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How A Goods' Price Is Determined

1237 words - 5 pages

Use the Supply & Demand model to explain how a good’s price is determined

In ordinary practice, price is the quantity of payment or reimbursement given by one party to another in return for goods and services. It is generally expressed in some form of currency. This essay will discuss how a good’s price is determined using the demand & supply model.

Supply & demand is perhaps one of the most fundamental concepts of economics. It is an economic model of price determination in a market. It ascertains that in a competitive market the unit price for a specific good will fluctuate until it settles at a point where the quantity ...view middle of the document...

Naturally, the demand for boxes of chocolate would increase. The effect of this shift is shown in graph 1.2 below. The effect is to shift the demand curve to the right – where point D1 indicates the demand curve prior to the publication of the study and D2 indicates the demand curve following the publication of the study. On the other hand if there was a validated study published by the government indicating that there was poison in boxes of chocolate which would lead to death the demand curve would move to the left indicating a lower quantity demanded as shown on graph 1.3.
Other influences on demand include
1. The price of related goods
2. Incomes
3. Tastes

Graph 1.2 - Shifts in the demand curve

Graph 1.3 – Shifts in the demand curve

Supply

The buyers' demand for goods is not the only consideration that shapes market prices and quantities. The sellers' supply of goods and services also plays a role in determining market prices and quantities. According to the law of supply, a direct relationship exists between the price of a good and the quantity supplied of that good. Apart from price there are other influences on supply one should consider

1. Changes in the prices for other goods

2. Change in the prices of inputs

3. Government regulation

A supply curve is a graphical representation of the relationship between price & quantity supplied (ceteris paribus) Graph 2.0. Changes in supply or shifts in supply occur when one of the determinants of supply other than price, changes. For example, if the cost of manufacturing a box of chocolates rises – this would cause a shift to the left on the supply curve. On the other hand if there was an improvement in technology it would lead to the right on the supply curve. (Graph 2.1 & 2.2)

Graph 2.0 The supply Curve

Graph 2.1 – Shifts in the Supply Curve

Graph 2.2 – Shifts in the Supply Curve

Equilibrium

Putting demand & supply together, we find Equilibrium (E) where supply & demand curves cross. It is at this point that supply is equal to demand. At this point the allocation of goods is at its most efficient because the amount of goods supplied is the same as the amount of goods demanded. (Graph 3.0)
There are times when the wants of customers change causing a surplus of demand or supply. In the case of excess demand, e.g. At Christmas when the latest computer game has been released, the manufacturers will increase the price in the knowledge that they will sell the game at this increased price. However, as the price increases, the quantity demanded will drop. Markets will always...

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