in economics a price is made up of what two things?
In economics, a price is determined by two main factors: demand and supply. The interaction between these two factors sets the equilibrium price in a market. Let's dive deeper into how demand and supply influence prices.
1. Demand: Demand refers to the quantity of a good or service that consumers are willing and able to buy at a given price. It depends on several factors, including consumer preferences, income levels, prices of related goods, and market expectations. As the price of a good decreases, the quantity demanded usually increases, and vice versa. This relationship is depicted by the demand curve.
2. Supply: Supply represents the quantity of a good or service that producers are willing and able to offer for sale at a given price. Like demand, supply is influenced by various factors such as production costs, technological advancements, input prices, and government regulations. As the price of a good increases, suppliers are generally motivated to increase production, resulting in an upward-sloping supply curve.
The intersection of the demand and supply curves in a market determines the equilibrium price. At this price, the quantity demanded by consumers matches the quantity supplied by producers, achieving a state of balance. If the price deviates from equilibrium, either a shortage or surplus may occur, eventually leading to price adjustments.
To determine the effects of changes in demand or supply on price, economists use the concept of elasticity. Price elasticity of demand measures how responsive the quantity demanded is to changes in price, while price elasticity of supply measures the responsiveness of quantity supplied. These elasticity measures help analyze the magnitude and direction of price changes in response to shifts in demand or supply.
Overall, understanding the interaction between demand and supply is crucial for comprehending how prices are determined in an economy.