Unit 1
Unit 3
The Market Mechanism
Microeconomics is the study of economic interactions within one particular market. We can examine the way in which people interact in a market through the use of a tool called the market mechanism.
The market mechanism is the technical name given to the way in which consumers and producers interact to determine what price a good or service will be exchanged for, and how many times that exchange will take place.
Economists have spent a great deal of time examining this process, and many different theories have been developed. In the pages which follow, you will be able to read about the laws of demand and supply, and the way in which they can interact to reach equilibrium. The results of this interaction are all possible due to the over-riding concept of consumer sovereignty.
Consumer sovereignty is the assumption which states that in a freely operating market it is consumers who will ultimately decide what is produced and in what quantities. This is because suppliers will respond to the actions of consumers.
For example, imagine that you own a small corner store. Each week you buy 100 bananas, and each week you sell exactly 100 bananas. Then one week you only sell 90. The following week you only sell 80, and the week after that you only sell 75. After several weeks you are still selling approximately 75 bananas each week, and then throwing the rest away. What would you do?
Obviously you would buy a lower quantity – you may start buying only 75 bananas. This way you do not waste money on fruit that you will not sell. You have also responded to the actions of consumers. Their change in spending patterns ultimately caused you to alter what you offer for sale in your store.
As you read through the following pages, remember to keep in mind that in a freely operating market like we have in Australia the concept of consumer sovereignty is paramount!
