3 Microeconomic and decision makers - study guide

3.1 Money and banking

Specialization – the process of concentrating on and becoming expert in a particular skill

Division of labour – assigning different parts of a process or task to different people

Barter – exchanging one good or service for another

Problems of barter

1. Fixing a rate of exchange

2. Finding someone to swap with
- in need of double coincidence of wants
3. Trying to save

The functions of money

1. Money is a medium of exchange

- generally acceptable in exchange for all other goods
2. Money is a unit of account
- measures and compares the value of different goods and services, and expresses their prices
3. Money is a store of value
- has value over time unless inflation occurs for that currency
4. Money is a means of deferred payment

Forms money can take: cash, financial assets (bank deposits, stocks, shares), physical assets

Velocity of circulation of money – the number of times money is exchanged or passed from one holder
to another in any given period

Money supply of an economy –

Banks

1. Commercial banks (high-street banks or clearing banks)

- mainly transfer funds on behalf of their customers through clearing (moving money from
acc to acc with issued instructions)
2. Central banks
- main function is to maintain the stability of the national currency and the money supply
3.2 Households

Disposable income – income left after income-related taxes and charges have been deducted

Consumer expenditure – amount spent on goods and services

Effects on consumer spending

1. Wealth
2. Consumer confidence
3. Interest rates

Propensity to consume – proportion of disposable income spent on goods and services

Effects on saving and borrowing

1. Interest rates
2. Wealth
3. Consumer confidence
4. Availability of saving schemes / ways of borrowing

Dissaving – withdraw or spend from savings

Default – situation where consumer fai\ls to meet loan repayments on time

Collateral – security against a loan, such as a valuable asset

Payments for labour

- Time rate
- Piece rate
- Fixed annual salary
- Performance-related payments

Perks/ Fringe benefits – extra benefits with monetary value, such as use of company car

Net advantages – all the wage and non-wage factors that affect the attractiveness of a job

Effects on the demand for labour

 - Consumer demand for products --> expand or reduce output
- Productivity of labour
- Price and poductivity of capital
- Wage and non-wage employment costs

Effects on the supply of labour

- Net advantages of a job

- Quality of education and training
- Demographic changes