2.4 Price

• Price is a 'reflection of worth'.

  It is defined as ''the sum of money you have to pay for a good or service. It is determined by the interaction of supply and demand''
• Price plays 3 roles in an economy:

  • Signalling -> An increase in demand leads to a rise in price. This increases profit for firms, so in turn, firms are now more willing to supply the good. *see diagram*
  • Transmission of preferences -> By creating a demand for products, through the above process, firms will now realise what consumers want and will then reallocate their scarce resources.
  • Rationing -> By raising prices, the potentially infinite demand for some goods + services will be reduced (or 'rationed').
• Equilibrium is defined as ''a situation that occurs in a market where the price is such that the quantity that consumers wish to buy is exactly balanced by the wish to supply''. Equilibrium is market clearing price, and any other price other than that price at equilibrium, will result in disequilibrium.

  Equilibrium price and quantity is defined as ''where the quantity supplied exactly matches the quantity demanded''.
• Determination of prices is defined as ''the interaction of the free market forces of demand and supply to establish the general level of price for a good or service.''