32. What factors is supply determined by?

The law of supply states that the quantity of an economic product offered for sale varies directly with its price. If prices are high suppliers will offer greater quantities for sale. If prices are low, they will offer smaller quantities for sale.

supply is determined also by factors other than price, the most important being the cost of production and the period of time allowed to supply to adjust to a change in prices. In economic analysis, these other factors are frequently assumed to be constant. This assumption enables supply and price to be related in what is called the «supply function». The supply curve is the graphical representation of the supply function, i.e., of the relationship between price and supply. It shows us how many units of a particular commodity or service would be offered for sale at various prices, assuming that all other factors (such as the cost of production, the period of time involved) remain constant.

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

In economics, the term «price» denotes the consideration in cash (or in kind) for the transfer of something valuable, such as goods, services, currencies, securities, the use of money or property for a limited period of time, etc.

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. Prices perform two important economic functions: they ration scarce resources, and they motivate production.

34. How do sellers and buyers use prices?

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. Prices serve as a link between sellers and buyers.

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

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 because the buyers come to the market larger to pay low prices instead the sellers come to the market hoping for high prices.

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. But it must be kept in mind that a consumer always wants to get the better product for the lowest price. At once the product will be produced only if its price satisfies the producer or the seller.