How the Market Economy Works. The central function of every economic system is to allocate its limit-

The central function of every economic system is to allocate its limit-

ed resources to satisfy the needs and desires of its people. The amount of

goods produced depends upon the amount of resources available and on

many other factors. At the same time, the people in a society have a great

variety of needs and wants. Some of these, such as the need for food and

shelter, always exist. Others, such as the desire to own particular style

or clothing, continually change. Economies generally try to maintain a

balance between the goods and services available from their producers

(supply) and the needs and wants of their customers (demand).

Demand is the quantity of goods or services consumers are willing

and able to buy at a given price. Usually the quantity demanded chang-

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es as price changes, and we can use a demand curve to represent this

change. The demand curve is a graphic representation of the relation-

ship between various prices sellers charge for goods or services and the

amount of those goods or services buyers will desire to buy at a certain

price. Each point along the curve represents a different price—quantity

combination. A demand curve slopes downward from left to right, re-

flecting the fact that the quantity of a product demanded varies inversely

with the price. This is called the law of demand. (See fig. 1)

Fig. 1. Demand curve

Supply is the quantity of goods or services marketers are willing and

able to sell at a given price at a given period of time. The supply curve,

or schedule of supply, graphically represents the amount of goods or ser-

vices marketers will supply at various prices. A supply curve shows that

as prices become more attractive to suppliers (marketers), those suppli-

ers will try to provide more of the good or service. Each point along the

curve represents a different price-quantity combination. A supply curve

slopes upward from left to right, reflecting the fact that the quantity of a

product supplied varies directly with the price. This is called the law of

supply. (See fig. 2)

The intersection of the supply and demand curves determines the

equilibrium price and the equilibrium quantity. Thus, at any price above

the equilibrium price, the quantity supplied exceeds the quantity de-

manded and the price tends to fall. At any price below the equilibrium

price, the quantity demanded exceeds the quantity supplied and the

price tends to rise. At the equilibrium price, the quantity supplied pre-

cisely equals the quantity demanded, and hence there is no tendency for

the price to change. (See fig. 3)

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Fig. 2. Supply curve

Fig. 3. Equilibrium point

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Read the text. Be ready to define the main idea of the text. In each paragraph, find the

topic phrase or sentence and those related and unrelated to it.