price and market equilibrium

what is the definition of price?

the sum of money you have to pay for a good or service. It is determined by interaction of supply and demand

Is price a reflection of worth?

although price is used to indicate worth, it is not a accurate measure of worth in all cases. One cannot state a price of a product that all people would agree with. This is because we are all prepared to pay different prices according to our situations

why do we need a way on pricing items based on their worth?

because we have scarce resources in the world

what is worth?

how much you value something. It varies between different people, due to fashion and interests or in different situations

What is efficiency?

The optimal production and distribution of scarce resources

what is the best production level?

Where average production costs are at their lowest and the profit margin is at its highest.

what is price in a market economy?

the means by which these scarce resources are allocated between competing users

what are the 3 functions price fulfils in determining efficient distribution of resources?

signalling, transmission of preferences and rationing

what is signalling?

Prices change to signal where resources are needed. if prices rise, this shows that more resources are required, whereas if they fall than a fewer is needed.

what is transmission of prefrences?

Through their choices, producers can send information to resource suppliers about their changing needs. Higher prices will encourage owners of resources to supply more

what is rationing?

Prices help to ration resources. If resources are scarce, the price rises so only those willing and able to pay the price are allocated the resources

what is equilibrium price and quantity?

Where the quantity supplied exactly matches the quantity demanded

what is the purpose of a market?

To set a price that is acceptable to both the buyer and the seller.

what is the determination of price?

The interaction of the free market forces of demand and supply to establish the general level of price for a good or service

what is allocation of resources?

How scarce resources are distributed among producers, and how scarce goods and services are allocated among consumers

how do markets distribute resources?

They distribute scarce resources among producers and determine how the resulting goods and services are allocated among consumers. In a market system, Scarce resources are rationed , incentives are given to producers to supply more and signals are offered to both producers and consumers and the owners of the factors of production. In a market economy, consumers will have the power to influence resource allocation as their spending decisions wills end signals to producers.

what are market forces?

Factors that determine price levels and the availability of goods and services in an economy without government intervention

how do market forces affect the market equilibrium?

-Market forces push prices when demand rises or supply falls

-Market forces force prices down if supply increases or demand decreases