33. What role do prices play in a market economy?

Prices play an important role in all economic markets. If there were no price system, it would be impossible to determine a value for any goods or services. In a market economy prices act as signals. A high price, for example, is a signal for producers to produce more and for buyers to buy less. A low price is a signal for producers to produce less and for buyers to buy more. Prices serve as a link between producers and consumers. Prices, especially in a free market system, are also neutral. That is, they favour neither the producer nor consumer.

Instead, they come about as a result of competition between buyers and sellers. The price system in a market economy is surprisingly flexible.

34. How do sellers and buyers use prices?

In a market economy prices act as signals. A high price, for example, is a signal for sellers to sell more and for buyers to buy less. A low price is a signal for sellers to sell less and for buyers to buy more. Prices serve as a link between producers and consumers. Prices, especially in a free market system, are also neutral. That is, they favour neither the producer nor consumer.

Instead, they come about as a result of competition between buyers and sellers. The price system in a market economy is surprisingly flexible. Unforeseen events such as weather, strikes, natural disasters and even war can affect the prices for some items. When this happens, however, buyers and sellers react to the new level of prices and adjust their consumption and production accordingly. Before long, the system functions smoothly again as it did before.

35. Why do buyers and sellers have the opposite intentions and hopes?

In economic markets, buyers and sellers have exactly the opposite hopes and intentions. The buyers come to the market larger to pay low prices. The sellers come to the market hoping for high prices. For this reason, adjustment process must take place when the two sides come together. This process almost always leads to market equilibrium — a situation where prices are relatively stable and there is neither a surplus nor a shortage in the market.

In a market economy prices act as signals. A high price, for example, is a signal for sellers to sell more and for buyers to buy less. A low price is a signal for sellers to sell less and for buyers to buy more. Prices serve as a link between producers and consumers. Prices, especially in a free market system, are also neutral. That is, they favour neither the producer nor consumer.

36. What is market equilibrium?

Market equilibrium is a situation where the supply of an item is exactly equal to its demand. Since neither there is surplus nor shortage in the market, there is no innate tendency for the price of the item to change.

The price at which goods and services actually change hands is known as the equilibrium, or market price.

In economics, the term equilibrium is used to suggest a state of "balance" between supply forces and demand forces. For example, an increase in supply will disrupt the equilibrium, leading to lower prices. Eventually, a new equilibrium will be attained in most markets. Then, there will be no change in price or the amount of output bought and sold — until there is an exogenous shift in supply or demand (such as changes in technology or tastes).. That is, there are no endogenous forces leading to the price or the quantity.