To show how a well-functioning free market pricing system determines how producers manufacture goods, what goods will be manufactured, and for whom the goods will be produced.
1. The meeting of buyers and sellers in a market can be represented by supply and demand curves. The curves show what sellers (buyers) are willing to sell (buy) at various prices. In a perfectly operating market the intersection of the supply and demand curves will be the point at which buyers and sellers agree on the price and quantity.
2. Goods are produced by using resources such as labor, machinery, and materials. The prices of these resources are set by supply and demand in the free market, and the producer is forced by competitive pressures to choose the method of production, which is least costly, i.e. the method which conserves high priced materials.
3. Consumers "reveal" how much they want a good by the way they spend their money. If a great deal of money is being spent on a certain good, producers will try to make more of that good. If consumers change the way they spend their money, producers will respond.
4. There is a difference between "need" and "effective demand." The market system only responds to those who have money to spend. The poor have the need for many goods that the free market system will not provide for them, because the market system only responds to needs that people spend money on..
|Key Economic Concepts supply and demand curves methods of production shift in demand, market failure,equilibrium price and quantity.
|Contemporary Issues From time to time, we hear that (alternately) there are too many lawyers and too few doctors. What could create such an excess supply or excess demand? What kind of role might the American Bar Association and the American Medical Association be playing in such market disequilibria (mismatch between supply and demand)? What would happen if the markets for doctors and lawyers were perfectly competitive?