ABSTRACT
Prices in a market economy are constantly on the move. Price has a key function in the market economy. On the one hand, it signals changes in demand patterns to producers, stimulating production of those products with increasing demand and depressing production of those products where demand is falling. At the same time, price provides an incentive for producers to economize on their inputs. This chapter investigates how price is formed in the market, the factors which determine the demand for and the supply of a good or service and demonstrates how the forces of demand and supply interact to determine price. This chapter enables the reader to:
identify a market and define the attributes of a perfect market
analyse the factors that affect the demand for a good or service
analyse the factors that affect the supply of a good or service
understand the concept of equilibrium price
analyse the factors that cause changes in equilibrium price
relate price theory to real-world examples.
