Introduction to Economics: How do markets and society in general work?

Supply and demand are two interdependent mechanisms (i.e. they depend on each other) that play a crucial role in determining how much is exchanged in a market and at what price.

Supply refers to the quantity of a good or service that producers are willing to offer at different prices. In principle, when a considerable number of producers are willing to offer a good or service, a reduction in prices may be necessary in order to attract more buyers. When few producers are willing to offer a good and service, prices would tend to increase reflecting the relative scarcity of the good offered.

Demand refers to the quantity of a good or service that consumers are willing to buy at different prices. When demand for a good or service increases, prices tend to rise as a reflection of increased competition among buyers. When demand decreases, prices tend to decrease as well.

Although supply and demand are essential laws of economics, it is important to understand these concepts in terms of the product, market and context. For example, if the price of salt is reduced by 20% tomorrow, would you consume more salt in your meals just because it is cheap?

From the Greek oikonomos, which translates as “one who manages a household,” economics is concerned with the study of human behavior in terms of the decisions we make. If we think about the management of a household, the kinds of decisions we face would include who does the cooking, who folds the laundry, who gets the biggest dinner, who decides on the vacation spot, what do you get in return (decisions that are influenced by multiple factors and contexts, as will be discussed below). Economics considers the distribution of scarce resources among different members of a collectivity who must organize themselves to decide who does what.

The foundation of economics, and the most relevant factor by which it should be considered, is scarcity. It means that as a collective we do not have enough resources to produce everything we want to have. This principle holds true whether we study society or our own home (you can even observe it in yourself).

Decisions of interest to the economy include:

• What is produced and in what way?

• What do we buy?

• What are we working on?

• How much do we save?

• How are resources managed?

• How is the product of labor distributed?

How does society work?

How do markets work?

What is economics?

Key economic concepts

The competition

Supply and demand

The commerce

To better understand how the economy works, it is important to become familiar with some key concepts:

The market refers to the scenario in which the exchange takes place. Naturally, there will be an encounter between one or more buyers and one or more sellers, either in a physical space (such as a marketplace, store, or store) or a virtual space (e.g., e-commerce).

In a market, buyers and sellers agree to exchange securities at a given price. We then have three key elements: buyers and sellers, a price system, and the possibility of exchanging goods and services (or other values).

Markets have the ability to allocate resources in an economy efficiently; in general, they allow scarce resources to be allocated to their most valuable uses through the price system and competition (although this allocation system can sometimes fail or have undesirable outcomes).

When we talk about competition in the economy, we often think of the “rivalry” that exists between companies to win customers and increase their market share. However, the economy is not only about companies. We can see competition in many of the economic decisions we make in our daily lives. For example, when deciding where we want to work we will find many other people who are facing the same decision; taking into account that vacancies are limited (scarcity principle), competition will occur as a consequence.

Many decisions that seem to be unrelated to economics are also subject to the principle of competition: which partner to choose? where to live? which car to have? where to study?

There is, of course, the competition among sellers that has been written about so much. In principle, competition can benefit people by providing them with a variety of choices and prices, encourage continuous improvement in products and services, and drive innovation as sellers will be attentive to buyers' needs and preferences to stay relevant in a competitive marketplace. Like markets, competition can also have undesirable results.

Government plays a key role in the economy as it has the authority to structure, design and intervene in markets. Government regulates markets to reduce the undesirable effects of competition and ensure fair play that benefits all parties involved. Government can also influence our behavior through sanctions and incentives, which directly affect the quantities exchanged in markets and the prices at which those transactions occur.

We mentioned earlier that markets fail. Let's think for example about access for disabled people to different places in the city. There may not be enough disabled people to motivate the production of special access to shopping malls; in case a producer wanted to serve this reduced market, the prices to be charged would be quite high. Would the market work in this case to improve the allocative efficiency of scarce resources, and if it does, would its effect on the welfare of society be desirable?

Governments provide public goods that are highly desirable to society but that a market economy alone could not provide satisfactorily (e.g., justice, defense, clean air).

The government

When a summer lashes the cattle-raising regions, the price of milk rises throughout the country; when war rages in the Middle East, the price of oil rises and fewer cars are sold. The common factor in both situations is the play of supply and demand. In a market economy, the prices of goods and services are determined by the interplay of supply and demand. In a competitive market we have many buyers and many sellers; consumers know that there are many places where they can buy a set of cookware and sellers know that they are not the only ones offering it. As a result, no single buyer or seller can determine prices for the entire market.

Based on the principle of competition, the market allocates limited resources to satisfy people's needs and wants. In a market economy, resource allocation is based on supply and demand. The prices of goods and services reflect their scarcity and the benefit that people find in them, while individual (and collective) economic decisions are oriented to obtain the greatest possible benefit.

There are systems of resource allocation other than the market. For example, in a planned economy, the government establishes objectives and priorities, organizing production and consumption around principles other than competition or the interaction of supply and demand.

In the middle ground between market economy and planned economy we find a great variety of systems and alternatives for the exchange of values. There are mixed economies, direct exchange (barter), collaborative economies and participatory exchange systems, among others.

Society is a complex web of interactions, relationships and systems that affect all aspects of our lives, including the economy. To understand how society as a whole works, it is important to consider how different elements interact, such as culture, politics, technology and, of course, the economy.

At the heart of society are people, with their values, beliefs, behaviors and decisions that influence how institutions are organized and operate. Culture plays a central role in society by determining the norms and customs that guide the behavior of individuals and the way economic activities are carried out. For example, in some societies, hard work and perseverance may be highly valued, while in others, leisure and relaxation may be most important.

Politics also exerts a significant influence on society by establishing the rules and conditions that govern relationships between individuals and institutions. Political decisions, such as taxation, trade regulations and welfare policies, can have a profound impact on the distribution of wealth and access to resources in a society.

In addition, technology is playing an increasingly important role in society by influencing the way we work, consume and communicate with each other. Technological advances can drive economic growth and improve quality of life, but they can also pose challenges, such as automation and job losses.

Ultimately, understanding how society at large works involves recognizing the interconnectedness of all these elements and how they affect people's lives as a whole. From individual decisions about what to buy and how to work to government policies that shape the distribution of resources and opportunities, every aspect of society contributes to the complex web of relationships that define our human experience.