A market is any opportunity for buyers and sellers to interact in order to agree a price.
A market doesn’t need a physical place. A street market and a shopping centre are markets, but so are online shops, auction apps, ticket websites and the phone line of a taxi firm.
Every market has buyers (who demand the product) and sellers (who supply it).
Markets can be local (a farmers’ market), national (the UK housing market) or worldwide (the market for oil).
Exam tipTo explain why something is a market, give the definition and apply it: ‘On the app, buyers and sellers interact, and a price is agreed, even though they never meet.’
Market
An opportunity for buyers and sellers to interact in order to establish a price.
3.1.2.1 Allocation of resources
How markets allocate scarce resources
Resources are scarce, so something must decide what is produced and who gets it. In a market, prices do much of this job.
Prices are signals. A rising price tells producers that buyers want more; a falling price tells them to make less.
Prices are incentives. A higher price means higher possible profit, so firms move resources (workers, land, machines) into making that product.
Prices ration. When a product is scarce, its price rises and only people who are willing and able to pay get it.
Example: if more people want electric cars, their prices and profits rise, so car makers shift factories and workers away from petrol cars.
Markets don’t always get it right (see Market Failure, Externalities and Government Intervention), which is one reason government also allocates some resources.
Exam tipUse the chain: more demand → higher price → higher profit → producers move resources into it. Each arrow is a step in your explanation.
Allocation of resources
How scarce resources are shared out between different uses.
Price signal
A change in price that tells buyers and sellers to change what they do.
3.1.2.1 Factor and product markets
Factor markets and product markets
In the product market, firms sell to households. In the factor market, households sell their labour (and land and capital) to firms.
The money goes round: households spend wages in the product market; firms use that revenue to pay for factors.
Product market
Factor market
What is traded?
Final goods and services that consumers buy
Factors of production: land, labour, capital (and enterprise)
Who buys?
Households (consumers)
Firms
Who sells?
Firms
Households and owners of resources
Examples
A clothes shop, a cinema, a food-delivery app
A job advert for nurses, renting out a field, a machinery auction
Households and firms meet in two kinds of market
Watch outProduct v factor is not goods v services. A haircut is a service but it is sold in a product market. In one year 17% of students scored 0 on this difference for that reason.
Exam tipA difference needs both sides: ‘a product market sells final goods and services, whereas a factor market sells land, labour or capital to firms’.
Product market
The market for final goods and services.
Factor market
The market for the factors of production: land, labour, capital (and enterprise).
3.1.2.2 Goods and services
Goods and services
Goods are tangible: physical products you can touch and store, such as a phone, a car or a loaf of bread.
Services are intangible: non-physical, done for you, such as a haircut, a train journey, insurance or a music stream.
Many purchases mix the two: a restaurant meal is food (a good) plus cooking and serving it (a service).
Services usually can’t be stored: an empty seat on today’s train can’t be sold tomorrow.
Exam tipTangible and intangible are the key words. ‘You can touch a good but not a service’ is a clear, quick difference.
Goods
Tangible, physical products.
Services
Intangible, non-physical products.
3.1.2.2 Primary, secondary and tertiary sectors
Primary, secondary and tertiary sectors
Products usually pass through all three: wheat (primary) → flour and bread (secondary) → the supermarket that sells it (tertiary).
The sector depends on the activity, not the firm’s size: a builder is secondary (construction); a delivery driver is tertiary.
Watch outThe secondary sector is mainly manufacturing (plus construction). In one year 30% of students scored 0 on a question about its decline because they didn’t know this.
Primary sector
Extracting raw materials, such as coal or timber.
Secondary sector
Turning raw materials into finished products: manufacturing and construction.
Tertiary sector
Providing services.
3.1.2.2 Relative sizes of the sectors in the UK
The relative sizes of the UK’s sectors
The tertiary sector is by far the largest in the UK. Services make up around four-fifths of the UK’s output and of its jobs.
Manufacturing is around a tenth of UK output. The primary sector is very small: farming, fishing and mining together are only a few per cent.
Deindustrialisation: over the last 60 years or so, the secondary sector’s share has shrunk and services have grown.
Why? Higher incomes mean people spend more on services (holidays, eating out, entertainment, health); many factory jobs moved to countries with lower costs; machines replaced many factory workers; coal mines closed.
Consequences: job losses and structural unemployment in former industrial areas; workers need new skills; more service jobs, some well paid (finance, tech), some low paid (retail, care); the UK imports more manufactured goods.
Shares are rounded. Last checked: November 2026.
The usual pattern as a country grows richer, shown for an invented country
Worked exampleIn an invented town, 1,150 people work in the primary sector, 7,300 in the secondary sector and 26,050 in the tertiary sector. Calculate the tertiary sector’s share of employment, to 1 decimal place.
Total = 1,150 + 7,300 + 26,050 = 34,500add all three sectors
26,050 ÷ 34,500 × 100 = 75.507…part ÷ whole × 100
75.5%
Worked exampleCalvia’s secondary sector fell from 40% of jobs in 1960 to 15% in 2020. Calculate the percentage change in its share, to 1 decimal place.
−25 ÷ 40 × 100 = −62.5%divide by the original value
−62.5% (a fall of 25 percentage points)
Exam tipIf a question asks for a consequence of a sector shrinking, don’t give a reason for it. Say what happens next: who loses jobs, what skills are needed, what happens to the area.
Deindustrialisation
The long-term fall in the size of the secondary (manufacturing) sector.
Percentage points
The simple difference between two percentages, e.g. 40% to 15% is a fall of 25 points.
3.1.2.3 Specialisation and division of labour
Specialisation and the division of labour
Specialisation: a person, business, region or country concentrates on producing a limited range of products, or on a few tasks, to become more efficient.
Division of labour: production is split into many small tasks, and each worker specialises in one of them, to raise productivity.
Why individuals specialise: to use their talents, build skills and earn more (a surgeon, an electrician, a web designer).
Why producers specialise: to get very good at one product, use specialist machinery and cut costs (a firm that only makes bike brakes).
Specialisation tends to raise productivity, output per worker (see Costs, Revenue, Profit and Productivity).
Division of labour: each worker repeats one stage
Exam tipSpecialisation is the general idea; division of labour is specialisation inside one workplace, task by task.
Specialisation
Concentrating on producing a limited range of products, or doing a limited range of tasks, to gain efficiency.
Division of labour
Splitting production into small tasks, with each worker specialising in one task, to raise productivity.
3.1.2.3 Exchange
Specialisation leads to exchange
A specialist produces far more of one thing than they need, and nothing of the other things they want.
So specialisation naturally leads to exchange: people and firms must trade what they make for what they need.
Exchange: buyers and sellers meeting to agree a price and swap goods or services for money.
Swapping goods directly (barter) is awkward, so money makes exchange much easier (see Money and the Financial Sector).
The same idea works between regions and countries: specialisation leads to trade (see International Trade and Free-trade Agreements).
Exam tipLink the two: ‘A plumber earns money by specialising, then exchanges that money for food, clothes and housing that other specialists produce.’
Exchange
Buyers and sellers swapping goods or services, usually for money, at an agreed price.
Barter
Swapping goods or services directly, without money.
3.1.2.3 Benefits and costs to the worker
Benefits and costs to the worker
Over-specialised workers face structural unemployment if their industry declines (see Employment and Unemployment).
Benefits to the worker
Costs to the worker
Becomes highly skilled and quicker at the task
Repetitive, boring work, which can lower motivation
Skill can lead to higher pay or promotion
Narrow skills: hard to find a new job if the task disappears
Less training needed to start the job
Risk of being replaced by a machine (automation)
Pride in expertise
Repetitive strain and health problems
Exam tipAnswer for the worker when the question says worker. In one year some students lost marks by giving a disadvantage to the firm instead. For 2 marks, link the benefit to the worker: ‘…so they may earn more or be promoted.’
Automation
Using machines or computers to do work that people used to do.
3.1.2.3 Benefits and costs to the firm
Benefits and costs to the firm
Whether specialisation is worth it depends on the size of the gain in output compared with the costs of boredom, absence and disruption.
Benefits to the firm
Costs to the firm
Higher productivity: more output per worker
Bored workers may make mistakes, lowering quality
Lower average costs, so lower prices or higher profit
Higher absence and staff turnover if work is dull
Less training per worker, as each learns one task
If one stage stops (absence, breakdown), the whole line stops
Easier to use specialist machinery
Dependence on other firms for parts and services
Easier to hire for one simple task
Specialist machines and training can be costly to set up
Exam tipIn a 6- or 9-mark answer, use the data: work out output per worker before and after, then weigh it against costs such as absence or quality.
Productivity
Output per worker (or per hour).
Average cost
Total cost divided by output: the cost of each unit.
Genious