The Law of Supply and Demand: Understanding Prices in a Market Economy, Lecture notes of Law

Download The Law of Supply and Demand: Understanding Prices in a Market Economy and more Lecture notes Law in PDF only on Docsity! The Law of Supply and Demand: The price of an item will go down if the supply increases or if the demand for the item decreases. The price of an item will go up if the supply decreases or if the demand for the item increases. In general, the price of an item is usually pushed toward the level at which the quantity supplied will equal the quantity demanded. The four basic laws of supply and demand are: 1. If demand increases and supply remains unchanged, a shortage occurs, leading to a higher equilibrium price. 2. If demand decreases and supply remains unchanged, a surplus occurs, leading to a lower equilibrium price. 3. If demand remains unchanged and supply increases, a surplus occurs, leading to a lower equilibrium price. 4. If demand remains unchanged and supply decreases, a shortage occurs, leading to a higher equilibrium price. Value  When something is limited in supply and in demand, it is scarce  Because scarcity exists, we must make choices about how to allocate our scarce resources  When faced with scarcity, a system must be decided upon to ration the scarce items  Value is a function of scarcity Market Price-Where supply and demand meet.  WHY PRICES ARE IMPORTANT IN A MARKET ECONOMY  Prices are key ingredients in our economy because they make things happen. If buyers want to own some items badly enough, they will pay more for them. When sellers want to sell some items badly enough, they will lower their prices. Prices play such an important role in economic life that the United States is often described as a price-directed market economy. Let us see why.  1. Act as Signals to Buyers and Sellers. One of the things that prices do is carry information to buyers and sellers. When prices are low enough, they send a "buy" signal to buyers