Economic Model of Price Determination

Economic Model of Price Determination in a Market:

• Supply and demand is an economic model of price determination in a market.

• The unit price for a good will vary until it settles at a point where the quantity demanded equals the quantity supplied, resulting in an economic equilibrium.

• The supply curve shows the relationship between the price of a good and the quantity supplied by producers.

• The demand curve represents the amount of a good that buyers are willing and able to purchase at various prices.

• A rise in the cost of raw materials decreases supply, while a fall in production costs increases supply.

• A demand curve is generally downward-sloping, but for some goods, it is upward-sloping.

• The concept of a supply or demand curve assumes that firms or purchasers are perfect competitors, having no influence over the market price.

• Economists distinguish between the supply curve of an individual firm and the market supply curve.

• Common determinants of supply are production costs, technology, taxes, and subsidies.

• Common determinants of demand are tastes and preferences, income, price of complementary goods, and number of buyers.

• Market equilibrium is the price-quantity pair where the quantity demanded equals the quantity supplied, represented by the intersection of the demand and supply curves.

• Partial equilibrium takes into consideration only a part of the market to attain equilibrium.Summary Title: Understanding Supply and Demand

• The supply curve is upward sloping, indicating that as the price of a good increases, the quantity supplied increases as well.

• The demand curve is downward sloping, indicating that as the price of a good increases, the quantity demanded decreases.

• The intersection of the supply and demand curves determines the equilibrium price and quantity in a market.

• The elasticity of supply and demand determines how responsive quantity supplied or demanded is to changes in price.

• The laws of supply and demand can be applied to all living things that interact in scarce resource environments.

• Demand and supply relations in a market can be statistically estimated from price, quantity, and other data using econometrics.

• The aggregate demand-aggregate supply model is the most direct application of supply and demand to macroeconomics.

• The phrase "supply and demand" was first used by James Denham-Steuart in his Inquiry into the Principles of Political Economy.

• The marginalist school of thought emerged during the late 19th century, changing the way prices were determined.

• The supply and demand model has been criticized for being an empty tautology, for failing to explain the prevalence of administered prices, and for failing to anticipate asset bubbles that can arise from a positive feedback loop.

• Paul Cockshott's critique focuses on the unfalsifiability of the neoclassical model.

• The labour theory of value is considered a simpler alternative to the supply and demand model.