The Price Mechanism.doc

2. The Price Mechanism Demand This is determined by the consumer and is the amount of a product that a consumer will buy at various prices. The following information was constructed from a class activity: Demand schedule for Mineral Water: A demand schedule is a table that shows the relationship between price and quantity demanded. Quantity Demanded (bottles) 20 40 60 80 100 Price (cents) 200 150 100 60 30 Demand Curve: A graph of the demand schedule is called a demand curve. Supply This is the amount of a product that a producer is willing to sell into the market at various prices. The following information was constructed from a class activity: Supply schedule for Mineral Water: A supply schedule is a table that shows the relationship between price and quantity supplied. Quantity Supplied (bottles) 80 70 60 50 40 Price (cents) 200 150 100 60 10 Supply Curve: A graph of the above supply schedule is called a supply curve. Equilibrium When you plot both curves on the same graph you will discover the following diagram: What is the significance of the point where the two graphs meet? It is the point of equilibrium or the point where demand and supply are equal. If you notice the amount supplied by producers and the amount demanded by consumers is equal at this point. At a price of 100 cents the supply of mineral water is equal to the demand for mineral water. This point is called equilibrium. There is no surplus production of mineral water and no shortage of mineral water at this point. Sixty bottles of mineral water will be exchanged at a price of one dollar. What is the price mechanism? The price mechanism explains how the forces of demand and supply determine the four fundamental economic questions. The demand and supply of goods and services will determine an equilibrium price and quantity for all products. The consumer decides how much of a product that they want to buy at various prices. The producer decides how much