What a market is
A market is anywhere buyers and sellers come together to exchange goods, services or factors of production. It does not have to be a place. A website, a phone call between two traders and a stall in a town square are all markets, because the defining feature is the exchange, not the location.
What markets do is answer the three questions from 1.2 — what, how and for whom — through price, and without anyone being in charge. That mechanism is the subject of 2.4.
- Market
- anywhere buyers and sellers come together to exchange goods, services or factors of production; the defining feature is the exchange, not the place
The three sectors of production
The difference between goods and services is the distinction underneath the sectors. A good is a physical item you can hold and own — a loaf, a car, a phone. A service is work done for you that you cannot hold — a haircut, a train journey, a bank account, a lesson. The primary and secondary sectors produce goods; the tertiary sector produces services.
The UK economy has shifted heavily towards the tertiary sector over the last century, with manufacturing and mining shrinking and services growing. That shift matters for the unemployment questions in 3.2: workers whose industry declines often lack the skills the growing sector needs, which is structural unemployment.
- Good
- a physical item you can hold and own
- Service
- work done for you that you cannot hold, such as a haircut or a train journey
- Primary sector
- the sector extracting raw materials, such as farming, fishing and mining
- Secondary sector
- the sector manufacturing goods from raw materials
- Tertiary sector
- the sector providing services
Factor markets and product markets
Markets divide into two kinds by what is being traded, and the specification asks for their interdependence as well as the difference.
A product market is where finished goods and services are sold to consumers. Firms are the sellers and households the buyers — a supermarket, an online shop, a cinema.
A factor market is where the factors of production are traded. Here the sides swap over: households are the sellers, supplying their labour, land or capital, and firms are the buyers. The labour market in 2.7 is the biggest factor market there is.
They depend on each other completely. Firms cannot sell in the product market unless they have first bought in the factor market — no workers, no output. Households cannot buy in the product market unless they have first sold in the factor market — no wages, no spending. And what happens in one moves the other: if demand for cars falls in the product market, car firms need fewer workers, so demand falls in the factor market too, cutting incomes and reducing spending in the product market again.
- Product market
- the market where finished goods and services are sold to consumers, with firms as sellers and households as buyers
- Factor market
- the market where factors of production are traded, with households as sellers and firms as buyers
Specialisation and exchange
Specialisation means concentrating on producing one thing, or on one task within producing it, rather than trying to do everything. Exchange is what makes specialisation possible: if you only make one thing, you have to trade for everything else.
The specification asks you to evaluate specialisation and exchange for four groups, so the table below is organised that way — questions name the group.
Worked example
A country specialises almost entirely in growing coffee for export. Evaluate this decision.
- Take the benefits first: producing what the climate and land suit best raises output and earns export revenue.
- Specialisation allows expertise and infrastructure to build up, lowering costs over time.
- Now the drawbacks, and make them specific rather than general.
- The country depends on one crop, so a fall in the world coffee price cuts the whole economy's income at once.
- A poor harvest, disease or a change in tastes has the same effect, and food must be imported.
- Reach a judgement and say what it depends on.
Answer: Specialisation raises output and export earnings, because the country is producing what its climate and workforce are best suited to, and expertise and infrastructure build up over time. But relying on a single crop is risky: a fall in the world price, a poor harvest or a plant disease would cut national income sharply, and food and manufactured goods must all be imported. It is a reasonable strategy if the country can also diversify over time or build up reserves against price falls, and a dangerous one if it cannot.
Common mistake
Specialisation is not the same as trade. Specialisation is concentrating on one thing; exchange is trading for the rest. Specialisation only works because exchange exists — which is why the specification names them together.
- Specialisation
- concentrating on producing one thing, or one task within producing it, rather than trying to do everything
- Exchange
- trading what you produce for what you need, which is what makes specialisation possible
Before you practise
- A market is wherever buyers and sellers exchange — not necessarily a place.
- Primary extracts raw materials, secondary manufactures, tertiary provides services.
- Goods are physical and can be owned; services are work done for you.
- Product markets sell finished goods, with firms selling and households buying.
- Factor markets trade the factors of production, with households selling and firms buying.
- The two are interdependent: incomes earned in one are spent in the other.
- Specialisation raises output but creates dependence on others through exchange.
- Evaluate specialisation separately for producers, workers, regions and countries.