1. 2013 Muhammad Raheel THE CITY SCHOOL (A-LEVEL CAMPUS) 9/9/2013 Micro Economics

2. 2 | P a g e WHAT IS ECONOMIC PROBLEM? (4) The economic problem, sometimes called the basic, central or fundamental economic problem, is one of the fundamental economic theories in the operation of any economy. Economic problem arises mainly due to two reasons- (I) human wants are unlimited (ii) means to satisfy human wants are scarce. Needs: Needs are material items people need for survival, such as food, clothing, housing and ware. Until the Industrial Revolution, the vast majority of the worlds population struggled for access to basic human needs and need are also those things without which we cannot live. Wants: These wants are often classified into individual wants, which depend on the individual's preferences and purchasing power parity, and collective wants, those of entire groups of people. Things such as food and clothing can be classified as either wants or needs, depending on what type and how often a good is requested. Wants are effective desires for a particular product, or something which can only be obtained by working for it.

3. 3 | P a g e DEFINE PUBLIC GOODS, MERIT GOODS AND CONSUMER GOODS ? (6) In economics, a public good is a good that is both non-excludable and non-rivalrous in that individuals cannot be effectively excluded from use and where use by one individual does not reduce availability to others.[1] Examples of public goods include fresh air, knowledge, lighthouses, national defense, flood control systems and street lighting. Public goods that are available everywhere are sometimes referred to as global public goods. A fireworks display is a public good because it is non-excludable (impossible to prevent people from using it) and non-rivalrous (one individual's use does not reduce availability to others). Definition of merit goods: Goods or services (such as education and vaccination) provided free for the benefit of the entire society by a government, because they are ought to benefit the society, wether the consumers are willing to pay for it or not. Products that are purchased for consumption by the average consumer. Alternatively called final goods, consumer goods are the end result of production and manufacturing and are what a consumer will see on the store shelf. Clothing, food, automobiles and jewelry are all examples of consumer goods. Basic materials such as copper are not considered consumer goods because they must be transformed into usable products.

4. 4 | P a g e WHAT ARE THE FOUR FACTORS OF PRODCTION? (8) The four factors of production are: Land: Consists of all useful materials found in the natural environment. Labor: The human effort that goes into producing the goods or services. Capital: Money used to buy tools and equipment used to produce goods or services An entrepreneur: is an individual who organizes and operates a business or businesses, taking on financial risk to do so. WHAT ARE THE ADVANTAGES AND DIS ADVANTAGES OF MARKET, MIXED AND PLANED ECONOMY? (12)

5. 5 | P a g e MARKET ECONOMY: ADVANTAGES: 1. market economies can adjust to change easily( If there is a demand for one thing, companies have the ability to change what they produce instead of having to go through too much government protocol first). 2. Rational self interest in market economies are also encouraged (allow freedom for people to do what they want, make what they want, and, sell what they want -to a certain extenT. 3. 3. there is a great variety of goods and services for consumers. 4. 4. market economy encourage competitive environment DIS-ADVANTAGES: 1. No provision of merit goods like education, health, housing... so the poor will be deprived of the merit goods. In this way the rich becomes richer and the poor becomes poorer. 2. No provision of public goods (bus stop, garden, street lighting, army, police, fire services) important requirements for public goods not provided since it is not profitable to produce as consumers are not directly willing to pay for them. 3. Over consumption of demerit goods (drugs, cigarettes, alcohol) if consumers have a preference for these goods, then they will be provided given that they are profitable to produce.

6. 6 | P a g e 4. Social cost ignored e.g. private firms ignore negative external factors (air, water and noise pollution, road conditions etc;) 5. Wastage of resources 6. Social injustice 7. Economic instability MIXED: Advantages: Producers and consumer have sovereignty to choose what to produce and what to consume but production and consumption of harmful goods and services may be stopped by the government. Social cost of business activities may be reduced by carrying out cost-benefit analysis by the government. As compared to Market economy, a mixed economy may have less income inequality due to the role played by the government. Monopolies may be existing but under close supervision of the government.

7. 7 | P a g e DIS-ADVANTAGES: Fear of nationalization: Private and public sector coexists . The government has the power to nationalize and own any industry, so private sector remains under a psychological fear that their industry may be nationalized or taken over in the public interest. Inequality of income: PLANNED: ADVANTAGES: Prices are kept under control and thus everybody can afford to consume goods and services. There is less inequality of wealth. There is no duplication as the allocation of resources is centrally planned. Low level of unemployment as the government aims to provide employment to everybody. Elimination of waste resulting from competition between firms. Disadvantages Consumers cannot choose and only those goods and services are produced which are decided by the government. Lack of profit motive may lead to firms being inefficient. Lot of time and money is wasted in communicating instructions from the government to the firms.

8. 8 | P a g e DEFINE FIXED COST, VARIABLE COST, TOTAL COST AND TOTAL REVENUE. (8)+(8) FIXED COST: In economics, fixed costs are business expenses that are not dependent on the level of goods or services produced by the business. They tend to be time-related, such as salaries or rents being paid per month, and are often referred to as overhead costs. This is in contrast to variable costs, which are volume-related (and are paid per quantity produced). VARIABLE COST: Variable costs are expenses that change in proportion to the activity of a business. Variable cost is the sum of marginal costs over all units produced. It can also be considered normal costs. Fixed costs and variable costs make up the two components of total cost.

9. 9 | P a g e TOTAL COST: In economics, total cost (TC) describes the total economic cost of production and is made up of variable costs, which vary according to the quantity of a good produced and include inputs such as labor and raw materials, plus fixed costs, which are independent of the quantity of a good produced and include inputs (capital) that cannot be varied in the short term, such as buildings and machinery. Total cost in economics includes the total opportunity cost of each factor of production as part of its fixed or variable costs.

10. 10 | P a g e TOTAL REVENUE: Total revenue is the total receipts of a firm from the sale of any given quantity of a product. It can be calculated as the selling price of the firm's product times the quantity sold, i.e. total revenue = price quantity, or letting TR be the total revenue function: Where Q is the quantity of output sold, and P(Q) is the inverse demand function (the demand function solved out for price in terms of quantity demanded). ADVANTAGES AND DIS ADVANTAGES OF FOLLOWING: (28) SOLE TRADER:

11. 11 | P a g e Advantages of a sole trader sole traders benefit from the following advantages: Control - Sole traders maintain full control of their business. Running it how they please without the interference of others. Profit retention Sole traders retain all the profits of their business. Private data Information about sole traders is kept private, unlike that of limited companies which is necessarily made public after registration with Companies House. Specialist Often a small business, sole traders can offer a more personal service with local roots and ties. This can be more appealing to potential customers in the local community. Personal Because there is no need to confer with other decision makers, sole traders can make decisions quickly and act on them swiftly, providing for the needs of their customers. Disadvantages of a sole trader Just like any other form of business, being a sole trader can also have its disadvantages. Liability sole traders are not seen as a separate entity by the law. Therefore, they are subject to unlimited liability. This means if the business gets into debt, the business owner is liable. In the worst case, this may mean a person risks their home, personal savings and any other assets they have both in and outside of the business. Finance sole traders often find it difficult to raise finance to fund their business. They may struggle with expansion in the future. Reverse economies of scale sole traders will be unable to take advantage of economies of scale in the same way as limited companies and larger corporations, who can afford to buy in bulk. This might mean that they have to charge higher prices for their products or services in order to cover the costs. Decision making all decisions must be made by the sole trader. There is no room for help by others. So the success or failure of the business rests on one person. PARTNERSHIP: Advantages of Partnership: Easy to set up

12. 12 | P a g e More capital can be brought into the business. Partners bring new skills and ideas to a business Decision making can be much easier with more brains to think about a problem. Partners share responsibilities and duties of the business. Division of labor is possible as partners may have different skills. Disadvantages of Partnership: There is unlimited liability: All the partners are responsible for the debts of the firm and if the business goes bankrupt, all the partners will have to clear the debts even if they have to sell of their personal belongings. Disagreement among the partners can lead to problems for the business. There is a limit to the capital invested. Because of the fact that maximum 20 members are allowed, the business may find it difficult to expand after a certain limit. There is no continuity of existence. Partnership is dissolved if one of the partners die or resigns or becomes bankrupt. PRIVATE LTD.: Advantages Limited Liability: It means that if the company experience financial distress because of normal business activity, the personal assets of shareholders will not be at risk of being seized by creditors. Continuity of existence: business not affected by the status of the owner. Minimum number of shareholders need to start the business are only2. More capital can be raised as the maximum number of shareholders allowed is 50. Scope of expansion is higher because easy to raise capital from financial institutions and the advantage of limited liability.

13. 13 | P a g e Disadvantages Growth may be limited because maximum shareholders allowed are only 50. The shares in a private limited company cannot be sold or transferred to anyone else without the agreement of other shareholders PUBLIC LTD. Advantages There is limited liability for the shareholders. The business has separate legal entity. There is continuity even if any of the shareholders die. These businesses can raise large capital sum as there is no limit to the number of shareholders. The shares of the business are freely transferable providing more liquidity to its shareholders . Disadvantages There are lot of legal formalities required for forming a public limited company. It is costly and time consuming. In order to protect the interest of the ordinary investor there are strict controls and regulations to comply. These companies have to publish their accounts. The original owners may lose control. Public Limited companies are huge in size and may face management problems such as slow decision making and industrial relations problems. COOPERATIVES: ADVANTAGES:

14. 14 | P a g e limited liability for the shareholder, ie if the cooperative becomes a private limited company, then shareholders' rights would be governed by company legislation a great sense of involvement as the business belongs to the members a feeling of equality as each member has one vote greater job satisfaction as members feel they are working for themselves less chance of industrial relations problems as the owners are the workers and there is no conflict of interest DIS-ADVANTAGES: In larger cooperatives, as opposed to the smaller cooperatives, it may take longer to arrive at decisions and disagreements can occur Difficulty in reaching decisions as everyone has a vote regardless of whether they have any knowledge or experience in the matter Failure to be competitive Ambitious workers may find it more difficult to get promotion or wage increases Idealistic belief may clash with harsh economic realities Profit may be sacrificed to ideals Financial control is often weak unless a manager and/or accountant is employed Difficulty in raising finance MULTINATIONAL: ADVANTAGES: Acquisition of raw material from abroad,which is cheaper in cost.

15. 15 | P a g e Technology and management expertise accquired from competing in global markets. Export of components and finished goods for assembly or distribution in foreign markets. Inflow of income from overseas profits,royalities and management contracts. Jobs and career opportunities at home and abroad in connection with overseas opportunities. DIS-ADVANTAGES: Trade restrictions imposed at the government-level Taxes or tariffs imposed on imports from other countries Limited quantities (quotas) of imports Effective management of a globally dispersed organization Slow down in the growth of employment in home countries. Destroy competition and acquire monopoly. Technology designed for mnc's is for world wide profit maximization not for the social welfare or development of economy. They could cause fast depletion of some of the non renewable natural resources in the host country. In order to alley the fears of host countries they need to: provide employment train managers provide products and services that raise the standard of living introduce and develop new technical and managerial skills increase productivity PUBLLIC CORPERATION: ADVANTAGES 1) shares are being sold to the general public via stock exchange, therefore there is an incentive to raise capital. 2)There is a limited liability- if business fail to pay off its debts, then debtors could not force

16. 16 | P a g e them to sell their private possessions. 3)the load of work is being divided among the shareholders DISADVANTAGES 1) Accounts of the business would not be kept secret. for example Accountant could know about the company's trading methodology. 2)If a company becomes too large, the chances of bankruptcy would increase because management may loose control. FACTORS AFFECTING DEMAND AND SUPPLY OF LABOUR: (12) Factors affecting demand of labor : 1) Wage rates fluctuations 2) The need of factor input in a firm varies with time 3) Increasing training costs Factors affecting supply of labor: 1) Competitive labor market 2) Working condition 3) Inflation

17. 17 | P a g e EXPLAIN WAGE RATE DETERMINATION POINT: (10) Determination of Wage rate In a perfectly competitive market, the wage rate of a particular type of labour is determined by the interaction of the labour demand curve and labour supply curve. In figure (a) the DD is the demand curve of labour say carpenters for the industry. It is found by summation of the demand curves of the firms in the industry SS represents the supply curve of carpenters for the industry, The labour demand curve DD intersects the labour supply curve SS at point N. The wage rate is NL or Rs. 20/- per day and the number of workers hired at the equilibrium wage rate (Rs. 20/-) is 200 thousand.

18. 18 | P a g e FACTORS AFFECTING : (11) BORROWING:

19. 19 | P a g e The amount you can borrow to buy a property is determined by a number of factors, including: Your income and commitments Your lifestyle and living expenses Your property Your loan interest rate, the term and type Any assets you offer as security (for example, another property) The value of your property Your credit history. SAVING: Factors affecting savings Interest rates: Higher interest rates will encourage people to save more. Availability of appropriate savings schemes: With more options to save money people will be attracted to save more Advertising of/knowledge about what is available at financial institutions Confidence/trust in financial institutions Size of real disposable income: Disposable income is the income left after paying taxes. Thus more money left in pockets will encourage people to save more. Rate of inflation: when inflation is high people have less money left with them to save because a major part of their disposable income will be spent to satisfy their needs and wants. Save for a future purchase: People might save with the motive to carry out a future purchase e.g. a house Precautionary factors: People might be saving for a rainy day Tastes and preferences of consumers: It also depends on a individuals preference. Some people save more than others. Consumer confidence/expectations about future changes in the economy, e.g. risk of unemployment may lead to people saving more

20. 20 | P a g e CONSUMPTION: (i) People save to face the unforeseen contingencies such as Illness, unemployed, accidents etc. (ii) People are induced to save because they want to provide for the future needs, i.e. education of the children, marriages of the children etc. (iii) To possess power or to get higher social or political status. (iv) People are motivated to save so that they can accumulate large wealth which will increase their social states. (v) To enjoy an enlarged future income by investing funds of current income. WHAT IS MEANT BY FINANCIAL INSTITUTION: (6)

21. 21 | P a g e In financial economics, a financial institution is an institution that provides financial services for its clients or members. Probably the most important financial service provided by financial institutions is acting as financial intermediaries. Most financial institutions are regulated by the government. Broadly speaking, there are three major types of financial institutions: 1. Depositary Institutions : Deposit-taking institutions that accept and manage deposits and make loans, including banks, building societies, credit unions, trust companies, and mortgage loan companies 2. Contractual Institutions : Insurance companies and pension funds; and 3. Investment Institutes : Investment Banks, underwriters, brokerage firms. Some experts see a tendency of global homogenisation of financial institutions, which means that institutions tend to invest in similar areas and have similar investment strategies. The reason for this tendency sees economist Jayati Gosh in financial deregulation. Consequences might be that there will be no banks that serve specific target groups and e.g. small scale producers are left behind. EXPLAIN THE ROLE OF THE FOLLOWING: (18) COMERCIAL BANK: Commercial banks engage in the following activities: processing of payments by way of telegraphic transfer, EFTPOS, internet banking, or other means issuing bank drafts and bank cheques accepting money on term deposit lending money by overdraft, installment loan, or other means providing documentary and standby letter of credit, guarantees, performance bonds, securities underwriting commitments and other forms of off balance sheet exposures safekeeping of documents & other items in safe deposit boxes sales, distribution or brokerage, with or without advice, of: insurance, unit trusts and similar financial products as a financial supermarket cash management and treasury merchant banking and private equity financing

22. 22 | P a g e traditionally, large commercial banks also underwrite bonds, and make markets in currency, interest rates, and credit-related securities, but today large commercial banks usually have aninvestment bank arm that is involved in the mentioned activities CENTRAL BANK: Functions of a central bank may include: implementing monetary policies. determining Interest rates controlling the nation's entire money supply the Government's banker and the bankers' bank ("lender of last resort") managing the country's foreign exchange and gold reserves and the Government's stock register regulating and supervising the banking industry

23. 23 | P a g e setting the official interest rate used to manage both inflation and the country's exchange rate and ensuring that this rate takes effect via a variety of policy mechanisms STOCK ECHANGE: Raising capital for businesses Exchanges help companies to capitalize by selling shares to the investing public. Mobilizing savings for investment They help public to mobilize their savings to invest in high yielding economic sectors, which results in higher yield, both to the individual and to the national economy. Facilitating company growth They help companies to expand and grow by acquisition or fusion. Profit sharing They help both casual and professional stock investors, to get their share in the wealth of profitable businesses. Corporate governance Stock exchanges impose stringent rules to get listed in them. So listed public companies have better management records than privately held companies. Creating investment opportunities for small investors Small investors can also participate in the growth of large companies, by buying a small number of shares. Government capital raising for development projects They help government to rise fund for developmental activities through the issue of bonds. An investor who buys them will be lending money to the government, which is more secure, and sometimes enjoys tax benefits also. Barometer of the economy

24. 24 | P a g e They maintain the stock indexes which are the indicators of the general trend in the economy.They also regulate the stock price fluctuations. ADVANTAGES OF SPECIALISATION / DIVISION OF LABOUR To the business: - Specialist workers become quicker at producing goods - Production becomes cheaper per good because of this - Production levels are increased - Each worker can concentrate on what they are good at and build up their expertise To the worker: - Higher pay for specialised work - Improved skills at that job. DISADVANTAGES OF SPECIALISATION / DIVISION OF LABOUR To the business: - Greater cost of training workers -Quality may suffer if workers become bored by the lack of variety in their jobs To the worker: - Boredom as they do the same job - Their quality and skills may suffer - May eventually be replaced by machinery FEATURES OF PERFECT COMPETITION: 1. Many firms.

25. 25 | P a g e 2. Freedom of Entry and Exit; this will require low sunk costs. 3. All firms produce an identical or homogenous product. 4. All firms are price takers, Therefore firms demand curve is perfectly elastic 5. There is perfect information and knowledge. Diagram for Perfect Competition These factors are unrealistic in the real world. However Perfect Competition is as important economic model to compare other models. It is often argued that competitive markets have many benefits which stem from this theoretical model. In the Industry price is determined by the interaction of Supply and Demand The firm will maximise output where MR = MC at Q1 In the Long Run Firms will make Normal profits. If Supernormal profits are made new firms will be attracted into the industry causing prices to fall. If firms are making a loss then firms will leave the industry causing price to rise

26. 26 | P a g e ADVANTAGES AND DIS ADVANTAGES OF: MONOPLY: Characteristics Only one single seller in the market. There is no competition. There are many buyers in the market. The firm enjoys abnormal profits. The seller controls the prices in that particular product or service and is the price maker. Consumers dont have perfect information. There are barriers to entry. These barriers many be natural or artificial. The product does not have close substitutes. Advantages of monopoly Monopoly avoids duplication and hence wastage of resources. A monopoly enjoys economics of scale as it is the only supplier of product or service in the market. The benefits can be passed on to the consumers. Due to the fact that monopolies make lot of profits, it can be used for research and development and to maintain their status as a monopoly. Monopolies may use price discrimination which benefits the economically weaker sections of the society. For example, Indian railways provide discounts to students travelling through its network. Monopolies can afford to invest in latest technology and machinery in order to be efficient and to avoid competition. Disadvantages of monopoly Poor level of service. No consumer sovereignty. Consumers may be charged high prices for low quality of goods and services. Lack of competition may lead to low quality and out dated goods and services.

27. 27 | P a g e 6 DIFFERENT PRICING STRATEGIES: Pricing Strategy Definition Example Penetration pricing: Here the organisation sets a low price to increase sales and market share. Once market share has been captured the firm may well then increase their price. A television satellite company sets a low price to get subscribers then increases the price as t increases. Skimming pricing: The organisation sets an initial high price and then slowly lowers the price to make the product available to a wider market. The objective is to skim profits of the market layer by layer. A games console company reduces the price of their console over 5 years, charging a prem lowest price near the end of its life cycle. Competition pricing Setting a price in comparison with competitors. Really a firm has three options and these are to price lower, price the same or price higher Some firms offer a price matching service to match what their competitors are offering. Product Line Pricing: Pricing different products within the same product range at An example would be a DVD manufacturer offering different DVD recorders with different fe prices eg A HD and non HD version.. The greater the features and the benefit obtained the gre will pay. This form of price discrimination assists the company in maximising turnover and prof

28. 28 | P a g e different price points. Bundle Pricing: The organisation bundles a group of products at a reduced price. Common methods are buy one and get one free promotions or BOGOF's as they are now known. Within the UK some firms are now moving into the realms of buy one get two free can we call this BOGTF i wonder? This strategy is very popular with supermarkets who often offer BOGOF strategies. Psychological pricing: The seller here will consider the psychology of price and the positioning of price within the market place The seller will therefore charge 99p instead 1 or $199 instead of $200. The reason why this because buyers will still say they purchased their product under 200 pounds or dollars, even pound or dollar away. My favourite pricing strategy. Premium pricing The price set is high to reflect the exclusiveness of the product. An example of products using this strategy would be Harrods, first class airline services, Porsch Optional pricing: The organisation sells optional extras along with the product to maximise its turnover. T This strategy is used commonly within the car industry as i found out when purchasing my car. Cost Based Pricing: The firms takes into account the cost of production and distribution, they then decide on a mark up which they would like for profit to come to their final pricing decision. If a firm operates in a very volatile industry, where costs are changing regularly no set therefore the firm will decide on their mark up to confirm their pricing decision.

29. 29 | P a g e Cost Plus Pricing: Here the firm add a percentage to costs as profit margin to come to their final pricing decisions. For example it may cost 100 to produce a widget and the firm add 20% as a profit margin s would be 120.00 DRAW THE FOLLOWING: DEMAND AND SUPPLY: DEMAND AND SUPPLY WITH CETRIS PERIBUS: INCREASE AND DECREASE IN DEMAND AND SUPPLY:

30. 30 | P a g e PERFECTLY INelastic,ELASTIC: Unitary elastic: PRICE ELASTIC AND IN-ELASTIC DEMAND: