A mixed economy.

Most modern economies are mixed as they are partly regulated by market forces and partly by governments. When governments influence economic decisions of economic agents, we talk about government intervention in the economy. The degree and forms of intervention differ from country to country.

Market forces: supply and demand

Adam Smith advocated the principles of a free market economy with no government regulation. He called the market forces – supply and demand – an ‘invisible hand’ which can regulate the economy better than any governments.

Demandis the willingness and the ability of consumers tobuy goods and services. In other words, demand is related to

people’s unlimited wants and influences consumers decisions what, how much and at what price to buy.

The demand curve is a graph which shows the relationship between the price of a good and the quantity of the good demanded. Price is measured on the vertical axis; quantity demanded is measured on the horizontal axis.

Figure 3.1Demand curve.

A

P¹

B

P²