Summary

Date: 2015-10-07; view: 497.

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Part_4_Lesson_3_Text 4

SUPPLY, DEMAND AND MARKET PRICE

Market economies are directed by prices. As the price of an item rises, sellers are encouraged to increase production, and consumers are discouraged from purchasing the item. When the price falls, the opposite is true. In this way prices send out «signals* to buyers and sellers, keeping the economy responsive to the forces of supply and demand.

In a free market economy, prices are determined by the interaction of the forces of supply and demand. Perfectly competitive markets are those in which many buyers and sellers, with full knowledge of market conditions, buy and sell products that are identical to one another.

Demand is the quantity of goods or services that buyers would purchase at all possible prices. Demand varies inversely with price. That is, at a higher price fewer items would be bought than at a lower one. The degree to which price changes affect demand will depend upon the elasticity of demand for a particular item.

A decrease in demand will result in a decrease in the market price.

A decrease in supply will result in an increase in the market price.

An increase in supply will result in a decrease in the market price.

Supply, which is the quantity of goods or services that sellers would offer for sale at all possible prices at a particular time and place, varies directly with price. In other words,-at a higher price, more goods and services will be offered for sale than at a lower one, and vice versa.

The price at which goods and services actually change hands is known as the equilibrium, or market price. It is the point at which the quantity demanded exactly equals the quantity supplied. Market price can be represented graphically as the point of intersection of the supply and demand curves.

Shifts in demand or supply will affect market price. When everything else is held constant, an increase in demand will result in an increase in market price, and vice versa. Similarly, an increase in supply will result in a decrease in price, and vice versa.