OCR Economics Part 1: How the Market Works

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The Economic Problem:
To manage resources to meet our needs and wants.
Resources are scarce, out wants are infinite- we need to combine resources in order to meet our needs and wants.

Factors of Production:
The resources we have available to produce goods and services.

  • Capital
    - goods used to produce other goods and services
    - spending on capital is known as investment
  • Enterprise
    - having ideas, taking risks in setting up a business
    - entrepreneur is involved in taking the risks
  • Land
    - the land and natural resources available for production
  • Labour
    - human input into the production process
    - every person has skills and qualifications - human capital

Production of goods and services
Goods are items that you can touch.
Services are things that someone provides for you, you cannot touch it

Primary - extraction of raw materials - mining
Secondary - raw materials manufactured into goods - car manufacturing 
Tertiary - the service sector - banking

Opportunity cost  is the next best alternative foregone when making a choice, what we give up.

Approaches to the economic problem:

Market economy: where all resources are allocated by private individuals and groups
Planned economy: where all resources are allocated by the government
Mixed economy: where some resources are allocated by the government, and other resources are allocated by private individuals and groups 

Public sector: the government sector of the economy, where organisations are owned and run by the government
Private sector: the sector of the economy where firms are owned and run by private individuals and groups - their main aim is profit nad maximisation

Specialisation:
We specialise in something we are skilled at and will become better at, and so we will be able to produce more of the good or service.

Benefits to the firm:

  • More productive
  • Lower average costs
  • Increased production levels

Costs to the firm:

  • Greater cost of training
  • Quality may suffer is workers become bored by lack of variety
  • More expensive workers (higher wages)

Benefits to the workers:

  • Specialised workers tend to get higher pay
  • Workers' specific skills will bbe improved
  • More motivation from job satisfaction

Costs to the workers:

  • Boredom
  • Skills may suffer as they're only doing one job
  • May eventually be replace by machinery

Functions of money:

  • Medium of exchange - shop to buy a good
  • Unit of account - prices, a measure of value
  • Store of value - money keeps its value (in a bank e.g.)
  • Means of deferred payment - loans

Competitive markets:
A market situation in which there are a large number of buyers (demand) and sellers (supply).

Areas of competition:

  • Price
  • Innovations
  • Advertising
  • Quality
  • Promotions
  • Branding

Implications for consumers:

  • 'Shop around' to get the best prices/highest quality
  • Variety & choice
  • (Confusion?)

Implications for firms:

  • Can supply the goods consumers want at a price they want to pay and earn profits
  • May be able to grow larger and gain market share
  • Will fail if they fial to satisfy consumers sufficiently

Monopoly

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