Question

In: Economics

Pick any product you would like. Trace out in some detail(meaning at least 4 steps)...

Pick any product you would like. Trace out in some detail (meaning at least 4 steps) how the price system coordinates the actions of consumers and producers to get this product to the market.

Solutions

Expert Solution

Lets take example of Tea which is a normal good i.e its demand will increase if consumer's income increases and its demand would fall if consumer income falls.

# Now lets say that the price of tea falls for buyers. This will simply lead to more consumption by the buyers. The demand for tea will rise. In return the producers will try to cope up production with the demand for tea.

# On the other hand if the prices increase, people will start consuming less of tea. The demand for tea falls.

# The consumer will move to tea's substitute which is coffee, hence a rise in the price of tea will lead to a rise in the demand for coffee.

# This will simply induce the coffee producers to produce more and keep up with the demands for coffee.

# Also with the rise in price of Tea, the demand for its complementry good which is suger will also fall.

So we just saw how a change in the price level of a product can lead to changes in actions of consumers and producers. And not only that, a change in a price of a product can also affects the market of its substitute and complementary good too.


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