Price of a Good and Scarcity - Essay Example

Price of a Good and Scar In economics, it is evident that demand and supply of goods and services influence and create the price of the goods or services in question. Furthermore, demand and supply go on further in determining the scarcity of a good or service. The creation of scarcity, in essence, comes about when the supply does not meet the demand of goods and services, and it is reflected by how the price of a good or a service is quoted. High prices reflect scarcity of goods and services while low prices are a reflection of a higher supply or an abundance of goods and services. The idea behind supply and demand concept is a huge factor when it comes to price and scarcity of goods and services. On the other hand, a competitive market entails a market in which many buyers and suppliers exist, and as a result, there is eradication of the idea of monopoly and creation of competition. A competitive market is efficient since no single entity, be it buyers or suppliers can control or influence the pricing of goods and services to their advantage. Additionally, in a competitive market, the high competition among buyers determines the demand price while the high competition among supplies determines the supply price. This paper is an explanation of the neoclassical arguments that the price of a good reflects how scarce it is, and that competitive markets are efficient. The price of a good can be classified as being high, low or moderate. The three classifications are highly influence by demand and supply of goods and services in the market. Moreover, the number of sellers and buyers in the market influence the demand and supply of goods and services. A high number of buyers in the market result, in a high demand, while a low number of buyers result in about a low demand. A high number of sellers in the market result in a high supply while a low number of sellers result in a low supply. A price of a commodity will be high when the supply of the commodity will not match up the demand by buyers. Alternatively, a price of a commodity will be low when its supply is higher than its demand thus creating a surplus. A moderate price comes as a result of market equilibrium that is when the supply of commodities equals the demand for commodities. In essence, the price for a good or a service fluctuates according to its supply, and the supply can be scarce, moderate or abundant. In relation to the theory of demand and supply when a market has many suppliers there will be an abundant supply of goods and services and in turn, a competition for buyers among the suppliers. This will go on to influence the price in that the suppliers will be forced to state their minimum supply price in order to win the competition for buyers. On the other hand, when there are a low number of suppliers the supply of goods and services in the market will be scarce. There will be competition for the little available goods and services among the buyers in the ready market, and as a result, the price for the commodities will go up. A scarce good or service has a high price. For instance, the theory that the price of a good reflects how scarce it is, is best exemplified when looking at the prices of precious metals, which are high are because of their scarcity. However, food stuffs are abundant and thus their prices are low (Keohane & Olmstead 182). Returns to scale, entails the idea of a company or an organization increasing its inputs in production, which are either capital or labor with the intention of increasing outputs. Increasing returns to scale aims at availing more goods and services in the market that is, increasing the supply of goods and services. Since a scarce good or service has a high price, increasing returns of scale will affect the price in that there will be an increased supply of goods and services in the marketplace. A high price of a commodity is a reflection of a low production of that particular commodity, which makes its supply low and thus scarce. Through returns of scale, inputs of production mainly capital and labor are increased at an equal proportion within the organization resulting in a higher output production. In order for prices to be high, scarcity for goods and services must be maintained, but this fact is in jeopardy after the introduction of the thought of increasing returns to scale. Ultimately, increasing returns of scale is detrimental to the concept of scarcity and high prices for goods and services (Keohane & Olmstead 92). Competitive markets The efficiency of a competitive market is engrained on the premise that the price of goods and services come as a result of buying by applying the demand price and selling through the supply price. In the competitive market, suppliers and buyers exist in that no one entity can influence the price of commodities to the others disadvantage. In this market, efficiency is ensured since issues of oligopoly and monopoly do not exist. The concept of equilibrium, which is realized when the demand price equals the supply price is an important characteristic of a competitive market. The competition for goods and services in the market among buyers helps in creating the demand price, while the competition for selling goods and services in the market among suppliers helps in creating the supply price. The nature of demand and supply makes competitive markets efficient since suppliers will strive to sell at the lowest supply price, and buyers pay at their highest supply price. In a market where buyers have the power to pay for goods and services at their maximum demand price without any influence on price by the suppliers, then that is efficient and thus a competitive market. Moreover, a competitive market is whereby suppliers, according to demand and supply forces, sell by charging the minimum supply price (Keohane & Olmstead 59). The efficiency of competitive market lies with the premise that there is market equilibrium, meaning that the demand price equals the supply price. Increasing returns to scale affects the nature of competitive market since the supply is altered. Increasing returns to scale will add more supply of goods and services, which will overpass the demand of these goods and services. The nature of the competitive market will be altered, since it is obvious that when a market experiences a surplus supply of goods and services then demand price and supply price are also altered. Returns to scale can be possibly introduced by a company that wants to instill monopoly by increasing supply in order to reduce the supply price. This monopoly will turn out to be a killer of the competitive market. Increasing returns to scale is an advantage to buyers; however, it becomes a disadvantage on the suppliers’ side. This is in relation to the principle of competitive market that suppliers should not influence the market price and that prices in a competitive market are as a result of market equilibrium (Keohane & Olmstead 62). Conclusion Scarcity is a great factor that influences the price of goods and services. Scarcity comes about when the supply of goods and services does not match up the demand for these goods and services. Commodities with high prices are scare in that they are not readily available. Contrarily, goods that have low prices are abundant meaning that they have a high supply and thus suppliers opt to sell at the lowest supply price. Increasing returns to scale is bound to affect the idea that the price of a good reflects how scarce it is. This is because increasing returns to scale brings about an increase in supply of goods or services making then abundant and driving down prices. Competitive markets are efficient since this is where utilization of market equilibrium exists. Market equilibrium comes as a result of equal demand and supply price. Increasing returns to scale in turn increases the supply of goods and affects the nature of a competitive market. The theories: the price of a good reflects how scarce it is, and competitive markets are efficient, can have problems when there is an alteration in the normal supply and demand. Ultimately, the price of a good will reflect whether the good is scarce or abundant, and a market will remain competitive if buyers and suppliers utilize the concept of demand price and supply price respectively. Work Cited Keohane N, Olmstead S. Markets and the environment. New York: Island Press, 2007. Print. Read More