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Module 1: The competitive market system

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Behaviour of Economic Participants

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Economics - Behaviour of Economic Participants

Behaviour of Economic Participants

A fundamental conflict exists between consumers and producers. Consumers
are motivated by satisfaction, known as utility in economics, and as such
want low prices. Producers are motivated by profit and, therefore, want
high prices. The price mechanism resolves this conflict, and in so doing,
performs a rationing function.

The equilibrium price will attract a certain number of producers who are
happy to make normal profit. These producers require resources to make the
goods and services demanded by consumers. Producers who are willing to pay
the market price for the resources will do so. This forces the producers to
allocate the resources efficiently.

The market price also allocates the product in an efficient way. If there
is a shortage, prices begin to rise, forcing some consumers to leave or
reduce their consumption. The product will be distributed to the consumers
who have the greatest need or desire for the product as shown by their
willingness to pay the equilibrium price. As Adam Smith observed in 1776,
when producers and consumers act in their own self-interest, the welfare of
society in general is enhanced.

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