Discuss the role of supply, demand, and scarcity in a market economy?

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justaguide | College Teacher | (Level 2) Distinguished Educator

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In a market economy prices are not controlled by the government in any way. The price of any product is determined by its demand from buyers and the supply from manufacturers. As demand increases, there is an increase in price; this attracts new manufacturers to enter the market which leads to a fall in price. A fall in price increases demand but decreases supply. The price and demand ultimately reach an equilibrium level, this is a function of the cost of producing the product and the extent to which buyers feel there is a necessity to buy the product.

Scarcity in economics is considered to be essential for any product to have an economic value. If a product is available in abundance and there is enough for everyone to consume it essentially has no economic value.

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