Main Functions of Prices in a Modern Competitive Market Economy - Essay Example

Sur Lecturer Microeconomics Main functions of prices in a modern competitive market economy Price in a competitive market economyserves two major functions; allocation and rationing. The rationing role relates to buyers of the good. A price is useful in rationing the limited quantity of services or goods among the different buyers who would prefer to purchase it. Consider a case where P1 denotes equilibrium price and Q1 denotes equilibrium quantity. Someway the quantity obtainable, Q1, need to be rationed amongst the buyers. This price P1 will make buyers to demand precisely the amount that is obtainable, Q1. Those who are willing to part with price P1 are the consumers who will obtain benefits with regard to satisfaction from the good and are also the ones to enjoy the good. If a consumer does not have a utility for the good that he or she values at least the same as P1, then the consumer will choose not to purchase that good; i.e., that good is never rationed to that particular consumer or buyer. Rationing by price automatically guarantee that a good will only be purchased by a buyers who value it the most (Prusty, 72-74). If a good was to increase in its price, then buyers or consumers would re-evaluate their utility of the good and so abolish those uses with values which are not at least equivalent to the new, higher price of a good. In summary, rationing role of prices has two significant functions: It give assurance that the quantity bought is equal to the quantity obtainable, It guarantees that the buyers who consume a good are the ones who value it most. The second role of price; allocating or sometimes known as signaling, relates to the producers and also resource owners. A higher price of say good X is, in most cases, a signal that the market needs extra output of X and so producers are offered an incentive so as to hire more resources to make X (Samuelson & William, 89-91). Similarly, a lower price for the good X will gesture them to dedicate fewer resources in the production of X. Consequently, in their search for earnings, producers will always respond to changing prices by either decreasing or increasing production as necessary. 2. What economists mean by: a). increase or decrease in the demand or supply of a product or service The demand for any product or service refers to the quantity that buyers or consumers will be willing and ready to buy at any given price. The supply of goods refers to the quantity which suppliers will be ready and willing to transport to the market at any given prices. An increase in demand for a particular service or product tends to exercise an upward pressure on price. That is, whenever the price of a good increases the corresponding quantity that consumer are willing to buy has also increased. Therefore, a decrease in demand means that the price of that good was lowered at some point in time. However, if producers act in response by supplying extra to the market this might then proceed to cause a fall in the price, since producers are capable of benefiting from a large scale production. In summary, an increase in demand refers to a rise (rightward change) in the quantity demanded at every possible price while a decrease in demand refers to fall (leftward change) in the quantity demanded at every possible price. This shift is always occasioned by non-price determinants. Illustrations of a decrease and an increase in demand and supply are pictured below. b). extension or contraction in the demand or supply of a product or service The supply keeps on varying with changing prices. Whenever there is a contraction or an extension of supply then there will always be movements along the very same supply curve. The same case will apply to a demand curve. This is basically due to the reality that only the price aspect causes these movements maintaining all the other factors constant. The word quantity demanded and quantity supplied implies a point corresponding to a particular price on the demand curve and supply curve respectively. A supply curve may be used to demonstrate the relationship between the price and quantity supplied. A fall or rise in price will cause contraction and expansion in the supply curve respectively. The figure below illustrates an expansion in the supply curve created by a rise in price from P1 to P2. The quantity supplied also expands from Q1 to Q2. The same can be witnessed on a demand curve. However, it`s worth noting that the law of demand stipulates that as price falls, quantity demanded rises.  An inverse relationship exists.  Contraction or expansion in the demand curve happens since the law of demand is reliant on ceteris paribus: all factors remaining unchanged except prices. 3. Effects of events on market for Enrolments on Full Time University Degree Courses a). rise in the wages paid to lecturers delivering Degree Courses A rise in wage rate usually increases the costs of running the university and producing the services. This will force the university to raise their enrollment prices/cost on a full time university course. As the price of the service (degree course) rises consumers (students) will buy less of this full time course and so less output/service that is to be offered to the students will be produced by the university. This implies that less labour will be employed. Since an increase in wages makes labour more expensive, the university may decide to invest in distance learning module as opposed to full time degree course. This implies that not as much labour will be utilized to produce whatever services the university in the education industry sells. If the wage rate is liberated to adjust in a rejoinder to the market forces it will shift to  We,  where demand for labour is equivalent to the supply. Whenever the wage is above  We,  extra labour will be accessible for employment than the university in the industry may profitably hire. Unemployment may only result in the university if wage rate is beyond the prevailing market equilibrium and certain institutional force evades it from being bid down. for instance, a union-university agreement may fix the wage at  Wu, as in Figure 2. This will imply that lecturers who are ready and willing to work in the university at a wage above  We,  and below  Wu,  will never find employment there. Though, it does not implies that there will exist unemployment in this economy as a whole since the lecturers who are displaced from this university will simply bid wages down and obtain employment in a bit favorable sector. b). reduction in the incomes of students The income of student point out what they can afford to buy. Just as when a consumers’ income falls, their demand for services and products decreases, university students are of no difference. When the income of students reduces the willingness to pay for a full time university degree course vanishes. Students will no longer afford the price of a full time degree course and so their demand will also go down. Income is one of the demand determinants and so if a student perhaps loses his or her job or takes up a new position with a lower salary, his or her demand might decrease. A reduction in income shifts the enrollment demand curve to the left, while an increase shifts the enrollment demand to the left. If a rational consumer (student) receive a reduction in income the most appropriate microeconomic decision is likely to reduce his or her demand for an enrollment into a full time university degree course.  The reduction in income can be occasioned by students perhaps being laid off.  In general, every consumer will behave as such when income reduces and when income increases, consumers buy more.  c). long run increase in career earnings A publishing new research report which shows the noteworthy long run rise in career earnings as a result of attaining a good Honours degree will unquestionably influence consumer (students) decisions. If student expect their earning to significantly increase in the future just by attaining good Honours degree, then their enrollment demand into a full time university degree course will definitely increase. Consumers are always opportunistic to the dynamic forces in the market (Pashigian, 45-47), and so students enrollment in the education sector will be no different. As microeconomics decisions demand, if consumers believe the price of a service or good will increase in the long run, they might opt to buy more of it by now so that they gain in future.   Consider a situation where a storm damages a huge portion of the orange crop.  Consumers might run out and purchase all the oranges they may find in anticipation that the price of acquiring oranges will increase.  The same theory can be adopted in this case. If more benefits are expected in the long run in terms of earnings, more students will enroll now into a full time university course so as to attain good honours degree. d). UK government grants more institutions University status A significant increase in the sellers` number can influence the production of services and services.  If the United Kingdom removes a restriction of acquiring University status, then there will be more sellers in this market.  This will increase supply of full time university degree courses in the market. A change in supply normally causes equilibrium output and price to change in the opposite direction as follows: An increase in supply definitely causes a reduction the equilibrium cost of enrolling into full time university courses and so the equilibrium quantity of student enrolling in the University will increase. The rise in supply causes occasions an excess supply at the original price. The excess supply will make the price to fall and so the level of students` enrollment into the full time degree courses will increase. e). Increase in student`s direct entry into apprenticeships and training schemes at companies This will create a similar effect as when more sellers are in the market except this time it`s more buyers prevailing in the market. A significant increase in the buyers` number can also influence the production of services and services (Pagoulatos, 65-67).  More students, in this case buyers, will be willing to acquire full time degree course and so more buyers will exist in this market.  This will increase demand of full time university degree courses in the market. A change in demand generally causes equilibrium output and price also to change in the same direction as follows: An increase in demand undeniably causes an increase in the equilibrium cost of enrolling into full time university courses and so the equilibrium quantity of student enrolling in the University might reduce in the long run. The rise in demand causes an excess demand at the original price. The excess demand will make the price to increase and so the level of students` enrollment into the full time degree courses will eventually decrease. f). increase in the population Population growth in any market will enlarge the demand for services and products since the pool of consumers of full time University degree course shall have grown (Bulatao, 14-16). However, population decrease will have an opposite effect.  A season of Baby Boom generation, will in the long run, have an effect of increase in demand for degree course over the course of individual`s lifetimes. More students are expected to enroll into a full time university degree course over time. It`s worth noting that this population increase will also cause the price of acquiring enrollment to increase as more demand for this service will be realized. In terms of cost of producing the full time degree course, the university might be forced to hire more lecturers to match the anticipated swell in demand of full time University degree course. Reference List Bulatao, Rodolfo A. Determinants of Fertility in Developing Countries: 1. Supply and Demand for Children. - 1983. - Xvii, 642 S. New York u.a: Acad. Pr, 1983. Print. Pagoulatos, Angelos. Major Determinants Affecting the Demand and Supply of Energy Resources: An Analysis of the Petroleum Market. New York: Arno Press, 1979. Print. Pashigian, B P. The Market for Lawyers: The Determinants of the Demand for and Supply of Lawyers. Stanford, CA: Center for Economic Analysis of Human Behavior and Social Institutions, National Bureau of Economic Research, Inc, 1976. Print. Prusty, Sadananda. Managerial Economics. , 2010. Print. Samuelson, Paul A, and William D. Nordhaus. Economics. New Delhi: Tata McGraw Hill, 2010. Print. Read More