Economics (Key Terms)
Public goods: goods that can be used by the general public, from which they will benefit.
Their consumption can’t be measured, and thus cannot be charged a price for (this is why a
market economy doesn’t produce them). Examples include street lights and roads.
Merit goods: goods which create a positive effect on the society and ought to be consumed
more. Examples include schools and hospitals. The opposite is called demerit goods which
include alcohol and cigarettes.
External costs (negative externalities) are the negative impacts on society (third-parties)
due to production or consumption of goods and services. Example: the pollution from a
factory.
External benefits (positive externalities) are the positive impacts on society due to
production or consumption of goods and services. Example: better roads in a
neighbourhood due to the opening of a new business.
Private costs are the costs to the producer and consumer due to production and
consumption respectively. Example: the cost of production.
Private benefits are the benefits to the producer or consumer due to production and
consumption respectively. Example: the better immunity received by a consumer when he
receives a vaccine.
Consumption- The buying of goods and services is called Consumption, money spent on it is
called Consumer Expenditure
ECONOMICS (Factors)
Demand:
1) Taxes on Income / Real Income (If Income Increases, so does demand)
2) Price of substitutes
3) Price of Compliments
4) Change in consumer taste and fashion
5) Degree of Advertising
6) Change in Population
Supply:
1) Change in Cost of Production
2) Technological Change
3) Change in availability of raw resources
4) Weather / Natural Disasters
5) Profitability of Other Products
Price Elasticity of Demand:
1) Proportion of Income
2) Luxury/Necessity
3) Addictiveness
4) Time Period (Consumer less responsive to short-term changes)
5) Substitutes
Price Elasticity of Supply:
1) Time Period
2) Ability to Store Goods
3) Spare Capacity
4) Mobility of Factors
Market Failure:
1) Overproduction of De-merit goods
2) Underproduction of merit goods
3) Under-production of public goods
4) Abuse of monopoly power
5) Factor Immobility
6) External Costs and Benefits
Ways to Correct Faliure:
1) Legislation (Max and Min Prices)- Price Ceilings
2) Direct provision of merit and public goods
3) Taxation of de-merit goods
4) Subsidies
5) Tradable Permits
6) Extension of Property Rights
7) International Co-operation
Drawbacks of Government Intervention:
1) Political Incentives
2) Lack of Incentives
3) Time Lags and Information Failure
4) Welfare effects of policies
Functions of Money:
1) Act as a medium of exchange
2) Store of Value - It holds its value for a long time, allowing us to save it for future
purposes.
3) Measure of Value- Money acts as a unit of account, allowing us to compare and state
the worth of different goods and services.
4) Money is a means of deferred payment. Deferred payments are purchases on credit
– where the consumer can pay later for the goods or service they buy.
Banking
Banks are financial institutions that act as an intermediary between borrowers and savers. It
is the money we save at banks that is lent out as loans to other individuals and businesses.
Functions of the Central Bank-
1) Act as a banker to the government
2) Act as a banker to other banks- Lender of last resort
3) Monetary Policies (How a country’s central bank controls the money supply and interest
rates to influence the economy)
4) Issue notes and coins of the national currency
5) Manges the country’s gold and foreign currency reserves
6) Supervises and Controls other banks in the economies
Functions of a Commercial Bank-
1) Accept deposits in form of savings
2) Give loans to private individuals and businesses
3) Act as a mediator between transactions
4) Provide Insurance
5) Provide Financial Planning Advice
6) Exchange foreign currencies
7) Facilitate transactions in forward and equity markets
Factors affecting Saving-
1) Interest Rates
2) Disposable Income (Income after tax has been paid and welfare benefits have been
considered)
3) Confidence in country’s economy (If someone’s not confident about job security,
they will save more)
4) Availability of Saving Schemes
5) Saving for Consumption (People save more if they want to buy something later)
Factors affecting borrowing-
1) Interest Rates
2) Wealth (Have more collateral)
3) Consumer Confidence (If people think inflation will affect prices soon, they borrow to
buy more stuff)
4) Ways of borrowing (More options = better for consumer)
Factors affecting consumption-
1) Disposable Income
2) Wealth (Asset consideration)
3) Interest rates
4) Consumer Confidence
Wage Factors-
1) Salaries- Fixed Payments made monthly/yearly to employees
2) Wages- Payments made on hourly/daily basis to employees for their labour.
3) Commission
4) Performance based pay
5) Piece-rate pay
6) Bonus
Non-Wage Factors for Employees-
1) Fringe Benefits
2) Job security
3) Satisfaction
4) Working Conditions
5) Fringe Benefits
6) Working Hours
7) Holiday Entitlements
8) Promotion Perspectives
9) Pension Entitlements
Factors causing shifts in Labor Demand curve-
1) Change in the demand for goods/services
2) Non-Wage Employment Cost (Governmental Factors)
3) Ability to Replace Workers with Technology
4) Productivity of Labour
5) Changes in the Cost of Other Inputs (COP price rises, they may cut back on labours)
6) Economic Conditions (Lesser employment if economy in recession)
Factors causing shift in Labor Supply curve-
1) Change in Wage Rates
2) Change in Government Policies (Working Conditions, and Laws for Employees
(Provide more lunch break time))
3) Change in Education and Skills Required
4) Change in Migration Laws (More Migration => More Employees)
5) Cultural and Social Factors (attitude towards women working, about certain
occupations)
6) Demographic Changes (More young people if birth rate increases)
7) Income Tax Levels
8) Wages in other occupations (Economics professional will incline towards priv. sector
rather than becoming a teacher)
9) Trade Union Power
10) Level of welfare benefits- the higher the welfare benefits, lower the incentive for
low-skilled labors to offer their work. (and vice-versa)
Factors affecting the difference in Wage- Why do different jobs have different wages?
1) Different abilities and qualifications ( More qualification needed => More pay)
2) Working Hours/Unsociable hours (More the working hours, more the pay. If hours
are unsociable, paid more too)
3) Risk Factor Involved while doing the job
4) Fringe Benefits (Jobs with more fringe benefits may have lower pay)
5) Lack of Information (People have lower pay because they aren’t aware of the higher-
paying opportunities)
6) Labour Immobility (People who are less mobile can’t move to higher paying
occupations)
7) Presence of a Trade Union
8) Supply and Demand of those difference Job niches
Why do wages differ between people doing the same job?
1) Racism and Sexism (Discrimination)
2) Regional differences in supply and demand for the job (where more demand less
supply, their wages would be more. In place of less demand more supply, their
wages would be less.)
3) Skill Level and Performance
4) Trade Unions (Those in the union may get higher pay, while those not may get a
lower pay)
5) Fringe Benifits
6) Length of Service (The more time they’ve been serving the company, perhaps pay
would be more)
Other Differentials
1) Public-Private Sector paygap: Private sectors may pay more, but the lower wages in
public will be compensated by job security and pension prospectives
2) Economic Sectors: Those working in primary sector are paid less than those working
in other sectors
3) Skilled and Unskilled workers
4) Gender Pay Gap: Women tend to go for low skills jobs, and because they spend most
of their time handling households, they have low career progression
5) International wage differential- Developed countries pay more than undeveloped
ones.
Specialisation- The process in which workers, or firms focus on providing a specific niche
of services/products in which they have an advantage – A cardiologist only treats the
heart, and in not involved in general medicine
Division of Labor- The process in which the production process is broken down into
simpler tasks, with each worker focusing on 1 task. - In a car factory, one worker
assembles the engine, another installs the seats, and another paints the car.
Advantages of Division of Labor (For Workers)-
1) Become Skilled
2) Better Job Opportunities (In the same field)
3) Lower Training Costs
Disadvantages of Division of Labor (For Workers)-
1) Immobility
2) Monotony (Repetitiveness of the task may make it boring)
3) Risk of Unemployment (Since they’re immobile)
Advantages of Division of Labor (For Firms)-
1) Increased Productivity
2) Increased Quality
3) Low Costs
4) Faster
5) Increased Profits
6) Aids a streamlined process.
