Unit 1
Unit 2
The Australian Economic System
The Role of Markets
By now you will have learned some of the basic concepts associated with the laws of supply and demand. During your study of Economics you will see a lot of supply and demand graphs, and so it is important that you understand how they relate to the other concepts that you will be learning.
In general terms, a supply and demand graph is one way of representing a market. The law of demand tells us how buyers will act, while the law of supply tells us about the actions of sellers. A market exists anywhere that a buyer and a seller get together to facilitate an exchange. When you go to a local shop to buy a banana, you are “in the market” for fruit. On the other hand, when you search online for a place to download an album that you want to buy, then you are “in the market” for music.
In a capitalist system, the forces of supply and demand play an integral role in determining the way in which our resources will be allocated. We use the economy in this way to answer the three basic questions that form the foundation of Economics:
1. What should we produce?
2. How should we produce these things?
3. Who should have the things that we produce?
For example, greater awareness of the environmental consequences of using oil has changed the way that we act in the market for cars. As oil prices increase, crude oil becomes more difficult to find and extract, and the human impact on global warming receives more and more attention, people are now shifting their focus to environmentally sustainable alternatives. For example, the demand for hybrid cars has increased, and so in order to try and meet this demand in late 2009 the first Australian made hybrid cars rolled out of the factory.
In other words, the sellers were responding to the actions and preferences of consumers. While there was certainly some involvement from the government (in terms of a subsidy to make the production possible), it was the forces of supply and demand that created the market for this product.
Consumers are now also paying more attention to the way in which products are made. In the past, this may have meant that a consumer would only buy items from certain sellers that they trusted, but with the growing complexity of the global economy this is no longer possible. Today we might choose to give more of our business to a firm that maintains similar philosophical goals to our own. For example, in Europe it is very popular to be aware of “food miles” – the distance that food has to travel before it can be served for you to eat. Imported food is often required to travel great distances, and this can add to pollution levels. Restaurants that focus on using local produce will minimise the distance that their food travels, and as a result they will also be reducing their carbon footprint.
In each of these examples, the process is the same – in a market, buyers and sellers get together to determine prices and quantities. If a product is not demanded by the market, then the seller will either reduce the price or stop making the product.
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