Economics

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.

The economy of India is expanding, thanks in large part to growth in industries like call centers and software development. The economies of many other nations are changing as well, while others, like that of the United States, have remained relatively stable for many years. In this section, you’ll learn that each nation’s economy depends on how that nation chooses to use its resources to satisfy people’s wants and needs.

The word demand has a special meaning in economics. Most American teenagers own a pair of sneakers. Because of high demand and high price, however, not everyone who wants a pair of Nike Air Force 1 sneakers is able to acquire this particular brand. As you read this section, you’ll learn that the idea of demand centers on people being both willing and able to pay for a product or service.

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.

IN CONTEXT:

FOCUS

Welfare economics

KEY THINKER

Vilfredo Pareto (1848–1923)

BEFORE

1776 Adam Smith’s The Wealth of Nations relates self-interest to social welfare.

1871 British economist William Jevons says that value depends entirely on utility.

1874 French economist Léon Walras uses equations to determine the overall equilibrium of an economy.

AFTER

1930–50 John Hicks, Paul Samuelson, and others use Pareto optimality as the basis of modern welfare economics.

1954 US economist Kenneth Arrow and French economist Gérard Debreu use mathematics to show a connection between free markets and Pareto optimality.

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