key term - Price

Definition

Price is the amount of money charged for a good or service. It represents the value that a buyer is willing to pay in exchange for what the seller is offering. Price is a fundamental concept in economics that is closely tied to the laws of supply and demand, as well as the concepts of elasticity and constant elasticity.

5 Must Know Facts For Your Next Test

1. Price is the primary determinant of the quantity demanded and the quantity supplied in a market.
2. The price elasticity of demand and supply measure how responsive the quantity demanded or supplied is to changes in price.
3. Constant elasticity refers to a situation where the elasticity of demand or supply remains constant over a range of prices.
4. Polar cases of elasticity include perfectly elastic and perfectly inelastic demand or supply, which have important implications for how prices and quantities adjust in a market.
5. Prices play a crucial role in allocating scarce resources and signaling information to both consumers and producers in a market economy.

Review Questions

• Explain how price is related to the concepts of supply and demand.
  • Price is the primary determinant of the quantity demanded and the quantity supplied in a market. The law of demand states that as the price of a good or service increases, the quantity demanded decreases, all else equal. Conversely, the law of supply states that as the price of a good or service increases, the quantity supplied increases, all else equal. The equilibrium price is the price at which the quantity demanded is equal to the quantity supplied, resulting in a balanced market.
• Describe the concept of price elasticity and its relationship to the polar cases of elasticity.
  • Price elasticity measures the responsiveness of the quantity demanded or supplied to changes in price. The polar cases of elasticity include perfectly elastic and perfectly inelastic demand or supply. Perfectly elastic demand or supply means that even a small change in price will result in an infinite change in quantity, while perfectly inelastic demand or supply means that quantity is unresponsive to changes in price. These polar cases have important implications for how prices and quantities adjust in a market, and they are closely related to the concept of constant elasticity, where the elasticity remains constant over a range of prices.
• Analyze the role of prices in a market economy and the significance of the concept of constant elasticity.
  • Prices play a crucial role in allocating scarce resources and signaling information to both consumers and producers in a market economy. Prices determine what goods and services are produced, how they are produced, and who receives them. The concept of constant elasticity is important because it means that the responsiveness of quantity demanded or supplied to changes in price remains the same over a range of prices. This has implications for how producers and consumers make decisions, as well as how markets adjust to changes in supply and demand. Understanding the role of prices and the concept of constant elasticity is essential for analyzing the functioning of a market economy.

Related terms

Demand: The amount of a good or service that consumers are willing and able to purchase at various prices during a given time period.

Supply: The amount of a good or service that producers are willing and able to sell at various prices during a given time period.

Equilibrium Price:

The price at which the quantity demanded is equal to the quantity supplied, resulting in a balanced market.