The basic:

The DIVISION OF LABOUR is a system whereby workers concentrate on performing a few tasks and then
exchange their production for other goods and services. This is an example of specialisation.

ADVANTAGES OF SPECIALISATION / DIVISION OF LABOUR

To the business:
- Specialist workers become quicker at producing goods
- Production becomes cheaper per good because of this
- Production levels are increased
- Each worker can concentrate on what they are good at and build up their expertise
To the worker:
- Higher pay for specialised work
- Improved skills at that job.
DISADVANTAGES OF SPECIALISATION / DIVISION OF LABOUR
To the business:
- Greater cost of training workers
-Quality may suffer if workers become bored by the lack of variety in their jobs
To the worker:
- Boredom as they do the same job
- Their quality and skills may suffer
- May eventually be replaced by machinery
OTHER TYPES OF SPECIALISATION
REGIONAL
Certain areas have specialised in certain industrial production e.g. coal mining in Yorkshire, pottery in Stoke
INTERNATIONAL
Certain countries have advantages in producing certain goods. They may have natural resources or they may be able
to produce goods more cheaply.
e.g. Sri Lanka Tea, Japan electronics. They then trade these goods for those produced in other countries.

(1) PRIMARY INDUSTRY

Industry that extracts raw materials from the earth, such as coal, fish and wheat. Raw materials are mined, collected,
grown or cut down.
Examples coal mining, agriculture, oil extraction
(2) SECONDARY INDUSTRY
Industry that processes primary products into manufactured goods.
Examples car production, making tables
(3) TERTIARY INDUSTRY
Businesses that provide a service, either to individuals or to other businesses
Examples hairdressing, banking or solicitors

How firm works:

To survive in the market
- To break even (cover costs)
- To improve its image
- To have high motivation amongst employees
- To maximise profits
- To increase market share
- To grow in size (e.g. saales, number of customers, number of employees
- To Sell abroad
- To diversify and sell different products
- To make returns to shareholders if a limited company (dividends)
Monopoly is a situation in which the market is dominated by one seller or producer. By law a monopoly occurs if a
firm has a market share of 25%.

PROBLEMS OF MONOPOLY
Consumers may pay higher prices due to the lack of competition
Consumers may have less choice
Firms may not be very efficient with their resources because there is no need to reduce costs
Less innovation (new products)
BENEFITS OF MONOPOLY
The firm should make higher profits
The firm may use these to invest in new products or improve existing products.
HOWEVER firms can only increase their prices up to a point ***************
HOW DO FIRMS KEEP THEIR MONOPOLY?
Imagine that Stagecoach has a 95% market share in local area. This means that 95% of buses are operated by
Stagecoach. How could they keep this power?
* Cost Barriers It is expensive for other companies to set up
* Advertising The may spend lots of money building up a reputation.
* Economies of scale Larger firms generally have lower costs per unit. They can cut their prices to force out
competition
There are several ways in which businesses can join together...

HORIZONTAL INTEGRATION
Two businesses at the same stage of production
e.g. 2 tablemakers join together
FORWARD VERTICAL INTEGRATION
A business takes over or merges with a businesses at the next stage of production
e.g. table maker joins with a shop
BACKWARD VERTICAL INTEGRATION
A business takes over or merges with a business at the previous stage of production
e.g. a table maker joins with a tree cutter

How do businesses decide where to locate? A number of factors are involved. These vary depending on what the
business produces e.g. primary, secondary and tertiary

POSSIBLE REASONS FOR CHOOSING A SPECIFIC LOCATION:

Near to the market (that is its customers)
Near to raw materials
Availability of skilled / unskilled labour
Local pay rates this could be influenced by unemployment rates
Cost of land
Government support e.g. grants
Transport links
Technology has given businesses far more freedom in recent years. Computer networks, mobile phones and the
Internet mean that many service companies can locate away from their customers and other branches. They can
communicate through technology or the postal service.
HOW DO INTERNATIONAL BUSINESSES DECIDE WHERE TO LOCATE?
Cost of workers
Transport costs / links
How near is the base to its existing / new customers?
Is the country in the European Union? (see page )
Is the country in the European Monetary Union? (see page)
Most businesses operate in a competitive situation. This means that they have to consider the activities of other
businesses when they make decisions.

COMPETITION means
a large number of producers
new firms can set up in the industry
firms are knowledgeable about the activities of their competitors.
How do firms compete?
1. PRICE - not too high or too low
2. QUALITY
3. INNOVATIONS e.g. new ideas
4. PROMOTIONS e.g. special offers
5. ADVERTISING
6. BRANDING e.g. creating an image / identity (Nike, Burberry)
Successful competition means that the business may
Survive in the market
increase profits

 increase market share

make more dividends for shareholders
Unsuccessful competition may mean the opposite
How should a business be organised? Who should own it? There are various options for a business to consider
Who owns the business?
These are all private sector organisations
SOLE TRADER / PROPRIETORSHIP
A one person business with unlimited liability
PARTNERSHIP
2 20 partners own, control and finance the business. They have unlimited liability
PRIVATE LIMITED COMPANY (ltd)
A Company owned by shareholders. A limited number of shares are issued, these are owned by family and friends of
the business. The business has limited liability
PUBLIC LIMITED COMPANY (plc)
A Company owned by shareholders. It must have 50,000 of capital when founded, and may allow its share to be
bought by the general public (though it does not have to). The business has limited liability
UNLIMITED LIABILTY
A legal obligation on the owners of the business to pay all debts of the business. Even their personal possessions
may be claimed.
LIMITED LIABILITY
Shareholders are only responsible for the companys debts up to the value of their shareholding.
1. INTERNAL GROWTH
This means that it grows without joining with another business. It could
build new premises
take on more employees
2. EXTERNAL GROWTH
In this case it has some involvement with another business

a) MERGER
Two firms join together and have equal ownership e.g. Lloyds and TSB merge to create Lloyds TSB bank.
b) TAKEOVER
One firm takes over another firm and has the ownership of that business. It is probably against the wishes of the
other business. e.g. Lloyds could takeover TSB. It would probably still be called Lloyds but it would also own TSB.

BENEFITS OF GROWTH
Increased profits
Increased market share
Gain new ideas from the other business
Avoid having to compete with the other business
Gain from economies of scale (page)
The new business may not need all of the workers. They could remove some workers to become efficient and make
more profit
PROBLEMS OF GROWTH
To the businesses
There may be two sets of managers who are unable to agree on the best direction for the company. This could
cause many problems.
The businesses may have different objectives and targets
It costs a lot of money to merge with or takeover another business
To customers
Possibly less choice in the market and possibly higher prices to pay
To workers
Possible job losses and job insecurity
TYPES OF ECONOMIES OF SCALE
Think of the advantages that ToysrUs has over a small, independently-owned toy shop in near you
MANAGERIAL Employ specialist managers e.g. accountants.
FINANCIAL Easier to get a loan from the bank
DIVERSIFY Sell a range of products. Reduces the risk of failure.
ADVERTISING They can afford to advertise nationally on TV

 BULK BUYING This is cheaper per good for the business

MASS PRODUCTION Helps spread fixed costs (page)
DISECONOMIES OF SCALE
These are the problems faced by businesses if they become too large
Lose touch with the customers
Managers lose touch with the workers
Communication problems because the business is so large
What is efficiency?
Producing at a lower cost or using fewer resources when making a product or providing a service. Also meeting the
needs of consumers.

HOW TO BECOME EFFICIENT

Use fewer raw materials
Use fewer workers
Have fewer managers
Replace high cost labour with low cost technology
Less waste, fewer reject goods
BENEFITS OF EFFICIENCY
Lower costs
Lower prices
More sales (revenue)
Greater profits
Higher bonuses for workers / managers
Greater returns for shareholders (limited company)

PROBLEMS OF GREATER EFFICIENCY

Quality may suffer
Low morale in the workplace as jobs are lost
Stress as people have to work harder
Redundancy payments to workers
Initial cost of buying technology
WAGE
An individuals payment usually for a weeks work
SALARY
An individuals payment usually for a months work

HIGHER WAGES USUALLY RESULT FROM

- Skills
- Qualifications / training
- Special talents (footballer / rock star)
- Experience
- Dangerous work
- Supply and demand of labour
SUPPLY AND DEMAND FOR LABOUR

In the diagram above:

Supply of labour:The number of workers willing to work at each wage rate
Demand for labour The number of workers required at each wage rate
Where supply = demand is the equilibrium wage rate (5 in this case)
The lower the supply of labour for a particular industry the higher the wage rate e.g. professional footballers
The greater the supply of labour for a particular industry the lower the wage rate e.g. cleaners
Each working person is guaranteed a minimum wage for work in the UK. It is illegal for an employer to pay a figure
below this. The minimum wage is different for under 21s and over 21s.

ADVANTAGES OF THE MINIMUM WAGE

- Fair for workers to be paid a minimum wage.

- Helps low earners gain a higher standard of living
- Extra disposable income should lead to extra spending in the economy
- Helps increase the gap between wages for low earners and unemployment benefit
- May help reduce unemployment
DISADVANTAGES OF THE MINIMUM WAGE
- Increases the cost to businesses
-Businesses may increase their prices (cost push inflation)
- Businesses may be unable to afford to employ as many workers
- Could cause unemployment
- Other workers may now ask for a pay rise
- Doesnt help the unemployed who dont receive a wage
Two key topics to understand are geographic and occupational mobility of labour

a) GEOGRAPHICAL
People are willing and able to move between regions or areas in order to take a new job. They often have to move
home.
b) OCCUPATIONAL
People are willing and able to move between types of jobs or occupations e.g. an unemployed coal miner becomes a
salesman.
GEOGRAPHICAL IMMOBILITY OF LABOUR OCCUPATIONAL IMMOBILITY OF LABOUR
People are unemployed because they are not prepared
People are unemployed because they are unwilling to work in
to move areas (e.g. leave their home area) in order to
a job which is different to what they had previously
take up work.
Reasons

Reasons
An unemployed miner doesnt neccesarily have the skills to
Cost of moving
use computers
House prices in other areas
Lack of confidence
Friends in the current area
Cant be bothered
Childrens education
Lack of education
Lack of training
GROWTH OF PART TIME AND TEMPORARY WORK
BENEFITS TO BUSINESS
Can employ workers for the busy time periods e.g. McDonalds on Saturday.
It is cheaper than to employ them full time
The business can reduce its costs more easily by reducing the size of its workforce.
They can bring in workers for busy seasonal periods e.g. Xmas.
BENEFITS TO WORKERS

 Allows more leisure time.

Avoids too much stress at work.
Many older workers go part time before they eventually retire.
Temporary workers can leave their jobs very quickly. They dont need to give so much notice to the employer.
Suits workers who have to look after their children at certain times.

WOMEN AT WORK
THE AVERAGE PAY OF MEN HAS BEEN HIGHER THAN WOMEN
Men are more likely to go into the highest positions in the business
Bias or discrimination at work against women.
The traditional expectation that women will leave work to look after the children
Women are more likely to work part time or temporary.

HOW TO REDUCE THE GAP IN WAGES

Equal pay laws. It is illegal to pay different rates for the same job.
Equal opportunities for all staff when promoting workers to higher positions.
Providing child care facilities at work (these could be paid for by the government)
Promote positive female role models i.e. women who have been successful in business. For example Anita
Roddick set up the Body Shop.
A trade union is an organisation which represents the interests of its workers in negotiations about improving
working conditions with employers and government..
There are about 240 different trade unions in the country about 33% of workers are in a trade union. Workers pay a
monthly fee to their trade union.

AIMS OF TRADE UNIONS

To increase the wages of their members
To improve their working conditions
To agree a certain number of hours to be worked each week
To support members who have problems with managers
To get extra benefits for workers e.g. pensions
HOW DO THEY GO ABOUT IT?
- Negotiations with managers i.e. general discussions
- Industrial action e.g. strike
- Help and pay to represent workers in court or legal battles
PROs AND CONs OF STRIKES

PROs
- Has an immediate effect as production halts e.g. trains stop running if the drivers strike
- Businesses suffer and have to take notice
- May get coverage on TV or in newspapers.
CONS
- May cause anger from the general public e.g. train passengers
- Workers dont get paid when on strike
- Notice has to be given otherwise it is illegal
Overall the effect will probably depend upon:
- The % of the workforce willing to strike
- The support of the general public
- The strength of the management to battle it out
WAYS OF MEASURING THE STANDARD OF LIVING IN A COUNTRY
GDP in the UK is 1,300,000. This suggests that the UK is quite a rich and prosperous country. But is doesnt tell
us about individuals.
GDP per person is 16,000. On average each person receives this amount of money per year. But it is only an
average.
OTHER WAYS (wealth / material)
How unequal is UK society? Do some people earn 1,000,000 and others very little?
Number of material goods owned by people e.g. cars, TVs, mobiles
Quality of life e.g. stress, congestion, crime rates
Number of holidays per year.
OTHER WAYS (social)
Number of patients per doctor
Infant mortality rates
% of the population that can read or write
Average food intake per person
OVERALL
It is important to consider all of these measures in order to work out an individuals standard of living, but it is not
possible to come up with a precise measure.
INCOME
This is money that a person receives over a period of time. It could be weekly, monthly or annually.

Examples:
- Wages (per week) Salaries (per month)
- Rent payments on their property Income from shares (dividends)
- Sale of shares
WEALTH
The stock of what a person owns or possesses
Examples:
- Money in the bank House
- Material goods e.g. cars, TVs Shares
INEQUALITY
The unequal distribution of income and wealth in society
e.g. 1% of the population owns 20% of the nations wealth
& 50% of the population owns only 6% of the nations wealth
CAUSES OF INEQUALITY
- Different wages e.g. Beckham / roadsweeper
- Different levels of skill and education
- Inheritance (being born into it)
- Taking a risk and gaining a reward e.g. setting up business / shares
HOW TO REDUCE INEQUALITY
- Make the higher earners pay more income tax. (progressive ) (see page )
- Increase benefits for the unemployed
- Increase the minimum wage for low earners
- Increase inheritance tax (when people are given family money)
- Increase pensions
The development and growth of an economy, without compromising or harming future generations.

SUSTAINABLE DEVELOPMENT includes

- Recycling
- Taking care of the environment
- Not using up non renewable resources
- Technological progress
- Treating workers fairly, particularly in developing countries.

ECONOMIC BEHAVIOUR WHICH MAY HARM SUSTAINABILITY

Polluting the environment
Greenhouse effect
Child labour exploitation
Using up natural resources in meeting the huge demands of todays population
Exploitation of labour in developing countries
It is important for the Government to take action against any business or economic activity which harms
sustainability by creating social / external costs
EXAMPLES OF GOVERNMENT ACTION
Bans on traffic in certain areas
Increases on taxes on petrol
Fines for firms who pollute the environment
Subsidies to firms who produce in an environmentally friendly way
A tax has to be paid by firms who dump waste
Encouragement of public transport
Minimum working ages in the UK
Stakeholders are those individuals or groups directly affected by the behaviour of a business.
An increase in demand (possibly due to increased popularity) has forced the price upwards. Suppliers will sell more
goods to take advantage of this
What Happens
Demand Curve
Good advertising campaign
Shift right
Increase in peoples incomes
Shift right
Increase in the price of substitutes
Shift right
Increase in fashion
Shift right
Decrease in peoples incomes
Shift left
Decrease in the price of substitutes
Shift left
Increase in the number of competitors
Shift left
Health scare
Shift left
It is possible that demand may change for reasons other than price
DEMAND INCREASES IF (MARS BARS)
1. The good or service becomes more popular
2. Increase in advertising on the good or service
3. Other substitute goods (e.g. twix) increase in price
4. Improvement in quality
5. People have larger incomes
DEMAND FALLS IF
1. The good or service becomes less popular
2. Decrease in advertising on the good or service

Price
Up
Up
Up
Up
Down
Down
Down
Down

3. Other substitute goods fall in price

4. Fall in quality or a health scare
5. People have smaller incomes
It is possible that supply may change for reasons other than price
INCREASE IN SUPPLY OF A GOOD
1. Cheaper raw materials (more profitable)
2. More efficient production
3. Better productivity
4. New technology
DECREASE IN SUPPLY OF A GOOD
1. More expensive raw materials (less profitable)
2. Less efficient production
3. Poor productivity
4. Poor weather / harvest
It is possible that demand may change for reasons other than price
DEMAND INCREASES IF (MARS BARS)
1. The good or service becomes more popular
2. Increase in advertising on the good or service
3. Other substitute goods (e.g. twix) increase in price
4. Improvement in quality
5. People have larger incomes
DEMAND FALLS IF
1. The good or service becomes less popular
2. Decrease in advertising on the good or service
3. Other substitute goods fall in price
4. Fall in quality or a health scare
5. People have smaller incomes
TAX
A charge placed on the production of a good and service by the Government. For example petrol is taxed heavily by
the Government

A tax will increase the cost of production to the producer. It is makes it more expensive to produce
It is likely that the producer will produce less therefore the supply curve shifts to the left. It is also likely to increase
the cost of the product
If people are really keen to buy the product (price inelastic) demand will stay fairly high. This often happens with
alcohol, petrol and cigarettes
SUBSIDY
This is a payment of money by the Government to a producer in order to encourage them to produce or supply a
certain good or service. For example an important bus route

A subsidy will reduce the cost of production to the producer. It makes it cheaper to produce.
It is likely that the producer will be encouraged to produce more therefore the supply curve will shift to the right . It
is also likely to decrease the cost of the product.
This is the total stock of money available in an economy at a point in time.

The money supply includes:

- Notes and coins
- Money in a current account in the bank
- Money in a savings account
- Money in a building society
If it is tied up for a long time i.e. you cant withdraw it for 2 years it is not classed as money.
FUNCTIONS OF MONEY
1. It can be used as a means of exchange or to buy resources
2. It is a measure of value e.g. 1 mars bar = 40p
3. It is a store of value e.g. it keeps its value
WHAT IS GOOD MONEY?
1. It should be ACCEPTABLE
2. It should be DURABLE and hard-wearing
3. It should be PORTABLE and easy to carry
4. It should be DIVISIBLE i.e. you can give change
5. It must be SCARCE
SAVINGS
Why do people save?
1. To buy a good in the future e.g. a car
2. In case something goes wrong e.g. lose job
3. To plan for retirement
4. To gain interest from the bank

INTERNAL STAKEHOLDERS (part of the business)

- Employees
- Managers
- Directors
Note - each of the above groups could also be shareholders
EXTERNAL STAKEHOLDERS (outside the business)
- Shareholders (who don't work in the business)
- Local community

- Customers
- Suppliers
- Government
Businesses are taking more consideration of the impact of decisions upon the range of stakeholders. This helps
maintain a positive image with all groups.
Sometimes it is difficult to please all stakeholders. For example, a wage increase to employees may cause lower
dividends to be paid to shareholders.
An interest rate is the price or cost of borrowing money.
For example you might borrow 1,000 from a bank. However, they will not give you the money for free you will
have to repay the 1,000 plus interest. AND
The reward for lending money
If you put money into a bank you will gain interest as a thank you for lending the money.
CHANGES IN INTEREST RATES
Banks and building societies regularly change their interest rates. A change will have a major impact upon
consumers, savers, borrowers, homeowners and businesses.
WHY DO THEY NEED MONEY?
To start up
To buy equipment
To expand into new premises
To take-over other companies
Due to an unexpected crisis
SOURCES OF FINANCE
1. OWNERS SAVINGS
GOOD: Doesnt need to be repaid
Doesnt give ownership of the business to anybody else
BAD: Risk losing their own money
May not have enough savings
2. BANK LOAN
GOOD: Can raise a lot of money
Can receive the money quite quickly
BAD: Needs to be repaid
Will have to pay interest as well

3. MORTGAGE (long-term loan - e.g. 25 years)

GOOD: Can raise even more money
Have 25 years to repay
BAD: Will have to repay far more than the initial loan
A long term commitment
4. SELLING SHARES
GOOD: Can raise lots of money
Doesnt necessarily have to be repaid
BAD: Shareholders becoming part owners of the business
Shareholders will expect annual dividends
5. PROFIT RETAINED IN THE BUSINESS
GOOD: Maintain control of the business.
Doesnt have to be repaid
BAD: Must be making a regular and healthy profit
FIXED COSTS
Costs of production that do not vary with output. They stay the same regardless of how many goods are produced.
Examples:
- Rent
- Managers salaries
- Interest payments on loans
VARIABLE COSTS
Costs of production that vary directly with output. If more goods are produced then the costs are likely to go up.
Examples:
- Raw materials
- Power used in production
- Wages linked to production
TOTAL COSTS
The total cost of producing all output. It is calculated by
FIXED COSTS + VARIABLE COSTS
Price Elasticity of Demand

This measures the relationship between changes in price of a product and the change in demand for the product.
Sometimes a change in price has a major effect on the demand e.g. holidays to Jamaica
KEY TERMS
PRICE ELASTIC
If the % change in quantity demanded is greater than the % change in price it has a major effect. In this case demand
is very responsive to a change in price. It is called elastic
PRICE INELASTIC
If the % change in quantity demanded is less than the % change in price it has a minor effect. In this case demand is
not very responsive to a change in price. It is called inelastic
Features:
PRICE ELASTIC GOODS
Lots of substitutes
Luxury
Little loyalty to the product
Often expensive

PRICE INELASTIC GOODS

Very few substitutes
Necessity or addictive
Strong brand loyalty e.g. Sony
Usually not too expensive

WHAT TO DO AS A BUSINESS?
PRICE ELASTIC GOODS
- Try not to increase the price as the business will collect less revenue. The fall in demand will outweigh any extra
price increases
- Cut prices a little as more people will buy your product.
PRICE INELASTIC GOODS
It should be possible to increase the price a bit and still collect extra revenue. There will be a slight fall in
customers but enough people will pay the extra price.
It is not worth cutting the price. It wont attract many new customers
These goods are often taxed heavily because people continue to buy them as they are considered to be necessities
e.g. petrol, cigarettes
Four main targets:
- Low unemployment lots of people in work
- Low and steady inflation prices and wages fairly stable
- Steady and sustainable economic growth (%change in GDP) the economy to grow a little bit each year
- A positive balance of payments to export more than we import

Two other possibles:

- To reduce inequality in the country to redistribute income and wealth in order to help the poor
- To protect the environment to avoid pollution and congestion
PROBLEMS / COSTS OF UNEMPLOYMENT
INDIVIDUAL
Loss of earnings
Lack of self esteem
Reduced spending power
Loss of skills and employabilty (human
capital)

OTHER WORKERS
May have to pay extra tax to cover increased unemployment benefits
Loss of job security they may fear losing their jobs.
May have to accept pay cuts to keep their jobs

GOVERNMENT
May become unpopular
Will collect less money in income tax and
VAT
More money to pay out on benefits
Will have less money to spend on education
and health

LOCAL AREAS / ECONOMY

Less spending by individuals
Businesses may suffer because of the fall in demand
Crime may increase
The area /country is not using its resources effectively and may
become less competitive

Reducing unemployment is a key target for all Governments. High unemployment has enormous costs for
individuals, businesses, the Government and the economy.
The way of solving unemployment will depend upon its cause
METHODS
Government support to struggling industries in order to try to save jobs e.g. airline industry
Provide more training and education to the unemployed. This could help improve computer skills and
communication. These people will become more confident and employable.
Make more information available in job centres.
Reduce unemployment benefits or cut benefits all together (see below)
Try to bring the country out of a recession. The Government needs to try to create demand in the economy. It
could;
- Give grants to businesses to produce goods
- Have projects such as roadbuilding

- Cut interest rates to encourage spending

- Cut income tax to encourage spending
NEW DEAL
At present an individual is only allowed to claim unemployment benefit for 6 months.
After 6 months they must take any job, which is offered to them or accept a loss of benefit.
Alternatively they can choose to do extra education or training.
There are 2 main reasons why prices could increase in our economy
1. COST PUSH
An increase in costs may lead to an increase in prices.
Examples:
Raw material prices ( possibly from abroad) increase...
...Costs to business increase...
...Business still wants to make a profit...
...Business puts its prices up...
...Consumers can buy less with their money...
...Workers demand and receive pay increases...
...Businesses costs increase again...
...Businesses put prices up again
On and on and on
2. DEMAND PULL
If there is too much demand for goods and services in the economy then prices may be forced upwards.
Individuals and businesses experience a feelgood factor ( maybe they have just had a tax cut)
They wish to buy more goods and services
Only so many goods and services are available at present
Suppliers experience so much demand for their limited number of goods that they decide to put up prices
How to reduce the level of inflation in an economy
1. REDUCE DEMAND PRESSURES
If inflation is caused by high demand then

* Raise interest rates to reduce consumers disposable incomes

* Raise interest rates to discourage borrowing and demand
* Raise taxes to reduce disposable income and spending
* These policies should all reduce peoples ability to spend too much money
2 REDUCE COST PUSH PRESSURES
If inflation is caused by high costs
Limit wage increases if possible e.g. public sector workers
Force electricity and gas companies to hold their prices
Increase the value of in order to reduce the cost of importing
3. REDUCE MONEY SUPPLY PRESSURES
If inflation is caused by too much money in the economy
Print less money
Withdraw some money from circulation.
Each of the above approaches has its advantages and disadvantages.
POLICY 1 is effective but will be unpopular with consumers and may cause a minor recession
POLICY 2 could be effective but it is very difficult for the government to tell private firms how much to charge for
inputs and also how much to pay their workers
This is measured by the yearly change in Gross Domestic Product (GDP). It is usually expressed as a % change.
Example Year 1 Tinseltown produces 1,000 worth of goods
Year 2 Tinseltown produces 1,100 worth of goods
Economic growth would be 10%
It (GDP) can be measured in 3 ways. Each is identical
The total production (output) of all businesses
The total incomes and profits in the country
The total of all spending by individuals and businesses
WHAT CAUSES ECONOMIC GROWTH?
Anything which allows the country to produce more goods and services.
More business investment * Better productivity
Better machinery * Improved training
Better skills * New technology
New ideas * Increased efficiency

COSTS AND BENEFITS OF ECONOMIC GROWTH

BENEFITS: More income for society, Should create jobs, Could reduce the number of poor people, More goods
produced and probably more choice for customers and businesses, Higher standard of living, Feelgood factor in
society
COSTS: Extra production could cause extra pollution, Exhaustion of non renewable resources like oil, Only the rich
may gain the benefits The poor stay poor and inequality increases, Greater stress on workers to produce more goods
he economy tends to experience different trends. These can be categorised as the trade cycle and may feature boom,
slump, recession and recovery
BOOM: A period of fast economic growth. Output is high due to increased demand, unemployment is low. Business
confidence may be high leading to increased investment. Consumer confidence may lead to extra spending.
SLUMP: A period when output slows down due to a reduction in demand. Confidence may begin to suffer.
RECESSION: A period where economic growth slows down and the level of output may actually decrease.
Unemployment is likely to increase. Firms may lose confidence and reduce investment. Individuals may save rather
than spend.
RECOVERY: A period when the economy moves between recession and a boom.
WHAT HAPPENS IN A BOOM?
- Businesses produce more goods
- Businesses invest in more machinery
- Consumers spend more money. There is a FEELGOOD FACTOR
- Less money is spent by the Government on unemployment benefits
- More money is collected by the Government in income tax and VAT
- Prices tend to increase due to extra demand (page)
WHAT HAPPENS IN A RECESSION?
- Businesses cut back on production
- Some businesses may go bankrupt
- Consumers spend less money. Fall in FEELGOOD FACTOR
- Individuals may lose their jobs
- More money is spent by the Govt on unemployment benefits
- Less money is collected by the Govt in income tax and VAT
- Prices start to fall

The reduction in demand for certain types of industries. These goods / services are no longer required in large
numbers
e.g. 1980/ 90s Deindustrialisation coal mining, shipbuilding
2001 Airline industry
This is called STRUCTURAL unemployment
People dont have the right skills and qualifications for todays work and the needs of businesses
e.g . Computer skills, communication, retailing STRUCTURAL
* Benefits are too high and too generous, therefore some people choose not to work.
e.g. an individual could collect 120 per week in different types of benefits
CLASSICAL
Jobs are lost in the country due to a recession. This is an unfortunate part of the trade cycle where businesses may
have to close down.
This is called CYCLICAL unemployment
* People may be between jobs. For example, a teacher may be unemployed because they are looking for a job as an
accountant
This is called FRICTIONAL unemployment
People may be out of work because of the seasons
This is called SEASONAL unemployment
HOW DOES THE GOVERNMENT TRY TO ACHIEVE ITS TARGETS?
They use their TOOLS OF THE TRADE

 Change taxes e.g. income, VAT, corporation this can affect the level of an individuals disposable income
Increase Government spending roadbuilding, spending on benefits, grants to businesses
Change interest rates this can influence a persons disposable income and affect the cost of borrowing (see
interest rates)
Influence the exchange rate to make it easier to export or cheaper to import.
Use supply side policies cutting benefits to unemployed or privatisation
. To collect money to pay for Government expenditure. In 2002 it will collect approximately 400 billion. This will
be spent on health, education, social security, roads etc.
2. To influence buying patterns. High taxes on cigarettes discourage smoking. Taxes on petrol encourage motorist to
buy less fuel.
3. To help redistribute income between individuals. It is highly likely that high earners will pay more income tax and
VAT, this is because they earn and spend more. If this money is given to the poor and unemployed in the form of
benefits it has been redistributed.
4. To manage the economy
(a) Increasing the level of income tax will usually slow down the economy. This is because people pay more tax,
have less disposable income and buy fewer goods. This is a policy for slowing down inflation.
Increase income tax
> People pay more tax out their wage
> their disposable income falls
> they are able to buy fewer goods
> less demand in the economy
> helps to control inflation / price rises
(b) Decreasing the level of income tax will usually kickstart the economy. This is because people pay less tax, have
more disposable income and buy more goods. This is a policy for increasing economic growth and reducing
unemployment.
Decrease income tax
> People pay less tax out of their wages
> their disposable income increases
> they can buy more goods
> more demand in the economy
> helps economic growth and reduces unemploymen
THREE TYPES OF ECONOMIC SYSTEMS
1. FREE MARKET SYSTEM

These decisions are made largely by private individuals and firms. They decide what to produce, how to produce and
for whom to produce. Therefore resources are allocated via the forces of supply and demand.
EXAMPLES
Levis and Wranglers have the freedom to make and sell jeans in whatever styles and at whatever prices.
Private firms would provide hospitals for patients. They would also decide how much to charge them.
2 COMMAND OR PLANNED SYSTEM
The decisions are made by the Government. The Government makes plans about what to produce, how to produce
and for whom to produce. Therefore, resources are allocated by the Government through a system of planning
EXAMPLES
The Government would tell factories what jeans to produce and what price to sell then for
The Government would provide hospitals for patients. They will probably be free to use
3 MIXED ECONOMY
In this case some decisions are made by private individuals and firms, and some by the Government. Therefore
some resources are allocated via the forces of supply and demand and others by the state planning system
EXAMPLES
Most leisure and household goods are produced by private firms
Certain essential services are provided free of charge by the Government e.g. hospitals, schools
THE UK HAS A MIXED ECONOMY
PRIVATE FIRMS ALLOCATING RESOURCES
Clothes e.g. Next, Top Shop

GOVERNMENT ALLOCATING RESOURCES

Hospitals

Some private schools

Many state schools

Industry e.g. Denby Pottery

Police force

Transport e.g. Midland Mainline

Army and weapons

ADVANTAGES OF EACH SYSTEM

FREE MARKET
There is lots of choice for consumers. Private firms understand
people better than the Government

COMMAND
Essential services are provided free of charge

Firms aim to maximise profits therefore they try to meet customer Everybody is guaranteed a job. There should be
needs
no unemployment

Individuals are allowed to start their own businesses. More

enterprise

There should be less inequality in society

People have incentives. They can aim for higher wages or for a
better job

Everybody is guaranteed housing

Firms are in competition with each other. They have to improve

their efficiency and quality
MAIN TYPES OF TAXES

Most people have the same government wage

whatever their job is

DIRECT TAX
A tax placed directly on an individual or business
- Income tax - taken out of an individuals wage
- Corporation tax - paid by businesses out of their profits
- National Insurance taken out of an individuals wage
INDIRECT TAX
A tax placed on a good or service
- VAT - this is put onto the price of most goods and services, usually 17.5%
- Council tax - paid on the value of an individuals property
- Excise duty - extra tax imposed on certain products e.g. petrol, cigarettes and alcohol
FAIRNESS OF TAXATION?
PROGRESSIVE TAXATION
A tax where the higher the income of the taxpayer, the larger the percentage of their total income paid in tax.
PROPORTIONAL TAXATION
A tax where the percentage of total income paid in tax remains the same at different income levels
REGRESSIVE TAXATION
A tax where higher income earners pay a lower percentage of their income in tax compared to low income earners
BUDGET SURPLUS
This happens if the Government collects more money in through taxation than it spends on services
e.g.
TAXATION COLLECTED = 400 billion
GOVERNMENT SPENDING = 390 billion

BUDGET SURPLUS is 10 billion.

HOW DOES A BUDGET SURPLUS HAPPEN?
Government may have cut back on its spending
Government may have raised taxes to collect more money
There may be a boom. In this case more people will be working, spending and paying taxes (income, VAT, NI), at
the same time the Government will have to spend less on benefits.
WHAT TO DO WITH A BUDGET SURPLUS?
Pay off some of the Government debt. The Government owes billions of . They have to pay 20 billion a year in
interest alone !!!!!
Use the money to fund extra spending e.g. health, schools, roads
Save the money in case it is needed for an emergency in the future e.g. war, health crisis
BUDGET DEFICIT
This happens if the Government spends more money than it collects in through taxation.
e.g.
TAXATION COLLECTED = 400 billion
GOVERNMENT SPENDING = 410 billion
BUDGET DEFICIT =10
HOW DOES A BUDGET DEFICIT HAPPEN?
Government may have spent more money on projects.
Government may have cut taxes and lost some revenue.
There may be a recession. In this case fewer people will be working and paying tax, at the same time the
Government will have to spend more on benefits.
AGGREGATE DEMAND
The total value of all of the demand in the UK economy.
It is calculated by adding together
- Consumer spending
- Business investment
- Government spending
- Exports
CONSUMER SPENDING Money spent by individuals and families on goods and services

BUSINESS INVESTMENT Money spent by businesses on improving their production e.g. stock, factories,
machinery, vehicles
GOVERNMENT SPENDING Money spent by the Government on grants, roads, hospitals etc
EXPORTS Money spent by foreigners on UK goods
These are added together to calculate an approximate measure of GDP (page )
An increase in GDP is a measure of ECONOMIC GROWTH (page)
Ways of increasing aggregate demand
1. Reduce income tax and interest rates to encourage consumer spending
2. Reduce interest rates or business taxes to encourage investment
3. Government could spend more money on projects
4. Reduce the exchange rate to encourage exports and discourage imports
AGGREGATE SUPPLY
The total value of the output of the UK economy
This means the combined output / production of all of the businesses in the UK.
The greater the value of aggregate supply the higher the level of production / output by UK firms
PUBLIC SECTOR
Organisations owned and controlled by the state or government
e.g. Mill Hill School, Ripley Hospital, Ripley Library
Objectives
Provide an essential service
Provide it cheaply or free of charge, therefore it is available to everybody
They are generally beneficial to society. It is good to have healthy and well educated people in the country
PRIVATE SECTOR
Organisations owned and controlled by private individuals and organisations
e.g. Top Shop, Virgin, British Telecom
Objectives
- To survive in a competitive market

- To maximise their profits

- To make returns for their shareholders (dividends)
PRIVATISATION
The sale of public sector organisations to the private sector. This means that they are no longer owned and controlled
by the government but instead by private individuals and shareholders
Recent examples:
British Rail was privatised now private firms such as Virgin and Midland Mainline provide rail services
British Telecom is now owned by private firms rather than the government it also faces competition from other firms
WHY DO COUNTRIES TRADE WITH EACH OTHER?
- To obtain goods that they cannot produce themselves
- To increase choice for their consumers
- To obtains goods at a cheaper price than what they can produce themselves
- To make more revenues and profits. It an extra place in which to sell their goods
- Countries specialise in the production of goods and services at which they are better.
- To exploit a comparative or absolute advantage.
COMPARATIVE ADVANTAGE
Where one country can produce a good at a relatively cheaper cost in terms of other goods than another producer.
(page )
ABSOLUTE ADVANTAGE
Where one producer is better at producing a product than another producer.
UK AND COMPARATIVE ADVANTAGE
In recent years the UK had a comparative advantage in a number of manufacturing industries such as textiles or
motorcycles.
This was because the UK had lots of natural resources and raw materials, trained workers and lots of relevant
machinery.
However, now this advantage has been lost to other areas of the world particularly Asia. They have extremely cheap
labour, new technology and low transport costs.
UKs comparative advantage now may well be in
- financial services (insurance / banking)
- tourism
- music

WHY COULD THE UK HAVE A DEFICIT (-) ON ITS GOODS BALANCE?

- Decline in manufacturing therefore fewer goods to export
- Lots of imports of goods from abroad
- Cheaper to import
- High exchange rate . This makes it more difficult to export but easier to import
- Loss of comparative advantage in many goods
- A boom in the UK means that consumers and businesses have more money to spend on imports.
WHY DO EXCHANGE RATES MATTER?
1. They influence the price of imports
2. They influence the price of exports
3. They effect tourism. Changes in exchange rates influence how much money you receive when you change your
currency
4. They can effect firms profits
5. They can have an effect upon unemployment, inflation, economic growth and the balance of payments.
MEMBERSHIP
There are 15 existing members of the single market including the UK
FEATURES
- There is free trade between member countries therefore there are no tariffs or quotas placed on imports
- Each country places an identical trade barrier against imports from non- European Union countries. This is called a
common external tariff
- Individuals and businesses are free to move between countries.
- Safety standards should be the same between each countries
- A movement towards similar business laws and rules in each member country
SOCIAL CHARTER
Minimum standards for workers in all 15 countries. These include
- Maximum hours to work in an hour
- Minimum pay
- Holiday rights
- Maternity / Paternity leave
BENEFITS OF THE SINGLE MARKET
Treats the area as one large trading block almost like an individual country instead of 15 separate countries
- Should encourage trade
- Should help create jobs
- Should improve standards of living
- Avoids protectionism / trade barriers between its members

- Ensures sound working conditions

- Has a market of 380 million customers for firms to sell to
EXPORTS
Goods and services sold to foreigners by UK firms. The money received will enter into the UK.
VISIBLE EXPORTS
Actual goods which are sold to foreigners by UK firms e.g. tables, TVs, vehicles.
INVISIBLE EXPORTS
Services which are sold to foreigners by UK firms e.g. banking, insurance, tourism
IMPORTS
Goods and services bought by UK residents and firms from foreigners. The money paid will leave the UK and go
into the foreign country.
VISIBLE IMPORTS
Actual goods and services bought by UK residents or firms e.g. tables, vehicles etc
INVISIBLE IMPORTS
Services bought by UK residents and firms e.g. banking and tourism.
BE CAREFUL
If a UK individual goes to Spain on holiday this is classed as an invisible IMPORT. This is because the money is
actually paid into Spain.
PROTECTIONISM
The restriction of imports into a country by government measures
REASONS FOR PROTECTIONISM
Protects UK businesses from extra competition
Helps new UK businesses to develop before they face competition
Helps protect UK jobs
Prevents foreign countries dumping lots of cheap imports into the UK
Prevents imports of harmful or desirable goods
TRADE BARRIERS / METHODS OF PROTECTIONISM

- TARIFFS or IMPORT DUTIES These are taxes on imported goods. They raise the price to customers and make
them less attractive
- QUOTAS These are limits on the quantity of a product that can be imported into a country e.g. 100,000 cars
- REGULATIONS This includes laws and safety guidelines
FREE TRADE
Trade without any protectionist / trade barriers between countries
BENEFITS OF FREE TRADE & PROBLEMS OF TRADE BARRIERS
1. Protectionism keeps UK firms away from genuine competition. They may become lazy and inefficient
2. Free trade forces UK firms to produce quality goods and services as they face much foreign competition
3. If the UK puts up trade barriers then other countries are likely to retaliate.
4. Free trade encourages firms to export and import. This should encourage a greater choice for consumers and a
higher standard of living
5. Trade barriers increase the cost of trading. For example, a tariff would mean that UK firms and consumers may
have to pay more for imports of raw materials or consumer goods
FIXED EXCHANGE RATE SYSTEM
An exchange rate that is kept within a certain value. It is prevented from changing too much
e.g. the may have to stay within a certain value against the $
1 = no less than $1.4 but no more than $1.6
WHY?
? Avoid wide ranging changes in the value of the
? Firms can plan ahead with confidence
? Exporters shouldnt suffer too much
? Should encourage trade
HOW DOES IT WORK?
If the is falling in value then the Government will intervene and buy from foreign countries this will
increase the value of the
If the is increasing in value then the Government will intervene and sell at a lower price to foreign countries
the will fall in value
FLOATING EXCHANGE RATE

The can change in value freely against the $. It could end up at any exchange rate. the government will not
intervene to influence its rate.
A FALL IN THE VALUE OF THE
This could happen in 2 ways
a) DEVALUATION
This is when the government deliberately engineers a fall in the . It may do this by selling at lower prices in order
to reduce their value. It might do this to make UK firms more competitive.
b) DEPRECIATION
This is when the falls naturally to a lower level. There is no influence from the government.
HOW WOULD THE UKs ECONOMICS CHANGE?
1. A single currency (the Euro) would replace the . The Euro would be used throughout Europe
2. There would be no exchange rates between Euro countries. This is because the , Deutschmark, Franc would no
longer exist
3. A central interest rate for the whole of Europe. The UK would no longer have its own interest rate
ADVANTAGES OF EMU
No need to change money into foreign currencies. This will
save time and money. This is good for businesses and
tourists
It is easier to compare prices in different countries. This is
because all figures are quoted in Euros.
Reduced exchange rate uncertainty. International trade
becomes easier because exchange rates cant effect prices
More foreign businesses may choose to set up in the UK if
we are using the same currency as the rest of europe

DISADVANTAGES OF EMU
The UK government will not be able to change
interest rates in order to manage our economy
Businesses have to change their tills and payment
systems
Businesses have to change their tills and payment
systems
The UK government wont be able to lower the
exchange rate in order to become more competitive

The Euro commenced on 010102.

At present the UK has not joined EMU although it may do in the future
The UK trades for Euros when trading with its European partners. Therefore changes in the exchange rate between
the and Euro are very important.