The Price System
The mechanism that markets use to allocate scarce goods and resources.
Prices convey a lot of information
- The value of a good (relative to other goods) using the common yardstick of money units.
- The cost of a good, since prices usually represent some mark-up over cost.
- The quality of a good? Sometimes.
Prices are determined by both buyers or “demanders” and sellers or “suppliers”
The quantity demanded is the amount that demanders are willing to buy at various prices:
Quantity Demanded = f(price).
The quantity supplied is the amount that suppliers are willing to sell at various prices:
Quantity Supplied = g(price).