We’ve already explored what the economy is as a system and how economic actors interact within it. Now let’s talk about how the laws of the market actually work.
Here's where it begins: https://drukarnia.com.ua/articles/grasping-the-economy-as-a-simple-system-X7vI5
Let’s go back to our example and look closer at one system element. Imagine a malfunction at the bakery: broken machines, human error, lots of wasted product. As a result, the cost to produce a single loaf of bread becomes 200 UAH. The bakery, aiming to make even a small profit, sets the price at 205 UAH. But customers refuse to buy — the price is too high.
So, price is determined by what’s in the customer’s mind — how much they’re willing to pay for the product.
In other words, when we look at the economic system as a whole, the value of a product is not defined by how costly it was for the bakery to produce it or how much effort was required to build a combine harvester. Value is defined by the consumer’s willingness to pay. This is one of the fundamental laws of the market — the Law of Value.
Now consider the opposite: if the bakery has optimized business processes (ingredient purchasing, delivery logistics, etc.), the cost to bake the bread will be low, and so will its price. The cheaper the bread, the more customers will buy. This illustrates the Law of Demand.
Price also depends on the quantity of a product in the market. If many producers offer the same product — say, bread — the price goes down. The first harvester introduced to the market may be extremely expensive, but as more producers enter the market, the price drops. This reflects the Law of Supply.
These same laws apply to the labor market. Wages depend first on how in-demand a profession is, and second on how many specialists are available. If there is demand for 2 million programmers and only 1 million exist, their salaries will be very high. But as more programmers enter the labor market, their average salary will go down.
⚠️ These are inviolable laws of a market economy.
What happens when these laws are broken?
Let’s look at a real example.
On January 2, 2022, the Ukrainian Cabinet introduced price controls on certain food items. The markup on sugar, buckwheat, pasta, eggs, oil, and bread was capped at 10%.
Let’s suppose price controls are acceptable, to protect seniors from rising prices and starvation. What happens next? On the surface, seniors are happy (but not for long). Meanwhile, businesses become unprofitable due to inflation increasing the cost of raw materials, while prices remain fixed.
What do businesses do? They close. Or they switch to other products without regulation. Or they go underground, selling the same goods at real prices but without paying taxes. As a result:
The economy shrinks instead of growing.
The government collects less tax revenue and cannot even index pensions or salaries, let alone raise them.
Consumers — including our seniors — become poorer due to inflation, and shelves go empty. The product still exists but only "under the counter" — at real prices, on the shadow market, where market laws still apply.
Sound familiar? That’s life in the USSR. Those who lived through it remember.
📌 That’s why price controls are harmful. They create new problems rather than solving existing ones. You cannot isolate one element of a system — the consumer, business, or government — without distorting cause-and-effect relationships and disrupting the logic of the system as a whole.
Even Lao Tzu said:
“When man divided the world into parts, he ceased to understand the laws — not only divine, but human.”
#EconomicsMadeSimple #EconomicThinking #MarketLaws #CivicLiteracy #OlhaPizhuk #PublicPolicy
