Economics[img]2012q1/ct_etoefm_etoeflistz_0192_20121[/img] [br] What does the pr

In this course, we’ll look at the basic problems every economy must face. We’ll focus on the modern industrial economy, and how it solves the problems of what, how, and for whom goods are produced. We’ll examine the market mechanism, how the problems of production are solved through a system of markets and prices.
The market system isn’t perfect. In fact, it’s far from perfect, but it’s one way to solve the problems of production. Let me just say one thing before we go on. No human economy today is purely a market economy. What we have in most capitalist societies today is known as a mixed economy.
In a mixed economy, the markets and the government share economic control over the direction of the market. The government has an important role in regulating business activity. A pure market system would have no government intervention—just consumers and businesses interacting through markets to determine the answers to the basic questions of economic organization.
OK. It’s essential to understand how a pure market system works. Basically, it works like this: consumers are kind of like voters. They use their money like votes to buy what they want. My votes compete with your votes over the goods we both want to buy. The consumers with the most dollar votes have the most influence over what gets produced and to whom goods go. In economics, the consumer is king.
The consumer is like a king—or a dictator, really, if we’re talking about a pure market system. In a pure market, the consumer would dictate the type and quantity and price of the goods that get produced. Of course, it’s not exactly like that in the real world because real consumers don’t always have complete information about goods, and, of course, real consumers can be influenced by advertising.
OK. Let’s take a look at how the consumer’s money votes operate in the marketplace. What I mean is, we’ll examine the theory of the two central economic forces: supply and demand, and how they influence each other and are eventually brought into balance by the price of the good.
First, let’s consider demand. In economics, "demand" refers to the amount of a good or service that people are ready to buy. Generally speaking, the quantity that people will buy depends on the price. The higher the price of a good, the less of it people will buy. The lower the price, the more they’ll buy. So you can see there’s a definite relationship between the price of a good and the quantity demanded. The connection between price and quantity is clear. When the price of a good is raised, consumer demand for it goes down. But when the price falls, demand increases, as more people will be willing and able to buy it at a lower price.
OK. That’s demand. Now, what about supply? In economics, "supply" means how much of a good producers are willing to supply. Goods are supplied by businesses. Businesses—if they’re competitive—they don’t supply goods for fun. They supply goods for profit. They’ll supply more of a good when the price is high because it’s more profitable to do so. But when the price is low, producers will choose to supply some other more profitable good instead.
I’ve just given you the briefest summary of market economics. Tomorrow we’ll look at just how supply and demand work in a real-world mixed economy. We’ll see how the market price of a good is a function of supply and demand ... how the price is a sort of agreement between the people who sell a good and the people who buy it.