A market economy determines resource allocation through supply and demand. Private ownership and the "invisible hand" guide production based on consumer spending. Most modern economies combine market and command elements. Competitive markets have many participants and price-taking firms, while non-competitive markets have few dominant firms that influence prices. The law of demand states that as price rises, quantity demanded falls due to less purchasing power and substitution effects. Individual demand reflects a person's preferences, while market demand aggregates all individuals' curves. Factors like income, population, tastes, substitutes, and expectations impact demand shifts.

1. Market economy
• Market economy, countries resources are allocated to deal with the
economic problem
• Tries to satisfy the wants of society
• Economic problem: what, how, who to produce
• Determines allocation of resources within economy
• Should society allow private or state owned goods

2. Types of economies
 There are four types of economies: Traditional economy, Command economy,
Market economy, And mixed economy
 Market economy or free market, all goods privately owned
 Command economy, resources owned collectively and decisions made by
government
 Most economies combine both and are called mixed economy
 Private markets are good at allocating most goods, government can help provide
health care and education and other merit goods.
 Economies can be categorized by decisions making they use

3. Types of economies continued
• Pure market is decided by supply and demand
• Invisible hand of the market
• The consumer is considered sovereign or ‘king’
• Australia markets allocate most resources, government accounts for
around 30% of total production evident in the health and education
sectors

4. Types of economies summary
Characteristics of a market economy include, Supply and
demand determine what, how, and for whom. The
invisible hand of the market allocates resources and
distributes income. The consumer is considered the ‘king’
of the market economy as their spending determines
production

5. Distinction between product and factor markets
• A market exists when buyers and sellers exist
• Market has three elements, buyer, seller, resource
• A product market deals with the buying and selling of a good or service
• Consumers represent demand, producers represent supply
• Factor markets deal in the buying and selling of factors of production
(labour, capital, natural resource)
• Households sell their resources to firms
• People sell their skills and time to firms in exchange for income

6. Summary
Product market deals with firms producing goods and services
and selling them to consumers. In a product market consumers
represent demand and producers, or firms represent supply.
Factor markets deals with the buying and selling of factors of
production or resources such as the labour, capital, and natural
resource markets. In a factor market households represent
supply, while firms represent demand.

7. Distinction between competitive and non-competitive markets
• Markets can be classified by competitiveness
• Competitive market: Large umbers of buyers and sellers, firms are price
takers, similar products, Easy entry (price determined by interaction
• No individual buyer can influence price
• Firms called price takers, must take price that is established
• E.g: Fruit and vegetable, cafes, hair dressing

8. Distinction between competitive and non-
competitive markets
• Non competitive market: small number of firms, product differentiation,
firms are price sellers (market power), entry into market is restricted
• Firms products try to look ‘different’ in consumers eyes
• Use barriers of entry to stop new firms entering market
• Coles and Woolworths duopoly in grocery store market
• Different imperfect markets: monopoly, singular dominant firm
• Oligopoly, few dominant firms

9. Summary
A competitive market is characterised by a large number of buyers and
sellers, firms are price takers, similar products, easy entry into the market. In
a competitive market price is determined by interaction between buyers and
sellers and no individual buyer or sell determining price meaning there is no
market power. A non-competitive market is characterised by, a small number
of firms, product differentiation, firms are price sellers, entry into the market
is restricted. A non-competitive market usually has a big firm with all the
market power determining price.

10. Law of demand
• LAW OF DEMAND: as price rises, quantity demanded falls (inverse
relationship
Why?
• As price rises, buyers have less income to spend on the product.
• As price increases, substitute products become more popular

11. Relationship between individual and market
demand curves
• An individuals demand curve is for a certain product and relates only
to that individual
• A market demand curve is the combination of all individual demand
curves for one product
Individual demand schedule Individuals demand curve

12. Summary
The law of demand: as the price of a good or service rises, its
quantity demanded falls. More of the buyer’s income is used up
and substitutes demand increases. An individual demand curve is
a singular persons demand curve for a certain product in a
market. A market demand curve is the combination of everyone’s
demand curves in one.

13. Factors affecting demand
• Price: Relating to Law of demand, there is an inverse relationship
• Income: Affects individuals demand curve, derived from individuals income
• Population: The more people, the larger the market
• Tastes and preferences: Trends, values, beliefs, fashion affect this, can affect both
individual and market demand curves
• Substitutes and compliments: Compliments goods are required with other goods,
substitutes are similar
• Future expectations: can affect buyers decisions to buy now or later, decreasing
and increasing quantity demanded.

14. Expansion and contraction of demand through price

15. Increase and decrease of demand through non price factors