Paper 1 Revision_Labour and Financial Markets.pdf

2.7 The Labour Market 2.8 Financial Markets GCSE ECONOMICS PAPER 1 REVISION 2021-22 2.7 The Labour Market Equilibrium in the Labour Market Wage rate LS W1 LD L1 Quantity of Labour Factors shifting the demand for labour 1. The state of the economy: if the economy is growing, more labour is likely to...

2.7 The Labour Market 2.8 Financial Markets GCSE ECONOMICS PAPER 1 REVISION 2021-22 2.7 The Labour Market Equilibrium in the Labour Market Wage rate LS W1 LD L1 Quantity of Labour Factors shifting the demand for labour 1. The state of the economy: if the economy is growing, more labour is likely to be demanded as existing firms are expanding and new firms are entering the market 2. Increased demand for the product (derived demand) 3. Productivity of labour: if the productivity increases, then labour may become more costefficient than capital 4. Profitability of firms: More profitable firms will expand and therefore require more labour Factors shifting the supply of labour 1. Size of the working population: this is affected by the school leaving age and the retirement age, as well as immigration 2. Other monetary factors e.g. overtime, bonus payments 3. Non-monetary factors: working conditions, opportunity for promotion, job security 4. ◦ ◦ ◦ Barriers to entry There may be qualifications needed to enter that labour market e.g. doctor training Trade unions and other professional organisations Discrimination e.g. against women, minorities and older workers 5. Education and training: an increase in workers undertaking tertiary education and training will increase the number of skilled workers available Price (Wage) Elasticity of Demand for Labour Price (or wage) elasticity of demand for labour measures the responsiveness of the quantity of labour demanded when there is a change in the wage rate. The PED of labour depends on: 1. The PED of the good being produced, since labour is a derived demand. If the PED of the good is inelastic, one might expect the demand for labour to be also inelastic 2. The extent to which labour can be substituted by other factors of production. If there are no substitutes, or if the PED of say, capital, is inelastic, then a firm may not be able to adjust its number of workers very much in response to changes in the wage rate. 3. What proportion of total costs is labour cost; if labour is a big part of total costs, then labour demand is likely to be more wage elastic. 4. How easy it is to let workers go, for example, are there large redundancy payments? Price (Wage) Elasticity of Supply of Labour Price (or wage) elasticity of supply of labour measures the responsiveness of the quantity of labour supplied when there is a change in the wage rate. The PES of labour depends on: 1. Specific skills and educational requirements: if there is a long training period or a need for higher level qualifications, labour supply will tend to be inelastic. 2. The time frame: in the short run, labour supply may be inelastic as it takes time for people to search for jobs or to re-train. 3. Vocational jobs, such as nursing, may not be very responsive to wage changes, because the pay is not the only thing that is important about that job Key definitions about salary payments Gross pay: The amount of money that an employee earns before any deductions are made Net pay: The amount of money that an employee is left with after deductions are made from gross income Income tax: A tax levied directly on personal income (ie. a tax on a person’s wages) National insurance: A contribution paid by workers and their employers towards the cost of state benefits Pension: A fixed amount paid at regular intervals to a person (usually retired) or their surviving dependants 2.8 Financial Markets Money Definition: Money is anything that is generally accepted as a means of payment for goods and services. It consists of notes and coins, which are regarded as legal tender, and bank deposits in the form of both current and savings accounts. Functions of money Medium of exchange: Anything that sets the standard of value of goods and services acceptable to all parties involved in a transaction Unit of account: money is used to measure prices (which tells us the value of a good) and loan repayments A store of value: this enables people to save their wealth to use at a future date. A means of deferred payment: this allows borrowing and lending Fall in interest rates leads to… Rise in interest rates leads to… Savings a reduction in reward for saving, leading to an increase in the reward for saving, leading to lower levels of saving in the economy. higher levels of saving in the economy. Borrowing a decrease in the cost of borrowing, leading to higher levels of borrowing by consumers and producers. Mortgage repayments a decrease in the cost of borrowing, an increase in the cost of borrowing, leading to leading to lower mortgage repayments paid higher mortgage repayments paid by by homeowners. homeowners. Investment a decrease in the cost of borrowing, therefore meaning firms are more likely to borrow to purchase capital goods. It will also lead to increased consumer borrowing and expenditure. Firms will therefore also want to invest to meet the expected rise in demand. an increase in the cost of borrowing, leading to lower levels of borrowing by consumers and producers. an increase in the cost of borrowing, therefore meaning firms are less likely to borrow to purchase capital goods. It will also lead to decreased consumer borrowing and expenditure. Firms will therefore be less likely to invest, due to the expected decline in demand. Interest rate calculations 𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒑𝒂𝒚𝒎𝒆𝒏𝒕 = 𝑰𝒏𝒊𝒕𝒊𝒂𝒍 𝒂𝒎𝒐𝒖𝒏𝒕 𝒃𝒐𝒓𝒓𝒐𝒘𝒆𝒅 × 𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒓𝒂𝒕𝒆 𝟏𝟎𝟎 With compound interest, 𝑭𝒊𝒏𝒂𝒍 𝒗𝒂𝒍𝒖𝒆 𝒐𝒇 𝒔𝒂𝒗𝒊𝒏𝒈𝒔 = 𝑰𝒏𝒊𝒕𝒊𝒂𝒍 𝒂𝒎𝒐𝒖𝒏𝒕 𝒔𝒂𝒗𝒆𝒅× 𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒓𝒂𝒕𝒆 𝒏 𝟏+ 𝟏𝟎𝟎 The Financial Sector Definition: The financial sector consists of financial organisations and their products, and involves the flow of capital. This normally involves the lending and borrowing of money, both in the short and the long run. Financial intermediaries (such as banks and stock markets) link consumers, firms and governments by allowing money to flow from those who do not need it immediately (savers) to those who do (borrowers). A healthy financial sector is needed to maintain a stable economy. There are a large number of different financial institutions. The following are among the most important: The central bank, Commercial banks, Building societies and Insurance companies Role of the central bank (Bank of England) Issue bank notes; the central bank has overall responsibility for the supply of money in the economy Control monetary policy by setting the bank rate (also known as the base rate) Provide financial stability by ensuring that the UK’s citizens can trust financial organisations Manage the country’s foreign reserves (cash and other assets held in foreign currencies) Act as a bank for commercial banks Act as a bank for the government Responsibility for maintaining a low and stable rate of inflation in the UK economy Role of commercial banks Accept deposits (savings) and keep them secure. In many cases they pay interest to savers Make payments on behalf of their customers; for example, through card payments or bank transfers Issue loans to individuals and firms, at an agreed rate of interest Provide foreign currencies for firms and consumers who require it Offer safe deposit boxes for very expensive items Role of building societies and insurance companies As a result of not having to pay dividends to shareholders, building societies claim that they have historically offered higher rates of interest to savers and cheaper mortgages Insurance companies are financial institutions that guarantee compensation for specified loss, damage, illness or death in return for an agreed payment (called premiums) Life insurance aims to pay out money to the surviving family if the person insured dies. This helps replace the loss of income General insurance covers all non-life policies and includes property, contents, motor, health, pets, etc. It helps individuals and firms deal with unexpected events and spreads the risk of loss across all insurance holders. Evaluating the importance of the financial sector Credit Provision (or borrowing) Without credit, the level of economic activity would be greatly reduced Credit cards can encourage people to spend more than they earn, but they also provide a way for consumers to buy now and pay later, increasing consumer spending Mortgages mean that home buyers only need to save a small percentage of the value of a house. Firms can also invest in more capital or technology without having to use up profits Governments use credit to spend money when tax revenue less than their spending Liquidity Provision Liquidity refers to how easy it is to turn an asset into cash Banks are the main providers of liquidity for households and businesses as this allows them to continue to function when there are unexpected demands for cash Banks do this for example, by offering overdraft facilities (short term loans) Risk Management Financial institutions allow savers and businesses to pool their risks Savings are taken from a range of customers and invested in a range of companies so that if one does less well, savers don’t lose all their money Evaluation: The importance of the financial sector may depend on: The age of the consumers, as this may affect the level of indebtedness or saving The attitude to risk The attitude to borrowing and/or saving The level of individual motivation, e.g. the desire to buy your first house The level of consumer income The state of the economy and confidence