Tuesday, January 12, 2010

A Picture of price and markets


We can picture the circular flow of economic life in the picture above. The diagram provides an overview of how consumers and producers interact to determine prices and quantities for both inputs and outputs. Note the two different kinds of markets in the circular flow at the top are the product markets,or the flow of outputs like pizza and shoes, at the bottom are the markets for inputs or factors of production like land and labor. Further, See how decisions are made by two different entities ,consumers and business.
Consumers buy good and sell factors of production, Business sell goods and buy factors of production. Consumers use their income from the sale of labor and property. Price in good markets are set to balance consumer demand with business supply; Price in factor markets are set to balance household supply with business demand.
All this sounds complicated. But it is simply the total picture of the intricate web of interdependent supplies and demands, Interconected through a market mechanism to solve the economic problems of what how and for whom. Look at the picture carefully.a few minutes spent studying it will surely help you understand the working of market economy

Market equilibrium

At every moment, some people are buying while the others are selling firms are inventing new products while governments are passing laws to regulate old ones; foreign companies are opening plants in America while American firms are selling their product abroad. Yet in the midst of all this turmoil, Markets are constantly solving the what, how, And for whom. As they balance all the forces operating on the economy, Markets are finding a market equilibrium of supply and demand.
A market equilibrium represents a balance among all the buyers and sellers. Depending upon the price, household and form all want to buy or sell different quantities. the market finds the equilibrium price that simultaneously meets the desire of buyers and sellers. Too high a price would mean a glut of goods with too much output; too low a price would produce long lines in stores and a deficiency of goods. those prices for which buyers desire to buy exactly the quantity that seller desire to sell yield on equilibrium, of supply and demand.

Three problems of economic organization

Every human society, wether it is an advanced industrial nation. A certainly planned economy ,or an isolated tribal nation must confront and resolve 3 fundamental economic problems. Every society must have a way of determining what commodities are produced, how these goods are made and for whom they are produced. Indeed these three fundamental questions of economic organization what, how ,and for whom are crucial today as they were at the dawn of human civilization.
To answer that three questions , Every society must make choices about the economy input and output .Input are commodities or services that are used to produce goods ,And outputs are the various useful goods or service that result from the production process and are either consumed or employed in further production.
Another term for input is factor of production. These can be classified into the broad categories, Such as: Land, Labor, Capital
Restating the 3 economic problems in term of input an outputs, A society must decide(1)what output produce, And in what quantity (2)How to produce them that is, By what techniques inputs should be combined to produced the desire outputs, and (3) For whom the outputs should be produced and distributed.