Instead it refers to the relatively efficient order that emerges
spontaneously out of the many independent decisions made by those
who produce, sell, and buy goods and services. The key to explaining this
market behaviour is that these decision makers all respond to the same
set of prices, which are determined in markets that respond to overall
conditions of national scarcity or plenty. Much of this book is devoted to
a detailed elaboration of how this market order is generated and how
efficiently that job is done.
That free markets usually generate relatively efficient outcomes does not
mean that they are always efficient or that everyone views the outcomes
as desirable or even fair. Free markets sometimes fail to produce efficient
outcomes, and these failures often provide a motivation for government
intervention. In addition, many market outcomes may be efficient but
perceived by many to be quite unfair. For example, we will see that an
efficiently operating labour market may nonetheless lead to large
differentials in wages, with some individuals receiving low incomes while
others receive enormous incomes. So, while a central aspect of economics
is the study of how markets allocate resources efficiently, much emphasis
is also placed on what happens when markets fail in various ways.
Self-Interest and Incentives
Lying at the heart of modern economies are self-interest and incentives
Individuals generally pursue their own self-interest, buying and selling
what seems best for them and their families. They purchase products that
they want rather than those they dislike, and they buy them when it