In section 1.1 we learned that economics is concerned with understanding how a society allocates resources: what it chooses to produce, how it produce and for whom it produces. But how are these determinations made? Which individuals or agencies, exactly, decide what, how and for whom? We can identify three influences on resource allocation in most economies:
Firms
Consumers
Government
Firms, consumers and government interact through markets. A market is simply a nexus, a means of connection for these different groups. It can of course, in the familiar sense, be a localized physical entity where buyers and sellers literally meet together Billingsgate market in London, for example. More usually when economists fish speak about markets they are referring to the process of interaction between producers, consumers and, as we shall see, government – as in the EUropean car market, the UK insurance market, and so on. Let us consider the role of each of the three key agents in the market, beginning with firms.