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Section 2.1 Markets - notes

Introduction

Resources are allocated in competitive (free) markets through the workings of the price mechanism. Price changes give signals to suppliers who are able to respond to the demands of consumers. If the price of houses rise, for instance, more builders will want to build (supply) houses. Also, if more people want to buy houses (demand) in an area, say as a result of a government department relocating there, prices will rise.

Two key terms have been mentioned, supply and demand. Write down now, before you go any further, what you think these terms mean. Put your descriptions to one side. We will return to them later.

The free market price mechanism, operating under certain specific conditions (more of this later) is also the base against which the workings of real markets and economies are measured by economists.

This unit examines the concepts of demand and supply in detail, then goes on to examine the operation of a competitive market. It is an extremely important unit, not only in its own right, but also because it links in with other units, such as units 4 and 5.

In this section we consider the following topics in detail:

  • Markets
  • Market structure
  • The importance of price as a signal
  • Demand
  • Supply
  • Interaction of demand and supply
  • Price controls





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