Demand and Supply Notes

H2 Economics Chapter 2 Notes This document is intended as a summary of the points provided in the NJC 2024 H2 Economics Chapter 2 Seminar Notes. It is to be used as a study guide to provide a structure for studying the Chapter 2 Notes. 1 The Free Market Economy The Free Market Economy In Chapter 1, we studied scarcity as the central economic problem, where unlimited wants exceed limited resources, necessitating decisions on resource allocation to maximise societal welfare. We briefly touched on how rational agents weigh benefits and costs to make decisions that enhance welfare. In Chapter 2, we delve into how this process unfolds in a free market economy. Below are the features of a free market economy 1 . ● Freedom of Choice and Enterprise: Households and firms undertake all decisions. Consumers are free to decide what to buy with their incomes (consumer sovereignty). Workers are free to choose where and how much to work. Firms are free to choose what to sell and what production methods to use. ● Pursuit of Self-Interest: Economic activity in the free market system is driven solely by self-interest. Each economic agent hence attempts to maximise their net private benefit. Hence, firms try to maximise profits, consumers try to maximise satisfaction and workers try to get jobs that yield as high a return as possible and governments aim to maximise societal welfare. ● Perfect Competition: Competition here refers primarily to price competition. This means that in the market for each commodity, there are a large number of buyers and sellers, each having an insignificant share of the market and hence having negligible influence on the market demand and supply. No single buyer or seller is influential enough to control a market and exploit other sellers or buyers. ● Private Ownership of Property: Households have the right to own labour, land, capital and entrepreneurship resources. Owners of factors of production thus have the right to the income (wages, rent, interest and profits respectively) earned from firms’ use of these factors of production. 1 The other types of economy are the command economy — in which the allocation of resources is entirely determined by the government — and the mixed economy — in which the allocation of resources is determined primarily by the free market, with government intervention in ma