costs
Output
costs
_1330934100.xlsChart1
3
1.75
1.3333333333
1.375
1.6
1.75
1.9285714286
Average costs
Output
costs
Sheet1
Demand schedule for flowerpots
Price (pence)Number demanded
14100
12120
10140
8160
6180
4200
Supply Schedule for Ice Cream cones
Price ()Number supplied
0.5100
0.75150
1200
1.25250
Demand and Supply for Beer
Price ()Quantity DemandedQuanitity SuppliedPrice ()
11041
2952
3863
4774
5685
6596
1
2
3
4
5
6
7
8
9
10
05050
105095
2050135
3050200
4050270
5050
1001010
145207.25
185306.1666666667
250406.25
320506.4
Cost Schedule for firm producing toys
OutputFixed CostsVariable CostsTotal CostsAverage Costs
101020303
201025351.75
301030401.3333333333
401045551.375
501070801.6
6010951051.75
70101251351.9285714286
0
100
200
300
400
500
Sheet1
0
0
0
0
0
0
Quantitiy demanded
Price (pence)
Demand curve for flowerpots
Sheet2
0
0
0
0
Quantity supplied
Price ()
Supply curve for Ice Cream cones
Sheet3
00
00
00
00
00
00
Demand
Supply
Demand and Supply for Beer
000
000
000
000
000
Fixed Costs
Variable Costs
Total Costs
Output
costs
Costs
0
0
0
0
0
0
0
Average costs
Output
costs
_1049700955.xlsChart5
0.5
0.75
1
1.25
Quantity supplied
Price ()
Supply curve for Ice Cream cones
Sheet1
Demand schedule for flowerpots
Price (pence)Number demanded
14100
12120
10140
8160
6180
4200
Supply Schedule for Ice Cream cones
Price ()Number supplied
0.5100
0.75150
1200
1.25250
Sheet1
Quantitiy demanded
Price (pence)
Demand curve for flowerpots
Sheet2
Quantity supplied
Price ()
Supply curve for Ice Cream cones
Sheet3
_1330761818.xlsChart1
3
1.75
1.3333333333
1.375
1.6
1.75
1.9285714286
Average costs
Output
costs
Sheet1
Demand schedule for flowerpots
Price (pence)Number demanded
14100
12120
10140
8160
6180
4200
Supply Schedule for Ice Cream cones
Price ()Number supplied
0.5100
0.75150
1200
1.25250
Demand and Supply for Beer
Price ()Quantity DemandedQuanitity SuppliedPrice ()
11041
2952
3863
4774
5685
6596
1
2
3
4
5
6
7
8
9
10
05050
105095
2050135
3050200
4050270
5050
1001010
145207.25
185306.1666666667
250406.25
320506.4
Cost Schedule for firm producing toys
OutputFixed CostsVariable CostsTotal CostsAverage Costs
101020303
201025351.75
301030401.3333333333
401045551.375
501070801.6
6010951051.75
70101251351.9285714286
0
100
200
300
400
500
Sheet1
0
0
0
0
0
0
Quantitiy demanded
Price (pence)
Demand curve for flowerpots
Sheet2
0
0
0
0
Quantity supplied
Price ()
Supply curve for Ice Cream cones
Sheet3
00
00
00
00
00
00
Demand
Supply
Demand and Supply for Beer
000
000
000
000
000
Fixed Costs
Variable Costs
Total Costs
Output
costs
Costs
0
0
0
0
0
0
0
Average costs
Output
costs
_1049700693.xlsChart4
14
12
10
8
6
4
Quantitiy demanded
Price (pence)
Demand curve for flowerpots
Sheet1
Demand schedule for flowerpots
Price (pence)Number demanded
14100
12120
10140
8160
6180
4200
Supply Schedule for Ice Cream cones
Price ()Number supplied
0.5100
0.75150
1200
1.25250
Sheet1
Quantitiy demanded
Price (pence)
Demand curve for flowerpots
Sheet2
Quantity supplied
Price ()
Supply curve for Ice Cream cones
Sheet3