Managerial Economics Resit Assignment - Essay Example

However, in a free market economy, price is highly influenced by the market forces of demand and supply and the utility or the value customers are expecting from a commodity is also influenced by these market forces. This paper addresses factors that determine the price of computers in a free market and explain why computer price has continued to fall even while the demand constantly increased. Price determinants of computer in free market Free market is a market system with few government restrictions on how a product or service can be produced and marketed or on how a factor of production can be employed (Kates, 2011).

Government in all other market systems do intervene in matters regarding how a good or service can be produced and marketed and how factors of production such as land, labor, capital and organization can be employed more than in the case of free market. As there are relatively few government restrictions in countries like United States and Canada, their economies are said to be closer to free-market economy. In a free market economy, price is determined by the market forces of demand and supply.

Consumers are willing to pay for a goods or service only if they are worth the price. Similarly, suppliers are ready to produce and market only if consumers are ready to pay for them. Market equilibrium occurs when market demand and supply are equal and this is how the price of a commodity is determined. Thus, value or utility of the commodity and willingness to pay are significant factors that determine the demand and supply forces in the market. In a free market mechanism, price is never affected by outside forces such as government restrictions.

The resources are allocated by the spending decisions of millions of consumers and producers. As governments place no or relatively very less restrictions on what can be bought and sold, owners of factors of production and producers of goods and services have fuller right to buy and sell whatever they own through the market system. When it comes to computers in a free-market, the price is determined according to the demand and supply forces. As depicted in the table and graph below, price of computers in a free market is determined in the equilibrium point where the demand for computers and its supply intersect.

When price of the computers areas lower as 10,000 or 15,000, the demand may increase to 60 and 50 respectively and the supply will reduce to 20 and 30 respectively. As the table shows, there is only one price of shifts ($ 20,000) where the market is in equilibrium. Quantity demanded is equal to quantity supplied at 40, 000 computers. At all other states, the market price is in disequilibrium wherein supply of computers and demand for computers are in a state of imbalance. Disequilibrium occurs either when the demand exceeds supply or the supply exceeds the demand for computers.

Price per computer $ Demand (000 computers) Supply (000 computers) Market position Effects on price 10,000 60 20 Shortage Rise 15,000 50 30 Shortage Rise 20,000 40 40 Equilibrium Stable 25,000 30 50 Surplus Fall 30,000 20 60 Surplus Fall 35,000 10 70 Surplus Fall As far as computers in free-market mechanism is considered, government will not intervene in resource allocation. In other economic systems, governments may choose to interfere in the price mechanism mainly because they want to control,