LEARNING OBJECTIVES
What you will be able to do
- analyse money, banking, saving and borrowing
- explain occupational choice and wage differences
- calculate firm costs, revenue, productivity and profit
- compare firm growth and market structures
AT A GLANCE
INTRODUCTION · THE BIG IDEA
Explain how households, workers, firms and financial institutions make choices.
Microeconomics studies decisions made by individual consumers, workers and firms. Incentives matter, but choices also depend on information, constraints, risk and non-financial aims.
Firm decisions connect productivity and scale to cost, revenue, profit and competition.
SECTION 01
Money, banks, saving and borrowing
Money avoids barter's need for a double coincidence of wants. Commercial banks accept deposits, provide payments, lend and offer financial services. Central banks issue currency, act for government and banks, oversee the financial system and may influence interest rates.
Households save more when income, interest incentives or uncertainty rise, but spend more when confidence and wealth rise. Borrowing decisions depend on interest, income, purpose, collateral and expected ability to repay.
| Rise in interest rate | Likely response |
|---|---|
| Savers | greater reward for postponing spending |
| Borrowers | loans cost more |
| Firms | some investment becomes less profitable |
SECTION 02
Workers, wages and trade unions
People choose occupations using wages, hours, security, conditions, location, training, promotion and personal satisfaction. Wage differences reflect demand and supply of labour, skill, qualifications, responsibility, risk, bargaining power and discrimination.
Labour demand is derived from demand for output and depends on productivity and wage cost. Labour supply depends on population, participation, migration, training and occupational mobility. Trade unions may negotiate pay and conditions but can also increase labour cost or conflict.
SECTION 03
Firms, production, costs and revenue
Firms combine factors to produce output. Productivity is output per input. Fixed cost does not vary with output in the short run; variable cost does. Average cost may fall through internal economies of scale and rise through diseconomies.
Revenue depends on price and quantity. A firm may maximise profit, growth, market share, survival or social outcomes. Principal–agent problems can arise when managers' aims differ from owners' aims.
Cost and profit
- A firm sells 500 units at $20 each, so revenue = $10 000.
- Fixed cost is $2500 and variable cost is $9 per unit, so total cost = 2500 + 4500.
- Profit = 10 000 − 7000.
Answer: Profit = $3000 and average cost = $14 per unit.
SECTION 04
Firm size, growth and market structure
Firms grow internally or through merger and takeover. Horizontal integration joins firms at the same stage, vertical integration joins different production stages, and conglomerate integration joins unrelated activities. Growth can create economies of scale but may weaken control.
A competitive market has many firms, low barriers and strong rivalry; a monopoly has one dominant seller and high barriers. Monopoly may fund research and exploit scale, but can restrict output, raise price and reduce choice. Small firms survive through personal service, flexibility, niche demand and low overheads.
| Type | Example direction | Possible purpose |
|---|---|---|
| Horizontal | competitor at same stage | market share and scale |
| Backward vertical | toward supplier | secure input and cost |
| Forward vertical | toward retailer | control distribution |
| Conglomerate | unrelated industry | diversify risk |
QUICK CHAPTER SUMMARY
The ideas to carry forward
- Household choices respond to income, interest, confidence and risk.
- Wages reflect labour demand, supply and non-wage conditions.
- Firm profit links revenue with all costs.
- Growth and market power can create both efficiency and consumer risks.
QUICK REVISION CHECKLIST
Can you do each of these without your notes?
- analyse money, banking, saving and borrowing
- explain occupational choice and wage differences
- calculate firm costs, revenue, productivity and profit
- compare firm growth and market structures