How are prices for goods and services determined in a market economy?

Answer 1

Prices and wages are determined by the price mechanism. The price mechanism is the interaction of the demand and supply curve, or the demand and supply model.

The answers below are referring to scenarios where there is no government intervention, when the market is a free market, or market economy.

You have to draw the model to understand the theory. Prices of goods and services model, on the horizontal axis, or X axis is the quantity of goods; on the vertical axis, or Y axis, you have the prices of goods. You have your two curves: demand and supply. The demand curve is downward sloping, and the supply curve is upward sloping. The interaction of this two curves will result in the shape of the letter: X.

There are two issues to consider.

1. When the market is at equilibrium. This is the point where Supply=Demand. Like reading of a graph, the price of the good will be set at this level and the quantity of the good will be set at this amount.

   Here, the market is stable. On the long run(where factors of production are variable)

2. When the market equilibrium changes due to the changes in demand and supply.

When there is an increase in demand, the new demand curve will shift leftward. This will result in a new point where Demand Curve 2 interacts with original Supply Curve. This is the new price and quantity output, where price increases and quantity output increases compared to when the market was stable in Scenario 1.

When there is a decrease in demand, the new demand curve will shift rightward. This will result in a new point where Demand Curve 3 interacts with original Supply Curve. This new price and quantity output, where price decreases and quantity output decreases compared to when the market was stable in Scenario 1.

When there is an increase in supply, the supply curve will shift rightward. This will result in a new point where Supply Curve 2 interacts with original Demand curve. The price will be lower, and the output will increase compared to Scenario 1 when the market was stable.

When there is a decrease in supply, the supply curve will shift leftward. This will result in a new point where Supply Curve 3 interacts with original Demand curve. The price of the good will increase, and the output will decrease compared to Scenario 1 when the market was stable.

The above conditions are the same for the labor curve of the total labor work force, but changing the labels of to quantity of labor, and replacing Wages with Price.

There are also shortages and surpluses on the short run that can be considered.

Most importantly, market will always return to equilibrium on the long run.

Answer 2

A product or service has to be sold at a price that is high enough to be profitable, but not so high that it makes you vulnerable to competitors who can sell at a lower price and take all your customers away from you. So, it is a constant balancing act. Some businesses get it wrong, and consequently fail.

Answer 3

By the competition as well as production costs, desired profit, and finally supply and demand.

Answer 4

type of product in the market.