8. Market price

1.What is a price?

Price is the money value of goods and services.

2.What is a price system?

Price system: an economic system in which resources are allocated as a result of the interaction of the forces of supply and demand.

3.What is a price for any commodity determined by in a free market?

Price for a commodity is a reflection of supply of and demand for this commodity.

4.What functions do prices perform?

•Price increases and decreases also send messages to suppliers and potential suppliers of goods and services.

•Prices act as signals to buyers and sellers.

•Prices encourage efficient production

•How the price system determines how society’s output will be distributed among the people.

5.Why do prices act as signals to buyers and sellers?

A product’s demand curve is an important determinant of how much firms will produce, since it reflects the amount of the product that will be in demand at each price. Low prices are signals to buyers (consumers), who can now afford to purchase the things they want. When prices are high enough, they send a signal to sellers (producers), who can now earn a profit at the new price.

6.What is the producers’ main incentive?

The producers’ desire for profit leads them to introduce new production methods to lower production costs.Firms that are efficient will produce more goods with fewer raw materials than firms that are inefficient. Thequestforgreatereffciencymotivates producersto succeed in competitive activity.

7.Why does the price system determine each person’s income?

Under the price system, each person’s income is determined in the market place. Some people are endowed with talent, skill, intelligence, education or special training and earn more, on the average, than those who are not endowed with such qualities. What the worker can buy with his wage will depend, in turn, upon the prices of the goods and services the worker would like to own. Consumers who are willing and able to pay the equilibrium price (or more) buy a desired product, while those who are unwilling or unable to pay this price have to do without this product.

8.What is an equilibrium price?

An equilibrium price (also known as a market price) is one at which each producer can sell all he wants to produce and each consumer can buy all he demands.

9.What is excess supply?

At prices above the equilibrium price, the quantity supplied exceeds the quantity demanded, so a surplus or excess supply develops.

10.What is a shortage and when does it develop?

At prices below the equilibrium price, the quantity demanded is greater than the quantity supplied, and a shortage or excess demand develops.

12.What does a decrease in demand lead to?

A decrease in demand leads to a decrease in both the equilibrium price and equilibrium quantity.

13.What does an increase in supply result in?

An increase in supply produces a higher equilibrium quantity but a lower equilibrium price.

9. MARKETS AND MARKET STRUCTURES

1.What is a market?

Market is any arrangement people have for trading with one another.

2.What do economists mean by the market structure?

The market structure is defined in terms of the number and the power of the buyers and sellers, the nature of the product (product differentiation), barriers to entry and exit, and availability of information.

3.What are the principal types of market structures?

The principal kinds of market structures are perfect competition, monopolistic competition, oligopoly, and monopoly

4.What is perfect competition?

A market for uniform products in which there many buyers and sellers, no one of which is big enough to affect the price, and has full knowledge of market conditions.

5.What are the key characteristics of perfect competition?

To the economists a perfectly competitive market requires all of the following conditions:

A large number of buyers and sellers all engaged in the purchase and sale of exactly the same commodity.

Identical commodity offered for sale.

Each buyer or seller has perfect knowledge of market prices and quantities.

There are no barriers to entry or exit.

6.What is monopolistic competition?

Economists describe a market with many sellers providing similar but not identical products as monopolistic competition.

7.What are the key characteristics of monopolistic competition?

So, monopolistic competition is characterized by:

a large number of firms producing similar but not identical products;

product differentiation;

some restrictions of information about market prices and quantities of goods;

a relatively easy entry to the market.

8.What is product differentiation?

The process of creating uniqueness in products is known as product differentiation.

9.What is oligopoly?

Oligopoly is a term applied to markets dominated by a few (roughly three to five) large firms, each with substantial market control.

10.What are the key characteristics of oligopoly?

The high cost of entry is one reason why some industries remain in the hands of a few sellers.

Competing firms cannot enter some industries unless they pay the patent holders for permission to use the process or find a new method of production not protected by existing patents.

Price competition is less effective where there is oligopoly

11.What is monopoly? Why does monopoly exist?

A monopoly is defined as a single firm producing unique products for which there are no close substitutes.

12.What is imperfect competition?

Imperfect competition describes markets in which sellers have more freedom to determine prices than they have under perfect competition, but less than they have under monopoly.

13.How does imperfect competition differ from perfect competition and monopoly?

Both perfect competition, with its many buyers and sellers, all of whom have perfect knowledge of market conditions, and perfect monopoly, with buyers, who unable to find substitutes and pay the monopolist’s price rarely occur/take place. In reality, most of the nation’s economic activity occurs under conditions of imperfect competition. This market structure consists of industries and markets that fall in between two extremes of perfect competition and pure mono

poly.