Markets; Price determination and resource allocation - Essay Example

The diagram below presents the picture of a market. Each variable is shown as interrelated to each other. Things to be produced are determined by the decisions of the buyers whether to purchase or not the available products like food, clothing and housing. Adjustments on product creation basically depends on the demand in the goods market. The method of production applied in creating the product are decided based on the level of competition of producers. Efficiency is the fundamental criteria in choosing for the method and it depends on the prices prevailing on factors of production like land, labor and capital and the prices of the output like food, clothing and housing.

Producers would want to minimize cost to meet the price competition. Concerns regarding for whom the products are depend on the nature of supply and demand for inputs. Prices of inputs serve as income and ascertain the ability to purchase product. As a whole, a competitive market presents the price system brought about by correspondence of supply and demand and resources are allocated efficiently without intervention. Given the mechanisms of a market, the law of supply and demand enters to present information of market equilibrium.

The law of supply and demand asserts that the equilibrium market price of a certain commodity is where supply equals demand. Equilibrium, on the other hand, is a state which when attained will be maintained. As shown in the succeeding diagram, the demand curve is negatively sloping because an increase in price reduces the amount of purchases. The demand curve shifts to the right because of several factors: increase in the price of substitutes, decrease in the price of complements, increase in income, change in preference for the product and special influences in favor of the product.

The reverse causes the shift of the demand curve to the left. Looking at the diagram, the supply curve is shown to slope positively because a price increase stimulates production.