Micro EconomicsThe Economic Problem Our wants are unlimited but our resources are limited. This

gives rise to scarcity. Therefore, we have to make decisions. Every time a decision is made, an opportunity cost is involved.

Opportunity Cost The next best alternative forgone when an economic decision is made

Factors of Production The things we need in order to make goods and services to satisfy our wants. There are 4 factors of production:

Land: Natural, non-human resources Payment: Rent

Labour: all human effort whether skilled or unskilled, manual or mental Payment: Wages/Salary

Capital: The human-made resources which help future production Payment: Interest

Entrepreneur: The risk-taker, decision-maker, organiser of production Payment: Interest

Sectors of Production + Demand + Supply + Price (exercise book)

Production Possibility Curve A curve which shows all possible combinations of two measured outputs, which maximises output. (exercise book)

Price Elasticity Of Demand The responsiveness of quantity demanded to changes in price of a good or service.

Measure PED:PED=% change∈quantity demanded% change∈price

If PED > 1 i.e price is elastic If PED < 1 i.e price is inelastic

Tax Compulsory payment to the government. Only the government can impose taxTypes of taxes:

Direct tax: Based on income or wealth (Eg Income tax) Indirect Tax: Based on expenditure (excise duties)

Specific (tax per unit)Ad Valorem: Percentage of price

Effects of Tax on the MarketTax imposed on producers would cause them to increase, hence increase market prices (Supply curve shifts upwards). Reduce disposable income. Consumer demand contracts, especially if the demand is price elastic

Barter The exchange of one good or service for another. The barter system. The barter system was introduced as in ancient

society, not all individuals are self-sufficient. They decided that each person should specialize and that there should be division of labour, and exchanges could be made afterwards. It was introduced before money was invented and had many problems:

Finding someone to swap with: Double coincidence where you can find someone who needs your good and sells what you want was very hard, nearly impossible.

Fixing a rate of exchange: It was hard to express the value of one good in terms of all other goods

Saving: Many goods were non-durable and saving was not possible. Others were hard to store.

Money: Function Money was invented to solve the problems of the barter system. The functions of money are:

Medium of exchange: this solves the problem of finding someone to swap goods with

Measure of value: This solves the problem of fixing a rate of exchange

Store of value: This solves the problem of saving Means of deferred payment: as money remains the

same throughout, deferred payment is made possible Money: Characteristics of a good money

Acceptability: a good money has to be recognize and accepted widely in order to carry out its function properlyDurability: As money is used in trade after trade, it should remain durable or else the value would be lostPortability: Money should be portable so that it is convenient to bring to trades at all timeDivisibility: As goods have different values, money should be divisible to acquire the desired sum.

Banks: Commercial Banks A bank is a financial intermediary that brings together people who want to save money and people who want to borrow moneyHow banks work:

1. People deposit money they make in banks2. Banks use this money to lend people desiring to

borrow3. People and firms buy goods and services with their

loans Back to first step

Role of commercial banks: Safe-keeping of money Lending of money through loans and overdrafts Allowing transfers of money through means of

debit/credit cards and cheques

Banks: Central banks Considered the bank of all banks. All commercial banks have an account at the central bankFunctions of a central bank:

Issues coins and notes for the national currency

Manages payments to and from the government Manages national debts on behalf of the government Supervises the banking system, regulating the conduct

of banks, holding their deposits and transferring between them

Lender the last resort (as interest rate is very high) to prevent banks from running out of money which may lead to bankruptcy

Manages the nation’s gold and foreign currency reserves. When necessary, it can stabilize the national currency.

Manages monetary policies: adjust interest rates to handle inflation

Stock exchange Stock exchange is a business organisation that enables individuals, companies and governments to buy and sell shares on the global stock market.Roles of the stock market:

Brings together buyers and sellers of new and second-hand shares

Provides up to the minute information on the market prices of different stocks and quantities traded

Supervises the conduct of firms of brokers that buy and sell shares on behalf of investors

Labour market The labour market is where employers and workers interact. It brings together the supply of labour (employees) and demand for labour (employers) to determine employer and wage level.

Division of labour Dividing up a job into a number of individual operations

Specialization Where workers concentrate on one task and become expert at that task

Wage differential Differences in wages between different occupations and employees in the same occupations

Circular flow of income (Exercise book)

Macro EconomicsAggregate demand Total demand of all goods and services in an economy

Aggregate Supply Total supply of all goods and services in an economy

Inflation Definition: Inflation is an increase in the general price level of goods and servicesTypes of Inflation

Demand-pull inflation: Increase in aggregate demand due to increase in government/household or firm spending. Banks may issue more notes and coins, hence increase inflation even more as the money -

supply increases, reducing the purchasing power of money (money is more abundant)

Cost-push inflation: when costs of production rises causing producers to increase prices in order to maintain their profit. Wage-price spiral: Workers demand higher wages because they do not feel their current wage level is not compatible with their effort. This leads to price increase. However, they continue to demand higher wages to keep pace with inflation. This keeps going, pushing the cost of production hence the prices higher and higher

Imported inflation: Inflation due to an increase in the price of imports. As the price of imports increase, prices of domestic goods using imports as raw materials also increase, causing an increase in the general prices of all goods and services. Imported inflation may be caused by foreign price increases or depreciation of a country's exchange rate

Effects of Low inflation Low and stable inflation in the economy will keep workers and their representatives from demanding higher wages. It will also make it more appealing to borrow money, as interest rate tend to be low as well hence increase investments and economic growth

Exports in a country with lower rate of inflation will be more competitive than other overseas producers. Demand for these exports will rise and create additional income and job opportunities

Effects of High inflation Inflation decreases the value of money, hence reduce the real income of every person in the economy. This tends to affect workers with little bargaining power.

Savers and investors suffer: the real value is reduced. If interest rates are lower than inflation there will be negative interest rate

Firms and producers of luxury goods suffer as the prices of their products are very elastic: the quantity demanded fall more than proportionately -> Firms may lose business and workers lose their jobs

Reduces the competitiveness of exports against rival producers from other countries on the international market as price rises i.e demand for these exports reduce affecting economic growth

and job opportunities/payments of these industries

Imposes additional costs on firms- Demand-pull: increase firms’ profits as

aggregate demand increases- Cost-push: decrease firms’ profits

Economic uncertainty: people will not know what the value of their money will be and firms will be reluctant to invest, individual consumers will be reluctant to spend

Price Index: Measuring Inflation WHAT? The price of a typical selection of goods and services purchased by a typical family/household in an economy. CPI/RPI is the main measure of price inflation

WHY? It is difficult to acquire up-to-date price of all goods and services exchanged in an economy, therefore making it difficult to measure inflation.

HOW? The price of this typical selection of goods is monitored at a number of different retail outlets across the economy -> Compile CPI/RPI

Unemployment WHAT? People who are members of the labor force who are able and willing to work but cannot get a jobLabor force: the economically active (aged 16-65) excluded of full time students

HOW? (Measure of unemployment)Unemployment level = Total number of people unemployed

Unemployment rate = unemployment levellabour force x 100%

WHY? (See Types of Unemployment Sheet)

Employment terms The conditions that an employer and employee agree upon for a job. Terms of employment include an employee's job responsibilities, work days, hours, breaks, dress code, vacation and sick days and pay. They also include benefits such as health insurance, life insurance and retirement plans. Employees whose skills are in higher demand will have an advantage when negotiating terms of employment.

Economic Growth GDP (Gross Domestic Product): The total value of all output produced in a country

Economic growth (nominal): An increase in GDP Only in nominal terms as the real value might

not increase apparently due to inflation, which means in fact there has been no

economic growth. If nominal GDP increases only because price increases (inflation) then the real GDP stays the same. The economy is no better off

Real economic growth: an increase in REAL GDP(Real GDP measures changes in total output assuming prices are unchanged overtime)

Government Policy: Monetary Involves changes in the money supply and/or interest rates to influence the level of aggregate demand and economic activity

Expansionary: Reduced interest rates encourage borrowing of

money and investments and make saving less attractive -> raise consumer expenditure

Quantitative easing: government buy bonds from the bank to increase the money banks have to lend to the people.

Contractionary: Raising interest rates Cut the money supply

Government Policy: Fiscal Involves varying the overall level of public expenditure and/or taxation in an economy to manage aggregate demand and influence the level of economic activity

Expansionary: Increase public expenditure Cut taxation: -> increase investments in new

productive capacity Boost employment + Output

Contractionary: Decrease public expenditure Increase taxation -> reduce disposable income

Reduce pressure on prices by cutting aggregate demand