g. Markets as dynamic systems

One thing the market is able to do very well is act as a powerful and efficient information system. Changes in consumers' tastes are quickly communicated to producers via market prices. The search for profits drives producers to offer new products or services and make them in more cost effective ways. An example of this is the way in which consumers' concern over the link between high cholesterol and heart attacks has led to the appearance of cholesterol testing units at chemists and health food stores in the UK.

Competition and the need to respond to and, if possible, anticipate consumer demand lead to a system which provides the maximum choice for the lowest possible cost; a system which is flexible, dynamic and efficient.

Real world markets

Some economists, such as Hayek, argue that in the real world most markets will be in a constant state of flux - always adjusting towards equilibrium but rarely actually reaching it. In this analysis, it is the market's ability to act as an information system that is important rather than its ability to produce a single equilibrium price.

Take our market for cosmetic dental services. If the market were free and competitive, then different dentists would offer different mixes of service, and some dentists would be more skilful than others. The skilful dentists offering the services consumers want would have lots of customers and would be able to charge higher prices than their competitors. This would force the other dentists to modify the services they are selling to try to capture back the consumers. This process of competition would be continuous, particularly as other factors influencing demand and supply, such as levels of income or the state of technology, are likely to be changing as well.

This kind of analysis has led some economists to argue that health care should be provided by the market not by the state. We look at this in the next section 'Health care - case for a free market'.