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

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



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