MICROECONOMICS

Microeconomics



Economic Factors Affecting Price

There are several economic factors that influence the prices of goods and services in the market.

Demand

Prices are significantly affected by the law of demand. The law of supply and demand is a key element explaining the functioning of a market economy. It shows how to reconcile by peaceful arbitration market, the interests of suppliers and seemingly contradictory applicants.

In particular, the law of demand tells us that, on any market , there is always a price level which eliminates the shortage (or surplus) and that balances quantity supplied and quantity demanded (for that price, producers are willing to sell the same amount of goods that consumers want to buy). Such a price level is termed optimal because it maximizes the benefits and minimizes the disadvantages for sellers as for buyers. There is an inverse relationship between price and demand (Pindyck, 2005). Consumers would buy more when price is low while less when the prices are high.

Elasticity

The second factor affecting prices is the elasticity of demand. The definition of the price elasticity of demand was elaborated by the economist Léon Walras; it indicates the expected percentage change in the demand for a given product / service (quantity sold, Q) with respect to a percentage change in the price of the same product or other products (elasticity).

Also known as the price elasticity of demand, it is a concept in economics that is used to measure the sensitivity or responsiveness of a product to a change in its price. In principle, the elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in price (Hubbard, 2006). The elasticity of demand can be expressed graphically through a simplification of demand curves.

This inverse relationship between price and quantity generates a negative coefficient, so usually takes the value of the elasticity in absolute value. The elasticity of demand depends upon the responsiveness to changes in prices; the elasticity of demand may be elastic or inelastic. The flatter is the demand curve, the greater the elasticity of demand. Similarly, if the demand curve is more vertical, the elasticity of demand is price inelastic. This is the issue we address as part of our concepts in economics (Pindyck, 2005). This elasticity refers to the sensitivity of consumers to the price of a product or service. For example, in the case of necessity goods, the demand would be same even if the price keeps on increasing while for luxury goods, the demand would decrease with the increase in price.

Market Structure

The market economy is necessarily based on a system of competition, but not necessarily the idealized form of pure and perfect competition. Different market structures have different influence of price of goods and services.

Perfect Competition

There are many sellers and many buyers where both firms and consumers are too small to influence the price. The companies alone cannot determine the price as it is determined by the relationship between supply and demand (atomization). The product is homogeneous, is identical, ...