36. What is market equilibrium?

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.

But such situation is impossible on the practice: many factors have influence on demand (for instance, incomes, substitutes) and on supply (production costs, productivity). That’s why equilibrium always changes in dynamics.

When the price is above the equilibrium point there is a surplus of supply; when the price is below the equilibrium point there is a shortage in supply. Different supply curves and different demand curves have different points of economic equilibrium.

37. What messages do price increases and decreases send to producers of goods and services?

Price increases and decreases send messages to suppliers and potential suppliers of goods and services. This situation is known as the production-motivating function of prices. As prices rise, the increase serves to attract additional producers. The higher price in a short period of time means larger profit on conditions that production costs remain stable. The profit is enough in order to stay in business. Similarly, price decreases drive producers out of the market. The lower profit lead to severe competition among the sellers and only the strongest ones will survive. In this way prices encourage producers to increase or decrease their level of output.

The second important economic function of prices is rationing of scarce resources: the more scarce something is, the higher its price will be, and the fewer people will want to buy it.

38. What is money?

Basically, money is what money does. This means that money can be any substance that functions as a Medium of Exchange, a Measure of Value, and a Store of Value.

As a medium of exchange, money is something generally accepted as payment for goods and services. As a measure of value, money expresses worth in terms that most individuals understand. Money also serves as a store of value. This means goods or services can be converted into money that is easily stored until some future time.

The most familiar forms of money are coin and currency. The term coin refers to metallic forms of money. The term currency refers to paper money issued by government. Modern money has the same characteristics that primitive money had. Modern money is very portable, durable, doesn’t go out of circulation unless it is lost, rates high in divisibility, isn’t stable in value.

39. What forms of money are in use in the world today?

The different forms of money are in use in different countries today. The most familiar are coin and currency. The term coin refers to metallic forms of money. The term currency refers to paper money issued by government. Coins and paper money are called cash. A share of cash in gross money turnover isn’t more than 10-30 per cent in highly-developed countries because dominant position is occupied by electronic money.

Money functions as a Medium of Exchange (something generally accepted as payment for goods and services), a Measure of Value (it expresses worth in terms that most individuals understand), and a Store of Value (goods or services can be converted into money that is easily stored until some future time).

Modern money has the same characteristics that primitive money had. Modern money is very portable, durable, doesn’t go out of circulation unless it is lost, rates high in divisibility and isn’t stable in value.