Money, banking, households and workers
Money and banks help households spend, save and borrow. Workers choose jobs for wage and non-wage reasons, wages are set by demand and supply, and trade unions represent workers.
📌 Key points
- The functions of money are: a medium of exchange, a unit of account, a store of value and a standard of deferred payment.
- Good money is acceptable, durable, portable, divisible, limited in supply and homogeneous (each unit the same).
- The central bank issues notes and coins, is the government’s bank and the banks’ bank, is lender of last resort and carries out monetary policy. Commercial banks accept deposits, lend and help customers make payments, aiming for profit.
- Household spending depends on income, wealth, interest rates and confidence; poorer households spend a higher proportion of their income.
- Higher interest rates encourage saving and discourage borrowing; higher incomes and confidence increase spending and borrowing.
- Workers choose jobs using wage factors (pay, overtime, bonuses) and non-wage factors (job security, working conditions, promotion chances, training, location, holidays).
- Wages are set by the demand for and supply of labour; jobs with high demand for workers and a low supply of suitable workers pay more.
- Division of labour (specialisation) raises productivity and skills, but work can become boring and repetitive, and production depends on every worker.
- A trade union is an organisation of workers that protects members’ interests through collective bargaining over pay and conditions.
- Unions may take industrial action, such as a strike, a work-to-rule or an overtime ban; they are stronger when most workers are members and labour is hard to replace.
📖 Key terms
- Medium of exchange
- The function of money that lets it be used to buy goods and services.
- Store of value
- The function of money that allows it to keep its value over time so it can be saved.
- Central bank
- The bank that issues currency, is the government’s bank and lender of last resort, and runs monetary policy.
- Non-wage factors
- Reasons for choosing a job other than pay, such as job security, working conditions and promotion chances.
- Division of labour
- When workers specialise in particular tasks or parts of the production process.
- Trade union
- An organisation of workers that aims to protect and improve its members’ pay and conditions.
- Collective bargaining
- Negotiation between a trade union and employers over pay and working conditions.
✏️ Worked example
Explain, using demand and supply, why surgeons are usually paid more than cleaners.
- Wages are determined by the demand for and supply of labour.
- Demand for surgeons is high, as the service they produce is very valuable.
- Supply of surgeons is low, because the job needs many years of training and high skills.
- Many people can do cleaning work with little training, so the supply of cleaners is high.
- Answer: high demand and low supply give surgeons a high equilibrium wage; high supply keeps cleaners’ wages low.
In ‘explain why wages differ’ answers, always refer to both demand for and supply of labour, and give a reason for each.
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