Market Economy

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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.

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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.

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