Micro economic decision Makers (1)

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YOUR NOTES
IGCSE Economics CIE 
3. Microeconomic Decision Makers
CONTENTS
3.1 Money & Banking
3.1.1 Understanding Money
3.1.2 Central & Commercial Banks
3.2 Households
3.2.1 Spending, Saving & Borrowing
3.3. Workers
3.3.1 Factors Affecting Choice of Occupation
3.3.2 Wage Determination
3.3.3 Wage Differentials
3.3.4 Division of Labour & Specialisation
3.4 Trade Unions
3.4.1 Types of Trade Unions
3.4.2 The Role of Trade Unions
3.4.3 Advantages & Disadvantages of Trade Unions
3.5 Firms
3.5.1 Classification of Firms
3.5.2 Small Firms
3.5.3 The Growth of Firms
3.5.4 Economies & Diseconomies of Scale
3.6 Firms & Production
3.6.1 Demand for the Factors of Production
3.6.2 Labour & Capital-intensive Production
3.6.3 Production & Productivity
3.7 Firms’ Costs, Revenue & Objectives
3.7.1 Costs & Revenue
3.7.2 Objectives of Firms
3.8 Market Structure
3.8.1 Competitive Markets
3.8.2 Monopoly Markets
Page 1 of 57
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3.1 Money & Banking YOUR NOTES


3.1.1 Understanding Money
The Meaning of Money

Prior to the creation of money, individuals & firms had to accept other goods or services as
payment, or be self-sufficient by producing everything required
Often lacking self-sufficiency or driven by the desire for a wider range of goods/services,
bartering became the norm but it too had problems
As individuals & firms trade with each other in order to acquire goods or raw materials, they
require a means of exchange that is acceptable & easy to use
Modern currency fulfils this purpose & money functions as a medium of exchange, a
measure of value, a store of value, and a method of deferred payment
Page 2 of 57
The Functions of Money YOUR NOTES

The Four Functions of Money 
A Medium of A Method of Deferred

A Measure of Value A Store of Value
Exchange Payment
Without money, it Money provides a Money holds its Money is an

becomes means of value over time (of acceptable way to
necessary for ascribing value to course inflation arrange terms of
buyers & sellers to different goods means that is not credit (loans) & to
barter (exchange and services always true!) settle any future
goods) Knowing the price This means that debts
Bartering is of a good in terms money can be This allows
problematic as it of money allows saved producers &
requires two both consumers It remains consumers to
people to want and producers to valuable in acquire goods in
each other's make decisions in exchange over the present & pay
goods (double their best interests long periods of for them in the
co-incidence of Without this time future
wants) measure it is
Money easily difficult for buyers
facilitates the & sellers to
exchange of arrange an
goods as no agreeable
double co- exchange
incidence of
wants is
necessary
Page 3 of 57
The Characteristics of Money YOUR NOTES

Many items were used for centuries as a form of money such as gold, silver, shells, beer, 
tobacco
However, each one of these items had some characteristics that made the less than ideal
for exchange in certain circumstances
Good money has a number of essential characteristics - and modern currency fulfils them
all
The six characteristics of good money

1. Divisibility: to be a valued medium of exchange, currency must be divisible. €50 notes
can be exchanged for €10 euro notes or €1 coins
2. Acceptability: the currency must be valued & widely accepted by society as a valid way
to pay for goods/services
3. Durability: the currency must be robust, not easily defaced/destroyed & last for a long
period of time
4. Scarcity: the supply of the currency should be such that is remains desirable & retains its
value in the market. Oversupply would decrease its worth
5. Uniformity: in order to be a valid measure of value each denomination must be exactly the
same e.g. every $50 note must be exactly the same
6. Portability: good currency is easy to carry/conceal
 Exam Tip
MCQ often checks your understanding of this topic. Be careful not to confuse the
functions & characteristics of money.
Page 4 of 57
3.1.2 Central & Commercial Banks YOUR NOTES


The Functions of Central Banks
Central Banks play a vital role in maintaining stability in the financial system. Additionally,
the policy tools at their disposal help to meet Government economic objectives & create
economic growth
Central Banks play four important roles in the economy
1. Implementation of monetary policy: This is more fully explained in Sub-topic 4.4.1
2. Banker to the government: The Government sets the annual budget but it is the Central
Bank that manages the tax receipts & payments. In 2022 there were 5.7 million public
sector workers in the UK who had to be paid by the Central Bank each month
3. Banker to the banks – lender of last resort: Commercial banks are able to borrow from the
Central Bank when they run into short-term liquidity issues. Without this help, they might
go bankrupt leading to instability in the financial system - & a potential loss of savings for
many households
4. Regulation of the banking industry: the high level of asymmetric information in financial
markets requires that commercial banks are regulated in order to protect consumers
Page 5 of 57
The Functions of Commercial Banks YOUR NOTES

Financial markets are any place or system that provide buyers & sellers the means to 
exchange goods/services & trade financial instruments
Financial instruments include loans, bonds, equities, & international currencies
Commercial Banks play a central role in financial markets

1. They facilitate saving: storing money for future use is essential for households & firms. It
also provides a pool of money that financial institutions can lend i.e. one person's savings is
another person's borrowing
2. They lend to businesses & individuals: access to credit is a key requirement for economic
growth & development. Being able to borrow money speeds up consumption by
households & investment by firms. It also allows households or firms to purchase assets &
pay them off over an extended period of time e.g. mortgages on home purchases
3. They facilitate the exchange of goods & services: each purchase of goods/services
requires the movement of money between at least two parties. Commercial Banks provide
multiple ways for this exchange to happen including phone apps (e.g. Google Pay), debit
cards, credit cards & bank transfers
4. They provide forward markets in currencies & commodities: forward markets are also
called futures markets. They provide some price stability in commodity markets & enable
investors to make a profit by speculating on future prices
5. They provide a market for equities: equities are shares in public companies that are listed
on stock exchanges around the world. Commercial Banks facilitate both long term
investment & speculation by providing platforms which connect buyers & sellers
Page 6 of 57
3.2 Households YOUR NOTES


3.2.1 Spending, Saving & Borrowing
The Influences on Spending

Spending in an economy is also called consumption
The level of consumption by households is heavily influenced by income, interest rates &
the level of confidence in the economy
The Influences On Household Spending & Consumption
Changes to Income Changes to Interest Rates Changes to Confidence Levels
Disposable income is the Interest rates are set by The stronger the economy,
money that households the government's Central the higher consumer
have left over from their Bank confidence. Consumers
salary/wages after they Changes to the base rate feel secure in their jobs &
have paid their taxes & cause commercial banks are confident of receiving
have received any to change the lending regular salary payments.
transfer rates they offer customers Therefore consumption
payments/benefits from If interest rates increase increases
the government then the cost of borrowing In a weakening or
Consumption increases increases. Higher recessionary economy,
as disposable income borrowing costs = less consumer confidence
increases & decreases as consumption falls. Consumers feel less
disposable income If interest rates increase, secure in their jobs &
decreases the monthly repayment consumption decreases
on any existing loan
increases. Higher loan
repayments = less
consumption
Page 7 of 57
The Influences on Saving YOUR NOTES

Disposable income can either be saved or spent on goods/services (consumption) 
The Influences On Household Saving
When disposable income Changes to the base rate Households tend to save
increases, the proportion cause commercial banks when they are more
saved depends on the to change the savings fearful of the future
overall income level of the rate they offer customers The stronger the economy,
household An increase in the savings the higher the consumer
Low income households rate offered by confidence & the lower
will spend any additional commercial banks the level of household
income on necessities or a incentivises households saving
few basic luxuries - little to save more The weaker the economy,
additional saving occurs An decrease in the savings the lower the consumer
Medium income rate offered by confidence & the higher
households will increase commercial banks the level of household
both consumption & disincentivises saving
savings households from saving &
High income households encourages consumption
will usually increase their
savings (or asset
purchases) significantly
Page 8 of 57
The Influences on Borrowing YOUR NOTES

Households borrow money from friends, relatives, money lenders & commercial banks 
Commercial banks usually require security in order to extend a loan
The need for security often prevents low income households from accessing bank
loans at competitive rates
The Influences On Household Borrowing
When disposable income If interest rates decrease, When the economy is

increases, household medium & high income booming, confidence is
borrowing often increases households may decide high resulting in more
due to the ability to make to borrow more money borrowing & consumption
additional monthly from commercial banks, When the economy slows
payments as it is now cheaper to down or stagnates,
Low income households repay confidence falls resulting
find it difficult to access There will likely be an in less borrowing &
commercial bank loans & increase in personal loans consumption
if they need to borrow to fund travel, car
money, they face higher purchases & home
interest rate charges (e.g. improvements
payday loans or "buy now, Low income households
pay later" schemes) - or are usually unable to
they turn to money lenders access borrowing from
Medium income commercial banks, even
households will increase when interest rates fall &
borrowing as income rises continue to borrow from
High income households sources that charge high
often receive preferential interest rates
interest rates & obtain
large loans to fund asset
purchases e.g. luxury
properties
 Exam Tip
When evaluating the influences on household spending, saving & borrowing, it is
useful to consider the impact on low, median & high income households. E.g.
While the poor spend less than the rich, they are likely to spend a higher proportion
of their income. They are also less likely to save any additional income as it goes
towards buying more necessity products
Page 9 of 57
3.3. Workers YOUR NOTES


3.3.1 Factors Affecting Choice of Occupation
Wage Factors
The occupational choices of workers are influenced by a range of wage & non-wage
factors, which are often held in balance when making decisions about where to work
Wage factors are financial payments that workers receive for their labour
Non-wage factors incorporate a range of influences that are meaningful to a worker
A Summary of Wage Factors That Influence Occupational Choices
Factor Explanation
Wages An agreed amount of money/hour & is calculated directly from

the number of hours worked
E.g. If a student works in a restaurant for 6 hours, 5 days a week
& she gets paid $10/hour, her weekly wage is $300 (6x5x$10)
Salary Employment contracts often state the agreed annual salary the
employee will receive
This is then divided by 12 & paid monthly (in the USA it is divided
by 24 & paid every 2 weeks)
The hours worked monthly may vary but the pay received is
always the same
Commission Often used as payment to sales people

It is typically a percentage of the value of the transaction
involved e.g. estate agents receive 3-7% of the selling price of
any property they sell
This can motivate employees to maximise sales
Bonus Money paid in addition to a salary & is usually single annual

payment
Often paid when the company earns high levels of profits, or as
a reward for exceptional worker performance
Piece rate pay A fixed amount paid to the employee for each completed item
produced e.g. 25 Rupees paid to workers in India for each pair of
socks they produce
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Performance related pay Payment based on how well the worker performs
YOUR NOTES
(PRP) Workers doing exactly the same job may receive different 
compensation based on different outcomes they achieve
Share options Payment through the issuing of shares in the company the
employee works for
This is usually in addition to a monthly salary
The monetary value of the shares provided to the employee can
be calculated on any given day as: number of shares x share
price
Fringe benefits Benefits provided in addition to the normal salary

They can be significant in influencing occupational choices
Includes benefits such as such as childcare, free lunches, gym
membership, company car
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Non-wage Factors YOUR NOTES

Many different non-wage factors influence a workers choice of occupation 
1. Length of training or level of education required: The longer the time period required to
study/train for a job, the fewer the number of people who seek employment in that
occupation e.g. it usually takes seven years to become a lawyer
2. Job security: Employment contracts in different industries have different time periods
attached to them. Some contracts are one to four years in length, so provide high security
e.g financial sector contracts. Others have a short notice period & the employee can be
dismissed with a very short notice period e.g. 30 days
3. Job satisfaction: Finding fulfilment in a job role & enjoying work is a significant part of
generating job satisfaction. Workers will often change their jobs/careers so as to improve
their job satisfaction
4. Career prospects: Jobs with a defined pathway for promotion (& salary increases) are
often more desirable
5. Level of challenge: Many workers step into an occupation due to the challenge of the role
e.g. firefighters
6. Status: Some jobs carry a higher recognition in society which workers find appealing, for
example doctors, surgeons & lawyers
 Exam Tip
This is a popular topic in Paper 2 structured questions. Questions can range from 2
mark 'define' questions (define wages) to 8 mark 'discuss' questions (Discuss
whether an increase in wages will attract more people to work in a specific industry).
To answer the discuss questions develop a two sided argument:
On the one hand, yes it will attract more workers because...
However, on the other hand it may not because of the non wage factors (explain
them)
If you look at both possibilities, then you have developed a balanced argument.
Page 12 of 57
3.3.2 Wage Determination YOUR NOTES


Factors That Influence The Demand for Labour
The labour market is composed of sellers of labour (households) & buyers of labour
(firms)
Workers supply their labour & firms demand labour
The demand for labour is a derived demand

This means that it depends on the demand for goods/services
If demand for goods/services increases then the demand for labour will increase -
and vice versa
Factors That Influence The Demand for Labour
The price of the product being produced The demand for the final product
If the selling price of the product As demand for labour is a derived

increases, then the firm will be incentivised demand, when an economy is booming
to supply more & the firm's demand for then demand for most goods/services
labour will increase will be high - & the demand for labour will
be high
Conversely, when an economy is in a
recession demand for most
goods/services will be lower - & the
demand for labour will be lower
The ability to substitute capital (machinery)

The productivity of labour
for labour
Firms will constantly evaluate if it will be If the productivity of labour increases

possible & more cost effective to switch (possibly through training) this will lower
production from using labour to capital average costs & firms will likely demand
(machinery) more labour
If it is more cost effective, then demand
for labour will fall
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Factors Influencing the Supply of Labour YOUR NOTES

There are numerous factors that influence the amount of labour supplied to a particular 
industry
Factors Influencing The Supply Of Labour
Training period Wages in other occupations Changes in migration policy
Long training periods (& their Comparative wage rates in Policies that increase the net
cost) act as a barrier to entry & substitute labour markets migration rate increase the
exclude many households strongly influence the supply supply of labour to certain
from offering labour in certain of labour e.g. it is getting harder industries e.g. in 2022, 36% of
markets to recruit economics teachers Singapore's labour force were
as the private sector offers migrants
higher wages for their skills
Income tax levels Working conditions Trade union power
At a certain level, income taxes The working conditions & non- Trade unions can increase the
become a disincentive to wage benefits can act as supply of labour to certain
households offering their strong incentive in certain industries as workers consider
labour. The assumption is that industries e.g. tech companies the benefits of belonging to
as income tax increases, are well known for their laid- the union e.g higher wages & a
labour supply decreases - and back work environment & safer working environment
vice versa wide range of benefits e.g.
on-site childcare & restaurants
Level of welfare benefits Social trends
The higher the level of welfare Social trends include any major
benefits, the lower the changes within society & can
incentive for low-skilled labour influence the supply of labour
to offer their labour - and vice to certain industries e.g. work
versa from home during Covid
resulted in significant changes
to the labour market & not all
workers returned to work when
economies opened up again
Page 14 of 57
Diagrammatic Analysis of the Labour Market YOUR NOTES

The labour market is a type of factor market 
Factor markets follow exactly the same rules as product markets

They are affected by changes to price, demand & supply
They are affected by the price elasticity of demand & supply.
Labour market equilibrium occurs where the demand for labour (DL) is equal to the
supply of labour (SL)
The DL is the demand by firms for workers - firms demand more labour as the wage
rate decreases which results in a downward sloping demand curve
The SL is the supply of labour by workers - workers supply more labour as the wage
rate increases which results in an upward sloping supply curve
Individual firms are price takers in the labour market as they have to accept the wage rate
that workers are being paid in the industry
If they offer a lower wage, they will likely struggle to recruit workers
If they offer a higher wage there will be a large number of workers applying to work
there
In the labour market for graphic designers, the equilibrium wage rate is W and the
equilibrium quantity is Q. At this point the DL = SL
Diagram Analysis
The market for graphic designers is in equilibrium where DL = SL
The equilibrium wage is W and the quantity of labour is Q
There is no excess supply of labour
There is no excess demand for labour
Page 15 of 57
Analysing the PED & PES of Labour YOUR NOTES

Price Inelastic Demand & Supply 
Consider the labour market for NBA basketball players

In 2022, LeBron James received a salary of $45m
Wage determination in highly skilled markets is price inelastic in both supply & demand
Diagram Analysis
DL is the demand for labour from the basketball clubs
SL is the supply of labour by the basketball players
The demand for highly skilled players is very price inelastic
Clubs want the very best players, almost irrespective of what they cost
The supply of highly skilled players is also very price inelastic
A significant increase in price will have little impact on the quantity of labour supplied in
the market as it takes years to develop LeBron James type skills
The market equilibrium is found at W1Q1 - a high price & relatively low quantity
Price Elastic Demand & Supply
Consider the labour market for labourers on a building site
Page 16 of 57
YOUR NOTES

Wage determination in unskilled markets is price elastic in both supply & demand
Diagram Analysis
DL is the demand for labour from the building company for labourers
SL is the supply of labour by people willing to work on a building site
The demand for workers is very price elastic
If wages dropped a little, then firms would respond quickly by employing more
workers
The supply of workers is also very price elastic
Due to it being an unskilled job, there would quickly be an increase in the supply of
labour if wages were to increase
The market equilibrium is found at W1Q1 - a low price & relatively high quantity
Relative Bargaining Power

Workers have different degrees of bargaining power when it comes to negotiating wage
increases with their employers
The following factors influence their bargaining power
1. Membership of a trade union: trade unions represent the interests of the workers in
negotiations with employers & members frequently enjoy higher wages than non-union
members
2. Age & experience: young, inexperienced workers have less bargaining power then older,
more experienced workers. As workers grow older their age often begins to count against
them & this reduces bargaining power
3. Level of education: education provides higher levels of skill & specialisation to a worker.
This increases their bargaining power relative to unskilled workers
4. Current supply conditions: the supply of labour in many industries can change due to
socio-political conditions e.g prior to Brexit, workers in the hotel industry had very little
bargaining power. Brexit created a shortage of labour willing to work in hotels & so the
bargaining power of workers has increased, resulting in higher wages in the industry
Page 17 of 57
Government Policy: Minimum Wages YOUR NOTES

Government's often intervene in the labour market by setting a minimum wage 
They do this in order to improve equity & avoid the exploitation of worker
A minimum wage is a legally imposed wage level that employers must pay their workers
It is set above the market rate
The minimum wage/hour often varies based on age
A national minimum wage (NMW1) is imposed above the market wage rate (We) at W1
Diagram Analysis
The market equilibrium wage & quantity for truck drivers in the UK is seen at WeQe
The government imposes a national minimum wage (NMW) at W1
Incentivised by higher wages, the supply of labour increases from Qe to Qs
Facing higher production costs, the demand for labour by firms decreases from Qe to Qd
This means that at a wage rate of W1 there is excess supply of labour & the potential for
unemployment equal to QdQs
 Exam Tip
When evaluating national minimum wages, do not assume that they will
automatically increase unemployment.
Many studies have shown that unemployment does not increase - and in some
instances employment increases. This is likely due to the fact that workers are
receiving higher wages & choose to consume more. This increases total demand in
the economy which in turn increases the demand for labour by firms - thus
reducing/eliminating any potential unemployment.
Page 18 of 57
3.3.3 Wage Differentials YOUR NOTES


Reasons for Differences in Pay
Workers are paid different amounts (wage differentials) due to a number of factors,
including
Gender pay differences
Industrial sector pay differences
Private & public sector pay differences
Differences in pay between skilled & unskilled workers
Reasons for Wage Differentials Between Men & Women

1. Men usually work full-time whereas women often work part-time in order to meet the
demands of motherhood/childcare
2. Men usually have an uninterrupted career journey whereas women often take time away
from work (motherhood/family) & so miss opportunities for advancement
3. Women are more likely to accept a job below their skill or quantification level if it fits in with
the needs of looking after their children
4. The gender pay gap is a form of discrimination & occurs when a women is paid less than a
man who is doing exactly the same job
Reasons for Wage Differentials in the Primary, Secondary & Tertiary Sectors
Primary sector workers are usually paid low wages due to the unskilled nature of the job &
the fact that raw materials often generate the lowest profits in the production chain
Secondary sector workers add value to the raw materials & these products sell for higher
profits. Therefore wages tend to be higher than primary sector wages
Tertiary sector workers are paid the highest. Their jobs often require highly valued skills that
take years to acquire & the products they sell or services they provide can be complex &
expensive e.g. artificial intelligence coders
Reasons for Wage Differentials Between Private & Public Sector Workers
Public sector organisations are owned & controlled by the Government
Private sector organisations are owned & controlled by private individuals & firms
Reasons for Wage Differentials Between Private & Public Sector Workers
Private Sector Workers Public Sector Workers
Page 19 of 57
Salaries can be extremely high, especially Wages will reach a maximum ceiling that is
YOUR NOTES
if the value of goods or services offered is often below what the private sector may 
high & the workers are productive offer e.g. public school teachers are paid
less than private school teachers
Some salaries can also be very low as
firms seek to cut costs & maximise profits Wages often do not fall as low as some
e.g. garment sector worker in Bangladesh private sector jobs as many public sector
get paid very little for the work they do workers belong to trade unions
Many wage benefits tend to be better Job security is high resulting in long careers
than those provided by the public sector with defined pathways for promotion
e.g. bonuses or share options
Pensions are often very good, but are
limited in comparison to private sector
pensions
Reasons for Wage Differentials Between Skilled & Unskilled Workers
Many economies have a high supply of unskilled labour. This means that employers can
push wages down as there is always someone willing to work for less (take it or leave it
approach to wages)
To become skilled takes time & money which means that there is a more limited supply of
specific skillsets. In recognition of these factors, wages for skilled workers are higher
 Exam Tip
This topic is often examined in Paper 2 structured questions. A favourite approach is
to ask a 'discuss' question which focusses on one area, but requires you to have
knowledge of the other areas in order to fully answer the question.
For example: Discuss whether younger workers are always paid less than older
workers
Often they are because they are less skilled, lack experience etc.
On the other hand, young workers may be highly trained in new technologies
which are driving growth in the tertiary sector & they will be highly paid
Remember to let the infromation in your case study lead the points that you are
making in your argument
Page 20 of 57
3.3.4 Division of Labour & Specialisation YOUR NOTES


An Introduction to The Division of Labour & Specialisation
Based on observations made during a visit to a pin factory, famous economist Adam Smith
developed the ideas of specialisation & the division of labour
He noted that a single worker could not make more than 20 pins a day as it involved
around 18 different processes, such as cutting the wire, sharpening the end, stamping
the head etc.
However, if the labour was divided up into different tasks & workers specialised in
just that one task, Adam Smith estimated that just 10 workers could produce 48,000
pins per day
The division of labour is when a task is broken up into several component tasks
This allows workers to specialise by focusing on one (or a few) of the components that
make up the production process & thereby gain significant skill in doing it
This results in higher output per worker & so increases productivity
Specialisation occurs on several different levels

On an individual level
On a business level. For example, one firm may only specialise in manufacturing drill
bits for concrete work
On a regional level. For example, Silicon Valley has specialised in the tech industry
On a global level as countries seek to trade. E.g. Bangladesh specialises in textiles &
exports them to the world
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Advantages & Disadvantages for Workers, Firms & The Economy YOUR NOTES
Pros & Cons of the Division of Labour & Specialisation 
Stakeholder Pros Cons
Worker Workers can acquire the single The work can be repetitive &
skill required relatively quickly boring
Workers gain recognition & There is limited opportunity to
status for performing their skill gain additional skills
well If the firm replaces labour with
capital, the worker may find it
difficult to find employment
elsewhere due to their limited
skill base
Firm Time spent training new Worker productivity can fall due
workers is relatively short to the boredom/ decreased
Increased output allows firms motivation experienced
to generate more sales & profit Staff turnover may be high as
Higher labour productivity workers seek new, interesting
lowers cost/unit for firms, opportunities elsewhere
which makes their goods more International trade is beneficial
competitive internationally for the firms that can compete
(exports) globally. However, some firms will
be unable to compete and will go
out of business
Entire industries may close
leading to structural
unemployment
Economy Increased exports can result in Specialisation may create over-

economic growth for the dependency on other countries'
nation resources. This may cause
Economic growth usually leads problems if conflict arises (E.g,
to higher income and a better Europe's reliance on Russian
standard of living natural gas during the Ukraine
Income gained from exports crisis)
can be used to purchase other Specialisation using a country's
goods from around the world own resources will lead to
(imports). This increases the resource depletion.
variety of goods available in a Specialisation increases the rate
country of resource depletion
Page 22 of 57
3.4 Trade Unions YOUR NOTES


3.4.1 Types of Trade Unions
Types of Trade Unions

A trade union is an organisation that represents the interests of its workers in
negotiations with a firm’s management or owners
The interests of the worker include

Wage & non-wage benefits of employment
Health & safety in the working environment
The reduction of discrimination & worker exploitation
Trade unions are usually formed by the members of specific industries

Airline pilots have a pilots' union
Rail & sea workers have a rail & maritime union
If there is no specialist union for an industry, most economies have a number of general
unions which any worker can join e.g. In the UK, UNISON is the largest trade union, & it
represents workers from across the public sector including those working in local
government, education & health
All trade unions can be classified into one of four categories
Types of Trade Unions
Type of Union Explanation
These represents skilled & unskilled workers in any industry e.g.

General Union
truck drivers, football referees, musicians & gardeners
These represents workers in the same industry. Anyone in the

Industrial Union industry can join, irrespective of skill level or seniority e.g. The Fire
Brigades Union in the United Kingdom
These represent skilled workers with a specific trade e.g. painters,

Craft Union
electricians
White Collar Union These represent professional office-based (‘white-collar’) workers

e.g. financial advisors, teachers, architects, designers
Page 23 of 57
3.4.2 The Role of Trade Unions YOUR NOTES


The Work of Trade Unions
Workers pay a monthly fee to join a trade union
The fee is called a subscription
Their membership ends when they stop paying this fee
Benefits of union membership include

Collective bargaining
Job-specific training
Legal representation in disputes
Discounts on a wide range of goods/services
When collective bargaining fails & discussions break down, trade unions have several
methods of forcing employers/governments to continue engaging with them
These methods are collectively referred to as industrial action & include
Strikes
Overtime bans
Work to rule
Go-slows
The Focus of Trade Union Efforts
1. Collective bargaining on wages, working conditions & contractual terms
Negotiates for acceptable wage levels - Negotiates for increased wages when
often well above the minimum wage comparative industries receive pay
increases
Negotiates for inflation-linked pay rises Negotiates for higher wages when firms
are making higher profits
Negotiates standard weekly working Negotiates for improvements to working

hours & any overtime payments conditions & equipment
2. Protecting the employment of their workers
Page 24 of 57
YOUR NOTES
Negotiates for the retention & Negotiates resettlement packages when 
redeployment of workers when firms relocate from one region to another
machinery (capital) replaces labour & redundancy terms for those unable to
relocate
Negotiates to minimise job losses when Negotiates on a fair termination process

machinery (capital) replaces labour when firms are struggling in an economic
downturn
3. Influencing government policy
Negotiates with government on the Aims to influence policy through member

creation/maintenance of minimum wage action such as strikes
levels
Negotiates to minimise job losses when Negotiates on a fair termination process

machinery (capital) replaces labour when firms are struggling in an economic
downturn
Page 25 of 57
Factors Influencing the Strength of Trade Unions YOUR NOTES

The higher the percentage of workers from a firm that belong to a trade union, the greater 
the collective bargaining power of that union with the employer
The higher the percentage of workers from an economy that belong to trade unions, the
greater the collective bargaining power of the unions with the government
There are numerous other factors which influence the collective bargaining power of
specific unions at different periods of time
Factors which influence the collective bargaining power of trade unions
1. The unemployment level - the higher the unemployment level the weaker the bargaining
power as firms can more easily replace existing workers
2. Wage levels as proportion of total costs - the lower the percentage of total costs that a
firms's wages represent, the higher the bargaining power
3. Swapping labour for capital - the nearer the replacement cost of capital for labour to
meeting the increased costs demanded by the union, the weaker the bargaining power
4. The level of profits - higher profits strengthen the unions demands for higher wages
5. State of the economy - less bargaining power in a recession & more when the economy is
booming
6. Overall size of the trade union - the larger the union the stronger their bargaining power
7. The productivity of labour - if the workers are extremely productive, generating high levels
of output from low levels of input, they are more valuable to the firm & the union has
stronger bargaining power
Page 26 of 57
3.4.3 Advantages & Disadvantages of Trade Unions YOUR NOTES


Pros & Cons for Workers, Firms & Governments
Different economies have different views about the usefulness of trade unions. Capitalists
generally do not like them as the collective bargaining increases costs for firms
The European Union values trade union activity whereas Saudi Arabia bans trade unions
completely
When considering the benefits of trade union activity, it is useful to analyse the
advantages & disadvantages for workers, firms & the Government
Pros & Cons of Trade Unions For Workers
Pros Cons
Workers no longer need to negotiate with Industrial action is stressful as it is a

management on their own as they benefit conflict between workers & management
from collective bargaining Workers do not get paid while on strike
Workers receive better pay than non- Strike action disrupts economic activity
unionised workers & can upset other people in the economy
Workers enjoy better working conditions Individual workers may not agree with
than non-unionised workers specific demands made by the trade union
Workers enjoy better non-wage benefits on behalf of all the workers, & yet they are
such as guaranteed lunch breaks pressured to support the collective action
Workers receive specialised job training & Some union members continue to work
free legal advice from the union through a strike (they may need the
money) & receive abuse & intimidation
from the other striking union members
Pros & Cons of Trade Unions For Firms
Pros Cons
Page 27 of 57
Training from the trade union increases Including unions in decision-making

YOUR NOTES
worker productivity which decreases increases the time period taken to 
costs implement changes which can be
Empowerment in the workplace improves detrimental to effective competition
employee motivation, which usually Management styles have to be more
results in fewer sick days, higher inclusive & less authoritarian which some
productivity & greater output for the firm managers find difficult to accept
Meeting union demands increases costs
of production, which may reduce output
& profits
Pros & Cons of Trade Unions For Governments/Economy
Pros Cons
Trade unions help create a more equal & Industrial action reduces output, lowers
prosperous society firms’ profits, thereby lowering the
A prosperous society is the basis of strong potential corporation tax collected by the
consumption in an economy & this helps government
to drive economic growth Strike action is often very disruptive to
If firms’ profits increase due to increased many people’s lives, especially when it
productivity, governments receive more occurs in essential industries such as rail
corporation tax networks
Higher wages mean that the workers pay Governments may find it harder to attract
more income tax to the government, multinational corporations (MNCs) to
which can be used to further fund public & invest if industrial action occurs regularly
merit goods MNCs may be more reluctant to invest in
strongly unionised economies as the
costs of production will be higher
Page 28 of 57
3.5 Firms YOUR NOTES


3.5.1 Classification of Firms
Criteria for Classifying Firms

A firm is a business organisation which sells or produces a good/service
All firms require factors of production as inputs
They add value to these inputs in producing a good/service
They sell the good/service, ideally at a price higher than their cost of production
It is useful to classify firms into categories so that we can make comparisons between
them
These categories are

The sector of the economy in which they operate
Publicly (government) or privately owned
Their relative size
1. The Economic Sector
Firms can be classified according to which economic sector they operate in

The primary sector includes firms involved in the production or extraction of raw
materials e.g. fishing, farming, mining (Tata Steel is a large firm in the primary sector)
The secondary sector includes firms that process raw materials in order to
manufacture goods e.g. car manufacturing (Kelloggs is a large firm in the secondary
sector)
The tertiary sector includes firms which provide services e.g. car sales, banking, travel
bookings (Expedia is a large booking firm in the travel industry)
Economies usually measure what proportion of firms are active in each sector
Two useful metrics are
The % of workers employed in each sector e.g in 2019, 84% of workers in
Singapore worked in the tertiary sector
The % of gross domestic product (GDP) which each sector generates e.g in
2021, 38% of the GDP in Ethiopia was generated from primary sector activity
2. Public or Private Sector
Public sector firms are owned & controlled by the Government

Private sector firms are owned & controlled by other firms & private individuals
(entrepreneurs and shareholders)
Privatisation occurs when government-owned firms are sold to the private sector
Many government owned firms have been partially privatised
The government retains a share in them so they can influence decision-making &
receive a share of the profits e.g. the shares of Singapore Airlines are 55% government
Page 29 of 57
owned & 45% privately owned YOUR NOTES


Public Sector Firms Private Sector Firms
Their main goal is usually to provide a The objective of most private sector
service organisations is profit maximisation
Public sector firms can operate on a local, This often causes the private sector to be
regional or national government level more efficient than the public sector with
E.g. Transport for London (local); higher levels of productivity
Agricultural State Service in India Types of business ownership vary from
(regional); Caribbean Airlines sole trader to partnerships to company
(national) shareholders
3. The Relative Size of Firms
When considering the size of firms, several metrics are useful for comparison & analysis
1. The number of employees: In 2021, Toyota had 366,000 employees whereas Hyundai had
75,000
2. The % of market share in an industry: During the 1st quarter of 2022, Samsung had 23% of
the global market share for smart phones
3. The size of profits: in 2021, Apple made the highest level of profits for any firm, $58.4bn
4. Market capitalisation: Calculated by multiplying the number of shares in existence by the
share price e.g. in October 2022, Apple, Saudi Aramco, & Microsoft were the top three firms
& had a market capitalisation in excess of $2trn each
 Exam Tip
Although most firms desire to grow, it is not always true that a bigger firm is better.
They can become impersonal & lack a caring & considerate customer relationship.
Smaller firms can often out compete them on quality, customer care & personalised
product offerings.
Page 30 of 57
3.5.2 Small Firms YOUR NOTES


Reasons Why Small Firms Exist
In 2015, 98.7% of firms in the European Union were considered to be small firms with less
than 49 employees
Some firms start small & will grow into large companies or even multi-national
corporations (Amazon started in a garage)
While many firms grow, others do not or they intentionally choose to remain small
Reasons Why Small Firms Exist

Personalised service Loans Niche Market
They offer a more Small firms are often unable to They provide a product that is
personalised service & focus access finance for expansion in a niche market - smaller
on building relationships with market size but can be very
their customers profitable
Mass markets Diseconomies of scale The firms' objective
Many small firms operate in Rapid growth can cause Owners goal is not profit
mass markets with low barriers diseconomies of scale which maximisation but rather an
to entry can be difficult to deal with & acceptable quality of life
so many owners choose to (satisficing)
avoid these
Page 31 of 57
Advantages & Disadvantages of Small Firms YOUR NOTES

Small Firms Experience Both Advantages & Disadvantages When Compared With Large 
Firms
Advantages Disadvantages
They often provide highly customised More susceptible to changes in the wider
goods/services e.g. pet grooming in the economy than large firms, especially
customer's home during recessions
They often create personal relationships Less financial resources available to
with their customers which helps to them, including access to larger bank
generate customer loyalty & word-of- loans - some smaller firms are unable to
mouth advertising access any loans at all
They often provide very unique products It is harder to recruit/retain staff as the
which are sold in small quantities at high wage & non-wage benefits are less
prices - this can be very profitable competitive than those offered by bigger
Smaller firms can respond quickly to firms
changing market conditions Owners may struggle to take a
holiday/sick leave as revenue
slows/stops coming in when they stop
working
Small firms struggle to generate
economies of scale as the volume of
output is significantly lower than that of
larger firms resulting in lower profit
margins
 Exam Tip
Students are often examined in the Paper 2 structured questions on the reasons for
differences in the size of firms. The question often takes the form of 'Analyse the
main reasons for differences in the size of firms.'
While this sub-topic explains the reasons for the existence of small firms, large firms
are usually driven by the profit maximisation objective which results in them
exploring every opportunity available for growth. How firms grow, is covered in the
next sub-topic & elements of that page can be included in answering this question.
Page 32 of 57
3.5.3 The Growth of Firms YOUR NOTES


Internal & External Growth
The growth of firms can be organic (internal) or inorganic (external)
Organic growth is usually generated by

Gaining greater market share
Product diversification
Opening a new store
International expansion
Investing in new technology/production machinery
Inorganic growth usually takes place when firms merge in one of three ways
Vertical integration (forward or backwards)
Horizontal integration
Conglomerate integration
A diagram that illustrates how a firm can grow through forward or backward vertical
integration
Forward vertical integration involves a merger or takeover with a firm further forward in
the supply chain
E.g. A dairy farmer merges with an ice-cream manufacturer
Backward vertical integration involves a merger/takeover with a firm further backward in

the supply chain
E.g. An ice-cream retailer takes over an ice-cream manufacturer
Page 33 of 57
Types of Mergers YOUR NOTES

Firms will often grow organically to the point where they are in a financial position to 
integrate with others
Integration speeds up growth but also creates new challenges
An Explanation of the Advantages & Disadvantages of Each Type of Growth
Type of Growth Advantages Disadvantages
Organic The pace of growth is The pace of growth can be

manageable slow & frustrating
Less risky as growth is Not necessarily able to
financed by profits & there benefit from economies
is expertise in the industry of scale
Avoids diseconomies of Access to finance may be
scale limited
The management know &
understand every part of
the business
Vertical Integration Reduces the cost of Diseconomies of scale

(Inorganic growth) production as middle man occur as costs increase
profits are eliminated e.g. unnecessary
Lower costs make the firm duplication of
more competitive management roles
Greater control over the There can be a culture
supply chain reduces risk clash between the two
as access to raw materials firms that have merged
is more certain Possibly little expertise in
Quality of raw materials running the new firm
can be controlled results in inefficiencies
Forward integration adds The price paid for the new
additional profit as the firm may take a long time
profits from the next stage to recoup
of production are
assimilated
Forward integration can
increase brand visibility
Page 34 of 57
YOUR NOTES
Horizontal Integration Rapid increase of market Diseconomies of scale 
(Inorganic growth) share may occur as costs
Reductions in the cost per increase e.g. unnecessary
unit due to economies of duplication of
scale management roles
Reduces competition There can be a culture
Existing knowledge of the clash between the two
industry means the merger firms that have merged
is more likely to be
successful
Firm may gain new
knowledge or expertise
Conglomerate Integration Reduces overall risk of Possible lack of expertise

(Inorganic growth) business failure in new products/industries
Increased size & Diseconomies of scale
connections in new can quickly develop
industries opens up new Usually results in job
opportunities for growth losses
Parts of the new business Worker dissatisfaction
may be sold for profit as due to unhappiness at the
they are duplicated in takeover can reduce
other parts of the productivity
conglomerate
 Exam Tip
Paper 1 MCQ frequently tests your ability to differentiate between forward vertical &
backward vertical integration. This is all about a supply chain for a good/service. If a
firm takes over another at an earlier stage in the supply chain - it is vertical backward
integration.
Page 35 of 57
3.5.4 Economies & Diseconomies of Scale YOUR NOTES


An Introduction to Economies & Diseconomies of Scale
As a firm grows, it is able to increases its scale of output generating efficiencies that lower
its average costs (AC) of production
These efficiencies are called economies of scale
Economies of scale help large firms to lower their costs of production beyond what
small firms are able to achieve
As a firm continues increasing its scale of output, it will reach a point where its average
costs (AC) will start to increase
The reasons for the increase in the average costs are called diseconomies of scale
Internal economies of scale occur as a result of the growth in the scale of production
within the firm
Economies of scale occur when average costs decrease with increasing output &
diseconomies of scale occur when average costs increase with increasing output
Diagram Analysis
With relatively low levels of output, the firms average costs are high
As the firm increases its output, it begins to benefit from economies of scale which lower
the average cost per unit
At some level of output, a firm will not be able to reduce costs any further - this point is
called productive efficiency
Beyond this level of output, the average cost will begin to rise as a result of diseconomies
of scale
Page 36 of 57
Types of Internal Economies & Diseconomies YOUR NOTES

Types Of Internal Economies & Diseconomies of Scale 
Internal Economies of Scale Diseconomies of Scale
Financial Economies Management Diseconomies
Managerial Economies Communication Diseconomies
Marketing Economies Geographical Diseconomies
Purchasing Economies Cultural Diseconomies
Technical Economies
Risk-bearing Economies
Page 37 of 57
External Economies of Scale YOUR NOTES

External economies of scale occur when there is an increase in the size of the industry in 
which the firm operates
The firm is able to benefit from lower average costs (AC) generated by factors outside
of the firm
Sources Of External Economies Of Scale

Source Explanation
As an industry grows, ancillary firms move closer to major

manufacturers to cut costs & generate more business. This lowers the
Geographic Cluster
AC e.g. car manufacturers in Sunderland rely on the service of over
2,500 ancillary firms
Improved transport links develop around growing industries in order

to help get people to work & to improve the transport logistics. This
Transport Links
lowers the AC e.g. Bangalore is know as India's Silicon Valley &
transportation projects have been successful in transforming the
movement of people & goods
An increase in skilled labour can lower the cost of skilled labour,

Skilled Labour thereby lowering the AC. The larger the geographic cluster, the larger
the pool of skilled labour
Favourable This often generates significant reductions in AC as governments

Legislation support certain industries in order to achieve their wider objectives
Page 38 of 57
3.6 Firms & Production YOUR NOTES


3.6.1 Demand for the Factors of Production
Influences On The Demand For Factors of Production

The demand by firms for factors of production (FoP) is influenced by three factors
1. The demand for goods/services
2. The price of different factors of production
3. The availability & productivity of the factors
1. The Demand for Goods/Services
The demand for the factors of production is a derived demand. If a tyre manufacturer
benefits from increased demand for their tyres, they will require more rubber to meet the
demand
They may also require more labour
Depending on the level of increased demand, possibly more capital (machinery) to
manufacture the tyres
The demand for rubber is derived demand from the demand for tyres
In the tyre market, the increased demand for tyres is represented by a shift in the demand
curve from D1 to D2
Rubber is a natural resource (land) & there is now increased demand from the firm for
rubber in order to meet higher levels of tyre production
The diagram on the right represents the rubber market where demand for it increases from
D1 to D2
2. The Price For Different Factors Of Production
The price of alternative factors of production are constantly monitored by firms in order to
ensure that they are maximising profits
The price of alternative (substitute) raw materials will be considered e.g. using fish
leather instead of cow leather to manufacture jackets
Page 39 of 57
The price of installing new & efficient machinery (capital) will be monitored against YOUR NOTES
the cost of hiring more workers (labour) 
3. The Availability & Productivity Of The Factors
The availability of the factors of production can change rapidly in factor markets
Covid 19 caused many supply issues which reduced the availability of labour & many
raw materials
Many firms responded by searching for substitute factors of production so that they
could continue producing goods/services
In some cases this meant switching demand from cheaper foreign imports to more
expensive locally produced raw materials
If the productivity of a factor is high (or increasing), then the demand for that factor will
also increase
If a new Government training scheme improves the productivity of car mechanics,
car repair garages will seek to employ more workers as each worker is able to achieve
more resulting in higher profits
 Exam Tip
Firms are able to increase their profits in two main ways.
Firstly, they can raise the selling price so that the gap between the selling price &
their costs of production increases (the effectiveness of this depends on the price
elasticity of demand).
Secondly, they can decrease the cost of their factors of production & maintain the
current selling price.
Following the second option can have significant impacts on the product
manufactured by the firm e.g. switching to a cheaper natural resource may decrease
product quality or decreasing the wages paid to workers may reduce motivation
leading to poor productivity.
Page 40 of 57
3.6.2 Labour & Capital-intensive Production YOUR NOTES


The Distinction Between Capital- & Labour-intensive Production
A firm’s production can be either labour-intensive or capital-intensive
Labour-intensive means that the proportion of labour costs are higher than the other
factors of production, including machinery
Capital-intensive means that the proportion of machinery costs are higher than any of
the other factors of production, including labour
Page 41 of 57
Choosing Between Capital- & Labour-intensive YOUR NOTES

When considering how to produce goods/services most efficiently, firms will consider the 
nature of their good/service & the advantages & disadvantages of capital/labour
intensive production
Some industries require labour-intensive production & hire many workers

This often occurs when jobs require technical skills which are difficult/expensive to
automate e.g. teachers in a school or garment workers in a clothing factory
The Advantages & Disadvantages Of Labour-Intensive Production
The firm can adjust the number of There may be periods where worker
workers hired as demand for its productivity is low
goods/services fluctuate The firm may find it difficult to recruit
Depending on the industry, workers can workers when needed & letting go of staff
build meaningful connections with when they are not required is unpopular
customers which helps to create The more skilled the labour required, the
customer loyalty e.g. restaurant waiters higher the wage bill for the firm will be
versus iPad ordering Each worker requires both wage & non-
Workers can generate new ideas & offer wage benefits, which can prove
suggestions on how processes can be expensive for the firm
improved Workers can get ill & then are unavailable
for work
Other industries are more capital-intensive or are gradually replacing labour with capital
when it makes financial sense to do so - as wages rise in a country more labour will be
replaced by capital (machinery)
Constant improvements to technology & process innovation mean that firms are
constantly evaluating the possibilities of moving from labour to capital-intensive
production
The Advantages & Disadvantages Of Capital-Intensive Production
Page 42 of 57
Production can continue 24/7 with only The cost of purchasing & installing new
YOUR NOTES
short breaks so as to allow for machinery machinery can be very high (but is often 
maintenance financed with a bank loan & paid off over a
Machinery cuts down on human error & period of years)
product quality remains consistent Most machinery cannot improve
Absenteeism or a shortage of skilled processes, although artificial intelligence
workers are non issues with capital- innovation is changing this
intensive production Switching capital for labour negatively
The firm can reduce average costs as it impacts both the workers who lose their
benefits from technical economies of job & also the morale of the workers left
scale behind
Once the machinery is installed, it can be
difficult for the firm to respond to
changing customer tastes/fashions
which require product changes
Page 43 of 57
3.6.3 Production & Productivity YOUR NOTES


The Distinction Between Production & Productivity
The terms production & productivity are fundamentally different
Production is the act of adding value to the factors of production to create

goods/services e.g. using tomatoes & basil to create a soup
It is the process of factor conversion into goods/services
It is a measure of output e.g. 3 cans of soup
Productivity is a measure of efficiency that calculates the amount of outputs produced

per unit of input
It calculates how efficiently resources are being used in the creation of
goods/services & provides a metric for comparison e.g. after training workers proved
to be 27% more efficient in their productivity
It is a measure of efficiency e.g. 3 cans produced per worker
Influences on Production
Production is often influenced by the state of the economy
During a recession production falls
During a boom period, production increases
As production is dependent on the demand for goods/services, any change to any of the
conditions of demand will result in changes to production
As production is also dependent on the supply of the factors of production, any change to
any of the conditions of supply will result in changes to production
Page 44 of 57
Influences on Productivity YOUR NOTES

Higher productivity is important for a firm & economy for the following reasons 
1. It lowers costs & improves a firms national & international ability to compete
2. It allows firms to produce more output with the same input which puts it in a position to
generate increased economies of scale
3. Firms can generate higher profits
4. Higher profits may mean that the firms can pay their workers more
5. Higher profits may mean that the government revenue from corporation tax will increase
6. An improved ability to compete in international markets will help to generate economic
growth
The Influences On Productivity Growth
Influence Explanation
Innovation Process innovation occurs when systems or manufacturing processes

are improved resulting in increased efficiency e.g. Ford created the first
moving production line for motor vehicle manufacturing
Product innovation occurs when a new product emerges that does
things better/faster e.g. driver free cars may transform the taxi industry
and lower taxi fares
Investment When the expenditure on capital (machinery, building etc.) increases,

workers are usually able to perform their jobs more efficiently resulting in
higher output
If firms hold back investment for long periods of time, their capital
(machinery) degrades possibly making it harder for workers to do their
jobs
The interest rates in an economy are one of the main determinants of
investment by firms. Low rates encourage investment & vice versa
Training Any form of training (on the job, degree, diploma etc) improves the skill
level of labour usually resulting in an ability to do the job better/quicker
Competition Competition between rival firms ensures that productivity improvements

continue to occur as the firms are seeking to 'win' market share from
each other
Some industries which are dominated by a monopoly lack competition &
it is possible for those firms to become inefficient & to have low levels of
productivity
Page 45 of 57
Entrepreneurial Economies which encourage small business & make it easy for firms to
YOUR NOTES
freedom start up & compete, ensure that there is a healthy level of competition 
leading to productivity improvements
 Exam Tip
Students regularly confuse the terms 'production' & 'productivity'. make sure you
know the difference.
Remember that production (output) can rise while productivity (efficiency) falls.
Page 46 of 57
3.7 Firms’ Costs, Revenue & Objectives YOUR NOTES


3.7.1 Costs & Revenue
Different Types of Costs

In preparing goods/services for sale, firms incur a range of costs. These costs can be be
broken into different categories
1. Fixed costs (FC) are costs that do not change as the level of output changes
These have to be paid whether output is zero or 5000
e.g. building rent, management salaries, insurance, bank loan repayments etc.
2. Variable costs (VC) are costs that vary directly with output
These increase as output increases & vice versa
E.g. raw material costs, wages of workers directly involved in production
3. Total costs (TC) are the sum of the fixed + total variable costs
Page 47 of 57
Cost Calculations YOUR NOTES

Based on the above definitions, we can calculate several different types of costs 
1. Total costs (TC) = total fixed costs (TFC) + total variable costs (TVC)
2. Total variable cost (TVC) = variable cost (VC) × quantity (Q)
total cost (TC)

3. Average total cost (AC) =
quantity (Q)
Total fixed costs (TFC)

4. Average fixed cost (AFC) =
quantity (Q)
Total variable costs (TVC)

5. Average variable cost (AVC) =
quantity (Q)
Cost Calculations Using the Above Formulas Where VC is $60

TFC
Output (Q) TFC TVC = $ 60 x Q TC = TFC + TVC AFC = Q AVC = TVC
Q
AC = TC
Q
0 200 - 200 - - -
1 200 60 260 200 60 260
2 200 120 320 100 60 160
3 200 180 380 66.67 60 126.67
4 200 240 440 50 60 110
5 200 300 500 40 60 100
6 200 360 560 33.34 60 93.33
7 200 420 620 28.58 60 88.57
8 200 480 680 25 60 85
Page 48 of 57
Diagrammatic Representation Of Costs YOUR NOTES

Sketches Which Represent The Different Costs Of A Firm 
Type of Cost Diagram Explanation
Fixed Cost (FC) The firm has to pay its fixed costs
which do not change, irrespective if
the output is 0 or 100,000 units
The fixed costs for this firm are
$4,000
Variable Cost The variable costs initially rise

(VC) proportionally with output, as
shown in the diagram
At some point the firm will benefit
from a purchasing economy of
scale and the rise will no longer be
proportional
Total Cost (TC) The total cost is the sum of the

variable & fixed costs
The total costs cannot be 0 as all
firms have some level of fixed costs
Average Fixed If the fixed costs of a firm are

Cost (AFC) $1,000 & it produces 1 unit of
output, then its AFC is $1,000
($1,000/1)
If the firm increases its output to
1000 units, then the AFC is $1 per
unit ($1000/1,000)
The more units a firm produces, the
lower its AFC will be
This is one reasons why large levels
of output help to increase the profit
per unit
Page 49 of 57
Average Total As a firm grows, it is able to

YOUR NOTES
Cost (AC) increases its scale of output 
generating efficiencies that lower its
average total costs (AC) of
production
These efficiencies are called
economies of scale
As a firm continues increasing its
scale of output, it will reach a point
where its average total costs (AC)
will start to increase
The reasons for the increase in the
average costs are called
diseconomies of scale
 Exam Tip
MCQ frequently tests your knowledge of these curves by presenting you with 4
unlabelled diagrams &, for example, asking you to identify which sketch
demonstrates the average fixed costs of the firm.
Page 50 of 57
Different Types of Revenue YOUR NOTES

Total revenue is the total value of all sales a firm incurs 
Total revenue (TR) = selling price (P) × quantity sold (Q)
Average revenue is the overall revenue per unit

TR
Average revenue (AR) =
Q
An Example Of Revenue Calculations

TR
P ($) Q TR (P ×Q) AR
Q
8 1 8 8
7 2 14 7
6 3 18 6
5 4 20 5
4 5 20 4
3 6 18 3
2 7 14 2
1 8 8 1
Average revenue information is especially useful to a firm selling multiple products (e.g.
supermarkets) or a firm that sells the same item at different prices (e.g. rail tickets are
usually priced differently for different types of commuters e.g. pensioners)
Page 51 of 57
3.7.2 Objectives of Firms YOUR NOTES


Objectives of Firms
The objectives of a firm are a reason for their existence or the desired focus of their
owners
These objectives typically include profit maximisation, growth, survival & social welfare
1. Profit Maximisation
Most firms have the rational objective of profit maximisation

Profit = Total Revenue (TR) - Total Costs (TC)
To maximise profits, firms can either increase their sales revenue or decrease their costs
Firms continuously analyse their costs to see if they can reduce them so that profit can
be maximised
2. Growth
Some firms have the business objective of growth

In subtopic 3.5 we considered the different metrics that firms use to compare their size
which include the number of employees, market share, size of profits & market
capitalisation
Firms with a growth objective often focus on increasing their sales revenue or market share
Firms will also maximise revenue in order to increase output & benefit from economies of
scale
A growing firm is less likely to fail
3. Survival
In the short term, many new firms focus solely on business survival
Generally, as much as 25% of new firms fail in their first year of business
Once a firm is established, it may then begin to focus on profit maximisation as its new
objective
4. Social Welfare
More firms than ever are launching with a social welfare objective
These typically include a focus on climate action & addressing poverty or inequality
They still require profit to survive, but will accept less than if they were profit maximising as
long as they are meeting their social objective
Page 52 of 57
Exam Tip YOUR NOTES

 The objectives of firms can change over time. Successful firms that have been profit

maximising for decades may find themselves in a a difficult market environment (e.g.
during Covid 19 lock downs) & switch their objective to survival. Likewise, firms
previously focussed on profit maximisation may desire to be more prominent in the
battle against climate change & so change to a social welfare objective.
Page 53 of 57
3.8 Market Structure YOUR NOTES


3.8.1 Competitive Markets
An Introduction To Competitive & Monopoly Markets

Each firm operates in a specific market
The conditions in different markets can vary significantly & are determined by the market
structure in which the firm operates
There are a range of market structures, however your syllabus only requires you to know
the characteristics of two - competitive markets & monopolies
Competitive markets are those with an extremely high degree of competition
A monopoly is a market structure in which one firm dominates the market & has significant
market power
The six characteristics which determine the type of market structure a firm operates in -
competitive or monopoly
The answers to the questions above determine the type of market structure in which a
firm is operating in
If a firm is selling a unique product (e.g.hand made car) it is likely operating in a
monopoly market & setting high prices
Page 54 of 57
Characteristics of Competitive Markets YOUR NOTES

The characteristics of a competitive market are as follows 
1. There are many buyers and sellers: due to the number of market participants sellers are
price takers
2. There are no barriers to entry & exit from the industry: firms can start-up or leave the
industry with relative ease which increases the level of competition
3. Buyers & sellers possess perfect knowledge of prices: this assumption presupposes
perfect information e.g if one seller lowers their price then all buyers will know about it
4. The products are homogenous: this means firms are unable to build brand loyalty as
perfect substitutes exist & any price changes will result in losing customers
Advantages & Disadvantages of Competitive Markets
Lower prices: competition causes firms to Worse quality: in a bid to lower prices,
lower prices for consumers in an attempt product quality may actually deteriorate
to gain market share over time
Better quality: firms innovate & Too much choice: consumers may be
continuously seek to improve their quality overwhelmed & not explore the full range
of their goods/services in order to become of market offerings, instead sticking to
recognised in a crowded market what they know
More choice: more sellers equals more Worker welfare: the greater the
choice for consumers competition the greater the need to cut
costs, often resulting in low wages & poor
working environments
Page 55 of 57
3.8.2 Monopoly Markets YOUR NOTES


Characteristics of Monopoly Markets
A monopoly is a market structure in which there is a single seller
There are no substitute products
The firm has complete market power & is able to set prices & control output
This allows the firm to maximise profit
There is no long-run erosion of profit levels as competitors are unable to enter the
industry
High barriers to entry exist
One of the main barriers is the ability of the monopoly to prevent any competition
from entering the market
E.g. by purchasing companies who are a potential threat
Many governments define a monopoly as any firm having more than 25% market share
Regulators act to prevent market share increasing beyond this level
It helps to maintain competition within the market
The Advantages & Disadvantages Of Monopoly Power
Stakeholder Advantages Disadvantages
The Firm Large profits generate money for Due to a lack of competition,
continued investment in there is a reduced incentive to be
technology & product innovation efficient
Market power enables the firm to Cross subsidisation can create
increase its global inefficiencies
competitiveness Monopolies lead to a
Economies of scale can increase misallocation of resources as
thereby lowering the average cost they limit supply in order to
Price discrimination: the firm can increase price
charge consumers different prices Due to a lack of competition,
based on the different price innovation sometimes lacks
elasticity of demand for the effectiveness
product e.g. peak (inelastic) & off-
peak (elastic) travel on trains
Employees Large profits often result in higher Having only one supplier in the
wages industry limits the opportunity to
change employers
Page 56 of 57
Consumers Product innovation due to the A lack of competition is likely to

YOUR NOTES
firm's large profits may result in a result in higher prices as no 
better-quality product substitute goods are available
Cross subsidisation can lower A lack of competition may result
prices on some products that the in no product innovation &
firm provides worse product quality over time
Prices may fall If firms pass on May experience worse customer
their cost savings to consumers service as the incentive to
(due to economies of scale) in the improve it is limited
form of lower product prices Cross subsidisation is likely to
increase prices on some
products offered by the firm
Suppliers Increased sales volume for some There is less competition for their
suppliers as they are able to supply products & a monopoly often
products that are distributed has the power to dictate what
nationally or internationally price they will pay to suppliers
Page 57 of 57

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3. Microeconomic Decision Makers

3.1 Money & Banking YOUR NOTES

The Meaning of Money

The Functions of Money YOUR NOTES

A Medium of A Method of Deferred

Without money, it Money provides a Money holds its Money is an

The Characteristics of Money YOUR NOTES

The six characteristics of good money

3.1.2 Central & Commercial Banks YOUR NOTES

Central Banks play four important roles in the economy

1. Implementation of monetary policy: This is more fully explained in Sub-topic 4.4.1

The Functions of Commercial Banks YOUR NOTES

Commercial Banks play a central role in financial markets

3.2 Households YOUR NOTES

The Influences on Spending

Changes to Income Changes to Interest Rates Changes to Confidence Levels

The Influences on Saving YOUR NOTES

The Influences On Household Saving

Changes to Income Changes to Interest Rates Changes to Confidence Levels

The Influences on Borrowing YOUR NOTES

The Influences On Household Borrowing

Changes to Income Changes to Interest Rates Changes to Confidence Levels

When disposable income If interest rates decrease, When the economy is

3.3. Workers YOUR NOTES

A Summary of Wage Factors That Influence Occupational Choices

Wages An agreed amount of money/hour & is calculated directly from

Commission Often used as payment to sales people

Bonus Money paid in addition to a salary & is usually single annual

Fringe benefits Benefits provided in addition to the normal salary

Non-wage Factors YOUR NOTES

3.3.2 Wage Determination YOUR NOTES

The demand for labour is a derived demand

Factors That Influence The Demand for Labour

If the selling price of the product As demand for labour is a derived

The ability to substitute capital (machinery)

Firms will constantly evaluate if it will be If the productivity of labour increases

Factors Influencing the Supply of Labour YOUR NOTES

Factors Influencing The Supply Of Labour

Training period Wages in other occupations Changes in migration policy

Income tax levels Working conditions Trade union power

Level of welfare benefits Social trends

Diagrammatic Analysis of the Labour Market YOUR NOTES

Factor markets follow exactly the same rules as product markets

Analysing the PED & PES of Labour YOUR NOTES

Consider the labour market for NBA basketball players

Price Elastic Demand & Supply

Consider the labour market for labourers on a building site

Relative Bargaining Power

Government Policy: Minimum Wages YOUR NOTES

3.3.3 Wage Differentials YOUR NOTES

Reasons for Wage Differentials Between Men & Women

Private Sector Workers Public Sector Workers

3.3.4 Division of Labour & Specialisation YOUR NOTES

Specialisation occurs on several different levels

Stakeholder Pros Cons

Economy Increased exports can result in Specialisation may create over-

3.4 Trade Unions YOUR NOTES

Types of Trade Unions

The interests of the worker include

Trade unions are usually formed by the members of specific industries

All trade unions can be classified into one of four categories

Types of Trade Unions