This section focuses on how individual economic units—like households, firms, workers,
trade unions, and governments—make decisions and impact the market.
3.1 The Role of Markets in Allocating Resources
Markets help allocate scarce resources through price signals.
The invisible hand of the market (coined by Adam Smith) pushes resources toward
their most valued use.
Example: If the demand for electric cars increases, their prices rise, encouraging producers to
allocate more resources to making them.
3.2 The Role of Money
Functions of money:
1. Medium of exchange – eliminates the need for barter.
2. Measure of value – prices express value.
3. Store of value – can save purchasing power.
4. Standard of deferred payment – used for loans and credit.
Diagram: Barter vs Money System
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Barter:
Money:
Apples ←→ Books (double coincidence needed)
Apples → £ → Books (money simplifies exchange)
3.3 The Financial Sector
Role of banks:
o Accept deposits.
o Provide loans and mortgages.
o Facilitate payments (cheques, online banking).
Central banks:
o Issue currency.
o Control money supply and interest rates.
o Act as lender of last resort.
Diagram: Flow of Money
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Households → Savings → Commercial Banks → Loans → Firms
3.4 Households
Consumers aim to maximize satisfaction (utility).
Income sources: wages, interest, rent, profit.
Disposable income = income after tax.
Spending influenced by:
o Income level
o Preferences
o Prices
o Government policy (e.g., taxes)
3.5 Workers
Workers supply labour in exchange for wages.
Factors affecting occupation choice:
o Wages, working conditions, job security, personal satisfaction.
Division of labour: Specialization in tasks increases productivity but can lead to
monotony.
Example: Factory assembly line
One worker fixes bolts, another paints—faster production, but repetitive.
3.6 Firms
Aim to maximize profit.
Revenue = Price × Quantity Sold
Costs:
o Fixed Costs: Don’t change with output (e.g., rent).
o Variable Costs: Change with output (e.g., raw materials).
o Total Costs = Fixed + Variable Costs
o Profit = Total Revenue - Total Costs
Diagram: Cost & Revenue
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Cost/Revenue
|
TR /\
/ \
TC /
\
/
\________
---------------------- Output
3.7 Perfect and Imperfect Competition
Perfect competition: many firms, identical products, no price control.
Monopoly: one firm dominates, price setter, high barriers to entry.
Oligopoly: few firms, interdependence, often non-price competition.
3.8 Trade Unions
Organisations representing worker interests.
Goals:
o Better wages and conditions.
o Legal rights.
o Safer workplaces.
Tools: collective bargaining, strikes.
Impact on labour markets: may increase wages but could reduce jobs if too high.
3.9 Government in the Economy
Provides public goods (e.g., street lighting).
Redistributes income (e.g., through taxes and welfare).
Corrects market failures (e.g., pollution control).
Regulates monopolies and protects consumers.
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