When’s the last time you heard a friend or family member complaining about the high price of something? Chances are it might have been the last time you were at the gas station. High gas prices have been a source of much complaining for quite a while now.
You may have done some complaining of your own, too, though. Have you been to the movie theater or wanted to buy a video game recently? If so, you’ve probably seen how prices on just about everything tend to go up over time.
But have you ever stopped to WONDER about how those prices get set? Let’s find out as we take a look at some basic economic principles today in Wonderopolis!
How prices are determined depends upon the type of product or service you’re talking about. There are many, many factors that go into setting prices. In fact, there are too many to cover in a single Wonder of the Day.
For example, taxes and government regulations often impact prices of certain goods and services. We’ll put those factors aside for now and instead concentrate on the basic economic principles that work together to help determine prices in a normal free market economy.
Although some people believe certain objects have an objective, intrinsic value, any particular good or service is ultimately only worth what buyers are willing to pay for it. That leads us to the concepts of supply and demand.
The supply of a good or service is how much producers are willing to make at a given price. The demand for a good or service is how much consumers are willing to buy at a given price.
Supply and demand interact with two other factors: quantity (how much of the good or service ends up in the market) and price (what is charged for the product or service given supply, demand, and quantity in the market).
All these factors influence each other. To see how they work together, let’s look at some real-world examples. Do you remember the last time a new must-have techno-gadget came on the market? Demand was very high. Everyone had to have it. Unfortunately, supply was low. It was brand new and the manufacturer had yet to make many of them.
What was the price of the item? It was likely extremely high. You wouldn’t be able to find it on sale. In fact, you probably couldn’t even find it in stores, because it was being bought as quickly as it could be produced.
Of course, over time, the opposite can also happen. When that latest techno-gadget came out, last year’s model was still on shelves. No one wanted it now. Demand was very low. Because people weren’t buying them, supply was plentiful and the quantity on store shelves was more than needed. What happened to its price? It likely fell quickly.
As the price fell and the item was offered on sale, more people probably wanted to purchase it for a lower price. Sooner or later, the price would settle at a lower amount that would balance the supply with the public’s demand for the product.
All this happens constantly and automatically as we go about our daily lives. Manufacturers make decisions about how many items to supply based upon their estimates of demand. Demand can often be influenced by advertising and other factors. Consumers’ actual purchases affect the quantity of items available and prices fluctuate accordingly.