2.1 The role of markets

Question 1

What is a market?

Answer 1

a market is a way of bringing together buyers and sellers to buy and sell goods and services

Question 2

A market can be what?

Answer 2

• a physical market with many stall holders (sellers) and buyers, as found in towns and cities or in farmers markets
• a shop where the seller is the shop owner, or the sales assistant, and the buyer is the customer
• an auction where the the selling price is determined by how many buyers there are and what they are prepared to pay
• through the internet or the telephone, or through catalogues sent through the post

Question 3

What is meant by a market economy?

Answer 3

a market in which scarce resources are allocated by the market forces of supply and demand

Question 4

What does the primary sector refer to?

Answer 4

refers to the direct use of natural resources, such as the extraction of basic materials and goods from land and sea

Question 5

What does the secondary sector refer to?

Answer 5

all the activities in an economy that are concerned with either manufacturing or construction

Question 6

What does the tertiary sector refer to?

Answer 6

all the activities in an economy that involve the idea of a service

Question 7

What is a factor market?

Answer 7

a market in which the services of the factors of production are bought and sold

Question 8

What is a product market?

Answer 8

a market in which final goods and services are offered to consumers, businesses and the public sector

Question 9

What are the 4 key points about a factor market?

Answer 9

• it refers to the buying and selling of the services of factors of production
• the demand for the factors is a derived demand
• the price of factors is determined by the interaction of demand and supply
• households supply labour to firms in return for wages/salaries

Question 10

What are the 3 key points about the product market?

Answer 10

• it refers to the buying and selling of final goods and services
• households, other firms and the public sector are the buyers
• the price of the product is determined by the interaction of demand and supply of a product

Question 11

What is specialisation?

Answer 11

the process by which individuals, firms, regions and whole economies focus on producing those products that they are best at producing

Question 12

What is meant by exchage?

Answer 12

the giving up of something that the individual has, in return for something they wish to have but do not posses

Question 13

What are the benefits of specialisation to producers?

Answer 13

• higher output: total production of goods and services is increased. In some areas it is possible to use automated systems or specialist equipment
• higher productivity: workers who specialise in one task become as skilled as they possibly can in that area, which increases productivity
• higher quality: the best and most suitable factors of production can be employed to produce the output, Producers can buy the best components from specialists instead of having to make them
• bigger market: if all producers specialise, then for each product, there should be more buyers for each producer
• economies of scale: larger output will enable the producer to gain economies of scale
• time saving: it takes time to stop producing one product and to start another, so specialisation saves time and money.

Question 14

What are the costs of specialisation for producers?

Answer 14

• As output increases, costs may eventually rise. This may be due to resources becoming shorter in supply or it takes more people to organise the workforce
• dependency: production of goods and services depends on all parts working well. Problems such as a technical failure or a strike can lead to the whole process stopping.
• failure of exchange: exchange can fail if it is not possible to buy the scarce resources or components needed to produce, or if the supplier greatly increases the price or restrict production
• movement of workers: workers may become bored and leave which means new workers will have recruited and trained

Question 15

What is meant by the division of labour?

Answer 15

when workers specialise is, or concentrate on, one area of the production process

Question 16

What are the benefits of specialisation for workers?

Answer 16

• increased skill: by specialising, workers become more skilful and knowledgeable about their jobs, which can result in them earning more money
• natural strengths: workers are able to do that which they are best at and don’t have to do work the may not be soo good at, which should allow them to earn more since they will be good at doing that which they like.
• increased job satisfaction: allowing workers to do that which they are good at is likely to improve their motivation and satisfaction at work
• increased standard of living: by earning more, workers will have more income to buy more goods that will not only satisfy their needs but also some of their wants

Question 17

What are the cots of specialisation for workers?

Answer 17

• boredom: some workers may get bored of having to do the same job everyday which can lead to demotivation
• deskilling: by specialising, workers lose the skills to do other types of work and are less able to respond to changes in demand
• unemployment: if there is a fall in demand for a particular product, workers may find it difficult to get another job because they lack the necessary skills or experience. this may also occur because machines can replace their work

Question 18

What are the benefits of specialisation for regions?

Answer 18

• efficient use of resources: a region can specialise in a particular industry due to the availability of resources, so it will be easier to use that resource efficiently
• creates jobs for residents: the development of an industry in a particular region helps the residents of that area, since they can find work near to their homes
• infrastructure development: a region that specialises in a particular industry will develop both infrastructure and supply industries to support that industry which it specialises in. This will lead to further regional development

Question 19

What are the costs of specialisation for regions?

Answer 19

• risk of fall in demand: if demand falls due to changes in taste and fashion, then the industry will collapse or shrink, leading to a resource wastage
• resource exhaustion: if the raw materials are no longer available then those employed in the industry will become unemployed
• loss of advantage: another region or country may become better at producing the good, leading to the problems of resource wastage and unemployment

Question 20

What are the benefits of specialisation to countries?

Answer 20

• economies of scale and efficiency: countries will specialise in that which they do best, leading to greater efficiency and economies of scale, which increases the countries output
• more jobs: the increased output may result in more investment and job creation
• international trade: if a country specialises then it will no longer produce some of the goods that it still may need or want, but they would have a surplus of its specialist goods. This leads to international trade and a greater choice of goods and services for its people.
• improved standard of living: increased choice, income, output and infrastructure means a better standard of living for most people
• government revenue: increase in output, income, and trade will lead to greater revenue from taxes for the government, which can again lead to improved standard of living since the government can use the extra income to provide better schools, hospitals, etc.

Question 21

What are the costs of specialisation for countries?

Answer 21

• unemployment: specialisation not only creates jobs, but also destroys them. As specialisation changes, workers in the declining industry may not be able to find new jobs, as they lack the necessary skills.
• over-dependence: countries can over-specialise and become dependent on one or a very few number of products. If world demand changes then these industries and the country’s economy may collapse
• over-exploitation of resources: output may be increased by over-exploiting resources, leading to unsustainable development
• negative externalities: over-exploitation of resources and over production can lead to serious environmental damage