Economics: Trade Unions and Labor Practices

Factors of Production & Rewards

• Land: All natural resources in an economy

  • Reward: Rent
  • Supply is fixed as land doesn't increase
  • Quality depends on soil type, fertility, and weather
  • Geographically immobile, cannot be moved
  • Occupationally mobile, can be used for various economic activities

• Labor: All human resources in an economy

  • Reward: Wages
  • Supply depends on available workers and hours worked
  • Quality depends on skills and education
  • Occupational mobility depends on skills
  • Geographical mobility depends on transport facilities and costs

• Capital: All man-made resources in an economy

  • Reward: Interest
  • Supply depends on demand for goods and services, business performance, and savings
  • Quality depends on the quality of goods produced using capital
  • Mobility depends on the nature and use of capital

• Enterprise: Ability to take risks and run a business

  • Reward: Profit
  • Supply depends on skills, education, corporate taxes, and regulations
  • Quality depends on ability to satisfy and expand demand

The Law of Demand

• An increase in price leads to a decrease in demand, and a decrease in price leads to an increase in demand.

Extension in Demand

• Increase in demand due to changes in price

Contraction in Demand

• Decrease in demand due to changes in price

Factors that Cause Shift in Demand Curve

• Consumer incomes:
  • Increased income = rightward shift
  • Decreased income = leftward shift
• Taxes on income:
  • Increased taxes = leftward shift
  • Decreased taxes = rightward shift
• Price of substitutes:
  • Increased price of substitutes = rightward shift
  • Decreased price of substitutes = leftward shift
• Changes in consumer tastes:
  • Increased preference for a product = rightward shift
  • Decreased preference for a product = leftward shift

The Law of Supply

• Increase in price leads to an increase in supply, and a decrease in price leads to a decrease in supply.

Extension in Supply

• Increase in supply due to changes in price

Contraction in Supply

• Decrease in supply due to changes in price

Factors that Cause Shift in Supply Curve

• Changes in cost of production
  • ↓ cost of factors = rightward shift
  • ↑ cost of factors = leftward shift
• Subsidy = rightward shift
• Quantity of resources available
  • ↑ resources = rightward shift
  • ↓ resources = leftward shift
• Technological changes = rightward shift

Shortage & Surplus

• Surplus: When price is above equilibrium price
• Shortage: When price is below equilibrium price

PED Formula

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

Inelastic Demand

• % change in quantity demanded is less than % change in price

Elastic Demand

• % change in quantity demanded is more than % change in price

What Affects PED

• Number of substitutes
• Time period

PED & Revenue & Producers

• Elastic demand: Lower prices to increase revenue
• Inelastic demand: Raise prices to increase revenue

PES Formula

• % change in quantity supplied / % change in price

What Affects PES

• Production time
• Resource availability

Features of Free Market Economic System

• Resources owned and allocated by private individuals
• Government refrains from regulating the market
• Production based on the most demanded/needed goods
• Producing for willing and able to pay consumers

Advantages of Free Market Economic System

• Wide variety of goods and services
• Firms respond to consumer demand
• High efficiency due to maximizing profits by using resources efficiently

Disadvantages of Free Market Economic System

• Only profitable goods and services are produced (public and merit goods may be neglected)
• Demerit goods may be produced
• Market failure can occur (unfair treatment, excessive harm or bad behavior by businesses)

Causes of Market Failure

• Social costs exceeding social benefits
• Over-provision of demerit goods
• Under-provision of merit goods

Features of Mixed Economic System

• Both public and private sectors exist
• Government and market systems determine resource allocation

Advantages of Mixed Economic System

• Government provides public goods, merit goods
• Less inequality
• Control of monopolies

Disadvantages of Mixed Economic System

• Taxes and regulations can increase production costs and reduce work incentive

Ways to Correct Market Failure

• Legislation and regulation
• Direct provision of goods
• Taxation
• Subsidies

Drawbacks to Government Intervention

• Political incentives
• Inefficiency
• Lack of incentives
• Welfare effects of policies

Money

• Medium of exchange of goods and services

Disposable Income

• Income of a person after all income-related taxes and charges are deducted

Consumption

• Buying of goods and services

Consumer Expenditure

• Money spent on consumption

Factors Affecting Consumption

• Disposable income
• Wealth
• Consumer confidence
• Interest rates

Saving

• Income not spent

Factors Affecting Saving

• Saving for consumption
• Disposable income
• Interest rate
• Consumer confidence

Borrowing

• Borrowing of money from a person or institution

Factors Affecting Borrowing

• Interest rate
• Wealth

Spending Patterns Between Income Groups

• Rich people spend, save, and borrow more
• Poor people spend more of their disposable income on necessities

Payments for Labor

• Time-rate wage
• Piece-rate wage
• Salary
• Performance-related payments

What Affects Individuals' Choice of Occupation

• Wage factors
• Non-wage factors

Labor Demand

• Number of workers firms demand at a given wage rate

Labor Supply

• Number of workers available and ready to work at a given wage rate

Backward Bending Labor Supply Curve

• When wage rate increases, supply of labor extends

Factors that Cause Shift in Labor Demand Curve

• Consumer demand for goods and services
• Productivity of labor

Price and productivity of capital

Factors that Cause Shift in Labor Supply Curve

• Advantages of an occupation
• Availability of education and training
• Demographic changes

Why Do Different Jobs Have Different Wages?

• Different education requirements
• Risk involved
• Unsociable hours
• Lack of information about other job opportunities

Why Do Wages Differ Between People Doing the Same Job?

• Regional differences in labor demand
• Fringe benefits
• Discrimination (race, gender, religion, age)
• Length of service

Division of Labor

• Dividing tasks in production to increase efficiency and productivity

Advantages to Workers

• Skilled and experienced
• Better future job prospects

Disadvantages to Workers

• Monotony
• Increased chance of errors
• Increased chance of unemployment

Advantages to Firms

• Increased productivity
• Increased quality of products
• Faster production

Disadvantages to Firms

• Increased dependency (on workers)
• Danger of overproduction

Advantages to Economy

• Better utilization of human resources
• Establishment of efficient firms
• Higher profits from division of labor; attraction of Entrepreneurs

Disadvantages to Economy

• Labor immobility
• Reduction in creative instinct

Trade Unions

• Organizations of workers aimed at promoting and protecting their interests

Functions of Trade Unions

• Improvements in non-wage benefits
• Defending employee rights
• Improving working conditions
• Improving pay

Collective Bargaining

• Negotiation between unions and employers over pay and working conditions

When Can Trade Unions Argue for Better Wages?

• Price rising (inflation)
• Increase in sales and demand
• Increased productivity of workers
• Wages in similar firms increase

Industrial Disputes

• Overtime ban
• Go-slow
• Strikes

Advantages to Workers

• Workers benefit from bargaining power
• Sense of unity and representation
• Reduced chance of discrimination

Disadvantages to Workers

• Potential for lower wages during strikes

Advantages to Firms

• Time saved in negotiations
• Better organization of workers
• Improved worker morale

Disadvantages to Firms

• Decisions can take longer
• Conflicts with unions may increase costs
• Reductions in output or revenue if unions strike

Advantages to Economy

• Ensures labor force is not exploited
• Protects workers' interests

Disadvantages to Economy

• Impacts on total output
• Possible unemployment

Classification of Firms

• Primary
• Secondary
• Tertiary

Private/Public Firms

• Public: Government-owned/run, no profit motive, provide essential services
• Private: Privately-owned, aim to make profit, often highly demanded

Small Firms

• Independently owned and operated, limited size and revenue

Advantages to Small Businesses

• Independence
• Control over operations
• Flexibility

Disadvantages to Small Businesses

• Higher costs
• Lack of finance
• Difficulty attracting experienced employees

Why Small Firms Still Exist

• Market size
• Specific products and services
• Customization/personalization
• Limited access to capital

Types of Firm Growth

• Internal growth
• External growth (Merger, Horizontal integration, Exploiting internal economies of scale etc.)

Diversification Risks

• Spreading into different markets (to improve chances of survival in case of failure in one)
• Inexperience / lack of knowledge; conflict in different management styles etc.

Economies of Scale

• Cost saving from large-scale production

Internal Economies of Scale

• Decisions made within a firm

Types of Internal Economies of Scale

• Purchasing economies
• Marketing economies
• Financial economies
• Technical economies
• Risk-bearing economies

External Economies of Scale

• Benefits a firm gets from the entire industry being large (access to skilled workers, ancillary firms etc.)

Types of Diseconomies of Scale

• Management diseconomies
• Inefficient running
• Use of capital
• Agglomeration diseconomies

External Diseconomies of Scale

• Increasing costs of production due to increased output.

Differences in Production based on scale

• External vs Internal
• Diseconomies vs economies.

Demand for Factors of Production

• Product demand
• Availability of factors
• Price of factors
• Productivity

Labor-Intensive Production

• Advantages: Flexibility, personal services, feedback, being essential
• Disadvantages: Relatively expensive, inefficient, labor problems

Capital-Intensive Production

• Advantages: Less errors, efficiency, consistent output
• Disadvantages: Expensive, lack of flexibility

Production

• Transformation of inputs into outputs

Factors that Influence Production

• Demand for product
• Prices and availability of factors of production
• Capital
• Profitability
• Government support

Productivity Formula

• Total output produced / Total input used

Productivity Increases When

• More output produced from the same resources
• Same output produced using fewer resources

Factors that Influence Productivity

• Division of labor
• Skills and experience of labor force
• Workers' motivation
• Technology
• Quality of factors of production

Fixed Costs

• Costs that remain constant regardless of output

Variable Costs

• Costs that change with output

Average Fixed Cost

• Total fixed cost / Total output

Average Variable Cost

• Total variable cost / Total output

Average Cost

• Total cost / Total output

Revenue

• Total income from sales

Total Revenue

• Number of units sold * Price per unit

Average Revenue

• Total revenue / Number of units sold

Break-Even

• Total revenue equals total costs

Firm Objectives

• Survival
• Profit
• Growth

Price Competition

• Competing to offer consumers the best possible prices

Non-Price Competition

• Competing based on factors other than price (quality, warranty, etc.)

Pricing Strategies

• Price skimming
• Penetration pricing
• Predatory pricing
• Cost-plus pricing

Price that Producers Fix on a Product

• Level and strength of consumer demand
• Amount of competition
• Cost of production
• Profit margins

Perfect Competition

• Many sellers and buyers
• Identical products
• Price takers
• No barriers to entry

High Consumer Sovereignty

• Wide variety of goods and services
• Low prices due to competition
• Efficient firms

Disadvantages of Perfect Competition

• Wasteful competition
• Misleading customers

Monopoly

• Dominant firms with market power
• Pure monopoly (single seller)
• Able to influence prices

Disadvantages of Monopolies

• Less consumer choice
• Higher prices
• Lower quality

Role of Government

• Providing merit goods (healthcare, education)
• Providing public goods (roads, parks)
• Setting regulations to manage externalities
• Managing taxes and subsidies.

Economic Growth

• Increase in the amount of goods and services produced per person over time.

GDP

• Total market value of all final goods and services produced within an economy in a given time period.

Causes of Economic Growth

• Discovery of more resources
• Investment in capital and infrastructure
• Technological progress
• Increase in quantity and quality of factors

Benefits of Economic Growth

• Greater availability of goods and services
• Increased employment
• Higher living standards
• Economic growth may further increase standard of living and well-being.

Drawbacks of Economic Growth

• Technical progress may cause capital to replace labor, causing unemployment;
• Disastrous for highly populated underdeveloped economies; pulling more people into poverty.

Sustainable Economic Growth

• Rate of growth can be maintained without creating significant economic problems for future generations.

Recession

• Phase where there is negative economic growth, real GDP.

Causes of Recession

• Financial crises
• Rise in interest rates
• Fall in real wages
• Fall in consumer confidence
• Cuts in government spending
• Black swan events

Consequences of Recession

• Firms going out of business
• Increased unemployment
• Reduced income
• Rise in poverty and inequality

Policies to Promote Economic Growth

• Expansionary fiscal policies
• Expansionary monetary policies
• Supply-side policies

Effectiveness of Policies

• Depends on the specific policy and economic conditions.

Labor Force

• Working population
• People not in the labor force

Dependent Population

• People who depend on the labor force for goods and services; students, children, retirees.

Employment

• Engagement in a trade, profession, or business

Unemployment

• People actively looking for jobs but are not currently employed

Full Employment

• All people who are willing and able to work are employed

Measuring Unemployment

• Claimant count
• Labour surveys
• Unemployment rate.

Types of Unemployment

• Frictional
• Cyclical
• Structural
• Technological
• Seasonal
• Voluntary

Consequences of Unemployment

• Loss of skills, reduced income, and decreased standards of living;
• Poverty, depression, poor quality of life,
• Lower purchasing power, decreased overall demand and reduced economic activity.

Policies to Reduce Unemployment

• Expansionary policies to boost demand
• Supply-side policies to increase workforce productivity (improve skills training, education etc.)

Inflation

• Sustained rise in the price level of goods and services in an economy.

CPI (Consumer Price Index)

• Measures the average change over time in the prices paid by urban consumers for a basket of consumer goods and services.

Causes of Inflation

• Demand-pull inflation
• Cost-push inflation

Consequences of Inflation

• Lower purchasing power
• Exports lose competitiveness.
• International payments problems.

Policies to Control Inflation

• Contractionary monetary policy
• Contractionary fiscal policy.

Deflation

• General fall in the price level

Causes of Deflation

• Aggregate supply exceeding aggregate demand
• Fall in demand in the economy.

Specialisation

• Concentrating production efforts on producing a limited variety of goods or services.

Absolute Advantage

• One country is more efficient in producing a good/service than another.

Comparative Advantage

• One country can produce a good/service at a lower opportunity cost than another.

Advantages of International Specialisation

• Economies of scale, efficiency
• Increased output while reducing costs.

Disadvantages of International Specialisation

• Structural unemployment
• Over-exploitation of resources
• Threat of foreign competition
• Over-specialization

Globalisation

• Process of interaction and integration.

Multinational Corporations (MNCs)

• Businesses operating in multiple countries.

Advantages to Home Country (of MNCs)

• Job creation
• Increased GSP (Gross Savings Product) from spending
• Increased profits from sales

Extending business choice (sales)

Advantages to Host Country (of MNCs)

• Job creation
• Improved quality/training/skills of local workforce
• Capital investment in production facilities/machinery.

Disadvantages to Home Country (due to MNCs)

• Capital transfer to host countries
• Potential for job losses

Disadvantages to Host Country (due to MNCs)

• Threat of business closure
• Exploitation of labour (lower wages, poorer conditions)
• Lack of control over economic development/growth (by other countries).

Free Trade

• No restrictions on trade between economies.

Advantages of Free Trade

• Enables specialization
• Increases consumer choice
• Allows economies of scale

Disadvantages of Free Trade

• Threatens jobs in developed countries
• May harm developing countries' businesses if they cannot compete.

Protection

• Usage of trade barriers (tariffs, quotas etc.) to restrict foreign market access, resulting in less competition for domestic firms but may limit consumer choices.

Types of Protection

• Tariffs
• Subsidies
• Quotas
• Embargoes

Reasons for Protection

• Protect infant industries
• Protect sunset industries
• Protect strategic industries
• Limit over-specialization

Consequences of Protection

• Restrict consumer choice
• Limit new revenue and employment opportunities
• Protect inefficient domestic firms.