1.2 The Complexity of Modern
Economies LO 2, 3, 4
A market economy is self-organizing in the sense that when
individual consumers and producers act independently to pursue
their own self-interest, the collective outcome is coordinated.
Incentives and self-interest play a central role for all groups of
decision makers: consumers, producers, and governments.
Individual consumers are assumed to make their decisions in an effort
to maximize their well-being or utility. Producers’ decisions are
assumed to be designed to maximize their profits.
The interaction of consumers and producers through goods and factor
markets is illustrated by the circular flow of income and expenditure.
Modern economies are based on specialization and the division of
labour, which necessitate the exchange (trading) of goods and
services. Exchange takes place in markets and is facilitated by the use
of money.
Driven by the ongoing revolution in transportation and
communications technology, the world economy has been rapidly
globalizing for several decades.