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| | {{Economics_Lectures}} | | {{Economics_Lectures}} |
| − | Recall that a "free market" is one where there is no interference with price and quantity of goods sold. In a free market, government does not regulate the price or limit the quantity. | + | Recall that a "free market" is one where there is no interference with the price and quantity of goods sold. In a free market, government does not regulate the price or limit the quantity. |
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| − | In a free market, supply equals demand for both price and quantity sold. That is one of the beauties of free enterprise. It is efficient, it is productive and it minimizes waste. The supply and demand reacts almost immediately to changing needs and circumstances. Millions of transactions, or sales, occur to bring the price to its point of price equilibrium. The free market reacts much more quickly than government can. For example, government offices like the Post Office typically close at 4:30pm and most government offices (other than the Post Office) are closed the entire weekend, but the free market is always working 24 hours a day. You may be asleep, but the free market is at work to bring price to its most efficient level. | + | In a free market, supply equals demand for both the price and quantity sold. That is one of the beauties of free enterprise. It is efficient, it is productive and it minimizes waste. The supply and demand react almost immediately to changing needs and circumstances. Millions of transactions, or sales, occur to bring the price to its point of price equilibrium. The free market reacts much more quickly than government can. For example, government offices like the Post Office typically close at 4:30pm and most government offices (other than the Post Office) are closed on Saturday, but the free market is working 24 hours a day, 6 or 7 days a week. You may be asleep, but the free market is at work to bring price to its most efficient level. |
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| − | Prices change daily due to continual changes in supply and demand. During your next few trips to the supermarket, notice how much the prices fluctuate. This is because both supply and demand are constantly changing. Supply changes due to problems or improvements in manufacturing and shipping, or different yields in crops. Labor costs change over time, which also affects supply. Demand is constantly fluctuating also. Every day people lose or switch jobs, which affects their buying decisions. The changing of the seasons also affects demand, as do variations in personal tastes. | + | Prices change daily due to continual changes in supply and demand. During your next few trips to the supermarket, notice how much the prices fluctuate. This is because both supply and demand are constantly changing. Supply changes due to variations in the amount of unsold goods, problems or improvements in manufacturing, farming or shipping, or different yields in crops due to weather and other factors. Labor costs change over time, which also affects supply. Demand is constantly fluctuating also. Every day people lose or switch jobs, which affects their buying decisions. The changing of the seasons also affects demand, as do variations in personal tastes. |
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| | Five to ten years ago there was tremendous demand for Beanie Babies, driving up the price. Now there is far less demand, so the price has fallen. The same could be said about any fad. | | Five to ten years ago there was tremendous demand for Beanie Babies, driving up the price. Now there is far less demand, so the price has fallen. The same could be said about any fad. |
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| | Building on last week's class, we can now state the three most basic principles of economics with respect to price: | | Building on last week's class, we can now state the three most basic principles of economics with respect to price: |
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| − | *A rise in price tends to increase supply and decrease demand. Conversely a fall in price tends to decrease supply and increase demand. '''LOWER PRICE MEANS HIGHER DEMAND''' (and higher price means lower demand). This is known as the '''Law of Demand''': demand changes inversely with price. | + | *A fall in price tends to increase demand, and a rise in price tends to decrease demand. '''LOWER PRICE MEANS HIGHER DEMAND''' (and higher price means lower demand). This is known as the '''Law of Demand''': demand changes inversely with price. |
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| | *When demand exceeds supply at a given price, the price tends to rise. Likewise, when supply exceeds demand, the price tends to decrease. | | *When demand exceeds supply at a given price, the price tends to rise. Likewise, when supply exceeds demand, the price tends to decrease. |