economics standard grade revision notes

Factors of Production

Economics Standard Grade Revision Notes

Economics

Standard Grade Revision Notes

TopicPage

1Economic Systems ..3

2Production ...7

3Consumption ...15

4Market Mechanisms ...17

5Money, Finance and Banking 25

6International Trade 28

7Public Finance 33

8Economic Growth ..37

9Inflation ...39

10Regional Disparities ...41

11Unemployment 42

Economic Systems

What is Economics?

Economics is study of how peoples wants and needs are satisfied.What is the difference between a want and a need?

Wantsomething people like but can live withoutNeedsomething people will require in order to survive

Give an example of a want and a needWantcomputer, fashion items, cars

Needclothes, shelter, food, water

What is an Economy?

An economy is the part of society involved in

MakingorDistributingorConsumingGoods and Services

producing

transportingusing up

Defining a Good or a ServiceGood Item that can be seen eg food, clothes

Service Help/assistance to improve life eg education, transport, lighting

Scarcity, Choice and Opportunity CostChoices have to be made in every economy as factors of production are scarce.

Society has to choose what to produce, for whom and how it should be produced.

When a choice is made between two goods, the opportunity cost of the good chosen, is the good that is now done without.What does scarce mean?

Resources are scarce if there are not enough of them to satisfy everyones wants so a charge is made for them

What is a Free Good?

Good that is not scarce and a charge is not made for it eg water, air, sunlight

What are the Factors of Production?

These are the scarce resources used to make goods/services

LandNaturalProvided by nature eg fields, minerals, the sea, trees

LabourHumanWorkersTrainingExample

Skilledtrained long termengineer

Semi-skilledshort term trainedhairdresser

Unskilleduntrained

labourer

CapitalMan-madeEquipment, machinery, transport system

EntrepreneurHumanPerson who puts the Land, Labour and Capital together in the hope of making a profit.

Economic Systems - Mixed EconomyThese differ according to the way resources are allocated by answering the following questions

What to produce?

How to produce?

For whom to produce?

What is a Mixed Economy?

Government makes some decisions; consumers/producers make the rest.

Advantages of Mixed Economy

essential services education, police, medicine provided

consumer choice available

producer profits an incentive to go into business

Disadvantages of Mixed Economy

some resources go to unallocated eg unemployment,

differences between rich and poor people,

limits to provision of government resources

Other Economic Systems in the world

Market economy = Free market system

Examples - America, Japan

Planned economy = communist system

Examples - Cuba, North Korea

How does the private sector allocate resources?

It follows the Price Mechanism:Market conditionEffect on profitsAction by Supplier

Good selling wellIncreasing

Raise priceProduce more

Good not selling well due to higher priceDecreasingLower priceProduce less

How does the public sector allocate resources and output?The Government makes decisions as to which merit goods to provide. A merit good is provided by the government as it is judged to be good for people regardless of their desire for it or ability to pay for it. It would be under-provided in a Free Market system.

education

health

The government will be limited by budgetary considerations ie the amount of tax revenue it can or wants to bring in but it will also provide some public goods. A public good is one that would not be provided in a free market system and which is free for all to use regardless of whether they have paid for it or not. It would not be provided at all in a Free Market system eg

street and traffic lighting police

What is Production?

Creation of goods and services to satisfy wants.

Difference between Goods and ServicesGood is an item that can be seen eg food, clothes and which satisfies a want

Service is help/assistance to improve life eg education, transport, lighting

Definitions of Consumer Goods and Capital Goods

Consumer goods give pleasure or satisfy wants.

They can be durable (long lasting) or non-durable (single-use). Consumer services are non-durable.

Capital (Producer) Goods help to produce other goods and services eg a machine is a capital good.

Free Good one you do not have to pay for eg air

Scarce good one you do have to pay for

Merit Good one seen by government as desirable but which would be too expensive for most people if provided by free market.

Public Good - is one that would not be provided in a free market system and which is free for all to use regardless of whether they have paid for it or not

Private Good Made for profit and cannot be consumed or used by those who have not paid for it.

Resources used in Production

What are the Factors of Production?

These are the scarce resources used to make goods/services

LandNaturalProvided by nature eg fields, minerals, the sea, trees

LabourHumanWorkers:

Skilledtrained long termengineer

Semi-skilledshort term trainedhairdresser

Unskilleduntrained

labourer

CapitalMan-madeEquipment, machinery, transport system

EntrepreneurHumanPerson who puts the Land, Labour and Capital together in the hope of making a profit.

How Mobile are Factors of Production?

The most mobile factors are the human ones and there are 2 types of mobility:

Geographical. People are willing and able to move between regions or areas in order to take a new job. They often have to move home. Reasons why individuals may not be geographically mobile:

Cost and upheaval of moving

House prices in other areas are too dear

Children settled at schools

Occupational. People are willing and able to move between types of jobs or occupations e.g. an unemployed coal miner becomes a salesman.

Reasons why individuals are not occupationally mobile:

An unemployed miner doesnt necessarily have the skills to use computers Lack of confidence Cant be bothered

Lack of education

Lack of trainingThe Chain of Production (Types of Industry)

PrimarySecondaryTertiary

Extracting raw materialsManufacturing goods for sale using raw materialsServices

Coal miningCar manufctureSelling cars

Changes in UK production between 3 sectors

De-industrialisation refers to the change in the balance of the UK economy between the output of different types of industry. In the UK and other advanced economies there is now less primary industry and more tertiary industry.

The UK has experienced the loss or decline of a number of established secondary industries e.g. shipbuilding, mining. These have been replaced by a growth in the tertiary service sector e.g. leisure facilities, retail. People generally have more time and disposable income to spend on these options.

Costs and RevenueCosts of Production and Profit

Production can only be sustained if a profit is made. To calculate profitability information on costs is collected in a schedule and then plotted on a graphCost Schedule for firm producing ornaments

OutputFixed CostsVariable CostsTotal

Costs

050050

105050100

205095145

3050135185

4050200250

50 50270320

Fixed Costs. Expenses to be paid no matter how many goods made eg insurance. They are identified by a horizontal line across the graph (eg at 50)

Variable Costs. Expenses which vary according to number of goods produced eg raw material. They start at 0 and increase to right as output increases.

Total Costs. Fixed and Variable costs added together. The total cost curve starts at the level of fixed costs and increases to the right as output increases

Average Costs. Total Costs divided by number of goods produced

Revenue. Amount of money received from selling goods

Total Revenue. Selling price multiplied by number of goods sold. The Total Revenue curve increases to the right as output is sold.

Average Revenue. Total Revenue divided by number of goods sold

Breakeven Point. Where Total Revenue equals Total Costs. It is where the Total Revenue curve crosses (equals) Total Costs curve (eg output of 10)

Profit. Total Revenue less Total Costs. It is any amount of output sold greater than break even point (eg output of 11 or more)

Average Costs

The cost per unit of output. It is equal to total cost divided by output. Average costs fall as output increases until the optimum lowest point. They then start rising again as the output increases above the most efficient level.

Cost Schedule for firm producing toys

OutputFixed

CostsVariable

CostsTotal

CostsAverage

Costs

101020303

201025351.75

301030401.333333

401045551.375

501070801.6

6010951051.75

70101251351.928571

Economies of Scale

The Scale of a business depends on the number of goods and services produced. Large scale is a high level of production e.g. 100 cars a week. Small scale could be 10 cars per week. The benefits gained from producing on a large scale are called economies of scale. They result from average costs falling as production numbers rise.Production Methods and Processes

Specialisation - Division of Labour

The Division of Labour is a system whereby workers concentrate on performing a few tasks and then exchange their production for other goods and services. This is also known as specialisation.

To:AdvantagesDisadvantages

employees Workers become more skilled

May be better paid as their expertise is rewarded

Work may be boring

Workers detached from final production

May eventually be replaced by machinery

employers Costs of production fall

Time is saved

Worthwhile buying machinery

Greater cost of training workers

People depend too much on each other

consumers More goods and services produced

Quality of goods improves

Products are all the same

The Growth of Firms and IndustriesGrowth means that the business is becoming larger. Growth may be an objective for the business in order to keep up with competition

achieve economies of scale and cut costs

get access to wider or newer markets

secure outlets for goods that are already set up by another firm

How do Firms Grow?Internal Growth

This means growing without joining with another business. The firm could

build new premises

take on more employeesExternal Growth

Merger. Two firms join together and have equal ownership.

Takeover. One firm takes over another firm and has the ownership of that business. It is probably against the wishes of the other business.

1 Forward Vertical Integration. A business takes over or merges with a business at the next stage of production

2 Conglomerate Integration. This occurs when a business merges with another that produces a completely different product. 3 Backward Vertical Integration. A business takes over or merges with a business at the previous stage of production 4 Horizontal Integration. Two businesses at the same stage of production merge.

Benefits of Growth

Increased profits

Increased market share

Gain new ideas from the other business

Avoid having to compete with the other business

Gain from economies of scale (page)

The new business may not need all of the workers. They could remove some workers to become efficient and make more profit

Problems of Growth To:EmployeesPossible job losses and job insecurity

Employers

There may be two sets of managers who are unable to agree on the best direction for the company. This could cause many problems.

The businesses may have different objectives and targets

It costs a lot of money to merge with or takeover another business

Consumers

Possibly less choice in the market and possibly higher prices to pay

Why do firms switch production abroad? Wages might be lower

Other governments might give financial incentives

Factory costs might be lower

More suitable pool of labour available

Patterns of Consumption in UK Individuals

In recent years many individuals have experienced an increase in their disposable income (the money they have to spend after tax and essential payments). Many people are also choosing to retire or go part time at an earlier age.Consequently growth areas of consumer expenditure include

Leisure Services e.g. holidays, eating out

Technology e.g. mobile phones, computers

Leisure Goods e.g. TVs, gardening equipment

Age and Consumption

An individuals pattern of consumption depends upon their age

Age of PersonSize of IncomeSpending Habits

Young Small Will spend almost everything on consumer goods

Adult (of working age)

BiggestWill spend some, save some and borrow to spend on

Housing

Food

Children

Heating

Cars

Holidays

Old

SmallWill spend almost everything on

Food

Housing

Heating

Saving and BorrowingWhy do people save?

To buy a good in the future e.g. a car

In case something goes wrong e.g. lose job

To gain interest from the bank To plan for retirementWhere do People save?

Place to saveAdvantagesDisadvantages

BanksCan get cash out quicklyLowest rate of interest

Building SocietiesBetter rate of interestMore difficult to get money out

Credit UnionsHighest rate of interest Have to apply in advance to get money out.

Why do people borrow?

To buy a house

To buy a large expensive item e.g. a car

Because something has gone wrong

To start a business

Where can People borrow Money

Source AdvantagesDisadvantages

BankCan negotiate a set interest rate over timeMust keep paying rate of interest even if interest rates fall.

Building SocietyCan get a mortgage to buy a houseMust keep payments up or will lose the house

Credit UnionWill lend to people who do not have well paid jobsMust have a deposit saved with Union before you can borrow

Credit Card Quick and easy to make purchase

You can buy goods without using your own money Will pay highest rate of interest back on debt

Debt can easily accumulate as credit card companies give generous credit limits so that people will borrow up to them.

What is Demand?

The amount that an individual or individuals are willing to buy at any given price.

Effective Demand. This means that people actually have the money to make the purchases e.g. we could all claim to demand a BMW at 80,000. But, how many of us actually have that amount of money?

Individual demand is demand of one consumer

Market demand is Demand of all consumers added together (aggregate demand). Information on individual demands is collected on a schedule and then drawn up as a graph.

Demand schedule for flowerpots

Price (pence)

Number demanded

14100

12120

10140

8160

6180

4200

The Demand Curve

This shows the relationship between demand and price.

The Law of Demand (the Relationship between Demand and Price)

As the price falls, demand extends (rises) and the point on the demand curve moves down to right

As the price rises, demand contracts (falls) and the point on the demand curve moves up to left

Conditions of Demand (Relationship between Demand and Non-Price Factors)INCREASE IN DEMAND (for reasons other than price)

An increase in demand (possibly due to increased advertising) has forced the price upwards. Suppliers will take advantage of this and sell more goods.

Revenue from Sales

An increase in demand will lead to an increase in revenue as more will be demanded at a higher price. In the graph above the following happened:

PriceQuantity Demanded Revenue (Price x Quantity Demanded)

0.4010040

0.5015075

Due to a good advertising campaign, quantity demanded for the good increased and the price rose by 10p. This small rise in price led to an increase in revenue of 35.00.Conditions of Demand (non-price factors affecting demand)

ConditionChange in ConditionEffect on DemandDemand curve shifts:

IncomeIncrease +Increase +up to right

Decrease -Decrease -down to left

AdvertisingIncrease +Increase +up to right


Tastes and fashion

Increase +Increase +up to right


Price of Complementary good

cars/petrolIncrease +Decrease -down to left

Decrease -Increase +up to right

Price of Substitute good

butter/margarineIncrease +Increase +up to right

Decreases -Decrease -down to left

Weather

ice creamHot weather Increase +up to right

Cold weatherDecrease -down to left

Population size

Increase +Increase +up to right


What is Supply?

The amount of goods that producers are willing to supply/sell at a given price.

Law of Supply (Relationship between Supply and Price)

As the price rises, supply extends (rises) and the point on the supply curve moves up to right

As the price falls, supply contracts (falls) and the point on the supply curve moves down to left

In short, supply increases as price increases and supply decreases as price decreases. This is because producers are aiming to make profit.

* If the good is sold at a high price they will make more profit.* If it is sold at a low price they will either make very little profit or even a loss

Supply Curve

Information on individual suppliers is collected on a schedule and then drawn up as a graph.

Supply Schedule for Ice Cream cones

Price ()

Number supplied

0.5100

0.75150

1200

1.25250

Supply CurveThis shows the relationship between supply and price

Conditions of Supply (non-price factors affecting supply)

Supply can increase due to other factors. In the example below producer(s) have increased their supply of a good because raw materials are cheaper and they believe that they can make more profit on each good. The supply curve has SHIFTED from S1 to S2.

The table below shows the effects of changes on non-price factors on supply.

Conditions of Supply (non-price factors affecting supply)

ConditionChange in ConditionEffect on SupplyEffect on

profitSupply curve

shifts

Weather

PotatoesDry weatherIncrease +Increase +Out to the right

Wet weatherDecrease -Decrease -In to the left

Costs of Production

WagesIncrease +Decrease -Decrease -In to the left

Decrease -Increase +Increase +Out to the right

Availability of Resources

Milk for ice creamDecrease -Decrease -Decrease -In to

the left

Increase +Increase +Increase +Out to the right

Technical Progress

EquipmentImprovement

Increase +Increase +Out to the right

Deterioration

Decrease -Decrease -In to

the left

Markets

The Equilibrium Price

Suppliers and Consumers determine the price at which a good is sold as seen on this graph

The Price Mechanism

Changes in market price result from changes in supply and demandMarket eventCondition of DemandEffect on

Demand

Effect on

Market PriceEffect on

Supply

Health scare

Change in tasteDecrease -Decrease -contraction

Economy

improves

Increase in IncomeIncrease +Increase +extension

Competitor

cuts pricesSubstitute goodDecrease -Decrease -contraction

Good weather

WeatherIncrease +

Increase +extension

Market EventCondition of SupplyEffect on SupplyEffect on Market PriceEffect on Demand

Bad weatherWeatherDecrease -Increase +contraction

New production techniqueTechnical progressIncrease +Decrease -extension

The Market for Labour

What influences the total amount of labour available to UK firms?

Changes in size of population of working age

Percentage of population actively interested in working

Ability to recruit migrant workers

What do Firms take into account when trying to find labour?

The real wage rate being offered

The wages being offered in alternative jobs

Skills/education required to be able to do the job

Availability of migrant workers

Risk to health doing the job

Ability to offer pensions or career progression

How does a Firm decide how many people to employ?

Wages are a Variable Cost. All firms try to operate at the lowest point on the average cost curve.

If they employ too many people the average costs will stop falling and start rising.

What is the Difference between Wages and Earnings?

Wages are the payment given to a worker by an employer.

Earnings are these wages added to any of the following:

income renting property

interest from savings in the bank

dividends from shares.

What is the Difference between Wages and Take-home Pay?

Take-home pay is less than wages as tax, national insurance and pension contributions are deducted from wages by employers and the rest given as take-home pay to employees.

Why do some jobs pay more than others?

Paid for risk-taking

Working unsocial hours

More qualifications required

More skills required

Some jobs creates more revenue for firm

The Nature of Money

What is money?

It is the legal tender most commonly in use in a country.

Money is used for the following Functions:

1. It can be used as a means of exchange or to buy resources2. It is a measure of value e.g. 1 mars bar = 40p3. It is a store of value e.g. it keeps its value

What are the Characteristics of Good Money?

1. It should be acceptable2. It should be durable and hard-wearing3. It should be portable and easy to carry4. It should be divisible i.e. you can give change5. It must be scarceDifferent forms of payment for goods and services.

Cash is the most acceptable form of payment Cheque (backed up by a cheque card) transfers money out of your bank account to the sellers bank account within a week

Debit Card transfers money out of your bank account to the sellers bank account immediately Credit Card allows you to temporarily borrow from credit card company and pay at the end of the month.

FinanceReasons why firms need to borrow money

To start up

To buy equipment

To expand into new premises

To take-over other companies

Due to an unexpected crisis

The main sources of borrowing for firms

SourceAdvantageDisadvantage

Bank Loan

(short term loan) Can raise a lot of money Can receive the money quite quickly Needs to be repaid

Will have to pay interest as well

Mortgage

(long-term loan e.g. 25 years) Can raise even more money Have 25 years to repay Will have to repay far more than the initial loan A long term commitment

Selling shares Can raise lots of money

Doesnt necessarily have to be repaid Shareholders becoming part owners of the business Shareholders will expect annual dividends

Banking

How to Banks make a Profit?

Lend savers money to borrowers are a higher rate of interest than they offer to the savers.

Invest savers money on the stock market

Apply bank charges to customers accounts for transfers and overdrafts.A Commercial Bank offers Services to its customers

Keep money safely for customers Lend money to customers Help customers make payments (through cheques, cards and money transfers) Give financial advice to businesses and personal customers. Sell insurance and share dealingNature and Purpose of Trade

Why do Countries trade with each Other?

To obtain goods that they cannot produce themselves

To increase choice for their consumers

To obtains goods at a cheaper price than what they can produce themselves

To make more revenues and profits. It an extra place in which to sell their goods

Countries specialise in the production of goods and services at which they are better.

To exploit a comparative or absolute advantage.

What is Absolute Advantage?

Where one producer is better at producing a product than another producer.

What is Comparative Advantage?

Where one country can produce a good at a relatively cheaper cost in terms of other goods than another producer.

In recent years the UK had a comparative advantage in a number of manufacturing industries such as textiles or motorcycles. This was because the UK had lots of natural resources and raw materials, trained workers and lots of relevant machinery.

However, now this advantage has been lost to other areas of the world particularly Asia. They have extremely cheap labour, new technology and low transport costs.

UKs comparative advantage now may well be in

financial services (insurance/banking)

tourism

music

media

Why might a government restrict imports into a country?

Protects UK businesses from extra competition

Helps new UK businesses to develop before they face competition

Helps protect UK jobs

Prevents foreign countries dumping lots of cheap imports into the UK Prevents imports of harmful or desirable goods

Common Trade Barriers

Tariffs or Import Duties. These are taxes on imported goods. They raise the price to customers and make them less attractive

Quotas. These are limits on the quantity of a product that can be imported into a country e.g. 100,000 cars

Regulations. This includes laws and safety guidelines

Problems with Trade Barriers

Protectionism keeps UK firms away from genuine competition. They may become lazy and inefficient

If the UK puts up trade barriers then other countries are likely to retaliate.

Trade barriers increase the cost of trading. For example, a tariff would mean that UK firms and consumers may have to pay more for imports of raw materials or consumer goods

Free Trade

Trade without any trade barriers between countries

Benefits of Free Trade

Forces UK firms to produce quality goods and services as they face much foreign competition

Encourages firms to export and import. Greater choice for consumers and a higher standard of living

What is the European Union?A political and economic union of over 27 member states.What does the European Union do?

Ensures free trade between member countries therefore there are no tariffs or quotas placed on imports

Allows individuals and businesses to move freely between countries.

Encourages safety standards to be the same between each countries

Moves towards similar business laws and rules in each member country

What is the Social Charter?

This is an attempt to have minimum standards for workers in all 27 countries. These include:

Maximum hours to work in an hour

Minimum pay

Holiday rights

Maternity / Paternity leave

Benefits of the EU Single Market

Treats the area as one large trading block almost like an individual country instead of 15 separate countries and this should

Encourage trade

Create jobs

Improve standards of living

Avoids trade barriers between its members

Ensure sound working conditions

Provide a market of 380 million customers for firms to sell to

Recording International Trading Activity

What is an Export?Goods and services sold to foreigners by UK firms. The money received will enter into the UK.Visible Export. Actual goods which are sold to foreigners by UK firms e.g. tables, TVs, vehicles.

Invisible ExportServices which are sold to foreigners by UK firms e.g. banking, insurance, tourism.

. What is an Import?

Goods and services bought by UK residents and firms from foreigners. The money paid will leave the UK and go into the foreign country.

Visible Import. Actual goods bought by UK residents or firms e.g. tables, vehicles

Invisible Import. Services bought by UK residents and firms e.g. banking and tourism.

The Balance of Payments

The purpose of the balance of payments is to record of all UKs financial dealings with foreignersCurrent Account. The part of the balance of payments accounts where the value of exports and imports is recorded.

Why does UK usually have Deficit on its Current Account?

Decline in manufacturing therefore fewer goods to export

Lots of imports of goods from abroad

Cheaper to import

High exchange rate . This makes it more difficult to export but easier to import

Loss of comparative advantage in many goods

A boom in the UK means that consumers and businesses have more money to spend on imports.National and International CurrenciesWhat is an Exchange Rate?The price at which one currency is bought and sold for another e.g.A 1 coin can be sold to buy $1.50 or 134 yen or 1.10 Euros.

Countries which have the Euro as their currency are part of the Eurozone.

Changes in the Value of the

The value of the changes daily against other currencies. It could become stronger or it could become weaker.

Strong Pound. A strong or an increase in the value of the makes it more difficult for exporters to sell their goods abroad as foreigners have to pay more in order to buy our goods. A strong could result in:

AdvantagesDisadvantages

Cheaper holidays abroad for UK citizens

cheaper costs as it is cheaper to import raw materials reduced cost push inflation

Fewer tourists from abroad as it is more expensive to buy in UK

slower economic growth

unemployment (because exports are too dear to sell abroad)

a deficit on the balance of payments (because imports are much cheaper)

Weak Pound. A weak or a fall in the value of the makes it more expensive to import raw materials or other goods from abroad. It may result in

AdvantagesDisadvantages

More foreign tourists able to afford to spend in Britain

Good for UK businesses which compete against foreign imports as people are less likely to import goods from abroad. More expensive for UK person to have a foreign holiday

Bad for businesses who import raw materials

May cause cost push inflation

Government Expenditure

What does the Government spend its Income on?

In a mixed economy the Government makes decisions as to which merit goods to provide.

A merit good is provided by the government as it is judged to be good for people regardless of their desire for it or ability to pay for it eg

education

health

The government will be limited by budgetary considerations ie the amount of tax revenue it can or wants to bring in but it will also provide some public goods. A public good is one that would not be provided in a free market system and which is free for all to use regardless of whether they have paid for it or not eg

street lighting

police

In addition the government makes transfer payments paying:

Adult benefits eg housing, jobseekers allowance

Child benefit

Pensions

What is the difference between capital and current expenditure?

Current expenditure is recurring spending on items that are consumed and only last a limited period of time. They are items that are used up in the process of providing a good or service. In the case of the government, current expenditure would include wages and salaries expenditure on consumables - stationery, bandages and so on.

Capital expenditure is spending on assets. It is the purchase of items that will last and will be used time and time again in the provision of a good or service. In the case of the government, examples would be the building of a new hospital, the purchase of new computer equipment or networks, building new roads

Public Provision of goods, services and transfer payments Arguments:

ForAgainst

Scope for economies of scale and savings due to large purchases The most up to date service could not be provided by government

More investment available as government can choose to concentrate its wealth on key areas The state sector is generally less efficient than private sector as it has got no profit motives.

Good education will increase economic growth The bureaucracy costs are generally high in state sectors.

Government Income

What is Taxation?

Taxation is money paid to the Government by individuals and businesses. This money is usually spent by the Government on essential services such as health or education. Governments collect taxes in order to: collect money to pay for Government expenditure.

influence buying patterns.

help redistribute income between individuals.

manage the economy.

Increasing the level of income tax will help reduce inflation. This is because people pay more tax, have less disposable income and buy fewer goods.

Decreasing the level of income tax will help increase growth and reduce unemployment. This is because people pay less tax, have more disposable income and buy more goods.

Are some Taxes Fairer than Others?

Progressive Tax. A tax where the higher the income of the taxpayer, the larger the percentage of their total income paid in tax. Eg Direct TaxesRegressive Tax. A tax where higher income earners pay a lower percentage of their income in tax compared to low income earners eg Indirect TaxesTypes of Taxes

Direct Tax. A tax placed directly on an individual or business

Income tax - taken out of an individuals wage

Corporation tax - paid by businesses out of their profits

National Insurance taken out of an individuals wage

Indirect Tax. A tax placed on a good or service VAT - this is put onto the price of most goods and services, usually 17.5%

Council tax - paid on the value of an individuals property

Excise duty - extra tax imposed on certain products e.g. petrol, cigarettes and alcohol Prescription charge

Government BudgetingThe budget is an opportunity for government to: alter its spending programme

alter the level and pattern of taxes raise or lower or leave unchanged its need to borrow.Budget Deficit. This is when the government spends more in a year than is raised from tax revenue. It might do this to increase demand for and spending on goods and services and may result in

reduced unemployment

increased inflation.

Budget Surplus. This is when the government raises more in tax revenue than it spends. It may do this to reduce demand and curb consumer spending. It may lead to

lower inflation.

higher unemployment

Government BorrowingWhere income from taxation is not enough to fund a governments budget plans, it can borrow.

How does the Government Borrow?

It can sell

Treasury Bills which it repays within a short time

National Savings certificates

Government Securities

All of which earn interest for the lender.The National Debt

This is the total amount a government owes to

Its own citizens

Lenders from abroad

Sometimes the amount the government owes is so large it has to borrow more just to make the interest payments.

How to we know if the Economy has Grown?This is measured by the yearly change in Gross Domestic Product (GDP). It is usually expressed as a % change. GDP can be measured in 3 different ways.

The total production (output) of all businesses The total incomes and profits in the country The total of all spending by individuals and businesses

How does the Economy Grow?Growth results from anything which allows the country to produce more goods and services eg More business investment

Better productivity

Better machinery

Improved training

Better skills

New technology

New ideas

Increased efficiency

Costs and Benefits of Economic Growth

CostsBenefits

Extra production could cause extra pollution

Exhaustion of non renewable resources like oil

Only the rich may gain the benefits

The poor stay poor and inequality increases

Greater stress on workers to produce more goods More income for society

Should create jobs

Could reduce the number of poor people More goods produced and probably more choice for customers and businesses Higher standard of living

What does Standard of Living Mean?

How well off an individual or nation is at a point in time. We can measure the nations standard of living by its level of GDP.To measure the individuals standard of living we look at: Average Income level

Number of material goods owned by people e.g. cars, TVs, mobiles

Quality of life e.g. stress, congestion, crime rates

Number of holidays per year.

And

Number of patients per doctor

Infant mortality rates

% of the population that can read or write

Average food intake per person

What is Inflation?General increase in level of prices over defined time period eg a year. It is expressed as a percentage. If prices increase by 5%, consumers can buy 5% less goods. Inflation leads to a fall in the buying power of money.What Effect does Inflation have on purchasing power of money?

Makes exports less competitive

Makes imports more attractive

Wages do not buy as many goods as the goods are more expensive

Makes planning difficult

Deters savings

Who Suffers in the Economy when there is Inflation?

All wage earners find their wages buy less and may need to keep asking for pay increases to match price rises. This can cause problems at work If people are on fixed incomes e.g. pensioners or students. They will be worse off because they will be able to buy fewer goods The costs to businesses may increase. They may cutback on production and this may increase employment.

If the prices of UK goods increase too much then people and businesses may start to import more goods from abroad because they are cheaper. Increasing prices make goods more expensive to export this could lead to a fall in exports.

Measuring Inflation

RPI Retail Prices Index

Each month 150,000 prices collected in 180 locations in UK. This basket of goods includes food, household goods, services charges, house prices. Prices are then averaged using weightings and the rate of price changes in then calculated from this.

The CPI Consumer Prices Index is calculated in a similar way but does not include house prices.

What is the difference between real and money price?Inflation erodes the real value of money. If inflation increases by 10% but wages increase by only 5% then the worker can buy 5% less goods than before. In real terms the workers buying power has been reduced.

What are Regional Inequalities or Disparities?

Within the UK there are many different types of regions. Some are quite wealthy others are quite poor in comparison, therefore the standard of living will vary between regions.How are disparities between regions identified?

Availability of social amenities eg leisure centre

Availability and quality of housing

Average income levels of local population

Percentage of population unemployed

Percentage of business premises lying vacant

Condition of infrastructure eg roads

Reasons why some regions are more attractive to businesses than others.

Quality transport links

Cheap land for sale

Skilled workforce available for hire

Good quality premises

Demand for goods

What can governments do to Overcome Disparities

Invest money into struggling areas e.g. roadbuilding project Give grants to businesses who locate in certain area Lower taxes for firms willing to come to the area

Subsidise cheaper rents for firms in these areas

Spend money on improving colleges or training to give workers relevant skills

Invest in leisure/social facilities to reduce crime

What is Unemployment

Any resource - human, natural or manmade - which is not being used in the production of goods and services, is said to be unemployed

Unemployment generally refers to those people able to work who are without a job.

Unemployment increases when aggregate (market demand) falls as less goods are demanded.How is Number of Unemployed Measured?

Those people willing and able to work and are without a job. They must also be eligible to claim benefits and choosing to claim benefits.What Causes Unemployment?

1Recession

A period where economic growth slows down and the level of output may actually decrease and unemployment is likely to increase. During a Recession:

Firms may lose confidence and reduce investment. Businesses cut back on production Some businesses may go bankrupt Consumers spend less money. Individuals may save rather than spend. Individuals may lose their jobs More money is spent by the Govt on unemployment benefits Less money is collected by the Govt in income tax and VAT2Threat from Imports

Imported goods pose a threat to UK employment resulting in:

UK employers have to be more efficient to compete with cheaper goods. They may choose to do this by employing fewer people in order to keep costs down.

UK employers who cannot compete may go out of business UK employers may choose to look for new products or move into different markets

3Lack of Mobility of Labour

There are 2 types of labour mobility:

Occupational means ability to move between professions

Geographical means ability to move between geographical areas

The immobility labour can contribute to unemployment as people may refuse

to retrain to update their skills

to move area when a firm relocates or may not apply for suitable jobs in another area

Problems and Costs of Unemployment to the Individual:

Unemployed WorkerEmployed Workers

Loss of earnings Lack of self esteem Reduced spending power Loss of skills and employabilty May have to pay extra tax to cover increased unemployment benefits Loss of job security they may fear losing their jobs. May have to accept pay cuts to keep their jobs

How can Government reduce Unemployment?

Government can give support to struggling industries in order to try to save jobs e.g. airline industry

Provide more training and education to the unemployed. This could help improve computer skills and communication. These people will become more confident and employable. Make more information available in job centres. Reduce unemployment benefits to make lower wage jobs more attractive

Try to bring the country out of a recession. The Government needs to try to create demand in the economy. It could;

Have projects such as roadbuilding

Cut interest rates to encourage spending

Cut income tax to encourage spending Give grants to businesses to produce goods

1 Economic Systems

1 Economic Systems

1 Economic Systems

1 Economic Systems

2 Production

2 Production

2 Production

2 Production

2 Production

2 Production

2 Production

3 Consumption

3 Consumption

4 Market Mechanisms

Shape of Demand curve

The Demand curve slopes downwards from left to right. As price falls more quantity is demanded and as price rises less is demanded.

4 Market Mechanisms

4 Market Mechanisms

4 Market Mechanisms

Shape of Supply Curve

The Supply curve upwards slopes from right to left. As price rises more quantity is supplied and as price falls less is supplied.

4 Market Mechanisms

Difference between Output and Supply

Output is the amount produced by suppliers. Supply is the amount of goods that producers are willing to supply/sell at a given price. Suppliers may hold back some output in reserve for a time when prices may rise.

4 Market Mechanisms

Equilibrium price and output

Where quantity demanded = quantity supplied

Where demand curve crosses over supply curve

4 Market Mechanisms

EMBED Excel.Chart.8 \s

5 Money, Finance and Banking



6 International Trade





7 Public Finance

7 Public Finance

7 Public Finance

7 Public Finance

8 Economic Growth

8 Economic Growth

9 Inflation

9 Inflation

10 Regional Disparities

11 Unemployment

11 Unemployment

11 Unemployment

4 Market Mechanisms

?

There are several ways in which businesses can join, merge or integrate together.

2

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economics standard grade revision notes

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