Vocabulary

competitor- конкурент supply and demand – спрос и предложение to charge the price – устанавливать, назначать цену consumer – потребитель effective demand– платежеспособный спрос an influence - влияние willingness and ability – готовность и способность relationship – связь, взаимоотношение quantity – количество

all else remaining equal – когда все остальное остается без изменений enjoyment - удовольствие to diminish -уменьшаться diminishing marginal utility – убывающая предельная полезность will result –явится результатом to be relevant – относиться to cause – заставлять to reduce – снизить substitutes– заменители complements– дополнители to influence – влиять

How are prices determined in the free market?

The price is determined by the interaction of demand for and supply of the product. If there are many competitors in a market, this will mean that businesses have to charge the market price for their products.

If a farmer produced rice, he would take the rice to market and sell it for the price that rice was selling for in that market. The farmer could not charge a much higher price because no one would buy his rice - consumers would buy from other farmers who were charging the lower market price.

To understand how price is arrived at, demand and supply will be looked at separately.

What is meant by demand?

The first thing to understand is that demand is not the same thing as desire, or need, or want. Demand is not just what people want to buy, they must also have money to be able to purchase the product. Only when desire is supported by the ability and willingness to pay the price it becomes an effective demand and has an influence in the market.

The demand for a product depends on how much is charged for the product. If the price increases, normally fewer will be bought and if the price goes down, more will be demanded.

Demand is a consumer’s willingness and ability to buy a product or service at any given price, at a particular time and place.The law of demand describes the relationship between the prices of a good or service and the quantity consumers will buy. This means that all else remaining equal, more goods and services will be sold at a lower price than at a higher price.

Let’s see the law of demand from the point of ice cream selling.

The first ice-cream consumed at the baseball game is great; the second is good; the third one is fair; the forth one was “too much”; and the fifth one made you sick. Clearly we would not like to pay as much to feel sick (the fifth ice-cream) as we would pay to feel great (the first ice-cream). So, sooner or later, we reach the point where enjoyment decreases with every bite no matter how low is the cost. What is true of ice-cream applies to almost everything we consume. After a certain point is reached, the satisfaction from a good or service will begin to diminish. Economists describe this effect as diminishing marginal utility. “Utility” refers to the usefulness of something.

Diminishing marginal utility helps to explain why lower prices are needed to increase the quantity demanded. Since your desire for a second ice-cream is less than it was for the first, you are not likely to buy more than one, except for the lower price. So, a decrease in demand will result in decrease of a market price. And on the contrary, an increase in demand will result in an increase in the market price.

To summarize: the law of demand states that in general, other things remaining equal, the lower the price of a good – the greater the quantity of that good buyers are willing and able to buy over a given period. Conversely, the higher the price of a good – the less the quantity of that good buyers will buy. This law is relevant to all goods and services.

Changes in Demand. What are some of the factors that would cause the demand for ice-cream, or any other product, to increase or to decrease ?

They are the following:

1. Changes in consumer income.

If consumer’s income falls, there will be less demand for many products. When consumers have less money to spend, they will reducetheir demand for products.

Changes in the prices of substitutes.

These are bought and used in place of another product. Assuming potatoes and macaroni foods are substitute products. If the price of macaroni foods rises then more potatoes will be bought and demand for macaroni foods will fall.

3. Changes in the prices of complements.

These are products that are often bought and consumed together. Assuming coffee and milk are complements; if the price of coffee rises, then less coffee will be bought and therefore will be less demand for milk.

4. Changes in consumer’s tastes or fashion.

If a product becomes more popular, demand will increase.

5. Changes in advertising.

If there has been a successful advertising campaign, for example for a particular brand of sports shoes, the demand will increase.

The demand for particular goods can be influenced by weather, demographic trend, taxes and other factors.