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Topic 2.1
The Role of Markets
You will cover the three sectors of the economy - primary, secondary and tertiary, alongside learning about the different types of markets. You will also find out about specialisation, and its advantages and disadvantages to workers, producers and countries.
Sectors of the Economy
Primary sector
The direct use of natural resources such as the extraction of basic materials and goods from land and sea. This is now the least common in the UK, but it very high in LICs (low income countries, such as Mali). Examples include farming, coal mining and fishing.
Secondary sector
All activities in an economy that are concerned with manufacturing or construction using primary sector goods. The growth of the secondary sector was a major part of the Industrial Revolution, but now this is more common in other countries e.g. China, rather than the UK.
Tertiary sector
All activities in an economy that involve the idea of a service. This is the most common in the UK, and worldwide as most economies have shifted from primary/secondary to tertiary.
Types of Markets
A market is any way of bringing together buyers and sellers to buy and sell goods and services. Examples include: stalls, shops, online or financial markets.
Factor Markets
Factor markets are where the services of the factors of production (capital, enterprise, land, labour) are sold.
Product Markets
Product markets are where final goods and services are bought and sold
Interdependence & Derived Demand
The factor and product markets are interdependent through households, which both consume goods in the product market and supply labour in the factor market. They are also connected through derived demand, meaning the demand for one input depends on the demand for the final product—for instance, the demand for labour depends on the demand for the goods it helps produce.
Planned Economy
An economy in which a government or central authority decided what, how and for whom goods and services are produced (e.g. North Korea, Cuba, former USSR)
Market Economy
An economy in which the prices and distribution of goods and services is solely decided by the market forces of supply and demand, with no government intervention. (e.g. US, UK, Japan)
Mixed Economy
An economy that combines private enterprise with government involvement, so some resources are allocated by the market while others are regulated or provided by the state
Specialisation and Exchange
Specialisation
Specialisation is the process by which individuals, firms, regions and whole economies concentrate on producing those products that they are best at producing.
Exchange
Exchange is the the giving up of something that the individual/firm has, in return for something they wish to have but do not possess. This includes buying things.
Evaluating the costs and benefits of specialisation for workers
Points
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Increased Job Satisfaction - allowing workers to do what they are best at is likely to improve satisfaction and motivation - they will produce more
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Natural Strengths - Workers can do what they are best at and do not have to do work at what they aren’t good at, so their output will be better - so they can earn more
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Improved standard of living - Improved skills and efficiency lead to higher-quality output, which increases income and provides individuals with more disposable income. This allows them to purchase more goods and services, satisfying both their needs and unlimited wants, ultimately resulting in a higher standard of living.
Evaluations
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Boredom - doing the same job everyday may lead to demotivation for workers.
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Deskilling - when workers specialise, their ability to perform other jobs is limited. As a result, they may struggle to adapt if there are changes in demand, such as shifts in the types of products or skills needed, making them less flexible and potentially more vulnerable to unemployment
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Unemployment - when demand for a particular product falls, workers might be unable to find alternative jobs because they lack the necessary experience or transferable skills. It can also happen when capital replaces workers’ jobs, as machines or technology may perform the work more efficiently.
Evaluating specialisation for producers
Points
Evaluations
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Revenue - Workers can focus on what they do best, becoming as skilled as possible and increasing productivity. This raises output per worker per hour, leading to more sales and revenue, which can then be reinvested in the firm. As a result, the business becomes more responsive to changes in demand, can benefit from economies of scale, and generate even more revenue.
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Higher quality - Higher quality results when workers focus on the tasks they are best at, so their output is better than if they were doing other jobs. As they gain more skills and become more proficient, quality improves even further, which makes consumers more likely to keep buying the products. This leads to more sales and revenue, allowing the business to reinvest, build brand loyalty, and strengthen future demand
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Economies of scale (topic 2.6)
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Dependency - For the production process to work well, all specialised parts need to work well. A technical failure or a strike can lead to the whole process failing.
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Movement of workers - Labour turnover may occur, this is due to incessant boredom faced by workers. New workers have to be recruited and trained, which costs money and raises costs of production. This particularly affects low-paid and low-skilled jobs.
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The business will have inelastic PES as it is much harder to respond to changes in demand (topic 2.3)
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As output rises, costs may eventually increase because resources can become scarcer and more expensive to use. A firm may also need more workers or management to organise production, which raises labour costs and can reduce efficiency.
Evaluating specialisation to regions/countries
Points
Evaluations
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Efficiency - Countries will specialise in the goods and services they produce best, which improves efficiency in the production process and raises productivity. This can create economies of scale, while also helping resources be used more sustainably, supporting environmental sustainability.
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Job creation - More jobs can lead to increased output, which then encourages more investment and creates even more jobs (multiplier effect)
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Government revenue - More output can increase international trade and raise income within the country, which boosts government revenue through higher tax receipts. That extra revenue can then be invested in the local area, improving public services such as schools and hospitals and raising the standard of living.
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More tourism - more jobs, and more investment, so businesses in the area grow
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Risk of fall in demand - due to changing fashion or trends, industries may collapse or shrink, leading to resource wastage.
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Unavailability of resources - if resources become unavailable in low skilled jobs, workers become unemployed.
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Loss of advantage - another region may gain an advantage in producing a good, this may lead to problems of resource wastage or unemployment
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Dependency - as world demand may change, countries may be unresponsive to this demand change as they specialise in producing one good, leading to economic collapse
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Environment - Over-exploitation of resources can increase output in the short term, but it is not sustainable because the resource is being used faster than it can be replaced. It can also create negative externalities, such as pollution and environmental damage, which harms the environment and makes long-term development unsustainable
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Key Tip: Learn these tables by heart, as this is a frequently asked 6-mark essay question. If memorising everything feels overwhelming, focus on the points about workers, since they can be adapted to answer the other questions.