The self-regulating mechanism of the market is determined by the interaction of supply and demand in a competitive environment. Thanks to this interaction, it is determined in what quantities and at what prices goods and services are most in demand for the consumer.
Self-regulation mechanisms
The main condition for self-regulation of the market is the presence of free competition, which ensures the desire of manufacturers to produce goods of higher quality at a more affordable price. The mechanism of competition drives unprofessional and ineffective production out of the market. This need determines the development of innovations in production and the most efficient use of economic resources. This feature of the market ensures the development of scientific and technological progress and an increase in the standard of living.
The market as a self-regulating mechanism is a process of optimal allocation of resources, location of production, combination of goods and services, exchange of goods. This process is aimed at striving for a balanced market, i.e. balance between supply and demand. Depending on general economic and local factors, market demand is formed, which changes under the influence of scientific progress, the effect of "saturation", and changes in tastes. The flexible pricing policy of a competitive market allows manufacturers to constantly adapt to changing demand conditions, striving to bring the most demanded offer to the market.
There are two scientific approaches to explaining market self-regulation. These approaches are reflected in the Walras model and the Marshall model. Leon Walras's model explains the presence of market equilibrium by the market's ability to quantitatively substitute supply and demand. For example, in the case of low demand for a product, producers reduce prices, after which the demand for the product will increase again - and so on until the quantitative ratio of supply and demand is equalized. Excess demand will allow producers to raise prices, which will reduce demand - and so on again until an equilibrium between supply and demand is achieved.
Alfred Marshall's model bases market equilibrium on the effect of price on supply and demand. So, if a product is overpriced, the demand for it falls, after which the manufacturer lowers the price, and the demand for the product increases - and so on until the price of the product becomes as conditioned as possible. This optimal price is called the equilibrium price.
The concept of the "invisible hand of the market"
The founder of modern economic theory, Adam Smith, called the process of self-regulation of the market the "invisible hand" of the market. According to Smith's theory, each person in the market seeks for his own benefit, but, striving to meet his needs, ensures the achievement of the maximum positive economic effect for the whole society and the market as a whole. The automatic influence of the “invisible hand of the market” ensures the availability in the market of the quantity of goods and services necessary for consumers of the quality and assortment they need. The invisible hand effect is explained by the interaction of supply and demand and the achievement of market equilibrium.
