Market Economy

  • Economic equilibrium : a system of free markets is stable

    There has long been something appealing for economists about the idea that the economy may behave with the same mathematical predictability of scientific laws such as Newton’s laws of motion. Newton’s laws reduce the whole complex, teeming, physical universe to three simple, reliable mathematical relationships. Is it possible to find similar relationships in the complex, changing world of markets?

    In 1851, a British professor named Francis Edgeworth published Mathematical Psychics, an early mathematical work on economics. He realized that economics deals with relationships between variables, which means that it can be translated into equations. Edgeworth thought about economic benefits in utilitarian terms. In other words believing that outcomes could be measured in terms of units of happiness, or pleasure.

  • Elasticity of demand: if you get a pay raise, buy caviar not bread

    The “elasticity” of demand is its responsiveness to changes in another factor, such as price. British economist Alfred Marshall is generally credited as the first economist to define the concept in 1890, but the German statistician Ernst Engel published a paper five years earlier, showing how changes in income alter the level of demand. The origins of the concept may be disputed, but its importance is not.

  • The competitive market: companies are price takers not price makers

    In the late 18th century Adam Smith wrote about the impact of competition on firms’ abilities to set prices and make profits above a “natural” level.

    However, there was no formal analysis of the situation until British economist Alfred Marshall published Economic Principles in 1890. The ideas in Marshall’s model remain a key part of mainstream economic theory, although the theory has been criticized as not representing the true nature of competition.

  • The competitive market: companies are price takers not price makers 2

    The assumptions of Marshall’s model create certain consequences for firms in perfectly competitive industries. One of the most important of these is that firms have no power over the price that they can charge. This is because there are so many firms selling an identical product that if any one firm attempts to sell at a price higher than its competitors, it will sell nothing. This is virtually guaranteed because the consumer has perfect knowledge about the prices being asked by all firms. In this way the market price is determined by the collective interaction of all the firms and consumers, and each firm has to accept that one particular price is the price at which they can sell the product. They have to “take” the price, not make it.

  • The Market Economy

    Market Economy

    Economics is the study of the market economy.The market economy refers to an abstract image of interaction among purposeful, "normal human beings," or actors, under a given set of conditions. The set of conditions are four:

    • a system of private property rights,

    • specialization,

    • the use of money

    • free enterprise .

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