Econ. 2010 Essay Example | Topics and Well Written Essays - 500 words

Econ. 2010 - Essay Example A higher price, however, will put them at a disadvantage because it will lessen their purchasing power, as a result they will demand less of that good. This decision will cause a change in demand as they will try to look for some alternatives or substitutes for that product. This is also known as the substitution effect. A seller may see the situation differently. A lower price is not as encouraging as a higher price. This means that the sellers are more willing to make their goods available in the market at higher prices because this means more profit. The shortage in the supply of grain had caused the prices to go up and the additional supply due to the better weather caused the prices to fall. This is a pricing mechanism in a purely competitive product market. Shortage is when the quantity demanded is greater than quantity supplied resulting to a higher selling price while surplus happens because quantity supplied exceeded what the market demanded. When neither shortage nor surplu s exists, the price and quantity supplied and demanded are at equilibrium. The equilibrium price and quantity is where selling and buying decision are synchronized or coordinated as a rationing function of prices (McConnell and Brue, p.58).