IGCSE Economics Basic Econonomic Problem

Unit 3; The Individual

Characteristics of money

  • Acceptable: everyone must accept it as a form of payment at its set value.
  • Portable: it must be easily carried without being bulky or heavy.
  • Durable: it must last for a long time and withstand much use without devaluing. Many countries are making plasticized bank notes now in an effort to increase their durability.
  • Divisible: it must be easily divided in small denominations to make it suitable for all types of transactions.
  • Scarce: it must be limited in its supply or it will quickly lose value and become worthless.

Functions of Money

For money to be successful it needs to perform several key functions or purposes.

  • Medium of exchange: this means that it must enable people to sell products for money and then take that money to another seller and use it to buy products.
  • Measure of value: money must have a value in relation to all other products. This solves one of the problems with barter - since it enables producers to know the value of their product in relation only to money – rather than all other products.
  • Store of value: money must not devalue (inflation aside). If a producer receives $10 for their produce today they know that in a month that $10 note will still be worth $10. This solves another problem of barter – an apple grower previously had the problem of apples going bad relatively quickly and losing their value.
  • Deferred payment: this enables lending and borrowing. Money should be able to be borrowed and repaid later, and goods bought and paid for at a later date. The fixed value of money allows deals to be negotiated and the lender to know exactly what they are getting at the later date.

Central Banks

Central banks act as the government’s bank and are not accessible for individuals and businesses (except commercial banks).

  • The Government’s tax receipts go into the central bank and its holds any gold and foreign currency reserves the government has.
  • They print the notes and coins.
  • They set the base rate of interest; this can be a powerful tool in managing the economy.
  • Central banks also play a very important role in regulating commercial banks and making sure that the banking system is functioning correctly.
  • In a financial emergency a central bank can act as a lender of last resort to a commercial bank that is in trouble.
Video 1.8 Outsourcing in the Philippines

Commercial Banks

Commercial banks are the high street banks that we are familiar with such as HSBC, Barclays and Citibank. Profit maximization is their main aim and they are usually privately owned. They traditionally make most of their money by offering savers a lower rate of interest than they charge for lending out that money to others as loans. Individuals and businesses are their customers and they provide a range of services:

  • Checking/current accounts: this is a standard account for depositing money in that allows you to access the money instantly if you need it. Due to the flexibility of this type of account the interest rates are usually very low.
  • Savings accounts: higher interest rates but customers don’t have an ATM card for withdrawing cash instantly.
  • Overdrafts: a pre-agreed debt facility which allows customers to spend more than they have in their account.
  • Loans and mortgages: commercial banks offer a range of loans and mortgages that vary in the amount lent and the timescale for repayment.
  • Credit cards: most commercial banks have a link with a credit card company such as Visa or Mastercard and link these to your bank account.
Commercial Banks
Figure : Commercial Banks

Stock Exchange

Stock exchanges play an important role in economies since they facilitate the buying and selling of shares in Public Limited Companies. This enables companies to raise capital for investment. Stock exchanges regulate the selling of shares and provide a secure marketplace.

Only Public Limited Companies can trade shares on the stock exchange. To buy and sell shares companies and individuals must use a stockbroker. A stockbroker is someone who is registered to trade in the stock exchange on behalf of clients.

Why buy shares?

  • Dividend payments: these are financial payments to all shareholders by the company from some of the profits it has made.
  • Capital gains: the rising value of shares (hopefully)
  • Gaining control of the company: big investors and companies may use the stock exchange to buy significant proportions of a company to gain influence in its management decisions or even to completely purchase it.
New York Stock Exchange
Figure : New York Stock Exchange

Wage Factors

Generally the higher the amount of money offered as pay, the more attractive the job is likely to be. The method of payment and performance incentives are also likely to influence the decision.

  • Salary: This is a pre-agreed total for the year, split into monthly sections. Because it is a set amount of money it does not depend on the hours worked – this may be a good or bad thing. Advantages of a salary are that it gives security and people can make plans based on the monthly income.
  • Wage: this is when workers’ pay is based on the number of hours they work at an agreed hourly rate. This has the advantage that workers may be able to do extra hours and increase their income.
  • Piece rate: this is when workers’ pay is based on their production. Often found in primary agriculture at harvest time. Coffee pickers are paid based on the weight of coffee cherries that they pick per day. If a worker is efficient they can make more money.
  • Commission: this is a method of pay that is often found in sales jobs. Usually the basic salary/ wage is very low but the employee will receive a percentage of the value of the sales they make.
  • Bonuses: these are financial rewards for good performance. These have the potential to significantly increase the yearly pay.
wage factors affecting employment choice
Figure : Piece rate work, coffee picking

Non-wage Factors

  • Geographical location: the proximity to the where the worker lives is likely to be important since longer journeys to work cost time and money.
  • Working hours: the number of hours required to work is important. But the timing of the shift is often also very important. Some jobs require night shifts or weekend shifts.
  • Working conditions: the physical demands of the job and the working environment are often important.
  • Job satisfaction: will the job stimulate the interest and provides a sense achievement.
  • Holiday entitlement: how many holiday days are provided? Some professions such as teaching have very favourable holiday provision. Some countries offer more holiday entitlement than others.
  • Pension provision: jobs that have a company pension scheme and one that offers a good pension on retirement are an attractive prospect.
non wage factors
Figure : Poor working conditions

Trade Unions

Trade unions are organisations that represent workers’ rights. Workers become a member a trade union and then the union will negotiate with employers for improved working conditions, working hours and pay increases. The NUT (National Union of Teachers) and Unison are examples of strong trade unions in the UK.

Trade unions are effective since they often represent a significant proportion of a firms workers. This gives them more influence than if individual workers negotiated separately. The representation of many workers is called collective bargaining.

It also benefits employers since they can deal with a much smaller number of people in making decisions that affect the entire workforce.

If wages levels are pushed too high and not matched by an increase in productivity then this will increase costs for the firm and make it less competitive. This may lead to unemployment – which would be against the interests of the trade union and its workers.

It is possible for trade unions to try and raise the wages for its members through restricting the supply of workers. This can be achieved by requiring specialist certifications or qualifications. Its members refuse to work any overtime hours, or even go on strike (refusing to come into work at all).

Trade unions need to be relaistic since theur actions may also be damaging to the workers since they may find the firm retaliates in some way (through loss of benefits or future unemployment for example).


Specialisation in the sense of individuals refers to the worker focusing their training and experience on a specific part of the production process.

  • Highly skilled specialisation: When workers want to obtain a highly specialized job they are likely to need extensive training. This may require extras years in education at universities, or it may be professional training received whilst working. Jobs often offer high wages, job satisfaction, good working conditions and more job security since they are difficult to replace.
  • Workers may specialise in much lower skilled tasks. Some, such as hair-dressing, may provide much job satisfaction and a reasonable wage level.
  • Production lines in factories: workers perform the same unskilled tasks over and over again. This form of specialization is often low paid and has little sense of job satisfaction. With low skilled specialization it is relatively easy for the worker to be replaced and so job security may be low.


There are several ways in which people save and different reasons for saving. Reasons for saving

  • Target saving: saving for future purchase such as a car, a house or maybe a TV.
  • Contingency saving: many people save to have a sum of money to fall back on in the case of an emergency or unforeseen event. Medical bills, car repairs etc.
  • Retirement saving: pension plans and specialist saving accounts are often used to save for the time when there is no longer an income from working.

Those on low wages will inevitably spend a large proportion of their income on necessities. This leaves little money for luxuries and saving. People receiving higher incomes are unlikely to spend significantly more on the necessities and subsequently have a larger proportion of their income available for saving.


Borrowing money is likely to feature in most people’s lives at some point. Most people borrowmoney to buy their first house. Others borrow money more frequently to purchase smaller items such as cars and to pay for holidays.

Interest rates affect borrowing. These represent the cost of borrowing money. If interest rates are it will dissuade people for borrowing money since the repayments will be high. If however interest rates are low then borrowing becomes cheap and many people will be enticed to buy now and pay later through borrowing.


Peoples’ motivation for spending is usually linked to the level of disposable income that they have. If disposable income decreases for any reason, people are likely to reduce their level of spending.

Interest rates often affect spending. If interest rates are rising or high, loans become expensive and people are unlikely to borrow money for large purchases. If interest rates are low or credit is easy to obtain people are likely to increase their expenditure level.

High income groups are likely to spend a larger amount than lower income groups, but importantly this larger amount usually represents a lower proportion of their income. Someone who receives double the income of another person is unlikely to consume twice as much food, water and electricity. This leaves them with more income to save and/or spend on luxuries of they wish.

Unit 3; The Firm

Sole Trader

A business that is owned by a single person is known a sole trader business. The owner may employ other people to work in the company but they have no ownership of the firm. Usually small in size and has low set up costs.

Typical examples are plumbers, electricians and gardeners.


  • the owner gets to keep the profit and make any decisions.
  • They be responsive the consumers demands and also establish good customer relationships.


  • the owner is usually liable for any debts that the company has.
  • Having a single owner may limit the range of skills and ideas in the decision making processes.
  • The amount of capital/money that a single person can raise is also likely to be relatively small low.


These are companies that have 2 or more owners (partners) and usually not more than 20. Common examples of partnerships may are dentists, accountants, solicitors and doctors practices.


  • Increased capital injections,
  • Wider range of skills and ideas in the decision making processes
  • Liability is shared between more people.


  • Profits are shared between the partners.
  • There may disagreements about the decisions made.
  • Between the partners there is still liability for any debts.

Private Limited Company (Ltd)

Private Limited Companies are owned by several people through the sale of shares. The shares are not available to the public through the stock exchange, but sold privately to friends and family. Private Limited companies must publish annual reports for their shareholders giving details about the company’s performance.


  • Ability to raise more capital (although it is limited to the finance that friends and family have and are willing to invest).
  • The company itself is liable for any losses and this means the share holders only have limited liability.
  • Shareholders can only lose the value of their shares


  • They tend to remain relatively small since the levels of capital that can be raised from friends and family is usually fairly low.

Public Limited Company (Plc)

Public Limited Companies are listed on a stock exchange and their shares are available for anyone to buy through a stockbroker. They are often relatively large in size.

To become a Plc, the company must publish information about its operations and accounts in a prospectus to inform any potential investors about the company, its direction and financial health. Each year reports must also be sent to all its investors about the previous year’s performance, accounts and future direction.


  • They can usually raise large sums of capital due to the global supply of investors.
  • They can grow quickly and/ or invest in the necessary capital.
  • Shareholders have limited liability and can vote at meetings about the decisions being made.


  • Higher administrative costs of informing all investors about extraordinary meetings and publishing yearly reports.
  • The owners of the company may lose control of the decision making since all investors can vote at the AGM (annual general meeting) if they are not happy with the performance or decisions being taken.


These are organizations that are owned jointly by their members and run in the members’ interests. There are several types of co-operatives:

Trading co-operatives

Formed when a group of producers team up to become a cooperative. This is common in agriculture; coffee farmers may form co-operatives to share equipment (reduce costs) and to have more influence in the market place due to controlling a larger supply.

Consumer co-operatives

They buy in bulk to benefit from reduced prices, this is then passed on to their members as cheaper prices.

Public Corporations

These are government run organizations and tend to be large in size. They are funded by the government and are not profit orientated. Their main aim is to provide the best service to the public. Utility and train operations are often state run (nationalized), in the UK the BBC (British Broadcasting Corporation) is a public corporation.


  • Making the decisions that are in the public’s interest rather than for profit maximization.
  • In some situations such as railways and public water infra-structure it makes economic sense to just have one set of rails and pipes rather than duplicating them for different private companies.


  • Inefficiencies since the corporation will be subsidized if it fails to cover its costs.
  • The lack of competition may lead to lower levels of innovation and possibly quality.
  • The size of public corporations can often lead to inefficient communication within the company.

Electronics Manufacturing, China

  1. Watch video 3.1.1 and make notes about the inputs, processes and outputs that are involved.
  2. Write a paragraph explaining why labour is so prominent in this factory and why the machinery is relatively basic.
  3. Are the workers skilled & do they appear happy/satisfied? Explain your answer.

(Clip taken from the video: Manufactured Landscapes)

Video 3.1.1 Manufactured Landscapes

Car Manufacturing: Mini, Oxford

BMW are one of the worlds major car manufacturers and produce many of their cars in developed countries where wages are high.

  1. Watch the clip and again comment on the inputs, processes and outputs involved.
  2. In this factory labour is more skilled but most processes are mechanised, explain why.
  3. Comment on whether the wokers seem satisfied - suggest reasons for your answer.
Video 3.1.2 Capital Intensive Car Production

Fixed Costs

These are the costs that don’t vary with output such as rent, interest on loans etc. This means that the Total Fixed Cost (TFC) line is straight.

The Average Fixed Cost (AFC) line is sloped. TFC/output = AFC. If fixed costs are $10 and 1 item is produced then the AFC is $10, however if 2 items are produced then the AFC is $5.

Fixed Costs diagram
Figure : Fixed Costs Curve

Variable Costs

These are the costs that change as output changes such as raw materials, wages, utility bills. As output increases Total Variable Costs (TVC) increase.

Average Variable Costs (AVC) initially fall as productivity of workers increase and the firm benefits from economies of scale but these diminish and may reverse with increased output. TVC/output = AVC

Variable costs diagram
Figure : Variable Costs Curve

Total Costs

Fixed Costs + Variable Costs = Total Costs.

The total cost line starts at the level of the fixed cost line since these costs must be paid despite no production.

Total costs diagram
Figure : Total Costs Curve


Revenue: This is the total amount of money a firms recieves from selling goods (before costs are deducted).

Average Revenue: Total revenue/output


The output per worker is known as productivity.

Firms aim to maximise the productivity of their workers in an effort to increase profits. There are several ways in which they may aim to achive this:

  • Investing in training should increase the speed or skill of the workers.
  • Mechanising some of the processes.
  • specialize their workforce in certain stages of production.

Diminishing returns to labour

Increasing the labour force can initially bring increased productivity as many jobs are made quicker through specialization. There are limits though to these benefits and at some point adding additional workers will lead to decreases in productivity.

If workers get in each other’s way, have to wait for shared machinery or cannot communicate effectively, their productivity will diminish, this is known as the Law of Diminishing Marginal Returns.

Perfect Competition

  • Firms in perfect competition cannot compete on price. In this type of market situation the price elasticity of demand is perfectly elastic. If a firm raises its price consumers will not buy from it.
  • Products are identical and consumers have complete knowledge of the other suppliers prices they will all buy from somewhere else.
  • Firms make what is known as ‘normal profit’ in the long-run.
  • They are unable to reduce their price since this would result in them making a loss.
  • Firms must accept the market price which is set by the forces of supply and demand.
  • Perfect competition makes the best use of resources since it reallocates the resources to the production of goods that are in demand and profitable. Inefficient producers will quickly go out of business.
  • If there is an increase in the demand then in the short run the suppliers will make higher than normal profits (super-normal profits). Others quickly join this market which will increase the supply and push the price back down to a point at which normal profit is again being made.
  • If there is a decrease in demand then the price will fall. This will quickly result in some suppliers leaving the industry and switching to something that is more profitable. This wil redcue the supply.
Placeholder image
Figure : Perfect competition in the market place


Monopoly situations occur when there is a single firm that is the sole supplier. In some cases it makes sense to have a single supplier since duplicating the infra-structure would be inefficient and wasteful. These industries are known as natural monopolies and include water companies, some rail companies (if they own the track) and electricity suppliers.


  • The firm has 100% share of the market.
  • High barriers to entry.
  • The firm controls supply and subsequently the price level

Monopolies might have complete control over the supply and therefore be able to set prices, but they cannot control the demand. This leaves them with an important choice. They can either:

  1. Decide the price level they want to achieve and supply the quantity that would achieve this.
  2. Decide the quantity they want to sell and accept the market price.

Disadvantages of monopolies

  • Inefficiency: the lack of competition allows monopolies to operate less efficiently than companies in a competitive market would.
  • Lack of innovation/poor quality: they can offer a poorer service/product without losing many customers.
  • Higher prices: they can set the price and earn super-normal profit levels.
Video 1.8 What are monopolies

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