ABSTRACT
Some students may feel there is an elementary difficulty with the demand-and-supply story in that it is stated as though the mechanism operates untouched by human hands. Prices are said to be changed by changes in demand or supply. Of course, prices are set and changed by people as a result of decision-making processes in which people respond to some degree to what they perceive, rightly or wrongly, to be changes in some of the conditions that affect demands and supplies. A human role is recognized in the term "price-makers," though the term "price-takers" seems to suggest absence of human intervention. It is explained that in the latter situation, an individual seller or buyer cannot effectively bargain over price since there are other buyers and sellers ready to complete transactions at a price that has been prevailing in the market. Older textbooks used to illustrate situations in which buyers and sellers could haggle and bargain over price within a range set by what each one was willing to do. In the imaginary perfectly competitive market situation, each side knows, or learns by experience, that the range shrinks to a single price. Apart from the two conditions just mentioned, bargaining and perfect competition, buyers decide
whether to buy or not to buy at prices others have set. And the sellers, who are the price-makers (as the term goes, or price-searchers as others would call them), make decisions about prices to charge, based upon their estimates of demand and supply conditions. Presumably they learn by experience that, for any given demand and supply conditions, although they have power to vary price, there is only one price that will maximize their profits. That is how demand and supply, the latter usually implying cost conditions, determine price, not by magic but by human decisions as to prices. Of course, the textbook is talking primarily about equilibrium prices, those that equate quantity demanded and quantity supplied, not primarily about the market prices at any specific time when they may not be at an equilibrium. But even though all prices involve someone's setting them according to some perceived conditions, even the monopolist seems "forced" to set the price that market and cost conditions dictate if the objective is profit maximization.
