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← Project Part OneEconomic Theory →
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Economics Project uk

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Price is the consideration that a seller receives in exchange for possession and ownership of goods and services. Economic equilibrium price is the price where the demand and supply of a product is equal. Demand refers to the price at which consumers are able and willing to purchase a product. Supply is the price at which sellers are ready and willing to avail goods to the market.

There are several factors that affect demand and supply and consequently affect the equilibrium price of a product. Changes in demand and supply take place in two forms; movements and shifts. A movement in demand is a change from one position to another along the demand curve. A movement in demand is caused by a change in the price of the product itself. An increase in the price of a product causes an upward movement along the demand curve. Consequently, the equilibrium price also increases and fewer goods are available in the market (Mankiw, 2008).

A shift of the demand curve is a lateral change from one position to another. A shift occurs as a result of change of any other factor affecting price except its price. These other factors include price of related products, income, population size, expectations and preferences.

Products could be related as either complements or as substitutes. Complements are products that are used together. The purchase of one product necessitates the purchase of the other product. Substitutes are goods that fulfill the same purpose. They have the same features and can be used interchangeably. A decrease in the price of a complement results in higher demand for our product. In accordance with the law of demand, an increase in demand is expected to lead to an increase in the equilibrium price.

An increase in the disposable income of consumers is expected to increase the demand for goods. Therefore, the equilibrium price also increases. A rise in the population size or number of consumers is also expected to boost demand for a product and in effect increase the equilibrium price (Wessels, 2000).

When consumers expect a future shortage of goods, they rush to buy the available stock. This causes a rise in demand and an increase in equilibrium price. A favorable change in consumer taste and preferences for a product causes demand. This results to an increase in equilibrium price. Factors that lead to an increase in supply of goods consequently increase the equilibrium price. These factors include an increase in price of the product, deterioration in production technology, and reduction in number of suppliers.

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