OCR Economics Part 1: How the Market Works

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…