The market mechanism, said Adam Smith, is guided by an invisible hand. This hand causes prices to rise where there is excess demand, and fall when there is excess supply, and so a new market-clearing price is achieved. We call this ‘market forces’.  In this section we examine how the usual downward sloping demand curve is derived (powerpoint 1) from our twin core concepts of consumer rationality and marginality. Consumers make decisions at the margin according to the law of diminishing marginal utility. They are assumed to be rational utility-maximisers. By the same token producers are cost-minimisers and profit-maximisers (see powerpoint 4 for the upward sloping supply curve). But do markets always ‘clear”? What happens in times of surplus and shortage (see the case study section on the tab above)? Are Governments unwise to interfere with market prices (as China did with the stock market price fall in June – August 2015)? There is more to be said, however. A key concept is that of elasticity – the price elasticity of demand showing the responsiveness of quantity demanded to a price change. Here are some different price elasticities for different products. But as you study the market mechanism remember it is the effect of price changes on total revenue (from a company perspective) and total consumer spending (from the consumer perspective) which is perhaps the critical implication of the elasticity values.

It’s an eternal economic truth ( the second on our list) that you can’t beat the market – although Governments will try (and fail).  Why not examine a case study – such as the housing market in 2015, or the milk market (which has sparked so many protests among farmers in the south west of England this year)?