How do markets and money help an economy work?
What a market is, the different types of market, the functions of money, the characteristics of money, and how money and markets allow specialisation and exchange to take place.
A focused answer for AQA GCSE Economics on what a market is, types of market, the four functions and characteristics of money, and how money and markets enable specialisation and exchange.
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What this dot point is asking
AQA wants you to explain what a market is, describe different types of market, list the functions and characteristics of money, and explain how money and markets allow specialisation and exchange to work. The big idea is that specialisation only pays off if specialists can trade, and money plus markets make that trade possible.
What is a market
In a market, the interaction of demand (buyers) and supply (sellers) sets the price, and that price coordinates the decisions of millions of people without anyone planning it centrally.
Types of market
- Goods and services markets: where products are bought and sold, such as shops, supermarkets or online retailers.
- Factor markets: where factors of production are traded, the most important being the labour market where workers sell their time to firms.
- Financial markets: where money, shares, bonds and currencies are traded.
- Markets can also be local, national or global in scale, from a village shop to the world oil market.
The functions of money
- Medium of exchange: accepted for goods and services, removing the need for barter and the double coincidence of wants.
- Store of value: keeps its value over time (provided inflation is low) so people can save and spend later.
- Unit of account: a common measure of value, so prices can be compared and added up.
- Standard of deferred payment: allows borrowing and lending, because a fixed money sum can be repaid in the future.
The characteristics of good money
For money to perform these functions well it should be:
- Durable: it does not wear out quickly.
- Portable: easy to carry and transfer.
- Divisible: can be split into smaller units for small transactions.
- Hard to copy: difficult to forge, so it stays trusted.
- Limited in supply: scarce enough to hold its value (this is why hyperinflation destroys money).
- Acceptable: people must trust and accept it.
How money and markets enable exchange
In a specialised economy people no longer produce everything they need. Markets bring buyers and sellers together, and money acts as the medium of exchange, so a specialist baker can sell bread and use the money to buy whatever they want. Without money, trade would rely on clumsy barter, which fails whenever there is no double coincidence of wants. So money and markets together are what make specialisation worthwhile.
Worked example
Try this
Q1. Define a market. [2 marks]
- Cue. Any arrangement that brings buyers and sellers together to trade at an agreed price.
Q2. Explain why durability is an important characteristic of money. [3 marks]
- Cue. Money that lasts can act as a store of value and stay in circulation, so people trust it for saving and spending.
Exam-style practice questions
Practice questions written in the style of AQA exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
AQA 20186 marksExplain two functions of money in a modern economy.Show worked answer →
One function of money is acting as a medium of exchange: it is accepted in return for goods and services, which removes the need for barter and the difficulty of finding a double coincidence of wants.
A second is acting as a store of value: money keeps its value over time (as long as inflation is low), so people can save now and spend later.
Other functions are a unit of account (a common measure of value for comparing prices) and a standard of deferred payment (allowing borrowing and lending). A 6 mark answer names each function and explains why it matters with a short example.
AQA 20214 marksOutline what is meant by a double coincidence of wants and explain why money removes this problem.Show worked answer →
A double coincidence of wants is the requirement under barter that each trader must want exactly what the other has to offer at the same time. For example, a baker wanting shoes must find a shoemaker who happens to want bread.
This makes barter slow and often impossible. Money solves it because it is accepted by everyone as a medium of exchange, so the baker can sell bread for money and use that money to buy shoes from anyone. Markers reward a clear definition of the double coincidence and a link to money as a universally accepted medium of exchange.
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Sources & how we know this
- AQA GCSE Economics (8136) specification — AQA (2017)