2.4 Price

• What does price represent in economics?

  The sum of money for a good or service
• How is price determined?

  By the interaction of supply and demand
• What does price reflect regarding value?

  How much a person values something
• Can the value placed on a good vary?

  Yes, it can vary between different people
• What is the role of price in resource distribution?

  Determines efficient distribution of resources
• What does efficiency mean in resource allocation?

  Optimal production and distribution of resources
• What are the three functions of price in resource distribution?

  Signalling, transmission of resources, rationing
• What does signalling in price changes indicate?

  Where resources are needed in the market
• What happens when prices rise?

  More resources are required
• What does transmission of resources involve?

  Producers sending information to suppliers
• How do higher prices affect resource suppliers?

  Encourages them to supply more resources
• What is the role of prices in a market economy?

  Allocate scarce resources among competing uses
• What are market forces?

  Factors determining price levels and availability
• What is equilibrium in economics?

  Where quantity supplied matches quantity demanded
• What happens at the equilibrium price?

  Price is unlikely to change significantly
• What is the allocation of resources in a market system?

  Distribution among producers and consumers
• How do prices serve as signals?

  Guide decisions of consumers and producers
• What happens when demand for a product rises?

  Prices typically increase, incentivizing supply
• What occurs if demand for a product falls?

  Prices drop, reallocating resources
• What are the effects of shifts in demand on equilibrium?

  • Shift to the right: Increases demand, price, and quantity
  • Shift to the left: Decreases demand, price, and quantity
• What are the effects of shifts in supply on equilibrium?

  • Shift to the right: Increases supply, decreases price, increases quantity
  • Shift to the left: Decreases supply, increases price, decreases quantity
• What is the equilibrium price and quantity?

  Where quantity supplied matches quantity demanded
• What is the effect of a rightward shift in demand?

  Increases demand, price, and quantity
• What is the effect of a leftward shift in demand?

  Decreases demand, price, and quantity
• What is the effect of a rightward shift in supply?

  Increases supply, decreases price, increases quantity
• What is the effect of a leftward shift in supply?

  Decreases supply, increases price, decreases quantity