What is a market, and how do the three sectors of production turn resources into finished goods?
What a market is, the primary, secondary and tertiary sectors of production, and how markets and the price mechanism allocate scarce resources.
An OCR J205 answer on what a market is, the primary, secondary and tertiary sectors of production, and how the price mechanism allocates scarce resources between competing uses.
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What this dot point is asking
OCR wants you to define a market, describe the primary, secondary and tertiary sectors of production, and explain how markets and the price mechanism allocate scarce resources. This connects the economic problem to the way real economies decide what gets produced.
What a market is
Markets exist for goods (a supermarket), for services (a hairdresser), for labour (a job market), and for finance (the market for loans). The course mostly studies product markets (goods and services) but the same demand and supply logic applies to all of them.
The three sectors of production
Production happens in three linked stages, each a sector of the economy:
A loaf of bread shows all three: wheat is grown (primary), milled and baked into bread (secondary), and sold in a shop (tertiary). As economies develop, employment usually shifts from primary towards secondary and then tertiary; the UK economy is now dominated by the tertiary sector.
How markets allocate resources
Because resources are scarce, an economy needs to decide which goods get produced and who gets them. In a market economy this is done by the price mechanism through three functions:
- Signalling. Prices carry information. A rising price signals that a good is more wanted; a falling price signals it is less wanted.
- Incentive. Prices reward action. A high price gives producers an incentive to supply more because it is more profitable, and gives consumers an incentive to buy less.
- Rationing. Prices share out scarce goods. When something is scarce its price rises, so only those willing and able to pay get it.
Together these functions move resources towards the goods consumers value most, without any central planner directing them. This is sometimes called the "invisible hand".
Strengths and limits of market allocation
The price mechanism is fast and needs no central planner, but it allocates resources to those with the money to pay, not necessarily to those with the greatest need. It can also fail, for example by ignoring external costs like pollution or under-providing public goods. This is why most economies are mixed, with the government correcting market failures, a theme returned to in Component 02.
Try this
Q1. Define what is meant by a market. [2 marks]
- Cue. Any arrangement bringing buyers and sellers together to trade, not necessarily a physical place.
Q2. Explain the rationing function of the price mechanism. [3 marks]
- Cue. When a good is scarce its price rises, so only those willing and able to pay obtain it, sharing the scarce good out.
Exam-style practice questions
Practice questions written in the style of OCR exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
OCR J205/01 20193 marksIdentify the three sectors of production and give an example of an industry in each.Show worked answer →
A knowledge question worth one mark per correct sector with a valid example.
The primary sector extracts raw materials (farming, fishing, mining). The secondary sector manufactures and processes those materials into goods (car making, baking, construction). The tertiary sector provides services (retail, banking, healthcare, education).
For full marks each sector must be correctly named and paired with a sensible example. Saying "primary, like a bank" loses the mark because banking is tertiary.
OCR J205/01 20216 marksExplain how the price mechanism allocates resources when demand for a good rises.Show worked answer →
A 6 mark question rewarding the signalling, incentive and rationing functions.
When demand for a good rises, its price rises. This higher price acts as a signal to producers that the good is more wanted, and as an incentive to supply more because it is now more profitable. Resources (land, labour, capital) are therefore drawn into producing that good and away from less profitable uses.
The higher price also rations the good among consumers: those unwilling or unable to pay drop out. Markers reward naming the signalling, incentive and rationing functions and linking them to resources moving towards the more valued use.
Related dot points
- The basic economic problem of scarcity, the difference between needs and wants, opportunity cost, and why choices must be made by consumers, producers and government.
An OCR J205 answer on the basic economic problem: scarcity, needs versus wants, opportunity cost, and why consumers, producers and government must all make choices.
- The role of the main economic groups (consumers, producers and government) and how they are interdependent in a market economy.
An OCR J205 answer on the three main economic groups (consumers, producers and government), the decisions each makes, and how they depend on one another through the circular flow of income.
- The law of demand, why the demand curve slopes downwards, movements along versus shifts of demand, and the factors that shift demand.
An OCR J205 answer on the law of demand, the downward-sloping demand curve, movements versus shifts, and the non-price factors that shift demand.
- Market equilibrium, how price is determined by demand and supply, surpluses and shortages, and how shifts in demand or supply change price and quantity.
An OCR J205 answer on market equilibrium, how demand and supply set price and quantity, surpluses and shortages, and how shifts move the equilibrium.
- The functions and characteristics of money, and the role of money and financial markets, including banks, in allowing saving, borrowing and investment.
An OCR J205 answer on the functions and characteristics of money and the role of money and financial markets, including how banks channel saving into borrowing and investment.
Sources & how we know this
- OCR GCSE (9-1) Economics J205 specification — OCR (2017)