OCR GCSE Economics

The main economic groups

An economy is made up of the people and organisations that make, buy and sell goods and services. Economists sort them into three main groups, sometimes called economic agents.

Consumers are the people (and households) who use goods and services to meet their wants. They spend their income on products, and they also supply the labour that firms need, so they are on both sides of the economy at once. Their choices about what to buy, and how much to save, shape what is worth producing.

Producers are the people and organisations that make goods or provide services. They include individuals such as a self-employed plumber, firms of every size, and the government when it provides services such as state schools or the NHS. Producers decide what to make, how much to charge and how many workers to employ, and they aim for different things: a private firm usually wants profit, whereas a public service is set up to provide something people need.

The government has several roles. It is a producer of services, an employer, a collector of taxes and a spender of the money raised. It also makes laws and regulations that set the rules for markets, and it uses taxes, spending and other policies to pursue aims such as stable prices, jobs and growth.

Interdependence

The three groups depend on each other. Consumers buy what producers make, and the money they spend becomes the producers' revenue. Producers use that revenue to pay wages, which gives consumers the income to buy more. The government takes taxes from both groups and spends them on services that both use: roads that firms deliver on and families drive on, schools that train future workers, and benefits that keep spending going when someone loses a job. A change in one group therefore passes to the others. If consumers cut their spending, firms sell less, may employ fewer people, and the government collects less tax.

Factors of production

Goods and services are made from resources, which economists call factors of production. There are four.

Capital here means physical capital: the machines and buildings a firm uses. Money and shares are not capital in this sense, because they are not used directly to make anything. A sensible way to separate land from capital is that land is provided by nature and capital is made by people, so a field is land and a tractor is capital.

An entrepreneur is the person who brings the other factors together, takes the decisions about how to use them and carries the risk that the business loses money.

Combining the factors

Producers can combine the factors in different proportions, and the best mix depends on what is being made. A hairdresser uses a lot of labour and little capital, so the production is labour intensive. A car factory with robotic assembly lines uses a great deal of capital and relatively few workers, so it is capital intensive. A farm in a large, thinly populated country may use a great deal of land per worker.

A firm chooses a mix by comparing the cost of each factor with how much it adds to output. If wages rise, a firm may replace workers with machines; if machines become cheaper or more productive, the switch becomes more attractive. The choice also affects the people involved: capital-intensive methods can raise output and lower costs per unit, but they can reduce the number of jobs.