Understanding the Price Mechanisms in Economics

Price Mechanism

System using supply and demand to set prices.

Equilibrium Price

Price where quantity supplied equals quantity demanded.

Allocate Function

Prices distribute scarce resources among competing uses.

Rationing Function

Higher prices limit access to scarce resources.

Signalling Function

Prices indicate resource allocation needs in markets.

Incentives Function

Higher prices encourage increased production by suppliers.

Corn Market Example

High prices motivate farmers to produce more corn.

Market Demand

Consumers' willingness to purchase goods at various prices.

Market Supply

Producers' willingness to sell goods at various prices.

Adverse Supply Shock

Unexpected event reducing supply, raising prices.

Price Elasticity of Demand (PED)

Measure of demand sensitivity to price changes.

Price Inelastic Demand

Demand changes little despite price changes.

Price Elastic Supply

Supply changes significantly with price changes.

Market Clearing

Condition where supply equals demand, no surplus.

Scarcity

Limited availability of resources relative to demand.

Consumer Behavior

How consumers react to price changes.

Producer Behavior

How producers respond to price changes.

Market Signals

Price changes communicate information to market participants.

Resource Allocation

Distribution of resources based on market signals.

Shortage

When demand exceeds supply at current prices.

Surplus

When supply exceeds demand at current prices.

Price Spikes

Sudden increases in price due to demand or supply changes.

Equity Issues

Concerns about fairness in resource distribution.

Market Competition

Rivalry among producers to attract consumers.

Quantity

Amount of goods available or demanded.

Market Demand Conditions

Factors influencing consumer desire for cocoa.

Incomes

Higher real income increases chocolate demand.

Relative Prices

Prices of cocoa substitutes affect cocoa demand.

Consumer Preferences

Shifts in tastes impact cocoa demand.

Derived Demand

Demand for cocoa based on its use in products.

Speculative Demand

Demand driven by expectations of future price increases.

Market Supply Conditions

Factors affecting the availability of cocoa.

Weather Impact

Adverse weather reduces cocoa yields.

Climate Change

Affects cocoa production through rainfall and soil quality.

Capital Investment

Investment in cocoa farming enhances production capacity.

Productivity

Efficiency of cocoa plantations influences supply.

Innovation

New methods improve cocoa growing yields.

Alternative Crops

Growing other crops can impact cocoa supply.

Cocoa Price Signals

Prices inform various market agents about cocoa status.

Supply Chain Vulnerabilities

Disruptions in production areas affect cocoa supply.

Smallholder Farming

Cocoa produced by small farmers with limited resources.

Supply Chain Constraints

Bottlenecks hinder cocoa market flow.

Global Demand Fluctuations

Changes in chocolate consumption affect cocoa prices.

Speculative Factors

Speculators influence cocoa prices through contract buying.

Inter-Related Markets

Supply changes in one market affect others.

Substitute Goods

Products that can replace cocoa in consumption.

Derived Demand for Bricks

Brick demand linked to housing market changes.

Excess Supply

Surplus occurs when supply exceeds demand.

Downward Pressure on Prices

Excess supply leads to price reductions.

Contraction of Demand

Decrease in quantity demanded due to price changes.