Money and banking
● Money is a medium of exchange of goods and services
● We need money in order to exchange goods and services with one another.
● In the past, the barter system was used, it was exchanging a good or service for another food or
service. This had a lot of problems as some goods were perishable and non-durable, indivisibility or
lack of portability
● Today, the notes and coins we use are durable, uniform, divisible, portable and generally accepted.
These are the characteristics of good money
● The functions of money
○ Money is a medium of exchange
○ Money is a medium of value. Money acts as a unit of account, allowing us to compare and
state the worth of different goods and services
○ Money is a store of value. It holds its value for a long time, allowing us to save it for future
purposes
○ Money is a means of deferred payment. Deferred payment are purchases on credit, where the
consumer can pay later for the goods or service they buy
● Banks are financial institutions that act as an intermediary between borrowers and savers. It is the
money we save at banks that is lent out as loans to other individuals and businesses
● Commercial banks are those banks that have many retail branches located in most cities and towns.
For example HSBC.
● There is also a central bank that governs all other commercial banks in a country. For example reserve
bank of India (RBI)
● Functions of a commercial bank
○ Accepts deposits in the form of savings
○ Aid customers in making and receiving payments via their bank accounts
○ Give loans to businesses and private individuals
○ Buying and selling shares on customers behalfs
○ Providing insurance
○ Exchange of forreign currencies
○ Provide financial planning advice
● Functions of a central bank
○ It issues notes and coins of the national currency
○ It manages all payments relating to the government
○ It manages national debt. Central banks can issue and repay public debts on the government;s
behalf
○ It supervises and controls all the other banks in the whole economy, even holding their deposits
and transferring funds between them.
○ It is the lender of last resort to commercial banks. When other banks are having financial
difficulties, the central bank can lend them money to prevent them from going bankrupt
○ It manages the country’s gold and foreign currency reserves. These reserves are used to make
international payments and adjust their exchange rate/currency value
○ It operates the monetary policy in an economy
Households
● Disposable income is the income of a person after all income-related tax and charges have been
deducted
● Spending (Consumption)
○ The buying of goods and services is called consumptions. The money spent on consumption is
called consumer expenditure
○ People consume in order to satisfy their needs and wants and give them satisfaction
● Factors affecting consumption
○ Disposable income
■ The more the disposable income, the more people consume
○ Wealth
■ The more wealthy (having assets as property, jewels, company shares) a person is, the
more he spends
○ Consumer confidence
■ If the consumers are confident of keeping their jobs and their future incomes, then they
might be encouraged to spend more now, without worries.
○ Interest rates
■ If the interest rates provided by banks on savings are high, consumers might save more
so they can earn interest and thus consumer expenditure will fall.
● Saving
○ Saving is income not spent(delaying consumption). People can save money by depositing in
banks and withdraw it at a later date with the interest.
● Factors affecting saving
○ Saving for consumption
■ People save so that they can consume later. They save money so that they can make
bigger purchases in the future. Thus, saving can depend on the consumer's future plans
○ Disposable income
■ If the amount of disposable income people have is high, the more likely that they will
save. Thus, rich people save a higher proportion of their incomes than poor people.
○ Interest rates
■ People also save so that their savings may increase overtime with the interest added.
Interest is the return on saving, the longer you save an amount, the higher the amount,
the higher the interest received
○ Consumer confidence
■ If the consumer is not confident about his job security and incomes in the future, he
many save more now
○ Availability of saving schemes
■ Banks now offer a variety of saving schemes. When there are more attractive schemes
that can benefit consumers, they might resort to saving rather than spending
● Borrowing
○ Borrowing is the simple borrowing of money from a person/institute. The lender gives the
borrower money. The lender is usually the bank which gives out loans to customers
● Factors affecting borrowing
○ Interest rates
■ Interest is also the cost of borrowing. When a person takes a loan, he must repay the
entire amount at the end of a fixed period while also paying an amount of interest
periodically. When the interest rates rise, the people will be reluctant to borrow and vice
versa
○ Wealth/income
■ Banks will be more willing to lend to wealthy and high-income earning people, because
they are more likely to be able to repay the loans, rather than the poor. So even if they
would like to borrow, the poor end up being able to borrow much lesser than the rich
○ Consumer confidence
■ How confident people feel about their financial situation in the future may affect
borrowing too. For example, if they think that prices will rise(inflation) in the future, they
might borrow now to make big purchases.
○ Ways of borrowing
■ The number of ways to borrow can influence borrowing. Nowadays there are many
borrowing facilities such as overdrafts, bank loans etc. and there are more credit(future
payment) options such as hire purchases(payment is done in installments overtime),
credit cards etc.
● Expenditure patterns between income groups
○ The rich people spend, save and borrow more amounts than the poor
○ The poor spend higher proportions of their disposable income, especially on necessities than
the rich. The poor save less proportions of their disposable income in comparison with the rich
Trade Unions
● Trade unions are organizations of workers that aim at promoting and protecting the interest of their
members/workers. They aim to improve wage rates, working conditions and other job-related aspects.
● The functions of a trade union
○ Negotiating improvements in non wage benefits with employers
○ Defending employees rights
○ Improving working conditions such as better working hours and better safety measures
○ Improving pay and other benefits
○ Supporting workers who have been unfairly dismissed or discriminated against
○ Taking industrial actions such as strikes, overtime ban when employers don't satisfy their needs.
● Collective bargaining
○ The process of negotiating over pay and other working conditions between trade unions and
employers
● When can trade unions argue for higher wages and better working condition
○ Prices are rising
■ The cost of living increases when prices increase and workers will want higher wages to
consume products and raise their families
■ The sales and demand of the firm has increased
■ Workers in other firms are getting a higher pay
■ The productivity of the members has increased.
● Industrial disputes
○ When firms don’t satisfy trade union wants or refuse to agree to their terms, the members of a
trade union can organize industrial disputes
○ Overtime ban
■ Workers refuse to work more than their normal hours
○ Go slow
■ Workers deliberately slow down production so the firm’s sales and profits go down
○ Strike
■ Workers refuse to work and may also protest or picket outside their workplace to stop
deliveries and prevent other non-union members from entering. They don’t receive any
wages during his time. This will halt all production of the firm
● Advantages of trade unions to workers
○ Workers benefit from collective bargaining power by being able to establish better terms of
labour
○ Workers feel a sense of unity and feel represented, increasing morale
○ Lesser chance of being discriminated and exploited
● Disadvantages of trade unions to workers
○ Workers might get lesser wages or none if they go on strike as the output and profits of the firm
falls and they refuse to pay
● Advantages of trade unions to firms
○ Time is saved in negotiating with a union when compared to negotiating with individual workers
○ When making changes in work schedules and practises, a trade union’s cooperative can help
organise workers efficiently
○ Mutual respect and good relationships between unions and the firms are good for business
morale and increases productivity
● Disadvantages of trade unions to firms
○ Decisions making may be long as there will be need of lengthy discussion with trade unions in
major business decisions
○ Trade unions may make demands that the firm may not be able to meet, they will have to
choose between profitability and workers interest
○ Higher wages bargained by trade unions will reduce the firm's profitability
○ Businesses will have high costs and low output if unions organise agitations. Their revenue and
profits will go down and they will enter a loss. They may also lose a lot of customers to
competing firms
● Advantages of trade unions to economy
○ Ensures that the labour force in the economy is not exploited and that their interests are being
represented
● Disadvantages of trade unions to economy
○ Can negatively impact total output of the economy
○ Firms may decide to subtitle labour for capital if they can’t meet trade unions expensive
demands and so unemployment may rise
○ Higher wages resulting from trade union activity can make the nation’s exports expensive and
thus less competitive in the international market
Firms
● Classification of firms
○ Firms can be classified in terms of the sectors they operate in and their relative sizes
○ Primary
■ All economic activity involving extraction of raw natural materials. This includes
agriculture, mining, fishing etc.
○ Secondary
■ All economic activity dealing with producing finished goods. This includes construction,
manufacturing, utilities etc.
○ Tertiary
■ All economic activity offering intangible goods and services to consumers. This includes
retail, leisure, transport, IT services, baking, communications
○ Firms can also be classified on the basis of whether they are publicly owned or privately owned
○ Public firms
■ This includes all firms owned and run by the government. Usually, the defence, arms and
nuclear industries of an economy are completely public. Public firms don't have a profit
motive but aim to provide essential services to the economy it governs. Governments do
also run their own schools, hospitals, postal services, electricity firms etc.
○ Private firms
■ This includes all firms owned and run by private individuals. Private firms aim at making
profits and so their products are those that are highly demanded in the economy
● Small firms
○ A small firm is an independently owned and operated enterprise that is limited in size and in
revenue depending on the industry.
○ They require relatively less capital, less workforce and less or no machinery. These businesses
are ideally suited to operate on a small scale to serve a local community and to provide profits
to the owners
● Advantages of small firms
○ Independence
■ Owners are free to run the business as he pleases
○ Control
■ The owner has full control over the business unlike in a large business where multiple
managers, departments and branches exist.
○ Flexibility
■ Small businesses can adapt to quick changes as the owner is more involved in the
decision making
○ Better communication
■ Since there are fewer employees, information can be imitated easily and quickly
○ Innovation
■ Small businesses can tend to be innovative because they have less to lose and are
willing to take risks
● Disadvantages of small businesses
○ Higher costs
■ Small firms cannot exploit economies of scale, their average costs will be higher than
large rivals
○ Lack of finance
■ Struggles to raise finance as choice as sources of acquiring finance is limited
○ Difficult to attract experiences employees
■ A small business may be unable to afford the wage and training required for skilled
workers
○ Vulnerability
■ When economics conditions change, it is harder for small businesses to survive as they
lack resources
● Small businesses still exist in the economy for several reasons
○ Size of market
■ When there is only a small market for a product, a firm will see no point in growing to a
larger size. The market maybe small because
● The market is local
● The final product maybe an expensive luxury item
● Personalized/custom services only
○ Access to capital is limited
■ Therefore owners can’t grow their firm
○ Small firms can cooperate
■ This can lead them to set up jointly owned enterprises woch allow them to enjoy many of
the benefits that large firms have.
○ Governments help small firms
■ Governments usually provide help to small scale firms because small firms are an
important provider of employment and generate innovation in the production process.
● Growth of firms
○ When a firm grows, it's scale of production increases. Firms can grow in to ways, internally and
externally
● Internal growth
○ This involves expanding the scale of production of the firm's existing operations. This can be
done by purchasing more machinery. equipment , opening more branches, selling new products,
expanding business premises, employing more workers etc.
● External growth
○ This involves two or more firms joining together to form a larger business. This is called
integration. It can be done in 2 ways, mergers and takeovers
○ A takeover or acquisition happens when a company buys enough shares of another firm that
they can take full control
○ A merger occurs when the owners of 2 or more companies agree to join together to form a firm
● Horizontal mergers
○ Integration of firms engaged in the production of the same type of good at the same level of
production, eg a cloth making company merges with another cloth making company
● Advantages of horizontal merging
○ Exploit internal economies of scale
■ Including bulk-buying, technical economies, financial economies
○ Save costs
■ When merging, a lot of the duplicate assets including employees can be laid off
○ Revenue synergies
■ Potential to secure revenue synergies by creating and selling a wider range of products
○ Reduces competition
■ By merging with key rivals, the two firms together can increase market share
● Disadvantages of horizontal merging
○ Risk of diseconomies of scale
■ A larger business will bring with a lot of managerial and operational issues leading to
higher costs
○ Reduced flexibility
■ The addition of more employees and processes can slow down the rate of innovating
and producing new products and processes
● Vertical merging
○ Integration of firms engaged in the production of the same type of goods but at different levels of
production. Example a cotton making industry merges with a cotton producing industry
○ Forward vertical merging
■ When a firm merges with a firm that is at a later stage of production than theirs. Example
a dairy farm with a cheese manufacturing company
○ Backward vertical merging
■ When a firm merges with a firm that is at an earlier stage of production than theirs.
Example a chocolate retailer merges with a chocolate manufacturing company
● Advantages of vertical merging
○ It can give firm assured supplies or outlets for their products. If a coffee brand merged with a
coffee plantation, the manufacturers would get assured supplies of coffee beans from the
plantation.
○ One firm can prevent the other firm from supplying materials or selling products to competitors
○ The profit margins of the merged firm can be more
○ The firms can increase their market share and become more competitive in the market
● Disadvantages of vertical merging
○ Risk of diseconomies of scale
■ A larger businesses will bring with it a lot of managerial and operational issues leading to
higher costs
○ Reduced flexibility
■ The addition of more employees and processes can slow down the rate of innovating
and producing new products and processes
○ When firms vertically merge, they are not familiar with the stage of production therefore they will
require training and some might even lose their jobs, it can be expensive as well.
● Lateral/Conglomerate merging
○ This occurs when firms producing different types of products merge. They could be at the same
or different stages of production
● Advantages of lateral/conglomerate merging
○ Diversify risks
■ Conglomerate merging allows businesses to have activities in more than one market.
This allows the firms to spread their risks. If one market is in decline, it still has another
source of profit
○ Creates new markets
■ Merging with a firm in a different industry will open up the firm to a new customer base,
helping it to market its core products to this new market
○ Transfer of ideas
■ There could be a transfer of ideas and resources between the 2 businesses even though
they are in different industries. The transfer of ideas could help improve the quality and
demand for the 2 products.
● Disadvantages of lateral/conglomerate merging
○ Inexperience can lead to mismanagement
■ If the firms are in entirely different industries and have no experience in the others
industry, cooperating and managing the 2 industries may be difficult and could turn
disastrous
○ Lose focus
■ Merging with and focusing on an entirely new industry could cause the firm to lose focus
of its core product
○ Culture clash
■ As with all kinds of mergers, there could be a culture clash between the 2 firms'
employees on practises and standards.
● Scale of production
○ As a firm's scale of production increases its average costs decrease. Cost Saving from a
large-scale production is called economies of scale
● Internal economies of scale
○ They are decisions taken within the firm that can bring about economies (advantages). Some
internal economies are-
○ Purchasing economies
■ Large firms can buy raw materials and components in bulk because of their large scale
of production. Supplier will usually offer price discounts for bulk purchases, which will cut
purchasing costs for the firm
○ Marketing economies
■ Large firms can afford their own vehicles to distribute their products, which is much
cheaper than hiring other firms to distribute them. Also the costs of advertising is spread
over a much larger output in large firms when compared to small firms
○ Financial economies
■ Banks are more willing to lend money to large firms since they are more financially
secure than small firms to repay loans. They are also likely to get low interest rates.
Large firms also have the ability to sell shares to raise capital. Thus they get more capital
at lower costs
○ Technical economies
■ Large firms are more financially able to invest in good technology, skilled workers,
machinery etc. which are very efficient and cut costs for the firm.
○ Risk bearing economies
■ Large firms with a high output can sell into different markets(even overseas); They are
able to produce a variety of products. This means that risks are spread over a wider
range of products or markets, even if a market of product is not successful, they have
other products and markets to continue business in. this costs are less
● External economies of scale
○ They occur when firms benefit from the entire industry being large
○ Access to skilled workers
■ Large firms can recruit workers trained by other firms. For example, when a new training
institution for pilots and airline staff opens, all airline firms can enjoy economies of scale
of having access to skilled workers who are more efficient and productive
○ Ancillary firms
■ They are firms that supply and provide materials/services to larger firms. When ancillary
firms such as a marketing firm are located close to a company, the company can cut
costs by using their services more cheaply than other firms.
○ Joint marketing benefits
■ When firms in the same industry locate close to each other, they may share an
enhanced reputation and customer base
○ Shared infrastructure
■ Development in the infrastructure of an industry or the economy can benefit from large
firms. For example better and more roads can cut on transportation costs for the firms.
● Diseconomies of scale
○ They occur when a firm grows too large and average costs start to rise
○ Management diseconomies
■ Large firms have a wide internal organisation with lots of managers and employees. This
makes communication difficult and decision making very slow. This leads to inefficient
running of firms and increased costs
○ Too much output
■ May require large supply of raw materials, power etc. which can lead to shortage and
halt production, increasing costs
○ Demotivation and less cooperation
■ Workers operating machine may feel bored this become demotivated, many workers
may leave or go on strikes, halting production
○ Agglomeration diseconomies
■ When firms merge/acquire too many different firms producing different products, the
owners can't coordinate and organise all activities, leading to higher costs.
○ The products become too standardised and less a variety in the market
■ This will reduce sales and profits and increase average costs
● A firm that doubles its inputs (resources) and is able to more than double its output as a result
experiences increasing returns to scale
● A firm that doubles its inputs but fails to double its output as a result experiences diminishing return to
scale
Firms and Production
● Demand for factors of production
○ The demand for the product
■ If more goods and services are demanded by consumers, more factors of production will
be demanded by firms to produce and satisfy the demand.
○ Availability of factors
■ Firms will also demand factors that are easily available and accessible to them. If the
firm is located in a region where there is a large pool of skilled labour, it will demand
more labour as opposed to capital
○ The price of factors
■ If labour is more expensive than capital, firms will demand more capital, as they want to
reduce costs and maximize profits
○ The productivity of factors
■ If labour is more productive than capital, than more labour is demanded
● Labour intensive production
○ It is where more labourers are employed than other factors say capital.Production is mainly
dependent on labour.
● Advantages of labour intensive production
○ Flexibility
■ Labour unlike most machinery can be used flexibly to meet changing level of consumer
demands
○ Personal services
■ Labour can provide a personal touch to customer needs and wants
○ Gives feedback
■ Labour can give feedback that provides ideas for continuous improvements in the firm
○ Essential
■ Labour is essential in case of machine breakdowns. After all, machines are only as good
as the labour that builds maintains and operates them
● Disadvantages of labour intensive production
○ Relatively expensive
■ In long term, when compared to machinery, labour has higher per unit costs due to lower
levels of productivity
○ Inefficient and inconsistent
■ Compared to machinery, labour is relatively less efficient and tends to be inconsistent
with their productivity, with various personal, psychological and physical matters
influencing their quantity and quality of work
○ Labour relation problems
■ Firms will have to put up with labour demands and grievances. They could stage an
overtime ban or strike if their demands are not met
● Capital intensive production
○ It refers to the machinery, equipment, tools, buildings and vehicles used in production. It is a
production which requires a relatively high level of capital investment compared to labour costs.
Many capital-intensive production is automated
● Advantages of capital intensive production
○ Less likely to make errors
■ Machines since they are digitally programmed to do tasks, won't make the mistakes that
labourers will
○ More efficient
■ Machinery doesn't need breaks or holidays, had no demands and makes no mistakes
○ Consistent
■ Since they wont have human problems and are programmed to repeat tasks, they are
very consistent in the output produced
○ Technical economies of scale
■ Increased efficiency can reduce average costs
● Disadvantages of capital intensive production
○ Expensive
■ The initial costs of investment is high as well as possible training costs
○ Lack of flexibility
■ Machines need not to be as flexible as labourers are to meet changes in demand
○ Machinery lacks initiative
■ Machines don't have the intuitive or creative power that human labour can provide the
business and improve production.
● Production and productivity
○ A firm combines scarce resources of land, labour and capital to make goods and services.
○ Production is the transformation of raw materials to finished or semi finished goods and services
● Factors that influence production
○ Demand for product
■ The more the demand from consumers, the more the production
○ Price, availability of factors of production
■ If factors of production are cheap and readily available, there will be more production
○ Capital
■ The more the capital that is available to producers, the more the investment in the
production
○ Profitability
■ The more profitable producing and selling a product is, the more the production of the
product will be.
○ Government support
■ If governments give money in grants, subsidies, tax breaks, more production will take
place in the economy
● Productivity measures the amount of output that can be produced from a given amount of input over a
period of time
● Productivity = total output produced per period/ Total input used per period
● Productivity increases when
○ More output or revenue is produced from the same amount of resources
○ The same output of revenue is produced using fewer resources
● Factors that influence productivity
○ Division of labour
■ Division of labour is when tasks are divided among labourers. Each one specializes in a
particular task and thus this will increase productivity
○ Skills and experience of labour force
■ A skilled and experienced workforce will be more productive
○ Workers motivation
■ The more motivated the workforce is, the more productive they will be. Better pay,
working conditions, reasonable working hours etc can improve productivity
○ Technology
■ More technology introduced into the production process will increase productivity
○ Quality of factors of production
■ Replacing old machinery with new ones, preferably with the latest technologies, can
increase efficiency and productivity. In the case of labour, training the workforce will
increase productivity.
○ Investments
■ Introducing new production processes which will reduce wastage, increase speed ,
improve quality, and raise output will raise productivity. This is known as lean production.
Firms’s costs, revenue and objectives
● Fixed costs
○ They are costs that are fixed in the short-term running of a business and have to be paid even
when no production is taking place. For example, rent, interest on bank loans, telephone bills
etc. These costs do not depend on the amount of output produced
○ Average fixed cost = Total fixed cost / Total output
● Variable cost
○ They are costs that are variable in the
short-term running of a business and are paid
according to the output produced. The more
the production, the more the variable costs
are. Example electricity bill cost of raw
materials
○ Average variable cost = Total variable
cost/Total output
● Total cost = Total fixed cost + total variable cost
● Average cost or average total cost is the cost per unit of output
● Average total cost =
○ total cost/total output
○ Average variable cost + average fixed cost
● Revenue
○ Revenue is the total income a firm earns from its sale of its goods and services. The more the
sales, the more the revenue
○ Total revenue = Number of units sold x Price per unit
○ Average revenue = Total revenue / No of units sold
● Total revenue - Total cost = Profit
● Objectives of a firm
○ Survival
■ Firms in a highly competitive market will also be more concerned with survival rather
than any other objective. To achieve this, firms could decide to lower prices, which would
mean forsaking other objectives such as profit maximization.
○ Profit
■ Profit is the income of a business from its activities after deducting total costs from total
revenue. Private sector firms usually have profit making as a primary objective. This is
because profits are required for further investment into the busines. Usually, firms aim to
maximise their profits by either minimising costs, or maximising revenue, or both.
○ Growth
■ Once a business has passed its survival stage it will aim for growth and expansion. This
is usually measured by the value of sales or output. A larger business can ensure
greater job security and salaries for employees.
○ Market share
■ Market share can be defined as the sales in proportion to total market sales achieved by
a business. Increased market share can bring about many benefits to the business such
as increased customer loyalty, setting up of brand image, etc.
○ Service to the society
■ Some operations in the private sectors such as social enterprises do not aim for profits
and prefer to set more social objectives. They aim to better the society by aiding society
financially or otherwise
