2.1 The Role of Markets

• A market economy is where consumers demand a product, and then it is produced using the scarce resources which an economy has.
• A 'market' is defined as ''a way of bringing together buyers and sellers to buy and sell goods and services''
• The 3 different sectors of the economy are primary, secondary and tertiary.

  • Primary is defined as ''the direct use of natural resources, such as the extraction of basic materials and goods from land and sea'' e.g. fishing
  • Secondary is defined as ''all activities in an economy that are concerned with either manufacturing or construction'' e.g. car manufacture
  • Tertiary is defined as ''all activities in an economy that involve the idea of a service'' e.g. transport, retailing, tourism and entertainment.
• Goods are tangible products (can be seen or touched) whereas services are intangible (can't be seen or touched)
• Factor Markets are defined as ''the market in which the services of the factors of production are bought and sold''. There is a derived demand for the factors, and the price of the factors is determined by the interaction of supply and demand. Households supply labour to firms in return for wages/ services.
• Product markets are defined as ''the market in which final goods and services are offered to consumers, businesses and the public sector''. Households, other firms and the public sector are the buyers. The price is determined by the interaction of supply and demand.
• Product and factor markets are interdependent. Households consume the goods and services that are produced in the product market. Households then supply labour (as a factor of production) to firms. Households are then paid by firms, for their labour services. Households will the spend their incomes on goods + services in product markets.
• Specialisation is suggested to be a solution to the economic problem. It is defined as ''the process by which individuals, firms, regions and whole economies concentrate on producing those products that they are best at producing.''
• An advantage of specialisation for producers/ firms is that workers will be more productive, so the firm's output will rise, as 'practice makes perfect'. By repeating the same task time and time again workers will become more efficient --> increased productivity allows firms to enjoy lower AC's --> This, in turn, allows firms to either lower the selling price of their products OR increase profits. Lowering the price would increase demand, furthering sales. *draw diagram*
• A disadvantage of specialisation for producers/ firms is that there could be a potential rise in costs of production instead. As firms increase output, they demand more raw materials --> Increased demand for raw materials results. *see diagram in notes* A higher demand for raw materials (D1 to D2) will lead to a rise in equilibrium price (P1 to P2). In turn, there is a higher price of raw materials as they are now becoming scarce due to infinite wants --> Therefore, there will be an increase in costs of production.
• To conclude, whether or not specialisation has a significant impact on firms/ producers will depend upon the price of raw materials, as an increase may not have such a large impact on profits and therefore supply.
• An advantage of specialisation for regions is that local economies will benefit from economic growth as a result of increased sales of products, as well as a rise in employment. Not only will people be able to find jobs closer to home, but there will also be a better standard of living.
• A disadvantage of specialisation for regions is that the region may overspecialise by focusing on the manufacture of one main product. If demand were to fall there is a possibility of widespread unemployment. *see diagram* A fall in demand for the regions specialised product (D1 to D2) will lead to a fall in equilibrium price (P1 to P2), giving the region less incentive to supply (Q1 to Q2), therefore leading to unemployment, as they no longer want to mass produce the product, and therefore don't require a huge number of workers.
• To conclude, the impact of specialisation on regions will depend upon whether they can continue producing the good which they specialise in or whether their scarce resources will run out.
• An advantage of specialisation for countries is that: if countries specialise and produce those goods + services which they are best at producing -> Each country will produce more output... creating a surplus -> one country trades their surplus with another country, in exchange for their surplus -> Consumers within the country have greater choice.
• A disadvantage of specialisation for countries is that: if countries become overdependent upon a narrow range of goods e.g. primary commodities, then as they are non-renewable resources (e.g. copper), then they could be used up and no longer available -> As a result, countries lose vital export earnings, so (X-M) falls.
• To conclude, the impact of specialisation on countries will depend upon whether or not there is 'free trade', and countries are able to exchange their surplus for another country's surplus.