Economic notes for exam to study

COSTS (Fixed costs, variable costs etc..)

Fixed costs are indifferent no matter the output (Do not vary with output )
Variable costs change depending on the output (Vary with output)

Total cost = total Fixed cost + total Variable cost

Average cost = Total cost/output
Average “ “= Total “ “/output

Output=Quantity

Average Fixed cost= Total fix cost/Output

Average Variable Cost= Total variable cost/Output

Total revenue = total output* (Average) price per unit

Total Profit = Total revenue- Total cost
*UNIT OF CURRENCY NEEDS TO BE SHOWN

ELASTICITY

Price elasticity of demand = Percentage in change Quantity demanded / Percentage

change in price
(PED)

Price elasticity of supply = Percentage in change Quantity supplied/ Percentage

change in price
(PES)

Income elasticity of demand = Percentage change in Demand / Percentage change in

Income
(YED)

%change in …= New Value-Original Value/Original Value*100

PED ALWAYS RESULT IN negative integer as they are inversely related

Output/GDP per capita(head) = total value/population

DIVISION OF LABOR

Breaking down of the production process into small parts with each worker allocated
to specific tasks

Specialization
Production of a limited range of goods by individuals, firms, regions or countries

Two main subtitle for Division of Labor= Business and Labor

(Page 108)

ECONOMIES OF SCALE

= large firms
= Output (increases) -> Average Cost (decreased)

If the business is too large = Output(increased) which leads to increase in Average

cost, thus it is called diseconomies of scale
INTERNAL ECONOMIES OF SCALE

internal economies of scale are the cost benefit that an individual firm can enjoy
when it grows

Purchasing economies
Large firms that buys lots of resources get cheaper rates(Bulk buying)

Bulk Buying
Buying goods in large quantities, which is usually cheaper than buying in small
quantities

MARKETING ECONOMIES

number of marketing economies exist. It may be cost effective for a large for, to
run its own delivery vehicles. For a large firm, with lots of deliveries to make,
this would be cheaper than paying a distributor, marketing economies can occur
because some marketing costs, such as producing a television advert, are fixed.
These costs can be spread over more unit of output for a larger firm, therefore,
the average cost of the advert is smaller than a large firm.

**ECONOMIES OF SCALE REDUCES AVERAGE COST**

TECHNICAL ECONOMIES

Larger factories are often more efficient

There can be more specialization and more investment
LARGE FIRMS WILL MAKE BETTER USE OF AN ESSENTIAL RESOURCES THAN A SMALLER FIRM

FINANCIAL ECONOMIES OF SCALE

LARGE FIRMS GETS ACCESS TO MONEY MORE CHEAPLY, THEY ALSO HAVE A VARIETY OF
RESOURCES TO CHOOSE FROM, THEY CAN RAISE MONEY BY SELLING SHARES. LARGE FIRMS CAN
PUT PRESSURE ON BANKS WHEN NEGOTIATING PRICE OF LOANS (INTEREST), BANKS ARE OFTEN
HAPPY TO LEND LARGE AMOUNT TO LARGE COMPANIES AT LOWER INTEREST RATE

MANAGERIAL ECONOMIES

Being able to afford lots of specialist mangers increase productivity and

efficiency

RISK BEARING ECONOMIES

A company that has income from diverse business ventures. So, that if they faced
trouble in one service or product, the other ventures will keep the company
running.

EXTERNAL ECONOMIES OF SCALE

External economies of scale cost benefits that all firm in an industry can enjoy
when the industry expands

SKILLED LABOUR
if an industry is concentrated in one area, there may be a build up of labour with
the skills and work experience required bu the industry. As a result Training cost
will be lowered when the workers are recruited. It is also likely that local
schools and colleges will provide vocational courses that are required by local
industry

INFRASTRUCTURE
if a particular industry dominated a region, the roads, railways, ports, buildings
and other facilities will be shaped to suit that industry’s need.

ACCESS TO SUPPLIERS
An established industry in a region will encourage suppliers in that industry to
set up close by.

SIMILAR BUSINESSES IN THE AREA

When firms in the same industry are located close to each other, they are likely to
cooperate with each other, so that they can all gain, for example, they might work
together to share the cost and benefits of a research and development center,

SMALL FIRMS
The vast majority of firms in many countries are small, governments in many
countries have encourages the development of small businesses. Because small
businesses in tertiary sector such as services are effective on small scale.

LARGE FIRMS
The largest firms in the world are multinational companies.

LARGE FIRM ADVANTAGES:

economies of scale, the main advantage of large firms are that their average
costs are likely to be lower than those of smaller rivals.

Market domination:
Large firms can often dominate a market. They have a higher profile in the
public eye than small firms and benefits from such recognition

large-scale contracts:

There are both small firms and large firms in the construction industry , however a
small firm could not compete with a large firm for a contract to build a new
motorway for the government.

Economies of scale
⁃ Average cost (decreased)
⁃ Profit (increased)
⁃ Therefore (increased investment)
⁃ Therefore (more growth)
⁃ Price (Decreased)
⁃ Therefore Gets advantage in competitive market (domestically and
internationally)

Customer benefits from large firms (economies of scale)

⁃ Cheaper prices

Disadvantages of economies of scale for large firms

⁃ Excessive bureaucracy (Takes too long to make executive decisions
because of paperworks)
⁃ Coordinates and control problems, because of huge volume of employees
operating, there may also be a need for more supervision that will raise costs.
⁃ Poor motivation, workers can have trouble seeing meanings in their work
and thus reduced productivity.
ADVANTAGES OF SMALL FIRMS :
⁃ Can adapt to change more quickly (etc, personalized product customer
requested)
⁃ Personal service: (Owner is able to offer services to customer
directly)
⁃ Lower wage cost: (Many workers in small firms do not belong to trade
unions and as a result, their negotiating power concerning wages are weak,
therefore the owner can pay legal minimum wage)
⁃ Better communication: Communication tends to be informal and more rapid
than in larger organizations. The owner will be in close contact wire all staff and
can exchange information quicker and more efficiently. As a result, decision making
will be faster and workers may be better motivated.
⁃ Innovation: Although small firms often lack resources of research and
development, they may be surprisingly innovative. One reason for this is that small
firms face competitive pressure to innovate. For example, if they fail to come up
with new ideas for their products, they may lose market share, it may also be
because small firms are more prepared to take a risk. Perhaps they have less to
lose than large firms .

Disadvantages of small firms:

⁃ cannot exploit economies of scale (higher average cost than large
firms)
⁃ Lack of finance as they struggle to raise finance and their choices of
financial sources are limited. (limited capital) Financial institutions and money
lenders sees small firms as more risky candidate for loans.
⁃ Difficulty in attracting quality staff, as they can’t have any
promotion prospects and their salary range is unsatisfactory compared to large
firms
⁃ Vulnerability: small firms may have difficulty surviving compared to
large firms if trade conditions are challenging. There may be times they are forced
to accept unattractive takeover terms.

Oligopoly - Market dominated by few large firms

Oligopoly characteristics

FEW FIRMS

one of the main features of oligopoly is that the market often contains just a few
firms, there is no exact number but it could be as small as three, four, five, or
six for example.

The difference between oligopoly and monopoly is that there is no competition in

monopoly and a few competition in oligopoly

Aggregate Demand= Consumption+Investment+Government expenditure+Net Export

AD(increased)—-> GDP(Increased)——> economic growth (increased)

GOVT POLICY

1. Fiscal Policy
2. Monetary Policy
3. SupplySide Policy

Fiscal Policy and Monetary Policy are demand-side policy

What does demand side policy do?

It influences demand. (Either decrease or increase demand)

AD(increased)—> Output(increased)—>GDP(increased) —-> Economic Growth(Increased)

Output(increased)—>Demand for Labor aka DL(increased)—>Employment(increased)—->

Unemployment (Decreased)—-> Income(increased)—-> spending(Increased)——>
Demand(increased)—-> Price(increased)—->AD(increased)>AS(decreased)

AD(Increased)——>Inflation(increased)
AD(Decreased)——> Inflation(Decreased)

Fiscal policy Is influenced through government expenditure (G)

And Taxation (T)

Monetary Policy is influenced through 1. Interest rate, 2. Monetary policy

AD(Increased) —-> Expansionary 1.Fiscal Policy ——Government expenditure(increased)

and Tax (Decreased)2. Monetary Policy——Interest rate(decreased)

AD(decreased)—-> Contractionary, 1. Fiscal Policy——-Government expenditure

(decreased) and Tax(increased)
2. Monetary policy——-Interest rate (increased)

SOCIETY

Sometimes unemployment can have an impact on local communities. For example, in

some towns and villages, a large proportion may be employed by the same business.
If this business closes down, local unemployment can be very high indeed. As a
result, the spirit in many of these communities worsen. Such areas become run down,
smaller business start to struggle and fail because their customers are suffering
hardship. Households do not have enough money to maintain their houses and garden
and their residential environment started to look uncared for.

They may also be an impact on the wider society. For example, losing job can be
psychologically hard on workers, individuals may doubt their value and a person.
This can lead to stress within relationships. Unemployed people are less likely to
get married and more likely to get divorced as their lack of work raises stress
levels. Stress can also lead to poorer health. Finally, unemployment can
potentially lead to crime. The unemployed still needs the necessities in life. In
some cases, they may turn to crime to meet their material needs.

Long question - Division of Labor(6 marks), economies of scale, Oligopoly, Fiscal

Policies,

If unemployment is decreased, the consumers have more purchasing power and that
leads to inflation.

If AD is increased, it increased Living Standard

But if aggregate demand is increased, aggregate supply has to increase

If AD(increased) > AS (increased) means they have produced the most effective
possible goods
⁃ shortages —-> goods became overpriced thus leads to inflation
(disadvantage of AD(increased) )
⁃ Environmental damage (Resources depletion)



LABOUR MARKET

(Increased) wages = Demand for LABOUR (decreased)

(Decreased) wages = Demand for LABOUR ( increased)
Inverse relations

⁃ Non wage factors also affect the supply and demands of labor market as
much as Wage rates
⁃ The price of Labour is wage rate (This is the amount of money that has
to be paid to people for them to work for a period of time)
⁃ The demand curve for labor is downward slopes this is because the
demand for labour and wage is inversely related, meaning, increase in wage rate
means fewer demands from firms for workers but higher demands for workers when the
wage rate is low.


NON WAGE FACTORS THAT AFFECTS THE LABOR MARKET

DEMAND FOR THE PRODUCT

⁃ Derived demand = Demand that arises because there is a demand for
another good
⁃ Demand for Lan our is said to be a derived demand, meaning an increase
in demand for goods and services from firms and public sector organizations means
an increase in demand for labour
Availability of Substitutes
⁃ The demand for labour is affected by the cost and availability of
substitutes for labor
⁃ In many organizations, it is possible to replace workers with machines,
if firms believe that Machines are more efficient, it will replace human workers
with machines.
⁃ As technology advances, the opportunity for machines to replace humans
are more likely.
⁃ Note from myself, (Even arts can be generated by AI)
⁃ Big firms will consider automating some tasks with machines to take
advantage of the economies by achieving high volume of their products even if they
spent high amount on fix costs.

Productivity of Labour

Productivity of Labour= Output/Worker per hour

⁃ (increased) productivity of Labour= ( increased) output/ Worker per
hour
⁃ (Increased) productivity of Labour —> (increased) demand for

Other Employment Costs

⁃ Firms needs to pay money to the government for National Insurance

Contribution (NIC) when employing a worker in some countries
⁃ Recruitment and selection cost
⁃ Cost of pensions
⁃ Perks; Company car, private health insurance, free meals,training, sick
pay, maternity and paternity pay, holiday pay, provision of childcare facilities
⁃ Changes in mentioned above points could have an effect on demand curve
for Labour.
Supply Curve of Labor

Supply Curve of Labor is upward slope

Population Size

⁃ ( Increased) population size leads to (increased) supply of LABOUR and

vice versa

Migration
⁃ Birthrate
⁃ Death rate
⁃ Immigration (immigrants moving in the nation)
⁃ Emigration (Citizens moving out of nation)
⁃ All of the points mentioned above affects the Supply of Labor

Age distribution of the Population

— Aging population = The number of people that are over the age of 65 years.
⁃ Dependency Ratio= Dependents (Non Workers)/Working Population
⁃ Developed Countries have lots of Aging population than Less developed
countries
⁃ Less developed countries have more birth rates, which means number of
children/ Dependency Ratio

Retirement age
⁃ (increased) retirement age means (increased) labor supply
⁃ Example in Canada; The Canadian govt announced that it will increase
retirement age from 65 to 67 to get any government benefits but it will only start
to take affect until 2023.
School Leaving age
⁃ (increased) school leaving age ==> (decreased) labor supply
Female Participation
⁃ An increasing number of women have elected to work due to changes in
society
⁃ More favorable equality legislation to work and pursue careers
⁃ Points mentioned above has increased labor supply in the labor market
⁃ NOTE: Increased female participation has caused decreased birth rate in
many Developed countries.
Skills and Qualifications
⁃ supply of labor will increase if people become more employable
(Example, good skills and well qualified labors)
LABOR MOBILITY
⁃ Geographically mobile workers can move easily from one region to
another to find work
⁃ Occupationally mobile workers can switch from one type of job to
another easily
⁃ (Increased) worker mobility —-> (increased) labor supply
⁃ In many countries such as Japan, (increased) transport mode ——>
(improved) Geographical Mobility of Labor
⁃ Points mention above will have labor demand shifts to the right if
(increased) but to the left if (decreased)