3 Microeconomic Decision Makers

Money is a medium of exchange of goods and services

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What is money?

Open Ended

What is money?

The functions of money

• Money is a medium of exchange, as explained in the slide before.

• Money is a measure of value. Money acts as a unit of account, allowing us to compare and state the worth of different goods and services.

• Money is a store of value. It holds its value for a long time, allowing us to save it for future purposes.

• Money is a means of deferred payment. Deferred payments are purchases on credit – where the consumer can pay later for the goods or services they buy.

3.1 Money and Banking

Why do we need money

We need money to exchange goods and services with one another. This is because we aren’t self-sufficient – we can’t produce all our wants by ourselves. Thus, there is a need for exchange.

In the past, a barter system (exchanging a good or service for another good or service) prevailed. This had a lot of problems such as the need for the double coincidence of wants (if the person wants a table and he has a chair to exchange, he must find a person who has a table to exchange and is also willing to buy a chair), the goods being perishable and non-durable, the indivisibility of goods, lack of portability, etc.

Thus the money we use today is in the form of currency notes and coins, which are durable, uniform, divisible (can be divided into 10’s, 50’s, 100’s etc), portable, and is generally accepted. These are the characteristics of what is considered ‘good money’.

Double coincidence of wants

" A situation which has to exist in a barter system, where each party involved in a transaction wants something offered by the other and so the two parties can exchange their goods or services " 

Open Ended

Define the concept of "Double Coincidence of Wants"?

Multiple Choice

What are the three functions of money?

• medium of exchange, unit of account and store of value

• medium of exchange, unit of account and means of production

• medium of exchange, unit of account and measure of wealth

• medium of exchange, unit of account, and to buy an iphone

Multiple Choice

What is the usual reason why people trust notes and coins issued by the government or central bank in their country?

• they are generally acceptable for trade and exchange

• they are easy to carry and are infinite in supply

• they are backed by gold in the central bank

• they are convertible into the US dollar or EURO

Multiple Choice

The use of a mobile phone app to make payments from a bank account is an example of which function of money?

• A store of value or wealth

• A unit of account

• A means of deferred payment

• A medium of exchange

Multiple Choice

A key function of money is to be a measure of value. What does this mean?

• it is used for future savings

• it is used to enable monthly payments for expensive goods

• It is used to pay the price of a good

• It is used to compare the worth of different goods

Banking

Banks are financial institutions that act as an intermediary between borrowers and savers. It is the money we save at banks that are lent out as loans to other individuals and businesses.

Commercial banks are those banks that have many retail branches located in most cities and towns. Example: HSBC. There is also a central bank  that governs all other commercial banks in a country. Example: Bank Negara Malaysia (BNM)

Functions of a commercial banks:

• Accept deposits in the form of savings.

• Aid customers in making and receiving payments via their bank accounts.

• Give loans to businesses and private individuals.

• Buying and selling shares on customers’ behalf.

• Provide insurance (protection in the form of money against damage/theft of personal property).

• Exchange foreign currencies.

• Provide financial planning advice.

Functions of a central bank:

• It issues notes and coins of the national currency.

• It manages all payments relating to the government.

• It manages national debt. Central banks can issue and repay public debts on the government’s behalf.

• It supervises and controls all the other banks in the whole economy, even holding their deposits and transferring funds between them.

• It is the lender of ‘last resort’ to commercial banks. When other banks are having financial difficulties, the central bank can lend them money to prevent them from going bankrupt.

• It manages the country’s gold and foreign currency reserves. These reserves are used to make international payments and adjust their currency value (adjust the exchange rate).

• It operates the monetary policy in an economy.(This will be explained in a later chapter)

Multiple Choice

What is the difference between commercial banks and central banks?

• Commercial banks only provide services to businesses, while central banks only provide services to individuals.

• Commercial banks manage a country's money supply and maintain financial stability, while central banks provide financial services to individuals and businesses.

• Commercial banks provide financial services to individuals and businesses, while central banks manage a country's money supply and maintain financial stability.

• Commercial banks and central banks are the same and provide the same financial services to individuals and businesses.

Multiple Choice

Name three banking services provided by commercial banks.

• Mortgages, Money Transfers, Savings Accounts

• 
  Deposits, Loans, Payment Services

• Insurance, Investments, Credit Cards

• 
  ATM Services, Foreign Exchange, Financial Planning

Multiple Choice

Which of the following statements about different banks in economy is correct?

• The central bank determines the tax and spending policies of the government

• The central bank loans money to small businesses and members of the public

• Commercial banks hold the gold and foreign currency reserves of the government

• Commercial banks settle debts by clearing customers' cheques and debit card payments

3.2 Households

Disposable income is the income of a person after all income-related taxes and charges have been deducted.

Spending (consumption)

The buying of goods and services is called consumption. The money spent on consumption is called consumer expenditure.

People consume in order to satisfy their needs and wants and give them satisfaction.

• Disposable income: the more the disposable income, the more people consume.

• Wealth: the more wealthy (having assets such as property, jewels, company shares) a person is, the more he spends.

• Consumer confidence: if consumers are confident of keeping their jobs and their future incomes, then they might be encouraged to spend more now, without worries.

• Interest rates: if interest rates provided by banks on saving are high, consumers might save more so they can earn interest and thus consumer expenditure will fall.

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Factors affecting consumption

​Saving is income not spent (or delaying consumption until some later date). People can save money by depositing in banks, and withdraw it a later date with the interest.​

Saving

Factors affecting saving

if the amount of disposable income people have is high, the more likely that they will save. Thus, rich people save a higher proportion of their incomes than poor people.

Disposable income

people save so that they can consume later. They save money so that they can make bigger purchases in the future (a house, a car, etc). Thus, saving can depend on the consumers’ future plans.

Saving for consumption

Factors affecting saving

if the consumer is not confident about his job security and incomes in the future, he may save more now.

Consumer confidence

people also save so that their savings may increase overtime with the interest added. Interest is the return on saving; the longer you save an amount and the higher the amount, the higher the interest received.

Interest rates

​banks now offer a variety of saving schemes. When there are more attractive schemes that can benefit consumers, they might resort to saving rather than spending.

Availabality of saving schemes

Borrowing

Borrowing, as the word suggests, is simply the borrowing of money from a person/institution. The lender gives the borrower money. The lender is usually the bank which gives out loans to customers.

Factors affecting borrowing

• Interest rates: interest is also the cost of borrowing. When a person takes a loan, he must repay the entire amount at the end of a fixed period while also paying an amount of interest periodically. When the interest rates rise, people will be reluctant to borrow and vice versa.

• Wealth/Income: banks will be more willing to lend to wealthy and high-income earning people, because they are more likely to be able to repay the loan, rather than the poor. So even if they would like to borrow, the poor end up being able to borrow much lesser than the rich.

• Consumer confidence: how confident people feel about their financial situation in the future may affect borrowing too. For example, if they think that prices will rise (inflation) in the future, they might borrow now, to make big purchases now.

• Ways of borrowing: the no. of ways to borrow can influence borrowing. Nowadays there are many borrowing facilities such as overdrafts, bank loans etc. and there are more credit (future payment) options such as hire purchases (payment is done in installments overtime), credit cards etc.

Expenditure patterns between income groups

The richer people spend, save, and borrow more amounts than the poor.
The poor spend higher proportions of their disposable income, especially on necessities, than the rich.
The poor save lesser proportions of their disposable income in comparison with the rich.

Open Ended

Define disposable income

Multiple Choice

Which one of the following types of household is most likely to spend the highest proportion of its disposable income?

• High income, middle age with no children

• Low income, young single parent with young children

• Middle income, young single person with no children

• High income, middle-age couple with two grown up children

Multiple Choice

Why might a period of rapid inflation combined with low interest rates be of concern for a consumer?

• Because the consumer lives on a pension linked to the consumer price index

• Because the consumer needs to draw from savings to pay monthly bills

• Because the consumer pays a fixed rent for their accommodation

• Because the consumer has a large bank loan to repay

Multiple Choice

What may cause an individual to increase their savings as a proportion of their current income?

• A belief that the prices of goods will rise in the future

• A fall in the rate of interest paid by banks

• A fear that the individual may be made unemployed in the future

• A desire to increase current consumption

Multiple Choice

Imanina works part-time in a local supermarket. She lives with her parents in a small house.

Ikhwan runs a successful business and owns a large apartment.

Which of the following statements is most likely to be correct?

• Imanina spends a smaller proportion of her disposable income than Ikhwan

• Imanina has a lower disposable income than Ikhwan

• Imanina saves most of her disposable income

• Imanina will find it easier that Ikhwan to borrow money

3.3 Workers

Labourers need wages to satisfy their wants and needs.

Labour markets

Payments for labour

• Time-rate wage: wage given based on the no. of hours the employee has worked. Overtime wages are given to workers who have worked extra no. of hours, which will usually be 1.5 times or even twice the normal time rate.

• Piece-rate wage: wage given based on the amount of output produced. The more output an employee produced, the more wage he/she earns. This is used in industries where output can be easily measured and gives employees an incentive to increase their productivity.

• Salary: monthly payments made to workers, usually managers, office staff etc. usually in  non-manual jobs.

• Performance-related payments: payments given to individual workers or teams of workers who have performed very well. Commissions given to salespersons for selling to a targeted no. of customers is a form of performance-related pay.

What affects an individual’s choice of occupation?

Wage factors

the wage conditions of a job/firm such as the pay rate, the prospect for performance-related payments and bonuses etc. will be considered by the individual before he chooses a job

What affects an individual’s choice of occupation?

Non-wage factors

• hours of work

• holiday entitlements

• promotion prospects

• quality of working environment

• job security

• fringe benefits (free medical insurance, company car, price discounts on company products, etc.)

• training opportunities

• distance from home to workplace

• pension entitlement