Understanding Money and Banking

What is Money?

• Money is a medium of exchange for goods and services.
• Money is necessary because people aren't self-sufficient and need to exchange goods/services.

Evolution from Barter System

• The barter system had issues like the double coincidence of wants, perishable goods, indivisibility, and lack of portability.
• Current money is durable, uniform, divisible, portable, and generally accepted.

Functions of Money

• Medium of exchange for goods and services
• Measure of value as a unit of account to compare the worth of different items
• Store of value, holding its value for future use
• Means of deferred payment for credit purchases

Banking

• Banks are financial intermediaries between borrowers and savers.
• Commercial banks have retail branches, while a central bank governs them (e.g., Reserve Bank of India).

Functions of Commercial Banks

• Accepting deposits
• Aiding payments
• Giving loans
• Buying/selling shares
• Providing insurance
• Exchanging foreign currencies
• Financial planning advice

Functions of a Central Bank

• Issuing currency
• Managing government payments
• Managing national debt
• Supervising commercial banks
• Acting as lender of last resort
• Managing gold and foreign currency reserves
• Operating monetary policy

Spending (Consumption)

• Consumption is the buying of goods/services.
• Consumer expenditure is the money spent on consumption to satisfy needs and wants.

Factors Affecting Consumption

• Disposable income: Higher income leads to more consumption
• Wealth: More wealth leads to more spending
• Consumer confidence: Confidence in future income encourages spending
• Interest rates: High rates encourage saving, lowering spending

Saving

• Saving means delaying consumption until later
• Money can be saved in banks and withdrawn with interest.

Factors Affecting Saving

• Saving for future consumption like large purchases
• Disposable income: Higher income leads to more saving
• Interest rates: Higher rates increase savings returns
• Consumer confidence: Lack of confidence increases saving
• Availability of saving schemes: More schemes encourage saving

Borrowing

• Borrowing is taking money from a lender with the intention of paying it back later.

Factors Affecting Borrowing

• Interest rates: Higher rates discourage borrowing
• Wealth/Income: Wealthier people can borrow more easily
• Consumer confidence: Belief in future financial stability affects borrowing
• Ways of borrowing: Availability of options increases borrowing

Expenditure Patterns Between Income Groups

• Richer people spend, save, and borrow more.
• Poor people spend a higher proportion of their income on necessities.
• Poor people save a lower proportion of their income.

Payments for Labour

• Time-rate: Wage based on hours worked
• Piece-rate: Wage based on output produced
• Salary: Monthly payments for non-manual jobs
• Performance-related payments: Bonuses or commissions for good performance

Factors Affecting Choice of Occupation

• Wage factors: Pay rate, bonuses, benefits
• Non-wage factors: Working hours, holidays, promotion prospects, work environment, job security, fringe benefits, training, distance to work, pension

Labour Demand

• Derived demand: the demand of labour depends on demand for products
• Demand for labor contracts when the wage increases, and vice versa

Labour Supply

• The number of workers ready to work at a given wage rate
• The supply of labour extends when the wage rate increases, and vice versa

Backward-Bending Labour Supply Curve

• Occurs when higher wages lead to fewer hours worked.
• Common among top-level executives.

Shifts in Labour Demand Curve

• Consumer demand: Higher product demand increases labor demand
• Productivity of labour: More productive labour increases demand
• Price/productivity of capital: Cheaper/more productive capital decreases labor demand
• Non-wage employment costs: Higher costs decrease labor demand

Shifts in Labour Supply Curve

• Advantages of an occupation: Better benefits increase supply
• Education and training: More availability increases supply
• Demographic changes: Population growth/immigration increases supply

Changes in Wage Rate Over Time

• Beginners earn less due to lack of experience and high wage rate
• Increases with experience, skills, and promotions.
• Likely to decrease near retirement age due to weakening skills.

Wage Differentials: Differences Between Jobs

• Different abilities/qualifications: Higher skills lead to higher pay.
• Risk involved: Riskier jobs pay more
• Unsociable hours also result in more pay
• Lack of information about other jobs Labour immobility- workers cant move

Wage Differentials: Differences in Same Job

• Regional differences in labour demand/supply
• Fringe benefits offered by some companies instead of high wages
• Discrimination based on gender, race, religion, or age
• Length of service or Tenure
• Local pay agreements by trade unions
• Government labor policies like minimum wage
• Government corporate tax policies which may reduce or make workers' wages more
• Public or private sector pay gaps
• Workers in primary sector activities earn very low wages
• Skilled vs Unskilled workers
• Gender Pay Gap
• International Wage Differentials

Division of Labour/Specialisation

• Dividing production into specific tasks to increase efficiency.

Advantages of Division of Labour/Specialisation to Workers

• Become skilled in a specific task
• Better future job prospects
• Saves time and expenses in training

Disadvantages of Division of Labour/Specialisation Workers

• Monotony leads to low morale
• Margin for errors increases
• Leads to workplace Alienation
• Labour mobility lowered
• Increased unemployment risks because excess workers are laid off

Advantages of Division of Labour/Specialisation to Firms

• Increased productivity & better products
• Low costs and Faster production
• Efficient movement of goods
• Better selection of workers
• Aids a streamlined production process
• Boosts profits

Disadvantages of Division of Labour/Specialisation to Firms

• Increased dependency of workers
• Danger of overproduction if too much is produced without demand

Advantages to the Economy of Division of Labour/Specialisation

• Better use of workers by specialization
• Establishment of efficient firms and industries via investment
• Inventions arise from workers skilled at tasks

Disadvantages to the Economy of Division of Labour/Specialisation

• Occupational immobility may arise
• Reduces the creative instinct of the labour force over the long-run
• May cause exploitation, poor working conditions, and monotony.