GCSE ECONOMICS (OCR)
Revision Guide: Unit 1
Markets at Work
Name:
Form:
, (A) The Basic Economic Problem
What is it?
The basic economic problem is the fact that RESOURCES are SCARCE (limited in supply) but WANTS are INFINITE
(never ending). As a result of this, consumers, producers and the government have to make CHOICES about how
to ALLOCATE scarce resources.
When we choice one thing, we often sacrifice or give-up something else. OPPORTUNITY COST is the highest
valued alternative that we forego because scarce resources allocated elsewhere.
What are resources?
Resources are all the elements that go into the production of goods and service. Resources are often known as the
FACTORS OF PRODUCTION. There are 4 factors of production:
(a) LAND: All natural resources used in production, for example building land, oil, water, wheat, apples
(b) LABOUR: The human contribution to production- i.e. workers!
(c) CAPITAL: Capital refers to man-made equipment that is developed to aid the production of other goods
and services. For example machines, computers, vehicles, shop fixtures, tills
(d) ENTERPRISE: The person(s) who has the initial business idea, raises the money and organises the other
factors of production.
Economic Systems
All economies face the basic economic problem. However, they may have different approaches to addressing it and
allocating resources. The approach they choose is known as an “economic system”
(a) PLANNED ECONOMY: All resources are owned by the PUBLIC SECTOR (the sector of the economy owned
and controlled by the government). The public sector determines what goods and services are made and
how. Goods and services are “shared out” amongst the population
(b) FREE-MARKET ECONOMY: All resources are owned by the PRIVATE SECTOR (the sector of the economy
owned and controlled by private individuals). Goods and services are allocated via the MARKET
MECHANISM, that is via demand and supply (prices)
There are pros and cons of planned and free-market economies:
Pros Cons
Planned Economy It is fair, everyone will get something There is no incentive to be efficient
Theoretically, everyone can be given a There will be little choice for consumers
job or workers
The government can provide merit There may be corruption
goods such as health and education, and Economic growth tends to be great low
public goods such as defence because of the lack of profit incentives
Free Market Economy There is competition- this is good for Inequality- there will be absolute and
consumers (Low prices, better quality, relative poverty- poor people will be
more choice, more innovation) reliant on charity and will have no choice
There is more incentive to be efficient as Public and merit goods may not be
low costs can allow low prices which provided/will be under
may be important if markets are produced/consumed- eg not enough
competitive access to education and health care
Environmental costs (eg pollution) is
likely and there is no incentive to look at
sustainable use of resources
,In reality, most economies are mixed. This means there is a mixture of a public sector and a private sector owning
and allocating the scarce resources. The UK has a mixed economy that is moving towards being more free market:
Public Sector: Education, Health, Police, Defence
Private Sector: Water, Electricity, Gas, Rail, Airlines, Supermarkets, Clothes stores
Examples of how the UK has become more free-market: Privatisation; de-regulation; contracting out; Free Schools
and Academies
Understanding the key differences between the public and private sector
This can be summarised below:
Ownership Control Aims Finance
Public Sector The government on A government To provide a good Money will be raised
behalf of the people minister will oversee quality public good from the taxpayer.
(tax payers) control or service
To allow as many Any losses will be
people as possible funded by the
access to the good or taxpayer.
service
The business/area
could continue even
if it was loss making
Private Sector Private individuals Owners/Shareholders Mainly to make a Finance will be from:
from: will lead the strategic profit (unless it is a
Sole Traders (1) direction. charity) Savings
Partnerships (2-20) Loans
Private and Public Managers will Wider aims and Redundancy
limited companies exercise control on a objectives (see later payments
(shareholders) day to day basis notes) Share issue
The different sectors of the economy
Definition Examples
Primary Sector The sector of the economy Fishing, mining, farming
responsible for extracting resources
from the natural environment
Secondary Sector The sector of the economy that is Textiles, Food manufacturing; Car
responsible for manufacturing and manufacturers;
construction (ie using the primary
resources to make goods and
services)
Tertiary Sector The sector of the economy Banking, Insurance, Leisure and
responsible for providing services to Tourism; Catering; Advertising and
consumers and to other businesses Marketing
The UK now has a very large tertiary sector having been through a period of DE-INDUSTRIALISATION. This is the
process by which the secondary sector of the economy shrinks so that it produces less and employs fewer people.
, The main reasons for de-industrialisation are:
Increased competition from abroad (globalisation)
Historically low levels of investment and productivity in the UK mean that our goods are more expensive and
poorer quality
Higher wage and tax levels in the UK have contributed to higher costs and therefore higher, less competitive
prices in the UK
As the UK has got more economically developed and richer, the demand for services has risen as they are
income elastic. Businesses have developed to meet this need.
Specialisation
Faced with the basic economic problem, it is important that scarce resources are used as efficiently as possible.
It can be argued that using resources in a more specialised way is more efficient and increases production. There are
different types of specialisation:
What is it? Potential Advantages Potential Disadvantages
Specialisation of labour The production process is Increased productivity as a Repetition leads to
(division of labour) organised so that workers result of expertise and boredom, de-motivation
all have a very specific (and repetition. Time is not and a reduction in
often quite narrow) job wasted moving from one productivity
role so that they repeat a job to another
particularly task often A break/weakness in the
Makes more efficient chain (eg a an
(planned) use of scarce unproductive worker)
capital could affect the whole
production process
Requires less training (in
unskilled contexts) as For workers, wages may be
workers only have to do a lower if tasks are unskilled
limited range of tasks
Product specialisation A firm focuses its The firm can buy resources It is very risky “all the eggs
production on one, or a to make the product in in one basket”- a decline in
very narrow range of bulk the demand for the
products particular good or service
The firm gains a reputation would be catastrophic for
as an “expert” in the field- the firm
this can stimulate demand
and make it more price It cannot take advantage of
inelastic cross-subsidising products
The above could It does not take advantage
contribute to a degree of of having existing
monopoly power in the customers who may wish
market to also buy a range of
products from the firm,
The firm can have very including compliments
specialist buyers and (and impulse buys)
sellers and can focus its
research and development Consumers increasingly
budget on one product want to buy a range of
products under one roof
for convenience- they may
go elsewhere
Revision Guide: Unit 1
Markets at Work
Name:
Form:
, (A) The Basic Economic Problem
What is it?
The basic economic problem is the fact that RESOURCES are SCARCE (limited in supply) but WANTS are INFINITE
(never ending). As a result of this, consumers, producers and the government have to make CHOICES about how
to ALLOCATE scarce resources.
When we choice one thing, we often sacrifice or give-up something else. OPPORTUNITY COST is the highest
valued alternative that we forego because scarce resources allocated elsewhere.
What are resources?
Resources are all the elements that go into the production of goods and service. Resources are often known as the
FACTORS OF PRODUCTION. There are 4 factors of production:
(a) LAND: All natural resources used in production, for example building land, oil, water, wheat, apples
(b) LABOUR: The human contribution to production- i.e. workers!
(c) CAPITAL: Capital refers to man-made equipment that is developed to aid the production of other goods
and services. For example machines, computers, vehicles, shop fixtures, tills
(d) ENTERPRISE: The person(s) who has the initial business idea, raises the money and organises the other
factors of production.
Economic Systems
All economies face the basic economic problem. However, they may have different approaches to addressing it and
allocating resources. The approach they choose is known as an “economic system”
(a) PLANNED ECONOMY: All resources are owned by the PUBLIC SECTOR (the sector of the economy owned
and controlled by the government). The public sector determines what goods and services are made and
how. Goods and services are “shared out” amongst the population
(b) FREE-MARKET ECONOMY: All resources are owned by the PRIVATE SECTOR (the sector of the economy
owned and controlled by private individuals). Goods and services are allocated via the MARKET
MECHANISM, that is via demand and supply (prices)
There are pros and cons of planned and free-market economies:
Pros Cons
Planned Economy It is fair, everyone will get something There is no incentive to be efficient
Theoretically, everyone can be given a There will be little choice for consumers
job or workers
The government can provide merit There may be corruption
goods such as health and education, and Economic growth tends to be great low
public goods such as defence because of the lack of profit incentives
Free Market Economy There is competition- this is good for Inequality- there will be absolute and
consumers (Low prices, better quality, relative poverty- poor people will be
more choice, more innovation) reliant on charity and will have no choice
There is more incentive to be efficient as Public and merit goods may not be
low costs can allow low prices which provided/will be under
may be important if markets are produced/consumed- eg not enough
competitive access to education and health care
Environmental costs (eg pollution) is
likely and there is no incentive to look at
sustainable use of resources
,In reality, most economies are mixed. This means there is a mixture of a public sector and a private sector owning
and allocating the scarce resources. The UK has a mixed economy that is moving towards being more free market:
Public Sector: Education, Health, Police, Defence
Private Sector: Water, Electricity, Gas, Rail, Airlines, Supermarkets, Clothes stores
Examples of how the UK has become more free-market: Privatisation; de-regulation; contracting out; Free Schools
and Academies
Understanding the key differences between the public and private sector
This can be summarised below:
Ownership Control Aims Finance
Public Sector The government on A government To provide a good Money will be raised
behalf of the people minister will oversee quality public good from the taxpayer.
(tax payers) control or service
To allow as many Any losses will be
people as possible funded by the
access to the good or taxpayer.
service
The business/area
could continue even
if it was loss making
Private Sector Private individuals Owners/Shareholders Mainly to make a Finance will be from:
from: will lead the strategic profit (unless it is a
Sole Traders (1) direction. charity) Savings
Partnerships (2-20) Loans
Private and Public Managers will Wider aims and Redundancy
limited companies exercise control on a objectives (see later payments
(shareholders) day to day basis notes) Share issue
The different sectors of the economy
Definition Examples
Primary Sector The sector of the economy Fishing, mining, farming
responsible for extracting resources
from the natural environment
Secondary Sector The sector of the economy that is Textiles, Food manufacturing; Car
responsible for manufacturing and manufacturers;
construction (ie using the primary
resources to make goods and
services)
Tertiary Sector The sector of the economy Banking, Insurance, Leisure and
responsible for providing services to Tourism; Catering; Advertising and
consumers and to other businesses Marketing
The UK now has a very large tertiary sector having been through a period of DE-INDUSTRIALISATION. This is the
process by which the secondary sector of the economy shrinks so that it produces less and employs fewer people.
, The main reasons for de-industrialisation are:
Increased competition from abroad (globalisation)
Historically low levels of investment and productivity in the UK mean that our goods are more expensive and
poorer quality
Higher wage and tax levels in the UK have contributed to higher costs and therefore higher, less competitive
prices in the UK
As the UK has got more economically developed and richer, the demand for services has risen as they are
income elastic. Businesses have developed to meet this need.
Specialisation
Faced with the basic economic problem, it is important that scarce resources are used as efficiently as possible.
It can be argued that using resources in a more specialised way is more efficient and increases production. There are
different types of specialisation:
What is it? Potential Advantages Potential Disadvantages
Specialisation of labour The production process is Increased productivity as a Repetition leads to
(division of labour) organised so that workers result of expertise and boredom, de-motivation
all have a very specific (and repetition. Time is not and a reduction in
often quite narrow) job wasted moving from one productivity
role so that they repeat a job to another
particularly task often A break/weakness in the
Makes more efficient chain (eg a an
(planned) use of scarce unproductive worker)
capital could affect the whole
production process
Requires less training (in
unskilled contexts) as For workers, wages may be
workers only have to do a lower if tasks are unskilled
limited range of tasks
Product specialisation A firm focuses its The firm can buy resources It is very risky “all the eggs
production on one, or a to make the product in in one basket”- a decline in
very narrow range of bulk the demand for the
products particular good or service
The firm gains a reputation would be catastrophic for
as an “expert” in the field- the firm
this can stimulate demand
and make it more price It cannot take advantage of
inelastic cross-subsidising products
The above could It does not take advantage
contribute to a degree of of having existing
monopoly power in the customers who may wish
market to also buy a range of
products from the firm,
The firm can have very including compliments
specialist buyers and (and impulse buys)
sellers and can focus its
research and development Consumers increasingly
budget on one product want to buy a range of
products under one roof
for convenience- they may
go elsewhere
