The Labour Market - Economics Unit 1 Revision

The labour market is a factor market.

The demand for labour is derived. This means that the demand is a consequence of demand for something else

The wage rate is seen as the price of labour. If the price of labour is low then firms tend to demand more than when it is high. This is what gives the demand for labour the downward sloping direction.

Apart from the wage rate there are other factors that affect the demand for labour, these will shift the demand curve inwards and outwards. They include:

• Productivity of labour - if they become more productive through new technology this will lead to an increased demand for labour and shift the demand curve to the right
• The demand for its final product - if the demand for the final product decreases then the demand for labour is also going to decrease and the demand curve will shift to the left.

The elasticity of demand of labour can affect the shape of the demand curve. Factors include:

• Extent to which other factors such as technology can be substituted for labour. If it is easily substituted then the demand will be elastic.
• share of labour costs to firms total cost - in service activity firms the wage costs are relatively high so the firm is more responsive to changes in price of labour so demand will be elastic.
• In the short run demand for labour will tend to be inelastic but in the long run it will be more elastic as firms are able to change the factors of production being used.
• It will also depend on the PED for the final product

Labour Supply

The supply of labour will be upward sloping as more people will offer themselves for work as the wage rate increases. 

A number of factors can influence the position of the supply curve, these include:

• rate of unemployment benefits payable - if people are more able to receive benefits then the supply may shift to the left.
• the participation rate (proportion of working age looking for a job or already in employment) - if there is a higher rate then the supply will increase.
• An increase in geographical mobility of labour will increase supply
• other factors such as job security and perks may also have an effect on the supply of labour.

Labour market Equilibrium

Found at where supply meets demand and determines the wage rate for an industry.

If the wage is lower than equilibrium then the firm will offer higher wage to fill vacancies and if the wage is higher than equilibrium then there is excess supply of labour, causing a decrease in wage rate.

Effects of Migration 

With the closer integration of the EU migration is increasing, this will increase the supply of labour. 

Effects of government intervention

• Minimum wage - A NMW above market equilibrium creates excess supply of labour as firms find it too expensive to employ aas many workers as before. This creates unemployment. However the NMW is there to stop exploitation, provide an incentive and alleviate poverty. The affect on unemployment depends whether the NMW is above of below the equilibrium wage rate. 
• Unemployment benefits - if benefits are high then it will reduce the supply of labour as it acts as a disincentive.
• Taxation - if taxes are too high then reduces incentive and therefore supply of labour.

Trade Unions

A trade union is an association of workers that negotiates with employers on behalf of the workers. The three main objectives of trade unions include wage bargaining, improving working conditions and providing job security. It is important to evaluate whether the trade union is in a position to affect any of these in a market.

One of the main criticisms of trade unions are that they have created barriers to entering industires for workers as existing workers have better access to information about how a firm is operating or about vacancies. This greatly affects the flexibility of the labour market by making it harder to firms to adapt to changing market conditions.

Subsidies - Economics Unit 1

A subsidy is a type of benefit given by the government in order to remove some sort of burden and increase the consumption of merit goods. An example is subsidies for wind farm investment in order to encourage them.

Here is a diagram of a subsidy. 

The area of deadweight loss is the cost to society created by market inefficiency. This is because total surplus with a subsidy is under that of when it is in a free market.

The size of the subsidy is the difference between P1 and P2. The cost of the subsidy is whole shaded area. You work it out by finding new equilibrium point taking it across,  then taking it up to original supply curve then taking it across 

Subsidies are usually seen as government intervention when there is an under consumption of a merit good. Therefore a way of solving an externality. I will go into detail on another post.

Tax - Economics Unit 1 + 3

TAX  A tax is a compulsory charge made by the government, on goods, services, incomes or capital.
Reasons for tax:

• Raise government revenue
• reduce inequality
• reduce competitiveness of foreign goods
• influence public spending

Tax - Unit 1:

• Direct tax is tax levied on an individual or organisation ie. income or corporation tax.
• Indirect tax is usually levied on purchase of goods or services. A tax on expenditure.

Indirect tax 

Has two types. Tax raises the price of a good by adding to the supply curve and shifting it left. In unit 1 taxes are used to solve negative externalities. ie. use of cigarettes.

• Ad Valorem tax - charged as a percentage of the price of the good. ie. VAT is 20%. Causes pivotal rotation of supply curve.

• Specific tax - charged a fixed amount per unit of a good. ie. excise tax on wine. Causes a parallel shift of the supply curve. 

The incidence of tax falls on partly the consumer and producer but the majority is dependent a combo of the PED and PES for that good. Goods that have inelastic demand such as addictive products ie. cigarettes, usually the incidence falls mainly on the consumer. This means the firm can pass on a higher price to them as they are willing to pay. 

A diagram shows how the incidence falls.

Here is a relatively even incidence but in some cases it can be heavily on the consumer or heavily on the producers dependent on the elasticities.

Tax - Unit 4:

Two types of tax already mentioned. Indirect is levied on expenditure and direct are those that cannot be passed on to anyone else and levied on income and wealth.

main direct taxes are income, corporation and capital gains. 

Three broad categories for taxes:

• progressive tax - as you get richer you pay more tax ie. income. to redistribute wealth.
• proportional - the percent you pay stays constant. ie. earn 10% more so you're taxed 10% more.
• regressive - the poorer you are the more you pay. ie. VAT, you can argue that as a percent of income they pay more than the rich. 

The Laffer curve

The laffer curve shows that in theory tax gets to a certain level where people pay then when it goes any higher people are disincentivised (due to more income going to government) and tax revenue decreases.

After tax rate of M the revenue starts to decrease, this is showing that people are not incentivised.

The Growth Of China

China Today...
Second largest economy in the world GDP= $9.24 trillion
worlds fastest growing major economy (however in 2014 suffered slowest growth for 24 years, still 7.2%)
Second largest trading nation and largest exporter of goods
Since 1978 the average income has x4
during last 10 years has contribute more than 30% to global economy
Attracts most FDI in the world

How did it get there?
China's rapid growth started when it switched from a centrally planned economy to a more market orientated economy in 1978 under Deng Xioping. This opened up China to all sorts of opportunities. TNCs started to use the country an an export platform which made it a major competitor on that field to the Asian Tigers.
FDI was initially encouraged in SEZs (small enterprise zones) which were situated along the coast. In early 1980s the number of SEZs was expanded to a total of 17 (14 coastal, 3 inland). These SEZs were areas that had separate, more relaxed regulations and improved infrastructure in order to attract FDI. Shanghai is an example of an SEZ.
China joined the WTO in 2001 which allowed it greater access onto the global market.
China had competitive advantages due to their large population, cheap labour force and their ability to push policies through quickly.


However this growth caused many problems...
There have been massive disparities in incomes creating huge inequality. Areas are being left behind such as Suchuan and many rural areas.
Rapid industialization has caused major pollution in the form of smog and polluted waters (31/52 of the major lakes have severe pollution). Acid rain falls on 30% China.

WTO, IMF and the World Bank

WTO is the world trade organization and their role is to help trade flow freely.

• only global organization dealing with the rules of trade between countries
• goal is to help producers of goods, services, exporters and importers conduct their business
• WTO agreements are signed by the large trading nations and are essentially binding contracts to keep trade policies within certain limits. ie. reduce protectionism by getting rid of tariffs or quotas.
• established in 1995
• 160 countries/members

World Bank is there to help developing countries.

• source of financial and technical assistance to developing countries
• aim is to reduce poverty and support development.
• They have two main goals: 1. end extreme poverty by 2030 and 2. promote shared prosperity (promoting incomes of the bottom 40% of developing countries)

IMF is the international monetary fund and they help countries with stability and growth

• 188 countries
• working to secure financial stability, facilitate international trade, promote employment and sustainable eco. growth along with reducing poverty
• independent organization that promotes monetary cooperation and exchange rate stability.

Producer And Consumer Surplus

Producer surplus is the difference between what the producers are willing and able to supply and the price they actually receive.

• The producer surplus is shown as the area above the supply curve and below the market price. 
• The level of producer surplus can vary dependent on the shift in supply or demand. 

Consumer surplus is the difference between what you are willing and able to pay and what you actually pay.

• It is the area beneath the demand curve and above the market price. 
• It is a measure of welfare gain for people consuming the good/service
• Consumer surplus varies on the elasticity of demand. When the price is perfectly elastic the price they are willing to pay is the price they actually pay, therefore consumer surplus is 0 and vice versa when demand is perfectly inelastic.
• Consumer surplus also can vary dependent on shifts in supply and demand. Example a higher supply leads to a higher price and therefore a fall in consumer price.

When put together the surpluses look like this.

Growth Of The BRICS

Brazil
Russia
India
China
South Africa?

Goldman Sachs economist Jim O'Neill predicted in 2003 the BRIC economies would, by 2050, be wealthier that most of the current major economic powerhouses. In 2012 South Africa joined therefore making the BRIC the BRICS. It is predicted that China and India will become the dominant forces in manufactured gods and services while Russia and Brazil will become the dominant suppliers of raw materials.

These 4 countries are the fastest growing and largest emerging market economies and account for just under half of the world's population. It is believed that China will become the biggest economy in the world sometime between 2030 and 2050 because as discussed in another post they have averaged 10% growth for the last 3 decades.

However they have experienced problems and are likely to run into problems in the future that include:

• Russia face political problems which in turn will cause economic problems for example exports to Russia have fallen sharply, they also rely too heavily upon oil (we have seen lately the huge decline in oil prices that will have an effect on Russian economy)
• India suffer from corruption and also an increasing current account deficit
• Brazil's economic growth has plunged from 7.5% to 0.9% in 2010 to 2012. 
• All growth figures and prospects will have been affected by the financial crisis

Goldman Sachs projected growth

Income Elasticity Of Demand

YED = Income Elasticity Of Demand

Income elasticity of demand is the responsiveness in demand for a good when there is a change in income levels

Inferior good

YED = % change in quantity / % change in income

If 0-1 then it is inelastic. If it is 1+ then it is elastic.

If the answer is negative (-) then the good is an inferior good. An inferior god is one that as income decreases then demand increases. An example of this could be Tesco value goods.

If the answer is positive (+) then the good is a normal good. A normal good is one when when income rises so does the demand for the product. For example trainers.

Normal good

Cross Elasticity Of Demand

XED - Cross Elasticity Of Demand

XED is the responsiveness of demand for one product following the change in price for another

XED = % change in quantity demand for good B / % change in price of good A

If 0-1 then it is inelastic. If 1+ then it is elastic.

If the number is negative (-) then the two goods are complements. Complements are two goods that go with each other, for example, If the price of a cinema ticket increases then the demand for popcorn will decrease. 

If the number is positive (+) then the goods are substitutes. This means you have one or the other. For example chicken or lamb, if the price of lamb goes up then the demand for chicken will increase. You can have weak and strong substitutes, a strong substitute would be dairy milk or galaxy therefore they will have a high XED.

Ways of lowering XED include branding and differentiating your product therefore there will be less substitutes and you can charge a higher price.

Price Elasticity Of Supply

PES = Price Elasticity of supply

Price elasticity of supply is the responsiveness of supply to a change in price.

PES = % change in quantity supplied / % change in price

If it is between 0-1 then it is inelastic and if its 1+ then it is elastic.

The graph on the right is inelastic supply and the one on the left is elastic.
If it is elastic then the producers are able to increase supply without a rise in cost or time delay.
If inelastic then producers find it hard to change level of supply in a given time period.

What determines whether it is inelastic or elastic?

• Level of spare capacity - if there is lots of spare capacity then the supply curve is elastic as they are able to supply more easily
• State of economy - if economy is in good state then it will be elastic
• Perishability - If a good is hard to store ie. flowers then the supply curve will be inelastic, if it is easy to store then it will be elastic
• Time period - if it is a short time period PES will be inelastic as it is hard to increase output with short notice.

Price Elasticity Of Demand - Economics Unit 1

PED - Price Elasticity of Demand

The responsiveness in quantity demanded for a good following a change in price of the good.

PED = % change in quantity demanded/ % change in price.

If the answer is between +/- 0-1 then the good is said to be inelastic. Examples of inelastic goods include cigarettes, petrol etc. (will go into detail why)

If the answer if +/- 1+ then the good is said to be elastic. Examples of elastic goods include sports cars.

If the PED = 1 then it is said to have unitary elasticity of demand, this means that a 10% change in price will cause a 10% change in demand.

If PED = 0 the good is perfectly inelastic, the demand curve would be horizontal.

If PED = infinity the good is perfectly elastic and the demand curve is vertical.
Factors that affect Price Elasticity Of Demand:

• Whether the good is a necessity or a luxury. If it is a necessary good then PED will be inelastic as a consumer is willing to pay whatever price for it. If it is a luxury then its PED will be elastic because they don't need it
• Availability of substitutes - If there are no substitutes, there is no competition therefore it is inelastic. If there are substitutes then its is elastic
• Addictiveness makes a good inelastic as thy will pay whatever for it. ie. Cigarettes
• Brand Loyalty
• Time frame - if you need a good today then you are more to pay whatever for it so it is inelastic
• % of income spent on good - if its a small percent of your income then it will be inelastic.

If PED is inelastic and and the price increases then total revenue (PxQ) will increase as you are selling at a higher price

If PED is elastic and the price decreases then total revenue (PxQ) increases as selling more at a lower price

Growth Of The Asian Tigers - Geography and Economics A-Level

The term Asian Tigers, refers to Taiwan, South Korea, Singapore an Hong Kong.

The term was becoming widely used in the 70s and 80s following the emergence of these four countries who all followed a similar pattern of development to becoming developed countries. These countries For example Singapore is now one of the world leading financial centres.

None of these countries had a rich supply of ntural resources. They followed a very export driven model of industrialization by focusing on selling to rich western countries such as the UK and USA. They decided that to boost the manufacturing industry they would have to tap in to economies of scale and therefore rely on international trade. In trading to a larger market they could improve efficiency through E.O.S. This model is different to conventional models of the time which involved imposing raised tariffs and quota on imports which reduced the number of imports and thus allowing the domestic industries to flourish and develop. Although the Asian Tigers did use this model at first before switching heavily to an export driven model.

These countries all had similar characteristics which included:

• GDP growth rate from 1960 to 2000 averaged 6% per year 
• abundance of cheap labour due to being poor in 1960
• all invested heavily in education, this can increase LRAS and increase productivity
• all had strong Chinese influences
• non democratic political systems meaning plans were driven through easily

But is this a good model to follow?

There are many criticisms of this export led model which include:

• dependency on other countries economic health can be very risky
• fast expansion of these countries caused problems such as a in 1990 many stock markets crashed and sparked a worldwide financial crisis
• Rapid industrialization has caused many environmental problems
• Lost competitive edge to India and China who can now create at cheaper unit costs. 

The new era of  Asian Tigers (Tiger Cubs)

It is said that Indonesia, Malaysia, Philippines and Thailand are also following the export led growth model.

It is predicted that these 4 countries will be in the top 50 economies in the world by 2050.

Due to a high number of Chinese entrepreneurs and residents, the transformation of China has led to increased investment. 

Basics - Economics Unit 1

• Economics is how we allocate scarce resources to infinite wants and needs.
• The opportunity cost is the cost forgone from the next best alternative
• Specialisation is the division of labour, this can increase production, reduce average cost however problems include tedium
• Sustainable means meeting the needs of today without affecting the needs for future generations
• A positive statement is one that is a fact as opposed to a normative statement is one that is a value judgement, includes words like 'unfair'.
• scarcity means limited resources
• Factors of production are land, labour, capital and entrepreneurship.
• A free market is one where there is no government intervention and left to the price mechanism. A mixed market economy is the most common where there is government intervention in certain markets. A planned economy is one where the government controls the resources ie. North Korea.
• PPFs show the trade off between 2 goods or services. The opportunity cost changes because it is not a straight line but a curve. A shift of the PPF outwards shows an increase in the productive potential. Can be caused by new technologies or a discovery of new resources ie. new oil field.

Demand - Economics Unit 1

Demand Curve 

• If price goes down, demand goes up and vice versa.
• A change is the price of the product is a movement along the curve from £0.50 to £0.20 shown in the change in demand from 100 to 400.
• Total revenue is PxQ. In example, the total revenue when the price is at £0.50 would be £50 and the total revenue when the price is £0.20 is £80
• When you move along the curve it is either an extension (price fall and extension in demand) or a contraction (price rise and fall in contraction in demand). 

What can cause a shift in demand?

• advertising
• branding
• public relations good or bad
• population growth
• tastes/preferences
• tax
• income
• a change in the price of substitutes (pork or lamb) or change in price of complement (port and apple sauce)

Supply - Economics Unit 1

• Supply of a good is upward sloping - as the price increases the supply increases as the suppliers are willing to supply more.
• A change of price is shown as a movement along the curve.
• A contraction is a decrease in price and an extension is an increase in price.

Factors that shift supply

• Subsidies
• Infrastructure
• Better technology
• Natural disasters
• Weather

Equilibrium - Economics Unit 1

Equilibrium is where the market clears, this means that everything bought to market is sold.

• Where supply and demand intersect

• Excess supply is where supply is greater than demand, this usually causes a cut in price as it moves back to equilibrium.

• Likewise, excess demand is where demand for a product is greater than the supply of the good, this usually causes a price rise.

Trade and Aid - Economics/Geography A2 level

Aid and Trade are 2 ways to promote growth and development in an economy.

Trade helps an economy because it improves the volume and quantity of exports. This in theory will turn into jobs and improved living standards. Hopefully some of this income will be saved and therefore boost demand in the economy (hopefully include multiplier effect) and start developing as a country. Trade also creates long term jobs which is key for sustained growth. According to the Rostow Model this will push the country past the traditional sector and into the preconditions for take off or take off. I will go into detail on in a different post.
This theory is very simplified and  assumes developing countries all follow the same stages as the now developed European countries the theory was based on. Trade can increase inequality as it is the owners of the firms who keep the money and do as they please with it. Another problem with trade comes about when you are outside of a trading bloc and have to pay an external tariff to trade with countries inside. This prevents many of the lower developed African countries trading with the developed western countries.

One of the main barriers to growth is the savings gap, the difference between the money that is earned and the amount of money that can be saved and thus invested. Due to a high propensity to consume in poorer countries, finding money to save is difficult and thus investment is difficult.

Aid is a useful way of overcoming that savings gap. Aid can come in many forms:

• Bilateral aid - Aid from one country to another
• Multilateral aid - Aid that comes from multiple countries through an international agency such as the World Bank
• NGOs - Non governmental organisations such as Oxfam provide money and professional support This type of aid is unlikely to come with any conditions like the others

Aid can come in the forms of money or in the form of technical assistance in order to create infrastructure or to help boost certain industries. There are many problems with aid that include:

• Can come with tied conditions such as having to buy from the donor country
• Can lead to aid dependency 
• Corruption can cause the aid to never be distributed evenly or where needed.
• Can led to distorted market forces

As mentioned earlier you can get aid in different forms: 

• Tied aid - aid that comes with conditions
• Short term aid - usually comes after a natural disaster
• Long term aid- aid for long term developments such as the improvement of hospitals or infrastructure
• Top down aid - aid given to organizations for large scale projects such as dam building
• Bottom up aid - schemes at grassroots level, often by NGOs working with local communities.

So which is better, aid or trade?
I believe trade is greater than aid when it comes to helping a country to develop. Over the past 50 years Africa has received $500 billion in aid and despite this the continent still suffers from poverty, disease and corruption. Aid is not usually aid as it is usually tied to conditions such as buying from donor country. Aid also creates dependency which is not sustainable compared to growth because as a country increases trade it increases jobs and wealth in a way that they are not totally dependant on aid from other countries. However many developed countries have protectionist measures that prevent trade with developing countries as they would have to pay high taxes. But before a country can truly develop it needs to eliminate any major health problems such as HIV or malaria.

Motives Of Firms - Economics Unit 3

Motives of a firm to grow include:

• Profit
• Risk Bearing
• Market Share
• New opportunities
• Managerial ambitions
• Economies of Scale
• Satisfiscing - After achieving minimum acceptable profit for shareholders the firm pursues another objective.

Growth can be either horizontal (same stage of production), vertical (different stage of production) or conglomerate (different sector). Both vertical and horizontal growth can be forwards or backwards.

Methods of growth:

• Takeover - a firm takes control of another can be hostile or friendly
• Merger - when two firms decide to share stakes in a company as they join together
• Internal growth - from the inside of the company, can be in the form of an entrepreneur
• External growth - from a merger of a takeover
• joint venture - when two companies agree to work together in order to create a product

Why do companies stay small?

• Barriers such as price, legal or marketing 
• Lack of resources
• Lack of ambition
• Diseconomies of scale

Why do firms break up?

• Government intervention
• Diseconomies of scale
• Over extended