Part A Microeconomics

Factors of production

Production
A process which involves converting resources into goods or services.
These goods and services are provided to satisfy the need and wants of people.
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Value added (selling price of FG - Price of RM )
The difference between the selling price of a product or service and the cost of bought in
materials and components.
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Factors of production = Resource = Capacity = Input
The resources used to produce goods and services.
There are four factors of production, land, labour, capital and enterprise.

1)Land (all of the natural resources) (Rent ) (L)

a)Renewable once used --- can be replaced by nature. Eg soil, water.
b) Non-renewable once they have been used they cannot be replaced. Eg. Oil, gold

2)Labour (human resources)( workforce in the economy) (L) (wages and salary )
The people used on production of goods and services.

3)Capital (artificial resource = man- made resource)

a) Fixed capital Eg factories, offices, machinery
b) Working capital or circulating capital Eg money

4)Enterprise = Business = Firm (Entrepreneurs)

An individual who organizes the other factors of production (LLK) and to take risks their own
money in a business venture.

Entrepreneurs (characteristic)
1)Risk- takers
2)Organizers - organizing the other three factors of production (LLK)
3)Decision makers
4)Innovator - come up with a business idea
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1)Labour- intensive production
Production method that make more use of labour relative to machinery. Eg retail store

Unemployed people --- need to pay low w&s ---- cost of production decline
Require high skill of labour eg Bank, Insurance

2)Capital- intensive production (machine intensive)

Production methods that make more use of machinery relative to labour.
eg Car production factories

1
Sector (industry) (Production sector) (stages of business activity)
1)Primary sector
Production involving the extraction of raw material from the earth
Eg mining and quarrying, fishing, forestry, Agriculture

2) Secondary sector (manufacturing sector)

Production involving the converting of raw materials into finished and semi-finished goods.
Eg factory

3)Tertiary sector
Produce and supply of services in the economy.
Eg professional services(Accountancy firm), transport, financial services
( banking, Insurance ), Advertising agencies.
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1)Industrialization
The decline in Primary sector and increase in Secondary sector.

2)Deindustrialization
The decline in Manufacturing and increase in Tertiary sector.
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Industrialization (advantages)
1)Output increase --- GDP increase ---- SOL increase
2)Output increase --- X increase
3)Individual and firm’s income increase --- Tax revenue increase
4)Increase in value added products

Disadvantages
1)Increase in housing and social problem --- people move form countryside to towns
2)M cost increase
3)Increase in MNCs --- received disadvantages --- environmental damage
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Reasons for deindustrialization
1)Increase in income & SOL --- increase in spend on services rather than more goods.
So, Substantial growth in tourism, hotel and restaurant and
2)Decrease in Spending on physical goods
3)To access cheap labour ---- move to developing countries
So, increase in imported goods.

2
 Resolving the problem (Basic Economic problem)

Needs basis requirements for human survival (eg water, food, shelter, medicine)
Wants people’s desires for goods and services.

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Resources individual needs and wants occur Scarcity

(LLKE)
Limited Unlimited needs to make choice

Opportunity cost

Scarcity
The lack of sufficient product to fulfill the total wants of the population.
(a condition where there are insufficient resources to satisfy all the need and wants of people.)

Opportunity cost
The next best alternative given up by choosing another item.
When choosing between different alternatives it is the benefit lost from the next best alternatives.
The idea of opportunity cost may be applied in any situation where choice are being made.
The need for choice is due to the existence of scare resources which have alternative uses.
This is why it is an important for economics.
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This choice will be in term of 3 main questions.

1)What to produce
eg Consumer goods --- goods ---- produced for People to consume
Capital goods ---- goods --- produced for other business

2)How to produce
eg labour intensive or Capital intensive)

3)For whom to produce

Consumer goods ---- produce for People for consume ---- improved standard of living (SOL)
Capital goods --- produce for other firms (Business) use as Raw material --- FG (value added
product) ---- gain economic growth / unemployment decline
For SR ---- Consumer goods
For LR --- to develop ---- Capital goods

3
Production Possibility Curve (PPC) (PPF)

Def: A group that shows the combinations of output that the economy can possibly produce
given the available factors of production and the available production technology.
So, increase in the output of one type of the product it will be necessary to reduce output of
the another.
(a line which shows the different combinations of two goods and economy can produce if all
resources are used up).

Usefulness
- Use to illustrate the idea of choice and the concept of OC
- Can be use in Microeconomics and Macroeconomics

Eg
Point Consumer goods Capital goods
A 16 m 0 Extreme situation
---------------------------------------------------
D 0 8m fully utilized --- factory of production
(LLKE)
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B 14 m 4m If move from B to C opportunity cost =?
--------------------------------------------------- To gain 3 m of capital goods
C 8m 7m 6m of consumer goods are being scarified
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F 8m 4 m Not all resources in the country are being used
Inside the PPC --- not efficient
(underutilization of resources)
A country should aim to push production
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E 12 m 7m Outside the PPC
In short run --- impossible (not have enough
resources)
In long run ---possible --- gain economic growth
Country Find new resources or
Use advance technology
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Opportunity cost =
(formula)

Conclusion
Recognition that if an economy chooses to allocate more resources to making one product, it has
to allocate fewer resources to another product to make more of one product it has to produce less
of another produce less of another product.

4
Causes of a shift of a PPC to the right (Reason for gain economic growth)
Due to Increase factor of production

1)Land Introduction of new resources

2)Labour Increase in the supply of labour
Improvement in Human Capital
Improved management of resources
3)Capital Investment in improved technology
4)Enterprise Encouragement of an enterprise culture.

5
 The market system (goods and service)

Market
A set of arrangements allowing buyers and sellers to communicate and exchange goods and
services. Eg housing market, the mortgage market

Market system or price mechanism

The automatic determination of prices and the allocation of resources by the operation of
markets in the economy.

Demand (Buyer) (Consumer) (Customer)

The amount of a good that will be bought at given prices over the period of time

Supply (Seller) (Business) (Firms) (Enterprise)

The amount of a good that seller are prepared to sell at a given price over the period of time.
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Effective demand
The amount of a good people is willing to buy at given prices over a given period of time
backed by the ability to pay.
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Demand curve (Law of demand)
Price and quantity demanded are inversely related
Increased in Price (P )----- willingness to buy and ability to pay decline ----- Decreased in
Quantity demanded (Qd)
Decreased in Price ----- willingness to buy and ability to pay increased ----- Increased in
Quantity demanded
D curve ---- Slopes down from left to right

Eg que
Price ($) 600 700 800 900
Qty of breads per annum 500 400 300 200

Fig (1)

6
Supply (S )(seller = business = firms = enterprise)
Law of Supply
Prices and quantity supply are positively related
Increased in Price (P) ----- get more profit ---- want to sell more ----- Increased in Quantity
supplied (Qs)
Declined in Price ---- get less profit / making loss ---- Decreased in Quantity supplied.

S curve --- Upward sloping

Eg que
Price ($) 600 700 800 900
Qty of breads per annum 350 400 450 500

Fig: (2)
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Equilibrium price (marketing clearing price)
Occur when there is no tendency for Price and Quantity to change.
Price where the amount supply in the market matches exactly the amount demanded.
(ie It is where Demand (Qd) is equal to Supply (Qs) )

Fig (3)

7
Total revenue
The amount of money generated from the sale of goods calculated by multiplying price by
quantity.
Price x Quantity = Total revenue
P x Q = TR

8
Government intervention
(I)Price floor ( Gov set Price > Pe )
A legal minimum on the price at which a good can be sold

Diagram

Reason
Gov think Pe too low.
At that price (Pe ) cannot cover the cost of production.
Poor firms will making loss .
Gov set Price > Pe

Consequences
Gov set Price > Pe
Buyer will not buy
Seller produce more
Lead to Excess supply --- Where supply is greater than demand and there are unsold goods in
the market
Therefore, Surplus of goods and service ---- surplus is created (over production) --- wastage of
resources in the economy.

9
(II)Price ceiling ( Gov set price < Pe)
A legal maximum on the price at which a good can be sold.

Diagram
Reason
Gov think Pe too high
Poor consumer will not affordable
So, Gov set Price ceiling (below Pe)

Consequences
Lead to Excess demand ---- Where demand is greater than supply and there are shortages in the
market.
Qd > Qs --- excess demand
Shortage of goods and services in the economy and
increase in D and decreased in S --- occur Black market.
Have to do ration for limited amount (Qty)
Ways ----- queue (1st come – 1st service) , quota ---- lead to corruption

Disadvantages
*It is possible that secondary or informal market or black market may emerge where the supply
is increased through illegal method outside the market.
In such a situation the price is likely to be well above the maximum price in the formal market
*Maximum price control will lead to excess demand in the market and this creates some form of
queue or waiting list which lead to bribery or corruption.

10
Definitions
Normal goods
Incomes increased; quantity demanded also increased
Incomes decline, Qd also decline

Inferior goods
Income increased; quantity demanded is decreased
Income decline, Qd will be increased
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Substitute (eg Pepsi and Coca Cola)
Two goods for which an increase in the price of one leads to an increase in the demand for the
others
(If Price of Pepsi increased --- Qd for Pepsi decline --- switch to buy Coca Cola --- Caca Cola
Qd increased)

Complementary ( eg Car and Petrol)

Two goods for which an increase in the price of one leads to a decrease in the demand for the
other.
( If car Price increased --- Qd for car decline --- no longer need to buy Petrol ---- Petrol Qd
decline )
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Subsidies
Financial assistance given by government to firms in order to reduce cost of production.
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Direct tax (Income tax )
Tax on income of individual and firms

Disposable income
Income after tax

Indirect tax
Tax on purchase of goods and services (tax on spending)
Eg
Value added tax (VAT )
Tariff --- tax on Imported goods
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Interest rate
Set by Gov or Central Bank
Cost of borrowed money

11
Demand
Change in price and Other factors changes

(1)Que :Price change (increased / decreased) effect on Demand ?

Answer
movement along the D curve

Diagram

Finding

 Price increased --- Qd decreased ---- Contraction in Qty demand

 Price decreased --- Qd increased ---- Expansion of Qty demand

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Change in Other factors ---- if increased in D ---- D curve --- shift to the right
If decreased in D ---- D curve --- shift to the left

For demand For Supply (Output)

(1)Income (1)Cost of production
(2)Population (2)Number of sellers
(no of buyers)
(3)Advertising and promotion (3)Changes in technology
(4)Tastes and fashion (4)Natural factors
(5)Substitute goods (5)Price of other goods
(6)Complementary goods (6)Subsidies
(7)Interest rate (7)Indirect tax
(8)Direct tax (8)Gov R and R

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(I)Income
a) Normal goods and Face with economic growth / full employment
Answer
increased in income --- can buy more for normal goods ---- Qd increased --- D curve shift to
the RIGHT.

Diagram

Finding
Buy more --- increased in Qty from Qe to Q1
So, price will be increased from Pe to P1
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b) Normal goods and Recession/ unemployment
Answer
income decline --- less buy for normal goods --- Qd decreased ---- D curve shift to the Left.

Diagram
Finding
Less buy --- decline in Qty from Pe to P1
So, price will be decline from Pe to P1

13
c)Inferior goods and Face with economic growth / full employment
Answer
increased in income ---- less buy for inferior goods --- Qd decreased ---- D curve shift to the
LEFT

Diagram

Finding
Decline in income --- less buy for inferior goods ---- D decreased from Qe to Q1
So, Price will be decline from Pe to P1
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d) Inferior goods and Recession/ unemployment
Answer
decline in income ---- will buy more for inferior goods ---- Qd increased ---- D curve shift to
the RIGHT

Diagram
Finding
Decline in income ---- more buy for inferior goods ---- Qty increased from Qe to Q1
So, Price will be increased from Pe to P1

14
(II)Population (depend on Birth rate / Death rate / Migration rate)

a)BR increased / DR decline(ageing population ) / immigration

Answer
Increased in population --- have to buy more ---- increased in D ---- D curve shift to the RIGHT

Diagram
Finding
D increased from Qe to Q1
So, Price will be increased from Pe to P1
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b) BR decline / DR increase / emigration
Answer
Decreased in population ---- need to buy less ---- D decreased --- D curve shift to the LEFT

Diagram
Finding
D decline from Qe to Q1
So, Price will be decreased from Pe to P1

15
(III)Advertising

a) Firms spend More advertising expenditure and provide promotion

Answer
well known and can persuade the customers --- increased in D ---- D curve shift to the RIGHT

Diagram
Finding
Will buy more --- increased in D from Qe to Q1
So, price will be increased from Pe to P1
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b) Firms reduce spend on advertising expenditure and less spend for promotion
Answer
less known and less attract ---- decline in D ----- D curve shift to the LEFT

Diagram
Finding
Will buy less --- decreased in D from Qe to Q1
So, price will be decreased from Pe to P1

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(IV)Taste and fashion

a) Product becomes popular

Answer
buy more --- increased in D ---- D curve shift to the RIGHT

Diagram
Finding
Increased in D from Qe to Q1
So, Price will be increased from Pe to P1
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b) Product become out of date/unfashionable
Answer
Less buy ---- decline in D ---- D curve shift to the LEFT

Diagram
Finding
decreased in D from Qe to Q1
So, Price will be decreased from Pe to P1

17
(V)Substitute goods (Seen at competitive market)
Eg Pepsi and Coca cola

a)If price of Pepsi increased and effect on Qd of Coca cola

Answer
Pepsi become expensive ----- demand for Pepsi decreased and substitute with Coca cola --- D
for Coca cola increased --- D curve shift to the RIGHT

Diagram ( for Coca Cola)

Finding
Increased in D from Qe to Q1
So, Price will be increased from Pe to P1
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b)If price of Pepsi decreased and effect on Qd of Coca cola
Answer
Pepsi become cheaper ---- demand for Pepsi increased so there is no longer to buy Coca cola ---
D for Coca cola demand decreased --- D curve shift to the LEFT

diagram ( for Coca Cola )

Finding
decreased in D from Qe to Q1
So, Price will be decreased from Pe to P1

18
(VI)Complementary goods
Eg Car and Petrol

a)If Car Price increased and effect on Qd of Petrol

Answer
Car Qd increased ---- Car Qd decline ---- no longer need to buy petrol ---- Petrol Qd also
decreased ----- D curve shift to the LEFT

diagram ( for Petrol )

Finding
decreased in D from Qe to Q1
So, Price will be decreased from Pe to P1
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b)If Car Price decreased and effect on Qd of petrol
Answer
Car Qd increased ---- need to buy ---- Petrol Qd also increased ----- D curve shift to the RIGHT

Diagram ( for Petrol )

Finding
Increased in D from Qe to Q1
So, Price will be increased from Pe to P1

19
(VII)Interest rate
a)If Gov Increased in Interest rate
Answer
cost of borrowed money increased ---- borrow decreased ----less buy ----- Qd also decreased -----
D curve shift to the LEFT

Diagram
Finding
Decline in Qd from Qe to Q1
So, Price will be decline from Pe to P1
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b) if Gov ----- Decreased in Interest rate
Answer
cost of borrowed money decreased ---- borrow increased ----buy more ---- Qd also increased
----- D curve shift to the RIGHT

Diagram
Finding
Buy more ---- Qd increased from Qe to Pe
So, Price will be increased from Pe to P1

20
(VIII) Direct tax (Income tax --- Tax on Income of Individual and Firms)
a)if Gov Increased in direct tax
Answer
disposable income decreased ---- can buy less ---- D curve shift to the LEFT

Diagram
Finding
Decline in Qd from Qe to Q1
So, Price will be decline from Pe to P1
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b) if Gov Decreased in direct tax
Answer
disposable income increased ---- can buy more ----Qd also increased ----- D curve shift to the
RIGHT

Diagram
Finding
Buy more ---- Qd increased from Qe to Pe
So, Price will be increased from Pe to P1

21
Supply
Change in price and other factors Changes

1)Price change (increased / decreased) affect on Supply ?

Answer
movement along the S curve

Diagram
Finding
 Price increased --- Qs increased ---- Expansion in Qty Supply
 Price decreased --- Qs decreased ---- Contraction of Qty Supply
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Change in Other factors ---- if increased in S ---- S curve --- shift to the right
If decreased in S ---- S curve --- shift to the left

22
Factors affecting Supply
(I)Cost of production (Factor of production --- eg cost of raw materials, wages & salaries , rent)
a)Price of RM / W and S / Rental charges increased
Answer
Increased in Cost of production ---- firm get less profit /making loss ---- Qs decreased ----
S curve shift to the LEFT

Diagram
Finding
Decline in Qs from Qe to Q1
So,Price will be increased from Pe to P1
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b)RM price cheaper / W and S decline / Rental charged decreased
Answer
decreased in cost of production ---- firm get more profit ---- Qs increased ----
S curve shift to the RIGHT

Diagram
Finding
Increased in Qs from Qe to Q1
So, Price will be decline from Pe to P1

23
(II)Number of sellers
a)Competitive market ---- Increased in no: of sellers
Answer
increased in output ----increased in Qs ---- S curve shift to the RIGHT.

Diagram
Finding
Increased in Qs from Qe to Q1
So, Price will be decline from Pe to P1
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b) monopoly market ----- Decreased in no: of sellers
Answer
decreased in output ---- decreased in Qs ---- S curve shift the LEFT

Diagram
Finding
Decline in Qs from Qe to Q1
So,Price will be increased from Pe to P1

24
(III)Changes in technology
a)business use Advance technology
answer
increased in output ---- Qs increased ---- S curve shift to the RIGHT

Diagram
Finding
Increased in Qs from Qe to Q1
So, Price will be decline from Pe to P1
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b) Business use Traditional method (use out of date machine / ageing machine )
answer
decreased output ---- Qs decreased ----- S curve shift to the LEFT

Diagram
Finding
Decline in Qs from Qe to Q1
So,Price will be increased from Pe to P1

25
(IV)Natural factors (eg weather)
a)Sound weather
Answer
increased in output ---- Qs increased ---- S curve shift to the RIGHT

Diagram
Finding
Increased in Qs from Qe to Q1
So, Price will be decline from Pe to P1
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b) Bad/ Poor weather
Answer
decreased in output ---- decreased in Qs ---- S curve shift the LEFT

Diagram
Finding
Decline in Qs from Qe to Q1
So,Price will be increased from Pe to P1

26
(V)Price of other goods
Eg Rice and Maize
a)If decreased in price of Rice affect on Quantity of Maize
Answer
decreased in Qs for Rice ---- S curve shift the LEFT and Increased in Qs for Maize ---- S curve
shift to the RIGHT

Diagram ( for Maize)

Finding
Quantity supply increased from Qe to Q1
So, Price will be decline from Pe to P1

27
(VI)Subsidies(financial assistance given by Gov to firms in order to reduce production cost)
a)Gov: provide subsidies
Answer
decreased in cost of production ----- can get more profit ----Qs increased ---- S curve shift to the
RIGHT

b) Gov withdrew subsidies

Answer
cost of production increased ---- less profit/ loss occur ----- Qs decreased ----- S curve shift to
the LEFT

28
(VII)Indirect tax (VAT ,Tariff)

a)Increased in indirect tax

Answer
cost of raw material increased ---- increase in cost of production ---- S curve shift the LEFT

b)Decreased in indirect tax

Answer
cost of raw material decreased ---- decrease in cost of production ---- S curve shift the RIGHT

29
(VIII)Rule and Regulation (environmental regulation. Labour regulation)
a)Gov set New legislation
Answer
compliance cost increased ----- cost of production increased --- decreased in profit ----
QS decreased ----- S curve shift to the LEFT

b)Gov withdrew R and R

Answer
cost of production decreased --- profit increased ---- Qs increased ----- S curve shift to the
RIGHT

30
Elasticity
(Price elasticity of Demand, Price elasticity of Supply, Income elasticity of demand,
Cross elasticity of demand)
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Price elasticity of demand
(It is usually negative) (it can range from perfectly inelastic to perfectly elastic)
Measure the responsiveness of demand to a change in price

Elastic demand
A change in price result in a greater change in demand
Eg P increased Qd decline decline decline

Inelastic demand ( eg medicine )

A change in price result in a proportionately smaller change in demand
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Factors affecting price elasticity of demand (determinants of PED )

Elastic Inelastic
Availability of substitutes Closely substitute Can not be substitute (unique )
Degree of necessity Luxury Essential
Proportion of income spent Spend a large proportion Spend a small proportion a product
on a product on a product
Time horizon Long run Short run
Definition of market Competitive Monopoly

Reasons (Elastic Demand)

1)Produce --- Can be closely substitute with other products ----- if Price increased ---- substitute
to buy to other products ---- Larger decline in Qd
2)Products --- luxury goods (not necessity) ----- if Price increased ---- consumers postpone to
buy --- largely decline in Qd
3)Spend a large proportion on a product ---- If Price increased ---- consumer ---- not affordable
4)In long run --- product become out of date --- if Price increased --- larger decline in Qd
5)Competitive market ---- large number of sellers ---- more choice for consumer
∞
Price elasticity of demand = % change in Qd
(PED ) (Ed) % change in P

Ans may be 0 = Perfectly inelastic D product (vertical)

<1 = inelastic D product (steeper)
1 = Unit elastic D product
>1 = Elastic D product (flatter )
∞ = Perfectly elastic D product (horizontal)

31
Exercises questions

(i)Price Qty
4 100
5 100
Calculate PED and
Draw diagram.
Ans 0
D curve is Vertical
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(ii) Price Qty
4 100
5 90
Calculate PED and
Draw diagram.
Ans 0.4
D curve is steeper

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(iii)Price Qty
4 100
5 75
Calculate PED and
Draw diagram.
Ans 1
D curve is

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(iv)Price Qty
4 100
5 60
Calculate PED and
Draw diagram.
Ans 1.6
D curve is flatter

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(v)Price Qty
4 100
5 40
Calculate PED and
Draw diagram.
Ans 2.4
D curve is Horizontal

32
Applications of Price Elasticity of demand (Usefulness of PED)
(Advantages of calculation of PED )

For firm help to predict the effect on TR of a price change

For Gov help to target goods for indirect taxation and it also effect on ER

1)Product A (Inelastic D --- change in P --- smaller change in Qd) (Steeper D curve)
If Business reduce the price ---- smaller increased in Qd , so TR will be decreased
Should not reduce the price.

Price x Qty = TR
$10 100 units = $1000
$8 110 units = $880

2)Product B (Elastic D --- change in P --- larger change in Qd ) (Flatter D curve )

If business reduce the price ---- larger increased in Qd ----- so TR will be increased
Should reduce the price.

Price x Qty = TR
$10 100 = $1000
$8 150 = $1200

3)Product C (Unit elastic ) (D curve --- rectangular hyperbola)

If Business reduce the price ---- proportionately increased in Qd
So, no change in Qd . Do nothing for business
Price x Qty = TR
$10 50 =$500
$5 100 =$500

33
Price Elasticity of Supply (it may be positive)
Measure the responsiveness of supply to change in price.

Elastic supply (manufactured goods)

The change in price resulted in a significant change in supply

Inelastic supply (eg Agriculture products)

The change in price resulted in an insignificant change in supply
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Factors affecting price elasticity of supply

Elastic supply
1)Producers that can hold stock of goods (eg durable goods) can respond quickly to price
change
2)Goods that can be produced quickly (manufactured goods / use capital intensive)
3)Producers have spare capacity (LLK)
4)Ease of entry into the market. (Low barrier to entry --- set up cost too low )

Inelastic supply
1)Producers that cannot hold stock of goods (eg perishable good) can respond quickly to price
change,
2)Goods that cannot be produced quickly (Primary sector goods- agriculture goods / use
labour intensive ) (agriculture goods --- time taken to produce)
3)Producers have no spare capacity (LLK)
4)difficult to entry into the market. (High barrier to entry --- set up cost too high )
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Price elasticity of supply = % change in Qs
(PES) % change in P

Ans may be 0 = perfectly inelastic (vertical) eg agriculture goods

<1 = inelastic (steeper)
1 = Unit elastic
>1 = Elastic (flatter )
∞ = Perfectly elastic (horizontal)

34
Calculate PES with diagram
(i)Price Qs
4 100
5 100

Ans
S curve may be
-----------------------------------------------------------------------------------------------------------------
(ii)Price Qs
4 100
5 110

Ans
S curve may be

--------------------------------------------------------------------------------------------------------------------
-
(iii)Price Qs
4 100
5 125

Ans
S curve may be

------------------------------------------------------------------------------------

(iv)Price Qs
4 100
5 140

Ans
S curve may be

-------------------------------------------------------------------------------------------------------------------

(v)Price Qd1
4 100
5 210

Ans
S curve may be

35
Income elasticity of demand (use to determine normal goods or inferior goods)
The responsiveness of demand to change in income

Income elasticity of demand = % change in Qd ÷ % change in income

(YED) (Ey)

Importance of YED
To concentrate their production and marketing resources
So, economy is experiencing full employment and raising income, should be marketing
expensive products.

36
 Economies and Diseconomies of scale

Economies of scale
Falling average costs due to expansion (become larger).

Minimum efficient scale (MES)

The plant size which minimizes a firm’s average costs.

Diseconomies of scale
Rising average costs when a firm become too big.
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Internal economies of scale (MRT PMF)
The cost benefits that an individual firm can enjoy when it expands.

Reasons
1)Purchasing EOS
Due to Bulk purchasing ---- can get (discount)cheap price – so Average cost decline
2)Marketing EOS
Eg own fleet of delivery vehicles --- so cost effective
3)Technology EOS
can use Larger plant increased in Output/ Productivity /Quality -more efficient than smaller one
4)Financial EOS
large businesses have larger variety of source of finance --- cost of borrow money decline
5)Managerial EOS
Afford to appoint specialist manager --- skilled high --- Output/ productivity / quality high
6)Risk-bearing EOS
Have wider range of product (multi products ) and Wider variety of market
---- risk diversification ---- Possibility of loss decline
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External economies of scale
The cost benefits that all firms in the industry can enjoy when the industry expends. (growths).

Reasons
1)Skilled labour
pool of skilled unemployed --- reduce training cost & wages --- so decline in average cost
2)Infrastructure
government will provide infrastructure (eg Road, Electricity, Bridge) / Reduce tax / provide
Subsidies (financial assistance) ---- cost decline
3)Ancillary and commercial services
eg Bank/ Insurance ---- can get services with cheap ---- decline in cost
4)Co-operation
there may be similar businesses ---- help each other --- cost decline

37
Advantages of economies of scale
1)can get high profit ---- Average cost may be decline ----- profit increased --- reinvest in R&D
--- innovation increase ---- more customer choice.
2) more competitive ---Average cost decline ---- can reduce the price ---- competitive selling
price ---- cheap consumer price

------------------------------------------------------------------------------------------------------------------
Diseconomies of scale (disadvantages of EOS)
Reasons
1)bureaucracy ---- bounded by rules and regulation --- strict --- inflexible ---time taken
to fill the forms and write the reports ----- cost will be increased
2)labour relation -----need to set strict R&R ---- lack of empathy ---- conflict ----
demotivation--- increased Labour turnover and absent seem.
3)control and co-ordination
number of employees ---
billions of $ high ---so, difficult to control --- wastages --- cost increased
dozens of plants

recommendation
use proper delegation of authority

38
Externalities: Costs and Benefits
Externalities
The spillover effects of consumption or production. They affect others and can be positive or
negative.

Social cost
The cost of an economic activity to society as well as the individual firm.
The production or consumption of a good will have costs.
These are divided into private costs and externalities.

Social cost = Private cost + External costs (negative externalities)

Private costs
The cost of an economic activity to individuals and firms.

Negative externality (External costs )

Spill over negative effect on 3rd party.
Eg of negative externalities
Pollution , Resource depletion , Traffic congestion, overcrowding, destruction of an area.

1)Pollution ---- health problem ---- decline quality of life

2)Depletion ---- non-renewable resources (crude oil ) ---- used up ---- run down ---- less
available for next generation ---- lead to unsustainable development
3)Traffic congestion ---- time to travel increased ---- increased in stress ---- decline in SOL

39
Social benefits
The benefits of an economic activity to society as well as to the individual or firm.
The production or consumption of a good will have benefits.
These are divided into private benefits and externalities.

Social benefit = Private benefit + External benefit (positive externalities)

Private benefit
The rewards to individuals or firms of an economic activity such as consumptions or production.

Positive externality (External Benefits)

Spill over positive effect on 3rd party.
Eg of positive externalities
Job creation , Training and education , Tax revenue ,R&D, new technology. site
development.

1)Job creation ---- job opportunities increased ---- income increased --- D for g&s increased ---
improved SOL
2)Training and education ---- increased in skilled / become multi-skilled ---- labour mobility
increased
3)Tax revenue ---- Gov income increased ---- can spend more on I H E ---- improved in country
status

Government policies to deal with externalities

A government will want to discourage economic activity that result in negative externalities and
encourage those that result in positive externalities.

Ways to deal negative externalities

40
1)Government rules and regulation
Eg Regulation relating to global warming, contaminated land, abandoned mines, national parks,
air quality and waste.
Set Gov R&R ---- increased in compliance cost ---- cost of production increased ---- can get less
profit / loss ---- reduce their output --- can reduce EC
Or
Need to raise the price ---- D decline ---- can reduce EC

2)Taxation
Eg: a tax is imposed on a firm that produces damaging emissions.
So, production cost increase --- price also increase --- demand decrease --- pollution decrease.

Fines
Fines are imposed on those who damage the environment.

3)Subsidies
Eg Government offer grants, tax allowances and other subsides as an incentive to reduce
externalities.
Financial assistance given by Gov to firms in order to reduce cost of production ---- can buy new
machine ---- pollution reduce

4) Awareness campaign
Providing the knowledge about the negative effect.

Other measures
Eg the London Congestion Charge --- introduce --- try to reduce congestion

41
Types of economy
(1) Command or planned economy
(2) Market or free market economy or free enterprise economy
(3) Mixed economy
---------------------------------------------------------------------------------------------------------------
(I)Command or planned economy
The public sector (Gov) choose: what to produce, how to produce and for whom to produce.
All resources belong to Gov: goods are sold to consumer at prices set by the state.

Advantages
1)Can get EOS ---bulk purchasing ---- can get discount ---- lower cost --- can charge low selling
price ---- consumer affordable.
2) Employment --- concentrate on Social benefit ---- Job security/ more holiday entitlement
3)Social equity ---- basis needs to be met for everyone in society
4)Social protection ---Set rules and regulation used to protect consumers and producers so
reduce negative externality (reduce pollution)
*Comply standard safe

Disadvantages
1)Inefficiency --- There may be equity but lack of efficiency ---- Cannot be fulfilling consumer’s
needs and wants
2)High level of Gov intervention lead to black market --- price will be higher than Market price
3)Lack of economic freedom --- do not have economic freedom to choose
from competing goods and services
*Lack of incentive --- lack of innovation --- not produce innovative products --- decline in SOL
*Bureaucracy
--------------------------------------------------------------------------------------------------------------------

(II)Market economy
Decision are made by individual Buyers and Sellers who act in their own self-interest
Producers aim to maximum their profits and consumers aim to satisfy their satisfaction/utility
(consumer sovereignty)
The price system allocates resources through the interaction of the force of demand and supply
so that an equilibrium, market clearing , position is established.
There is no or very little government intervention

Advantages
1)Greater efficiency Profit maximization --- cost use as low as possible
--- reduce in recourses wastages
2)Consumer sovereignty Consumer should decide on the allocation of
resources.
3)Wide choice/ more competition
4)Encouragement of innovation

42
Disadvantages of Market economy (Market failure) (causes of MF )
Market is insufficient
Fail to produce goods that customer’s wants
Fail to produce the quantity of goods required
Fail to produce goods at acceptly low prices

Types of Market failure

1)Imperfect competition (Existence of monopolies)

Monopoly
there is no sufficient numbers of firms
One sell and many buyers.
One firm dominant in the market.
Business has high bargaining power --- will not produce
Natural monopoly (supply of water, electricity coming from Huge dam)
------------------------------------------------------------------------------------------------------------------
(2) Incomplete market (mission market) (Non-provision of public goods)
Public goods
Individuals reluctant to pay for such service but can obtained benefit from the services.
non-rival --- someone used --- not less available for others
non excludable by user charges
There may be existence of free rider.
Eg
a police force, street light, national defense, road repair
Goods that are not likely to be provided by the private sector (Firms). (reluctant to provide by
business /firms)
Only provided by Government.

Free rider
a person who receives the benefit of a good but avoids paying for it.
So, profit cannot be made by private firm --- no provision of public good by firms
---------------------------------------------------------------------------------------------------------------------
3)Under provision of merit goods
Merit goods
Merit goods is one with substantial benefits for society as a whole
Private goods --- Rival --- someone used ---- less available for others / excludable by user
charges
Everyone benefits if these are provided at low cost but they are expensive that many people
would not be able to afford them
So, public sector has to provide them free of charges or low cost
Eg
inoculation against particular disease, education and health, vaccinations
-----------------------------------------------------------------------------------------------------------------

43
4)Over provision of demerit goods
Demerit goods
People may not aware of the potential damage to themselves
So, over- produced and over consumed
Private goods --- Rival --- someone used ---- less available for others / excludable by user
charges

Eg cigarettes, alcohol, gambling and driving a car.

---------------------------------------------------------------------------------------------------------------

(5) Existence of negative externalities (External cost)

Spill over negative effect on 3rd pary.
Eg
Pollution ---- health problem ---- decline in SOL
Depletion --- non-renewable resources ---- used up ---- run out ---- occur unsustainable
development

---------------------------------------------------------------------------------------------------------------
(5) Imperfect information
Lack of information between buyers and sellers (outcome of imperfect information--- merits and
demerits goods)
-------------------------------------------------------------------------------------------------------------------
(6) Inequality in distribution of income and wealth
Rich have for more choice and economic freedom
Basis services for poorer member of society may be neglected
----------------------------------------------------------------------------------------------------------------
Mixed economy
Try to gain advantages and avoid disadvantages of both market and planned economies
Both the public and private sector to provide goods and services.
This mean price system continues to exist may area of economy but there is a recognition of
possible market failure.
Degree of Gov: intervention may not be the same by countries to countries.

44
 (4) Types of Markets
(I)Perfect competitive market
Characteristics
1)Each firm produces an identical / homogenous products eg Banana
2)No barriers to entry or exist (easily enter into market)

3) There are a large number of firms in the markets (many buyers and sellers)
4)Not requires to advertise due to perfect knowledge. There is perfect information
5)Normal profits are made in the long run and price taker
------------------------------------------------------------------------------------------------

45
(II)Monopolistic competitive market
Common features of competitive market
1)Products are similar ----- close substitute each other
2)Low barriers to entry or exist.

3)There are a large numbers of firms in the markets ( many buyers and sellers)
4)Free flow of information about the products. (Perfect information )
5)Cannot control over the price charged by one firm. ( so , firms ---- price taker)
-------------------------------------------------------------------------------------------------------------
Ways to improve MS (sales)Monopolistic Competition and the firms
1)Reduce the price --- willingness to buy and ability to pay increased ---- sales increased
2)Improve quality --- customer satisfaction --- loyalty (repetitive buying) ---- word of mouth
advertising ---- image and reputation increased --- increased in current sales and potential sales
3)Provide innovative --- unique ---- more interested ----
4)Provide promotion / advertising --- well known /more attract
5)One aspect of innovation is product differentiation
------------------------------------------------------------------------------------------------------------
Disadvantages for firms
1)Amount of profit made will be limited --- can only get normal profit
2)Price lower ----- profit lower.
---------------------------------------------------------------------------------------------------------------
Advantages for consumers
1.Lower price and firms are likely to be responsive to changes in consumer’s demand ---
affordable --- SOL improved
2)More choice --- customer satisfaction ---
3)Better quality --- satisfaction --- SOL improved
3.innovation

Disadvantages for consumer

1.Market uncertainty---- Unprofitable firm eventually leave the market----Some consumers
might be inconvenienced.
2.Lack of innovation-----Firms may not have enough profit (only get normal profit) to invest in
product development
Advantages for economy
Resources (land labour Capital) will be allocated more effectively --- because waste need to be
reduced
More innovative product ------ a better SOL

Disadvantages for economy

Resources might be wasted
Some factors of production are immobile --- eg land (geographically immobile)
Higher unemployment---- unprofitable firm --- shut down

46
Monopoly
One seller, many buyers
A situation where there is one dominant seller (monopolist) in a market.

Features of monopoly
1)Unique product ( no close substitute)
2)Price maker ---- can control over price --- can get Abnormal profit
3)Barriers to entry high --- difficult to enter into the market for new entrance
(a)Cost barriers
Some markets the cost of setting up a firm is too high
New competitors may find it difficult to match such financial commitment.
(b)Legal barriers
Some markets, it is possible to exclude competition legally
Eg patent, a license which grants permissions to operate as a sole producer of a newly designed
product.
(c)Marketing barriers --- can advertise heavily --- famous --- sales increased

Natural monopolies
A situation that occurs when one firms in an industry can serve the entire market at a lower
cost than would be possible it the industry were composed of many smaller firms.
Eg water distribution, electricity distribution.

Advantages for consumer / Firms

1.get normal profit and abnormal profit --- can reinvest in R & D – more innovation
--- SOL improved for consumers
--- improved image and reputation
2.Can gain EOS --- increase in output --- decline in cost --- can reduce the price----
--- more affordable for consumer
international competitiveness for firms --- X will be increased

Disadvantages
1)will charge high price --- firm have more bargaining power --will charge high price ---- not
affordable for consumer
2)Restricted choice --- less customer satisfaction
3)Lack of innovation --- all profit use for wealth creation of owner ---- not use for R and D
4)Inefficiency

Conclusion
Government should set rules and regulation as Competition Act, Fair Trading Act .
Depend on the ethic of the firm.

47
Oligopoly
Few large firms and many buyers
A market dominated by a few large firms.

Features
1.Interdependence
Firms in oligopoly ---- interdependent
One firm --- heavily advertise --- increase sales ---- other firms --- lose sales

2.Collusion
Informal agreements between firms to restrict competition
Agree on Price and Quantity

3.Price rigidity
Market prices stay the same for quite long periods of time
Set by the market leader and others just follow
Reason--- afraid of a price war

4.Non- price competition

Eg advertising, promotion

5.Gain EOS

6.Barriers to entry high

Advantages of oligopoly
1)EOS ---- Average cost decline ---- can reduce the price --- price may be lower ---
affordable
2)Price stability--- Market prices are fairly stable for long periods of time --- more certainty for
consumers
3)More Choice----Consumer --- provided with some choice than monopoly
4)Niche market --- small section in a large market
Eg supply sport car

Disadvantages
1)Cartel

48
Meaning
Price war
Where one firm in the industry reduces price causing others to do the same

Collusion
Informal agreements between firms to restrict competition

Cartel
Where a group of firms or countries join together and agree on pricing or output levels in the
market

Innovation
the commercial exploitation of a new innovation.

Barriers to entry
Obstacles that might discourage a firm from entering a market

Product differentiation
An attempt by a firm to distinguish its product from that of rival.

49
 Labour market

Wage rate
The amount of money paid to workers for their services over a period of time (ie the price of
labour

Demand curve for labour (business )(demand for labour--- derived demand)
Wages increased --- Cost of production increased --- D for labour decline
Wages decreased --- Cost of production decline --- D for labour increased
Slopes downwards, from left to right
Wages rate and demand for labour are inversely related

Supply of labour (employees)

Wages increased ---- want to do the job increased --- S of labour increased
Wages decreased --- S of labour decreased
Slopes upwards, from left to right
Wages rate and supply of labour are proportionately related

Wages determination
The wage rate in any labour market is determined by the interaction of the supply and
demand for labour
Change in the supply and demand for labour will change the equilibrium wage rate.

Fig:

50
Government intervention on labour market

Minimum wages rate (MWR) ( Gov set wage rate > We)
Firms must pay its workers the minimum amount of wages imposed (set) by law.

Reason
We too low
At that wages --- poor labour (low skilled labour ) ---- can not meet basic needs

Advantages
1)Low income earners --- increased in income --- D for high quality goods and services ---
increase SOL
2)Unemployed people --- incentive to work --- reduce voluntary unemployment --- increase
Output ---- GDP increased ---- gain Economic growth.
3)Receive fair wages and are not exploited by employers

Disadvantages.
1)Already receive more than MWR will demand more (due to seniority) --- increased in labour
cost --- cost of production increased ---- increased in price (to maintain the profit) --- cost push
inflation.
2)S of labour (0 to Qs) greater than D for labour (0 to Qd) ---- lead to Excess supply of labour
---- Increased in unemployment

51
Factors affecting the demand for labour (Business)
1)Substitution of labour

a) possible to replace people with machine (substitute with machine)

D for labour will be decreased --- D for labour curve --- shift to the Left.

b) cannot not replace with machine (cannot substitute with machine)

D for labour increased --- D for labour curve ---- shift to the Right.
-----------------------------------------------------------------------------------------------------------------
2) productivity of labour
a) increased in productivity of labour
worker is able to produce more output/ high productivity --- D for labour will be increased --- D
for labour curve ---- shift to the Right

b) workers less skill and low productivity

D for labour will be decreased ---- D for labour curve ---- shift to the Left.
------------------------------------------------------------------------------------------------------------------
3)Other costs relating to employing labour
Other cost Eg --- NIC, cost of pensions, private health insurance, free meals, training, sick pay,
maternity pay

a)If business need to incurred additional cost

cost increased for firms ----- D for labour will be decreased --- D for labour curve ---- shift to the
Left.

b) other costs decreased

cost for firms lower ---- D for labour increased ---- D for labour curve ---- shift to the Right

52
Factors affecting the Supply of labour (employees)

1)Changes in the school leaving age

a) school leaving age ----- reduce (early )
S of labour increased ---- S of labour curve shift to the Right.

b) school leaving age ---- extend

S of labour decreased ---- S of labour curve shift to the Left.
------------------------------------------------------------------------------------------------------------------
2)Changes in the retirement age.
a)The retirement age --- increase
S of labour increased ---- S of labour curve shift to the Right. (Eg Japan)

b)The retirement age --- reduce

S of labour decreased ---- S of labour curve shift to the Left
------------------------------------------------------------------------------------------------------------------
3)Change in the role of women
a)role of women --- increase
S of labour increased ---- S of labour curve shift to the Right.

b)role of women --- decrease

S of labour decreased ---- S of labour curve shift to the Left .
-----------------------------------------------------------------------------------------------------------------
4)The age distribution of the overall population of a country
a) ageing population ---- high ---- S of labour decreased ---- S of labour curve shift to the Left.
b) young population ---- high --- S of labour increased ---- S of labour curve shift to the Right.
c) Welcome immigrants ---- S of labour increased --- S of labour curve shift to the Right.
d) high emigration ---- S of labour decreased ---- S of labour curve shift to the Left

53
Reason for increased in wages rate
1)Due to D for labour high --- 1) skill of labour high (Productivity of labour)
2)cannot substitute with machine
3)industry expansion
2)Due to S of labour low ----- 1) dangerous, unpleasant job
2) decline in population
3)Member of Trade union --- TU have high bargaining power --- will demand high wages
--------------------------------------------------------------------------------------------------------------
Reasons for increase in role of women
1 decline in gender discrimination
2.increase in the education of women
3.increase in cost of living
4.increase in part- time and flexible employment.
-----------------------------------------------------------------------------------------------------------------
Factors affecting the different occupations
- Job which require no skill --- S of labour increased --- low wages
- Job which are dangerous, unpleasant ---- S of labour decreased --- high wages
- An industry expands ---- D for labour increased ---- high wages
- Workers in trade unions ---- wages will be increased.
-----------------------------------------------------------------------------------------------------------------

54
Comparison *****
1)Public sector (Gov) // Private sector (business)
Public sector workers are sometimes paid less than private sector workers for doing similar
jobs because public sectors often enjoy more job security and more holiday entitlement than
private sector employees
But the public sector is a major employer and needs to offer attractive wages and other
benefits to recruit and retain skilled workers.
----------------------------------------------------------------------------------------------------------------
2)Males // Females employees
On average male employees tend to earn more than females because some women may take
career breaks to raise children and more female employees work part-time compared to men
or choose occupations like teaching, nursing and retailing which tend to offer lower wage rates.
There may be also be discrimination.
------------------------------------------------------------------------------------------------------------------
3)Skilled // Unskilled workers
Skilled workers are paid more than unskilled workers because skilled workers are more
productive. Some specialist skills are in short supply. Demand for skilled workers is
increasing in many countries, firms are willing pay higher wages to attract and retain skilled
workers.

55
Diagram
4)Agricultural (Primary sector) // Manufacturing workers (Secondary sector)
Agricultural workers tend to be paid less than workers in manufacturing service industries
because agriculture has become more capital intensive and so the demand for agricultural
workers has declined. An abundant supply of low skilled labour available for agriculture.
Manufacturing and particularly service industries have expended significantly( D for labour
high) and there is storage of supply labour with specialist skills for many advanced
manufacturing sectors.
---------------------------------------------------------------------------------------------------------------
5)Earnings people with special talents or celebrity status
Exceptionally high wages --- because of S of labour --- perfectly inelastic ---vertical.

Diagram

56
Working population (workforce) (Labour force)
Those people who are in work or seeking work.
----------------------------------------------------------------------------------------------------------------
Division of labour
The breaking down of the production process into small parts with each worker allocated to a
specific task

Specialization
The production of a limited range of goods by individuals, firms, regions or countries
Involves concentrating on a particular task result in an increase in production
A country should concentrate on the line at which it is relatively most efficient.
---------------------------------------------------------------------------------------------------------------------
Advantages (for workers)
1)Job become simple/ easy / repetitive --- skill increased --- output / quality high --- wages and
salary --- income increased ---- D for g&s increased ---- SOL improved.
2)Can also learn new skill or enhance their existing one --- muti-skill --- Occupational mobility
increased ---- Job opportunities increased
3)May enjoy more job satisfaction / reduce stress --- due to increase in skill

Disadvantages
1)Boring and stressful because it is repetitive ------ Boredom may lead to job dissatisfaction and
affect motivation.
2)Repetitive task --- replace with machinery--- employee lay off ---- unemployment of low
skilled labour increased.

-------------------------------------------------------------------------------------------------------------------
Advantages (for firm)
1)Job become simple / easy ---- Output --- productivity increased ---- gain EOS---- Average cost
decline ---- Profit increase --- reinvest for expansion or
can reduce the price --- more competitive ---- increased in sales
2)repetitive job ---- skilled increased ---- quality improve --- Customer satisfaction ---- business
image improved

Disadvantages
1)Boring people result in poor-quality work, poor punctuality. Increased absenteeism and high
staff turnover.
2)Problems can also occur if one stage of production depends on another stage.
If one production process delay (one employee in particular stage --- absent and no one to
replace it ) may lead to whole process delay.

57
Change in earnings over an individual’s lifetime
1)Entry to the workforce, earnings relatively low because lack of work skills and experience
2)Increase in skills/ experience: get promotion --- earnings rise significantly --- D for labour
curve shift to the Right
3)Older/ end of career workers/ demotion/loss of jobs ---- earnings fall because he or she will
become vulnerable to redundancy.
-------------------------------------------------------------------------------------------------------------------
The factors considering choice of occupation
1)Financial factors
wages rate, salary, bonus, overtime, commission, PRP, share option

2)Non-financial factors
job satisfaction, working condition and working hours, location of job, career prospects
(opportunities for promotion)
---------------------------------------------------------------------------------------------------------------------
Explain how individual workers can try to increase their wages?
1)Improve their training / qualifications/ skills --- increased in D for labour – wages will be
increased
2)Work longer hours --- receiving OT payment
3)Change to a better paid job with another employer
4)Join Trade Union --- benefit from the potential advantages of collective bargaining

58
 Trade union

Trade unions
An association of employees formed to protect and promote the interest (benefits)of its
members (workers)
------------------------------------------------------------------------------------------------------------
Collective bargaining (negotiation)
The process of negotiation over Pay and Working conditions between trade unions
(worker’s representatives) and employers (employer’s association)
----------------------------------------------------------------------------------------------------------
Types of Trade union
1)General unions represent unskilled and semi-skilled
2)Craft unions represent particular skilled workers
3)Industrial union represent all workers in the industry
4)Non-manual unions represent non-manual workers (office staff)
5)professional association
--------------------------------------------------------------------------------------------------------------
Functions of trade unions (Advantages for employees)
1)Improved pay ---- collective bargaining to improve pay and other benefits including holiday
entitlements ----increased in income --- improve SOL
2) improvements in their working conditions, including hours of work ---- health and safety at
work. --- safe --- reduce in death and injury --- quality of life improved
3)Encouraging firm to increase worker participation in business decision-making
--- job satisfaction ---- increase motivation.
4)Defending their right of members, eg in the legal dispute
5)Training
6)Equal opportunities
-----------------------------------------------------------------------------------------------------------------
Worker participation
To involve worker’s advices and contribution in the business
Ways
1)Appoint the worker director (representative of the workers ) to attend all board meeting.
2)Organized the works councils ---- health and safety, everything concern with workers,
worker’s views are being proposed.
3)Quality circles -----(groups of workers who meet regularly to discuss work related problems)
----- team works, continuous improvement.
4)Democratic styles of leadership.
----------------------------------------------------------------------------------------------------------------
Disadvantages of trade unions
1)Inflation --- will demand high w & s --- cost of production increased --- Price increased

59
2)disruption of the economy --- due to Industrial action --- Output decline / damage reputation
3) increase in unemployment --- shut the business --- All lay off

Industrial action
Action taken by the trade unions to decrease or halt (stop) production

1)Official action
It has backing of the union, and other unions may also take action in support

2)Unofficial action
Workers taking industrial action do not have the support of their unions
---------------------------------------------------------------------------------------------------------
Various forms (types) of Industrial action

1)Overtime ban
They did not work overtime which means no efficiency and no productivity

2)Work- to – rule
When workers comply with every rules and regulation at work in order to slow down
production.

3)Go-slow
Working deliberately slowly (move time to finish their tasks on purpose)

4)Sit- in
When workers refuse to leave their place of work, often in an attempt to stop a firm installing
new machinery or closing down

5)Picketing
Workers stand outside the factory gates to prevent or protest at the delivery of goods, arrival and
departure of other employees

6)Strike
Workers refuse to work.

60
Possible harmful consequences of Industrial action
For employer
Loss of output ------ loss of income and profits,
customer may be lost to other firms as orders are not delivered ----- poor reputation and cash
flow problems

For employees
Loss of wages,
threat to jobs if company loses customers.
They may not return after the dispute is settled

For the economy

Workers have less money to spend ---- lower income ---- less tax revenue for Gov:
Country may gain a bad reputation for not delivering goods on time
Suppliers to the firm with the strike may need to lay off workers
Exports may be lost and imports may be increased

For the firm’s customers

Need to find alternative supplier ----- cost may be higher
May lose income
Shortages of products ---- deliveries not made
May not be able to produce goods
----------------------------------------------------------------------------------------------------------------
Arbitrator
A person who listens to both sides in the industrial dispute (trade union and management) and
then give a ruling on what they think is fair to both sides.
---------------------------------------------------------------------------------------------------------------
Employer association (Employer federations or trade associations)
Groups of employers who join together to give benefits to their members.

61
62