1.2.1a Markets

A market is an opportunity to trade

1. The key word is opportunity, because what makes a market is the chance to trade, not a building or an address.
   1. Two traders who never meet are in the same market as long as each can reach the other.
2. Every market is built from four parts, and removing any one of them leaves no market.
   1. The buyer is willing and able to pay for the product.
   2. The seller offers that product in return for money.
   3. The product is the good or service traded, such as a punnet of strawberries or a train ticket.
   4. The transaction is one completed exchange of the product for money at an agreed price.
3. Markets are counted by the product traded, so everyone trading one product is in one market however far apart they are.

Online markets count as much as physical ones

1. A physical market gives both sides a place to meet, such as Borough Market or a high street car showroom.
2. An online market links them through a website or an app instead, such as eBay or Tesco.com.
3. Neither is more of a market, because the test is whether buyers and sellers can reach each other.
4. Some markets have no home at all, since the UK second-hand car market is spread across dealers, driveways and websites.
5. The boundary is set by who can trade with whom, so a market can be one street wide or worldwide.

Interaction between both sides settles the price

1. Neither side fixes the price alone, because a price only becomes real once the other side agrees to it.
   1. A seller asking more than buyers will pay is left with unsold stock, so the asking price comes down.
   2. A buyer offering less than sellers will accept goes home with nothing, so the offer comes up.
2. The price that survives is the one at which trade actually takes place, which is what establishing a price means.
3. An eBay auction makes this visible, because the bidding is the interaction and the winning bid is the price.
4. A supermarket does the same quietly, since stock priced too high sits on the shelf until Tesco cuts the price.

1.2.1b Allocation of resources

Prices allocate scarce resources without a planner

1. Allocation is unavoidable because resources are scarce, so every use a resource is put to is another use given up.
2. The striking thing about a market is that nobody takes the decision, yet it is taken millions of times a day.
   1. Each firm and household reacts only to the prices in front of it, and the pattern that results is nobody's plan.
3. A price can do this because it is public, so both sides read the same figure without anyone collecting or sending information.
4. A price works in three ways, by signalling, by acting as an incentive and by rationing.

Signalling shows where resources are wanted

1. Signalling means the price carries information about how scarce something is relative to what buyers want.
2. A rising price says buyers want more or that supplying it has become harder, and a falling price says the opposite.
3. Avian flu cut UK laying flocks in 2022, and the rising shelf price told every baker, caterer and shopper that eggs had become scarce.
   1. None of them needed to have heard about the outbreak, because the price alone carried the message.
4. The signal also reaches firms in other markets, since they are deciding where to put their money next.

Incentive gives a reason to act

1. Incentive means the price offers a reward large enough to make somebody act on the signal.
2. A higher price earns extra revenue on every unit sold, so existing firms supply more and new firms enter the market.
3. UK haulage firms raised HGV drivers' pay sharply in the 2021 driver shortage, pulling drivers back into the job from other work.
   1. That is labour, a scarce resource, reallocated by a price rather than by anyone directing it.
4. For buyers the incentive runs the other way, because a higher price rewards buying less or switching to a substitute.

Rationing shares a limited quantity between buyers

1. Rationing means the price itself decides who goes without, rising until the quantity wanted matches the quantity available.
2. The rise removes the buyers who will not or cannot pay, so the limited supply reaches those who value it most in money terms.
   1. Rationing here means allocation by price alone, not coupons or queues.
3. Peak-time rail fares between Manchester and London ration a fixed number of seats among commuters who all want the same trains.
4. The scarcer the good, the higher the price has to climb before the two quantities match.

Together they answer what, how and for whom

1. What to produce is answered by signalling and incentive together, as resources move into goods whose price has risen against the cost of making them.
   1. Rising UK sales of electric cars pulled investment into battery capacity and out of diesel engine parts.
2. How to produce is answered by the prices of the factors themselves, since firms pick whichever mix of resources is cheapest for the output they want.
   1. Rising UK wages made self-service checkouts cheaper than extra staff for the big supermarket chains.
3. For whom to produce is answered by rationing, so output goes to whoever is willing and able to pay the price.
   1. The distribution of goods therefore follows the distribution of income, which is why the market answer is not the fair answer.
4. The process never stops, because any change in wants, costs or resources moves a price and starts the sequence again.

1.2.1c Factor and product markets

Factor and product markets trade different things

1. The two markets sit at opposite ends of the same process, because factors go into production and products come out of it.
2. The roles flip between them, so the household that sells labour in one is the buyer in the other.
   1. This is why saying that firms sell and households buy is only ever half the picture.
3. The price carries a different name in each, since a factor earns a reward while a product simply has a price.
   1. Land earns rent, labour earns a wage, capital earns interest and enterprise earns profit.
4. Each factor has a market of its own, so the labour market, commercial premises and machinery are all factor markets.

Households and firms swap roles between markets

1. Households own the factors of production, so they are the sellers in factor markets and the income they earn there is their reward.
2. Firms buy those factors, combine them and sell the output, which makes them buyers in one market and sellers in the other.
3. Households then spend the income they earned in factor markets on the output firms offer in product markets.
4. That spending becomes the revenue firms use to pay for the next round of factors, so money loops one way and resources the other.
   1. A Greggs baker paid on Friday is the same person who buys a coffee on Saturday, on both sides of the loop within a day.

Demand for a factor is derived demand

1. Derived demand means a factor is never wanted for its own sake, but only for what it can be used to produce.
2. Greggs has no interest in bakers' hours in themselves, and hires them only because customers want sausage rolls.
3. When sales of vegan sausage rolls rose, Greggs opened extra production capacity and took on more staff.
   1. The demand for bakers rose without anything changing about bakers, because what changed was demand for the product.
4. The link runs the other way too, so a chain losing customers cuts hours and releases labour and premises for other firms.

A change in one market moves the other

1. A rise in demand in the product market raises demand in the factor market, and the reward paid to that factor tends to rise with it.
2. A rise in a factor price runs the link the other way, because higher wages or rent raise costs and feed into the price of the product.
   1. Increases in the UK National Living Wage raised staff costs across bakery and coffee chains, and menu prices followed.
3. Prices in both markets are established the same way, by buyers and sellers interacting, which is why the same tools explain both.

1.2.2a Primary, secondary and tertiary sectors

Three sectors split production by stage

1. Named UK primary sector work includes oil and gas extraction off Aberdeen, arable farming in East Anglia and the Scottish fishing fleet.
2. Named UK secondary sector work includes the Nissan car plant in Sunderland, the Tata steelworks at Port Talbot and JCB digger production in Staffordshire.
3. Named UK tertiary sector employers include the NHS, Tesco, Barclays and the train operating companies.
4. Large firms often work in more than one sector, so classify the activity described rather than the whole company.
   1. Greggs bakes its own products, which is secondary work, and sells them over the counter, which is tertiary work.
5. Each sector adds value to what the one before it produced, so most finished products pass through all three.

Tertiary now dominates UK output and employment

1. The tertiary sector is by far the largest, producing around four-fifths of UK output and employing a similar share of the workforce.
   1. Financial services in the City of London, retailing, healthcare, education and tourism are its biggest parts, and services are also a large UK export earner.
2. The secondary sector is much smaller, well under a fifth of UK output once manufacturing and construction are added together.
3. The primary sector is the smallest of all, a couple of pounds in every hundred of UK output and well under two workers in every hundred.

Deindustrialisation explains the long-run shift

1. This long-term shift away from primary and secondary work towards services is called deindustrialisation, and it has been running in the UK since the 1960s.
   1. Its causes are automation in factories, mechanised farming and mining, cheaper manufactured imports from lower-wage countries, and rising incomes spent increasingly on services.

Deindustrialisation has helped some places and hurt others

1. The growth of services created large numbers of higher-paid and physically safer jobs in city economies, and made services one of the strongest UK exports.
2. Former mining and manufacturing towns lost the single large employer their local economy was built around, and many still have lower pay and higher unemployment than the national average.
3. Judgement: deindustrialisation has raised UK output overall, so on balance it has been good for the economy as a whole, but the gains and the losses landed on different places, which is why regional inequality is the main cost to set against it.

1.2.2b Goods and services

Four features separate a good from a service

1. Tangibility means a buyer can inspect a good before paying, while a service can only be judged after it has been delivered.
2. Storability means a good can be made now and held in stock until someone buys it, whereas an unsold service is lost for good.
   1. An empty barber's chair at ten in the morning, or an empty seat on a departing train, can never be sold later.
3. Ownership transfers when a good is bought, so the item is yours to keep, resell or give away, while a service buys only the benefit of the work done.
4. Production and consumption happen at the same moment for a service, so the producer and the customer are usually together.
   1. A Greggs sausage roll is baked hours before you walk in, but an NHS appointment does not exist until the patient and the doctor are both there.

The test is tangibility, not price or importance

1. Ask what the buyer is left with once the money is paid, because a physical item they now own is a good and the benefit of an action performed for them is a service.
2. The price tag decides nothing, so a 50p pencil and a £30,000 car are both goods, while a £5 car wash and a heart operation are both services.
3. Who provides it decides nothing either, because state provision by the NHS and private provision by a dentist are equally services.
4. In the UK a purchase chosen at random is more likely to be a service than a good, because services are around four-fifths of UK output.

Many purchases bundle a good and a service

1. A single transaction often contains both, so split it rather than force it into one category.
2. Buying a new car from a UK dealership brings the car itself, a good, with the warranty repairs, servicing and MOT work that follow, which are services.
3. Ordering a takeaway brings the meal, a good, with the delivery ride, a service, which firms such as Deliveroo sell on its own.
4. A mobile phone contract bundles the handset, a good, with network access, a service, into one monthly payment.
5. Bundling is common because the service is what makes the good usable, so firms increasingly compete on the service attached rather than on the item.

1.2.3a Specialisation and the division of labour

Specialisation means doing one thing, not everything

1. A specialist ends up with far more of one good or skill than they could ever use, and almost none of everything else they need.
2. The division of labour needs three things: enough workers to share the tasks, output large enough to keep each one busy, and a way of passing the part-finished product along.
3. It is the wider idea of specialisation, not the narrower division of labour, that explains why whole regions and countries concentrate on one industry.

Specialisation happens at four levels

1. Individuals specialise by training for one occupation, so a plumber or a nurse sells one skill and buys in everything else.
2. Firms specialise by narrowing what they produce, so a bakery chain concentrates on bread and pastries instead of a full supermarket range.
3. Regions specialise when one area concentrates on one industry, as the City of London does in banking, insurance and legal services.
   1. Clustering works because a pool of trained workers, specialist suppliers and expert customers builds up in the same place.
4. Countries specialise in what their resources, climate and workforce suit best, so Saudi Arabia concentrates on oil and the UK on financial services.

Dividing tasks raises output per worker

1. Repeating one task builds skill quickly, so the worker becomes faster, wastes less material and makes fewer mistakes.
2. No time is lost switching between tools, benches or parts of the building.
3. Each worker can be put on the task they are best suited to, instead of being merely average at all of them.
4. Specialised machinery becomes worth buying once one task is repeated all day, and the machine lifts output again.
5. So productivity, meaning output per worker, rises: the same wage bill and premises now produce more units, and the cost of each unit falls.

Specialisation only works if producers can exchange

1. Exchange is trading your own output for what other people produce, and it is what turns a narrow output into a full standard of living.
2. A worker who fits car doors all day cannot eat, wear or live in car doors, so every other good is bought with the wage that specialising earns.
3. Money makes exchange run far more smoothly than barter, which needs each side to want exactly what the other is offering.
   1. Everyone accepts money, so the baker can sell bread to one person and buy shoes from another.
4. Specialisation and exchange therefore rise together: the narrower a producer's output, the more trade they need to obtain everything else.

1.2.3b How and why producers specialise

Individuals specialise by training for one occupation

1. A worker picks an occupation and then invests years in it through school, college, an apprenticeship or a degree.
2. The qualification matters as much as the skill, because it proves to an employer that the training was completed.
3. They do it for the wage, since an employer pays more for a skill that took years to acquire and that few other people hold.
   1. The scarcer the skill, the stronger that effect, which is why an experienced electrician earns more than someone doing work anyone could pick up in a morning.
4. The choice is also a bet, because the training is worth little if demand for that occupation later falls away.

Firms specialise by product range or stage

1. Narrowing the product range is the first route, so a bakery chain concentrates on bread and pastries rather than everything a supermarket sells.
   1. That builds a reputation for one thing, which is worth more than being unremarkable at many.
2. Specialising by stage of production is the second, where a firm makes only one component and sells it on to firms that assemble the finished product.
   1. A UK engineering firm supplying brake parts to several car makers never builds a car, yet its output ends up inside thousands of them.
3. Inside the workplace the firm goes further and divides the work between individual workers, which is the division of labour.
4. Firms take these routes to raise output per worker, to cut the cost of each unit and to make specialised machinery worth buying.

Countries specialise by resources, climate and skills

1. Natural resources drive the first pattern, so Saudi Arabia concentrates on oil because its reserves are large and cheap to extract.
2. Climate and geography drive the second, so Spain specialises in tourism, drawing visitors that colder countries cannot attract.
3. Skills and institutions drive the third, so the UK specialises in financial and professional services, backed by a trained workforce, the English language and a long-established legal system.
   1. The UK then imports many of the manufactured goods it no longer makes in volume, paying for them with what those services earn.
4. The gain is that each country obtains goods more cheaply by trading for them than by producing everything itself.

Country specialisation is relative and shifts

1. A country need not be the only producer of a good, since what counts is producing it relatively well compared with the other things it could make.
2. Patterns shift as resources, skills and technology change, which is why the UK moved from coal and shipbuilding to services within a single lifetime.

The motive is the same at every level

1. Concentrating on one activity builds skill faster than spreading effort across many, and a more skilled producer works more quickly and spoils less.
2. Time otherwise lost switching between different jobs, tools or sites is spent producing instead.
3. Higher output spreads the same fixed costs, such as rent, machinery and management, over more units, so the average cost of each unit falls.
4. Lower costs then allow either a lower price to win customers or a wider profit margin.
5. The logic runs in reverse as a warning: a producer who refuses to specialise carries a higher cost per unit and is undercut by rivals who do.

1.2.3c Costs and benefits of the division of labour

Benefits: more output, lower unit costs

1. Workers
   1. Repeating one task makes a worker expert at it, so they work faster, waste less material and make fewer mistakes.
   2. Learning one narrow task takes days rather than the years needed to master a whole trade, so a new starter reaches full pay sooner.
   3. A worker who becomes genuinely fast at a task others find difficult can command higher pay, because that speed is worth money to the employer.
   4. Workers can be placed on the task each is best suited to, so nobody spends the day on the part of the job they are worst at.
2. Firms
   1. Output per worker, which is productivity, rises, because skill accumulates and no time is lost moving between tools or benches.
   2. Lower unit costs follow, since the same wage bill and the same premises now yield far more units.
   3. Training becomes cheaper as well as quicker, which matters most where staff turnover is high.
   4. Specialised machinery becomes worth buying once a task is repeated all day, raising output a second time.

Costs: a narrow skill, a fragile process

1. Workers
   1. Doing the same task all day is boring, and a bored worker is less motivated, less careful and more likely to let quality slip.
   2. Boredom shows up as higher labour turnover and absence, so the worker rarely settles long enough to be promoted.
   3. Years on the line build depth in one task rather than breadth, so de-skilling leaves a worker whose task is automated away months out of work while employers hire people with broader experience.
   4. That occupational immobility also caps pay, since a worker who cannot credibly move elsewhere has little leverage when asking for a rise.
2. Firms
   1. Interdependence makes the process fragile, because one absent worker, one broken machine or one missing component halts the line while everyone else stands idle.
   2. Quality control is harder, since each worker sees only their own stage, so a fault can travel several stages before anyone notices and the batch has to be reworked.
   3. Flexibility is lost, because a workforce each trained on one narrow task cannot be moved onto a different product when demand shifts.
   4. Turnover and absence are a direct cost too, as constant recruiting and retraining eat into the saving from lower unit costs.

The balance depends on the job

1. It depends on how repetitive the task is, because splitting a build into six stages costs almost nothing in motivation while splitting it into sixty leaves each worker with seconds of work to repeat all day.
2. It depends on the scale of output, because a large plant with long production runs captures the full productivity gain, while a small workshop making one-off items would lose the flexibility it depends on.
3. It depends on how reliable the process is, since interdependence only bites where breakdowns and absences are frequent, and spare parts and a few cross-trained workers cover the gaps.

And on how the drawbacks are managed

1. It depends on what the firm does about it, since job rotation, teamwork, rest breaks, bonuses and handing the worst repetition to machines recover much of the lost motivation.
2. It depends on how easily the worker can retrain, because occupational immobility is the heaviest cost of the system and good training, transferable skills and support after redundancy all reduce it.
3. It depends on whose position you take, as the firm collects the lower unit costs while the worker carries the boredom and the risk that their one skill stops being wanted.

Automation is where the worker's cost bites

1. A narrow, endlessly repeated task is the easiest kind to hand to a machine, so the workers most exposed to de-skilling are also the most exposed to automation.
2. Training that builds transferable skills is what turns occupational immobility from a permanent problem into a temporary one.