Introduction to Economics: How do markets and society work?

Supply and demand are two interdependent mechanisms that play a central 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. Generally, when many producers are offering the same good or service, prices may need to come down to attract more buyers. When only a few producers are willing to supply a good or service, prices tend to rise, reflecting its relative scarcity.

Demand refers to the quantity of a good or service that consumers are willing to buy at different prices. When demand for a product increases, prices usually go up as buyers compete with each other. When demand falls, prices tend to go down as well.

Although supply and demand are essential concepts in economics, it is important to understand them in the context of the specific product and market. For example, if the price of salt drops by 20% tomorrow, would you really consume more salt in your meals just because it’s cheaper?

The word economics comes from the Greek oikonomos, meaning “one who manages a household.” At its core, economics studies human behavior through the lens of the decisions we make. If we think about running a household, typical decisions might include who cooks, who does the laundry, who gets the biggest portion at dinner, who chooses the vacation destination, and what trade-offs are made along the way. These decisions, shaped by multiple factors and contexts, mirror the way societies manage their collective resources.

The foundation of economics—and the most essential concept to understand is scarcity. Scarcity means that we do not have enough resources to produce everything we might want. This principle applies whether we are analyzing society, our household, or even our personal choices.

Economics is concerned with key questions such as:

• 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 helps to get familiar with some fundamental concepts.

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

In a market, buyers and sellers agree to exchange value 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 forms of value).

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

When we talk about competition in the economy, we often think of the “rivalry” between companies to win customers and increase their market share. However, the economy is not only about companies. We can also see competition in many of the economic decisions we make in our daily lives. For example, when deciding where we want to work, we face many other people making the same decision; since job openings are limited (the principle of scarcity), competition naturally arises.

Many decisions that may seem unrelated to economics are also subject to competition: which partner to choose, where to live, which car to buy, where to study.

Of course, there is also the well-known competition among sellers. In principle, competition can benefit people by providing a variety of options and prices, encouraging continuous improvement in products and services, and driving innovation as sellers adapt to buyers’ needs and preferences to stay relevant in the marketplace. Like markets, however, competition can also have undesirable results.

Government plays a key role in the economy because it has the authority to structure, design, and intervene in markets. It regulates markets to reduce the negative effects of competition and to ensure fair play that benefits everyone involved. Governments can also influence our behavior through sanctions and incentives, directly affecting the quantities exchanged in markets and the prices at which those transactions take place.

We mentioned earlier that markets can fail. Take, for example, accessibility for people with disabilities in different parts of a city. There may not be enough demand to motivate private producers to invest in special access to shopping malls; and if one did, the prices would likely be very high. In this case, would the market really work to improve the efficient allocation of scarce resources—and even if it did, would the outcome be desirable for society’s overall welfare?

Governments also provide public goods that are highly valued by society but that markets alone cannot deliver effectively, such as justice, defense, and clean air.

The government

When a heatwave hits cattle-raising regions, the price of milk rises across the country; when war breaks out in the Middle East, oil prices rise and fewer cars are sold. The common factor in both cases is the play of supply and demand. In a market economy, the prices of goods and services are determined by the interaction between supply and demand. In a competitive market, there are many buyers and many sellers: consumers know they can purchase a set of cookware in different places, and sellers know they are not the only ones offering it. As a result, no single buyer or seller can set the price for the entire market.

Based on the principle of competition, markets allocate scarce resources to satisfy people’s needs and wants. Prices reflect both scarcity and the value people place on goods and services, while individual (and collective) economic decisions are oriented toward obtaining the greatest possible benefit.

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

Between a purely market-based economy and a planned economy, we find a wide range of alternatives for the exchange of value: mixed economies, barter systems, collaborative economies, and participatory exchange systems, among others.

Society is a complex web of interactions, relationships, and systems that shape every aspect of our lives, including the economy. To understand how society as a whole functions, it is important to consider the interaction of different elements such as culture, politics, technology, and, of course, the economy.

At the core of society are people—their values, beliefs, behaviors, and decisions influence how institutions are organized and operate. Culture plays a central role by setting the norms and customs that guide individual behavior and shape how economic activities are carried out. For example, in some societies, hard work and perseverance are highly valued, while in others, leisure and relaxation may take precedence..

Politics also has a major impact by establishing the rules and conditions that govern relationships between individuals and institutions. Political decisions—such as tax policies, trade regulations, and welfare programs—can profoundly affect the distribution of wealth and access to resources.

Technology, too, plays an increasingly important role by changing the way we work, consume, and communicate. Advances in technology can drive economic growth and improve quality of life, but they can also create challenges, such as automation and job displacement.

Ultimately, understanding how society works means recognizing the interconnectedness of all these elements and how they shape people’s lives. From individual decisions about what to buy or how to work to government policies that influence the distribution of resources and opportunities, every part of society contributes to the intricate web of relationships that define our human experience.