Supply and Demand
Supply and Demand: The Market Mechanism
All societies necessarily make economic choices. Society needs to make choices about, what should be produced, how should those goods and services be produced, and whom is allowed to consumes those goods and services. For conventional economics the market by way of the operation of supply and demand answer these questions. Under conditions of competition, where no one has the power to influence or set price, the market (everyone, producers and consumers together) determines the price of a product, and the price determines what is produced, and who can afford to consume it.
Price provides the incentive to both the consumer and producer. High prices encouraged more production by the producers, but less consumption by the consumers. Low prices discourage production by the producer, and encouraged consumption by the consumers. Both incentives push the price to balance the forces of consumption (demand) and production (supply). Economists call this balance: equilibrium. This natural mechanism requires no external institution for direction (or only a minimum amount), or any altruists’ motivation by either the consumers or the producers.
The supply and demand mechanism (the economic model) besides being the natural consequences of economic forces provides the most efficient economic outcomes possible. Satisfaction for society is maximized, at minimum cost. The market mechanism’s efficiency outcome is always located on the production possibility curves frontier, where all resources are fully utilized (points within the production possibility curves are inefficient by definition, since resources are not being utilized). This core model of supply and demand explains why economists usually favor market results, and seldom wishes to interfere with price. Setting minimum wages, for instance, or interfering with trade, violate the spirit of the model, and lead to inefficient outcomes.
Alternative Viewpoints
There are alternative
All societies necessarily make economic choices. Society needs to make choices about, what should be produced, how should those goods and services be produced, and whom is allowed to consumes those goods and services. For conventional economics the market by way of the operation of supply and demand answer these questions. Under conditions of competition, where no one has the power to influence or set price, the market (everyone, producers and consumers together) determines the price of a product, and the price determines what is produced, and who can afford to consume it.
Price provides the incentive to both the consumer and producer. High prices encouraged more production by the producers, but less consumption by the consumers. Low prices discourage production by the producer, and encouraged consumption by the consumers. Both incentives push the price to balance the forces of consumption (demand) and production (supply). Economists call this balance: equilibrium. This natural mechanism requires no external institution for direction (or only a minimum amount), or any altruists’ motivation by either the consumers or the producers.
The supply and demand mechanism (the economic model) besides being the natural consequences of economic forces provides the most efficient economic outcomes possible. Satisfaction for society is maximized, at minimum cost. The market mechanism’s efficiency outcome is always located on the production possibility curves frontier, where all resources are fully utilized (points within the production possibility curves are inefficient by definition, since resources are not being utilized). This core model of supply and demand explains why economists usually favor market results, and seldom wishes to interfere with price. Setting minimum wages, for instance, or interfering with trade, violate the spirit of the model, and lead to inefficient outcomes.
Alternative Viewpoints
There are alternative