1.1 Competitive Markets: Demand and Supply - notes
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 vegetables rises, for instance, more farmers will want to grow and sell (supply) vegetables. Also, if more people want to buy vegetables (demand) in an area, say as a result of increased population, 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.
In this section we consider the following topics in detail:
- Markets and market structure (this is covered in detail by HL students in section 1.5)
- Market structure
- The importance of price as a signal
- Interaction of demand and supply
- Price controls
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 3 (International Economics) and 4 (Development Economics).