Market Price

MARKET PRICE

MARKETS:-

Markets exist for the vast majority of goods and services. Markets can be defined broadly or narrowly. For example there are the consumer goods, capital goods, commodities, financial and labor markets. Each of these broad categories can be broken down into more specific markets. For example within the financial market there are markets for foreign exchange and for long term loans, within the corn modifies market there are the markets for corn and copper and within the consumer goods market there are the markets for clothes and cars. Prices usually play an important role in these markets.

EQUILIBRIUM PRICE AND OUTPUT:-

In the absence of government intervention, price is determined by demand and supply. The equilibrium price is where demand and supply are equal. At this point there are no forces causing the price to change. The quantity which consumers want to buy will equal the quantity which producers want to sell at the current price.

At prices higher than the equilibrium price the quantity supplied will be greater than the quantity demanded and the excess supply would oblige sellers to lower their prices in order to dispose of their output. For example, if price is 40p supply would exceed demand by 110. This situation, illustrated in Figure 11.2, where supply exceeds demand and there is downward pressure on price is sometimes described as a buyers’ market.

At prices lower than the market price, e.g. 2Op, the quantity demanded will exceed the quantity supplied, giving rise to a condition known as a sellers’ market. This is illustrated in Figure I I .3.

The equilibrium or market price is 3Op, because at any other price there are market forces at work which tend to change the price.

CHANGES IN EQUILIBRIUM PRICE:-

As market prices are determined in free markets by the interaction of demand and supply, changes in market prices are due to changes in demand or supply, or both.

THE EFFECTS OF SHIFTS IN DEMAND:-

The effects of changes in demand may be stated in terms of economic predictions.

• In the short run, other things being equal, an increase in demand will raise the price and this, in turn, will cause an extension in supply.

• In the short run, other things being equal, a decrease in demand will lower the price and cause a contraction in supply.

Figure I I .4 illustrates the effects of an increase in demand. OD is the original demand curve so that the equilibrium price is P and quantity Q is demanded and supplied. If demand increases from DD to D’D’ the immediate effect is to cause a shortage (shown by the dotted line) at the ruling price P. This shortage will cause the price to be bid upwards and supply to extend until a new equilibrium price is established at P’. The quantity demanded and supplied is now Q’.

Figure I I .5 shows a decrease in demand. The demand curve shifts to the Left (D ).There is a surplus at price P (equal to the horizontal distance between the demand curves). Suppliers will be obliged to lower prices to Pi in order to clear their stocks. This fall in price will cause a contraction in supply.

THE EFFECTS OF SHIFTS IN SUPPLY:-

The effects of changes in supply may also be summarized in the form of two economic predictions:

• in the short run, other things being equal, an increase in supply will lower the price and this in turn will cause an extension in demand:

• in the short run, other things being equal, a decrease in supply will arise the price and cause a contraction n demand.

Figure I I .6 demonstrates the effects of an increase in supply. The supply curve moves from 55 to S 5. The immediate effect is a surplus (shown by the dotted line) at the ruling price P. This surplus will force price downwards to P and the lower price will result in an extension in demand. The quantity