1.1 Competitive Markets: Demand and Supply - notes
Economics is the study of the allocation of scarce resources.
In a freemarket economy resources are allocated 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 soya rises, for instance, more farmers will want to grow
and sell (supply) Soya. Why? If prices rise, ceteris paribus*, farmers
will make more profit so will aim to produce more and vice versa.
*Ceteris paribus - all other things remaining the same: here the assumtion is average costs remain the same.
Price changes also give incentives (disincentives) to consumers to want to buy more or less of a good.
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 is the foundation of all
other sections of the syllabus. make sure you spend quality time
understanding how free markets work - ESEPME is the key