• People make or do things to earn a living (among other reasons) - and hence SUPPLY something or other;
• People earn livings in order to survive, prosper and enjoy themselves - to have a life - by buying the things and services other people produce, and hence exhibiting a DEMAND for things and services
  
• But the livings suppliers or producers can make depends on how badly other people want what they do, and how much they are prepared to pay for those things and services - the DEMAND includes a willingness to pay for things and services;
• The more expensive in time, effort and resources things are to produce, the more they will cost, otherwise the suppliers cannot make decent livings producing them - the SUPPLY includes a concept of peoples' willingness to accept payment in return for the provision of the good or service
  
• The more people want and are prepared to pay for, the more people can make livings out of producing them, and the more resources they can devote to their production;
• There is a CIRCULAR FLOW OF INCOME - from producers (firms) to consumers (households) [who may be the same people] - Economics simplifies the system by considering households as selling their services (labour etc.) to firms in return for income, and spending at least some of this income buying things and services from firms.
• Peoples' income is earned as a return to the resources (also called Factors of Production) which they rent out to the firms:  Land, Labour, Capital and Management.
• These Factors earn returns as wages and salaries, rents, returns on investment (dividend payments and shares of profits).
• The ways and means that people use to trade their own labour (and ownership of land and capital) for goods and services are called MARKETS - processes through which people agree to exchange things (usually through the medium of money).

Any Economy can be divided into two groups:

• Firms - the suppliers of goods and services & the demanders of factors of production
• Households - the demanders of goods and services & the suppliers of factors of production
• There is a flow of Income (and spending) in one direction
• And a flow of goods and services in the opposite direction.
• Demands for and Supplies of goods and services are balanced in the markets for these goods and services
• Demands for and Supplies of factors of production are balanced in the Factor markets.

• each individual pursues his or her own self-interest;
• but people are in competition with one another for their livelihoods;
• people can become better-off than otherwise by specialising in what they do best (compared with what else they might do) and trading the products (or services) with others.

If there are too many butchers - the supply of meat from the butchers is too great in the face of demand by customers -  then the prices they can charge will fall so low that some (at least) do not make enough to live on, and some will give up and seek something else to do. Prices and incomes for those remaining will then rise.

In the end, the market system should settle down so that each makes as great an income as possible, which is at least as much as each could make doing something else - in their next best alternative form of occupation. In so doing, customers (consumers) will find that they are supplied with as much as they are willing to buy (given their income) at a price which they are willing to pay. If not, there will be profit opportunities available for someone to increase supplies of those things which consumers want in greater quantities than are presently available.  If consumers are willing to pay more than it costs to produce something, then someone will find it profitable to increase supplies.

Because people are different, some people are better at doing one thing than another. In addition, people have different resources to work with - their land and capital (plant and equipment) is different.  As a result, it will generally pay people to specialise in production of one thing - the thing they are good at relative to what else they themselves might do - and then trade this output with others (producing different things), so making everyone better off than they would be if they all tried to be self-sufficient.  Notice, especially, that specialisation makes sense even for those who are absolutely worse at doing everything than their neighbour or potential trader.  Even these people (or groups or regions) will be better at doing some things than doing other things.  They will be comparatively good at something - compared with the other things they themselves could do.  They should specialise according to their own comparative advantage.

If this proposition is not immediately convincing, just consider how busy you would be, and how little leisure time you would have, if you tried to be totally self-sufficient. Would you consider yourself to be better-off without the possibility of trade and exchange?  If so, why are you not already practicing complete self-sufficiency? I know you are not, because if you were, you would not be reading this.

Economic Systems as evolutionary systems.

Finally, and not least importantly, I think it might be helpful to emphasise a concept of the economic system which is not well explained in most text-books (or even well understood by many practicing economists).  Ungoverned economic systems (the unfettered private market) can be seen as little more than natural selection, survival of the fittest and natural evolution written another way.

(Household) Businesses seek to perpetuate themselves by supplying what other people want. Their success in doing this provides them with an income to spend (growth) and an asset base or store of wealth which allows them to replicate - passing on their recipes for success to their heirs and sucessors.

This pursuit of self-interest (the selfish gene principle applied to social systems) can and probably will generate an increasing efficiency and effectiveness in the transformation of raw materials to meet the needs of the surrounding populations - the Adam Smith story.

Notice, this concept of competition is somewhat different from some of the more normal uses of the word. This is NOT a winner-takes-all system.  The richer the environment (economy) the more diverse and differentaited the associated ecology (economic structure) and the more niches and specialist adaptations there are likely  to be. Uniformity and homogeneity are not natural climax conditions, and should not be expected to be the final outcome of pursuit of profit, on which ungoverned market systems depend - as the measure of survival and replication capacities. To be sure, excessive profits being earned will signal opportunities for other species (different ways of doing things, other businesses) to expand into this territory. The outcome will be more diversity, and more use of the surrounding environment (economic resources). The 'perfect competition' notion of economic textbooks does not make this point at all clear.

So, what makes social evolution different from natural evolution? The key difference is the human ability to choose who lives and dies, who prospers and who is declared illegitimate. Natural selection is governed by the exogenous bio-physical laws - life and death - which cannot be altered by the components of the system. In human, or cultivated, selection is supposedly self-governing - we get to decide (collectively) what does and does not count - the critical outcome of the expulsion of Adam and Eve from the Garden of Eden (as the end of natural selection). We get to choose which bits of natural selection we will accept, and which we will reject and modify. We are still trying to learn how best to do this - we have not, compared with our animal cousins, had much time to develop and practice these skills.  Most of rural development and resource management can be seen as problems associated with how to do this more effectively and equitably, and ultimately sustainably than we have so far managed.

This brief outline of the story of economic competition according to Adam Smith introduces seven key economic concepts:

• supply - the quantities of products and services producers are prepared to provide and the prices they are willing to accept - to cover their costs and provide an income comparable with what they could earn doing something else;
• demand - the quantities of products and services customers (consumers) are willing to buy and the prices they are willing to pay for them;
• markets - the processes through which suppliers and producers exchange their products with customers and consumers - that is, a broader and more inclusive concept than simply market places or market halls.
• market equilibrium - achieved when supplies are balanced with demands at a common price accepted by both sides (suppliers and customers) as being reasonable (or unavoidable);
• circular flow of income - one person's spending becomes another's revenue (and thus income) through the activity of trade and exchange through markets.
• opportunity cost - the cost of being in one occupation (or doing one thing) rather than another. If the opportunity cost is not covered by the revenues earned (or benefits gained), in addition to the direct or cash costs of the activity, then we can expect people to change what they do in favour of the alternative - the next best opportunity.
• gains from trade (or exchange) and comparative advantage - that people (or localities, regions or countries) can be better-off by specialising in what they are relatively good at, compared with what else they themselves might do, and trading with each other, rather than seeking to be entirely self-sufficient.  People will be better off if they specialise according to their comparative advantage.

• The market mechanism works much like the system of natural selection and competition - new innovations and ways of doing things are tested in the market place against peoples' willingness to pay.  Those which are successful survive and replicate;  those which are not, perish (i.e. find something else to do, or other ways to survive).
• The selection criteria match the costs of provision (of production), which include opportunity costs, to the willingness to pay for the provision.
• The resulting equilibrium price matches supplies with demands, and represents both an indication of the value of the product or service to the consumer or user and also the full costs of providing the good or service incurred by the supplier, so that he/she can earn a reasonable living from the supply, given the alternative occupations available to the supplier.
• This equilibrium is continually adapting to changing consumer demands (which depend, inter alia, on incomes, tastes and preferences, and perceptions of the way the world is and works) and on changing supply conditions, as production possibilities and technologies change.
• Price is the key signal through which adaptation happens: prices which are high relative to the underlying costs of production are an incentive to increase supplies and vice versa.
• Incomes (and thus wealth) are the source of both willingness to pay (the demand price) and willingness to provide (the supply price).  It is incomes which provide people with their 'votes' in the market system as to what is wanted and what is not.
• Incomes depend on peoples' endowments of resources or factors of production (land, labour, capital and management skills)  It is through employing these resources that people earn their incomes. But the resources people have (their endowments) are determined through accidents of birth, and then more or less capriciously augmented or depleted through success or failure in the market selection processes, not all of which are under the control of any one individual.
• Government is the process through which humans elect, erect and enforce the rules of the markets and other human transactions.   It is also the way in which we as humans choose to adjust the mechanisms of natural selection as worked out through the markets, and also adjust the resource endowments of people so that incomes and economic activity are distributed in more socially acceptable ways than would be the case if markets ruled alone.

• Those who wish to pursue careers in the market - where an understanding of how markets work is likely to be valuable;
• Those who wish to earn their livings by modifying or adjusting the way in which the market works (presuming that you are willing to co-exist with it) - where an understanding of how markets and government interacts is likely to be valuable;
• Those who are determined that the market plays no sensible or useful role in human affairs and the pursuit of human happiness - where it will definitely pay to know your enemy!