Write a definition of

the term “market”.

O C R GC SE
Topic 2: The role of markets and money
EC O N O M IC S 2.1 The role of markets
J205/1
 2.1 THE ROLE OF MARKETS

 IN THIS UNIT YOU WILL LEARN:

 explain what is meant by a market

 explain the features of the primary, secondary and tertiary sectors, including the
difference between the production of goods and services

 explain the difference between factor and product markets, including their
interdependence

 evaluate the costs and benefits of specialisation and exchange in markets

including for producers, workers, regions and countries
 MARKETS

 A market is a place where buyers and sellers come together to exchange

goods and services
 A market can be a physical location such as a shop or a non physical location
such as a web site
How far should a firm go
to understand its market
 The type of competition in the market place varies between industries
for a product?
 Buyers and sellers will interact in order to set a price
 This will be based on the demand for and supply of scarce resources

In small groups identify as many different types

of markets as you can.
 MARKETS AND THE ALLOCATION OF RESOURCES

 Markets play a fundamental role in allocating scarce resources in an

economy
 Consumers will make a choice on what they wish to buy
 Producers will make a choice on what they wish to sell
 Price will be used to distribute the resources
 This is known as the price mechanism
 MARKETS AND THE ALLOCATION OF RESOURCES

Discuss what has

happened to the price of  If demand increases for a product this will lead to a rise in its price
the following in recent
years:  Firms can charge a higher price and still sell the product
a. Houses
b. Textiles
 If demand decreases for a product this will lead to a fall in its price
c. Petrol
 Firms will lower price in order to sell it

 If supply increases for a product this will lead to a fall in its price
 Firms will have too much stock and lower in order to sell it

 If supply decreases for a product this will lead to a rise in its price

What has happened to  As the product becomes more scarce the firm can raise its price
house prices in Northern
Ireland? Why?
 PRIMARY SECTOR

 The primary sector includes those activities that are related to natural resources

 These activities include agriculture, fishing, mining and forestry

 The primary sector is the start of the chain of production

 Businesses will take natural resources from the primary sector and turn them into manufactured
goods

How many primary sector businesses can you name on your local area?
 SECONDARY SECTOR

 The secondary sector includes those activities that are related to the
manufacturing of natural resources that have been taken from the primary sector
 This involves manufacturing e.g. cars, energy and the construction industry
 This is the second stage of the production process
 The key for firms in the secondary sector is to add value to the raw materials and
semi-processed goods that they hold
 This will help to distinguish them from the flood of cheaper imported goods from
How could the secondary countries such as China and India
sector add value to this
primary sector output?

How many secondary sector businesses can you name on your local area?
 TERTIARY SECTOR

Can you name  Those activities that provide a service

the G7
countries?
 The UK is more reliant on the service sector than any of the Group of 7 (G7)

 This includes banking, finance, insurance, education, tourism, the health industry and
the defence industry
 Firms in the tertiary sector will also need to add value to their products
Which sector
is dominant  It is harder for a Chinese firm to move into the UK service sector because services rely
in your local
area? far more on good communications and face to face contact with the customer
 it might be easy for the Chinese to produce a laptop but to act as a financial consultant
or a teacher is far more difficult due to the language and cultural constraints
How many tertiary sector businesses can you name on your local area?
 UK TRENDS

 Look at an item of clothing, bag or school equipment

 Where was it manufactured?
 Draw a tally chart to show geographically where these items were made?
 How many were made in the UK?
 UK TRENDS

 In the UK the secondary sector has seen rapid decline, this has particularly hit manufacturing
 We import more manufactured goods than we export
 There are still some strong industries e.g. car manufacturing

 In the UK services are the most important component of the economy

 Most UK exports are from the tertiary sector and we export more services than we import

 The UK now specialises in services such as finance, education and media

 Why is this?

 Inability of traditional industries to compete

 The ability to produce cheaper abroad e.g. China and India

 Education system
 INTERDEPENDENCE

Use the diagram above to show your understanding of primary, secondary and tertiary sectors.

Each sector does not work in isolation they are interdependent i.e. they depend on each other. A firm in the primary sector relies on firms
in the secondary sector to buy their resources as raw materials. One firms output can become another firms inputs.
Explain the interdependence between firms in the secondary sector and those in the primary and tertiary sector.
 5 MINUTE TEST

 With the use of an example explain what is meant by:

 Primary sector
 Secondary sector
 Tertiary sector

 State 1 reason why the manufacturing sector has declined in the UK

 With the use of an example, explain what is meant by
interdependence of sectors

End
 GOODS AND SERVICES

 Products are made up of goods and services

 Goods are tangible i.e. you can touch them e.g. cars or phones

 Services are intangible i.e. you cannot touch them e.g. finance or education

 The UK has seen a significant decline in the manufacturing of goods since

the 1970s
 This is mainly due to low cost competition from abroad
 However, we do produce highly differentiated goods, using our expertise
from a well-educated workforce e.g. in engineering

Write a list of five different types of good and five

different types of service that are used in your centre.
 GOODS AND SERVICES

 The service sector has grown rapidly since the 1970s

 The UK is one of the leading countries in a number of industries
 Financial services are the biggest in Europe
 We have some of the best universities in the world. In 2017 six of the top
21 universities were in the UK*
*QS Top
universities
 FACTOR AND PRODUCT MARKETS

 Factor markets are those where factor inputs are bought and sold
 This allows for the exchange of factors of production:
 Land
 Labour
 Capital

 These are used to make finished products e.g. cars for product markets
 Households ‘sell’ their factors of production for reward i.e. rent for their land, wages for
the supply of their labour and interest for the supply of capital e.g. interest on savings in
the bank
 Changes in demand and supply will change the reward to each factor of production e.g.
low unemployment should see an increase in wages
How much could you earn for your labour at the moment?
What will happen to the reward for supplying your labour in the future?
Why?
 FACTOR AND PRODUCT MARKETS

 Product markets are those where goods and services that are produced by
firms are sold to households and other firms
 Households buy goods and services using the rewards gained from their
factors of production
 When firms sell to households it is called B2C (Business to consumer)

 When firms sell to other firms it is called B2B (Business to business)

 Firms sell goods and services in order to make a profit

List five products that a business might sell to a consumer.

List five products that a business might sell to another business.
 SPECIALISATION AND EXCHANGE

 Specialisation occurs when workers, producers, regions or countries focus on the

production of particular tasks, products or industries
 When each worker in an organisation becomes an expert at their specific job

 When producers become experts in their field

Could you work in a
chocolate factory?
 When regions use their factor inputs to produce specific goods and services

 When countries concentrate on specific industries e.g. tourism or finance

 Division of labour
 Specific tasks are allocated to each member of staff

 On a car production line one person may be responsible for adding the wheels before the car
moves to the next person to add the hub cap

 Technology allows firms to specialise, increasing productivity

 HOW AND WHY WORKERS AND PRODUCERS
SPECIALISE

 Workers specialise in specific tasks to gain expertise, improve quality and increase
production
 Low skilled workers will find repetitive tasks boring
To what extent does
repetition lead to  Firms will have to take this into account when setting specific work
expertise?
 However, there is a greater supply of low skilled workers so they can be replaced easily

 By doing the same task workers improve

 Highly skilled workers can become experts in their field

 This can be motivational as they concentrate on areas that they are interested in

 As experts, they will receive high pay, good quality working conditions and will be highly respected

 This leads to a high level of autonomy, allowing them to have a greater choice in the jobs they
choose to do and the firms that they choose to work for
 HOW AND WHY WORKERS AND PRODUCERS
SPECIALISE

 Workers can specialise through completing the same task again and again
 As they do this, they reduce the mistakes that they make

 This leads to higher quality and greater productivity

 This improves the reputation of the individual or firm, whilst lowering unit costs

 Producers can lower costs or gain a reputation for being the best in their
field
 In a mass market low cost producers have a competitive advantage, allowing
them to charge lower prices, increasing sales and profits

 Highly differentiated firms, with a reputation for high quality products, can
charge higher prices, increasing profits
 COSTS AND BENEFITS OF DIVISION OF LABOUR

Advantages Disadvantages
• Increased productivity due to specialisation • Boredom due to monotony of doing same
in particular field task
• Lower unit costs • Less flexible workforce
• Greater consistency • Demotivated workforce
• Specialist/expert workers • Risk of process becoming automated
Would you like to build Lego
for a living?

What is the relationship between productivity, unit cost and competitiveness?

Would you prefer to be an expert at one task or have a greater variety of tasks?
Does it depend on the tasks?
 HOW AND WHY REGIONS AND COUNTRIES
SPECIALISE

 Regions and countries can specialise based on the factors of production available to them
 Natural factors of production might come from the land

 Climate is important as certain foodstuffs are only sustainable in certain areas e.g. wine-making in
France and Italy

 Some areas are blessed with natural resources, particularly commodities e.g. the Middle East and
oil reserves

 Tourism is boosted by good weather e.g. Spain or for historical reasons e.g. the United Kingdom

 Many regions and countries have chosen to specialise based on the skills of the workforce
 The Midlands is famous for the quality of its shoes e.g. Crockett and Jones as worn by James Bond

 London has highly skilled workers in the financial, legal and entertainment fields
 COSTS AND BENEFITS OF REGIONS AND
COUNTRIES SPECIALISING

Advantages Disadvantages
• Increased productivity due to specialisation • Can become too reliant on demand for
in particular field products
• Significant source of income • Less flexibility amongst workforce
• Significant source of employment • Open to competition from other regions
• Reputation of area countries producing the same product

Can you think of any other regions in

Declining steel industry
the UK that have suffered as their
hits regions.
industry has declined?
 EXCHANGE

Write a definition of each

of the terms shown in red.
 By specialising economic agents can improve quality and lower unit costs
 They can then trade or exchange their products with other economic agents
 This means that all parties can benefit
 This leads to:
 higher quality for all parties
 Lower costs for all parties

 Therefore, by exchanging products, the economic welfare of all economic

agents can be improved
 However, although overall welfare improves, some stakeholders might lose out
 2.1 THE ROLE OF MARKETS

 IN THIS UNIT YOU SHOULD HAVE LEARNT:

 explain what is meant by a market

 explain the features of the primary, secondary and tertiary sectors, including
the difference between the production of goods and services

 explain the difference between factor and product markets, including their
interdependence

 evaluate the costs and benefits of specialisation and exchange in markets

including for producers, workers, regions and countries