<2.2 THE ROLE OF MARKETS> 

In a market system what would happen to the value of apples...[Explain]

• ...if their was a really good harvest?

• ...if their was a really bad harvest?

• ...If the doctor's report stated that apples was good for your health?

• ...If the doctor's report stated that apples was bad for your health?

Using the terminology presented above can you explain how your teacher's scarce labour resource was allocated from the UK to Taiwan. 

• The price/relative value and subsequent quantity of a good determined through the forces of supply and demand is called the MARKET EQUILIBRIUM PRICE AND QUANTITY. In other words where the QUANTITY DEMANDED = QUANTITY SUPPLED. 

• At this point, there is no surplus (excess supply) or shortage (excess demand), and the market clears. The price where this happens is called the equilibrium price.

• Equilibrium quantity is the amount of goods exchanged at this price. At equilibrium, resources are allocated efficiently, and there is no pressure for price/relative value to change.

• Disequilibrium occurs when the market price is either above or below the equilibrium price, leading to either a surplus or a shortage:

• Surplus: If the price is too high, the quantity supplied exceeds the quantity demanded. This causes unsold goods, pushing prices down until equilibrium is restored.

• Shortage: If the price is too low, the quantity demanded exceeds the quantity supplied. Buyers will compete for the limited goods, pushing prices up until equilibrium is achieved.

• In a functioning market system, prices adjust dynamically in response to changes in supply and demand, guiding the efficient allocation of scarce resources.

• The price mechanism incorporates a 'SIGNALING FUNCTION' which refers to how changes in prices ACT AS SIGNALS to both PRODUCERS and CONSUMERS.

• • • SIGNALS FOR PRODUCERS:

• If DEMAND RISES => SHORTAGE OCCURS at initial price => the PRICE starts to RISE => SIGNAL to PRODUCERS that CONSUMERS WANT MORE of this product.

• If DEMAND FALLS => SURPLUS OCCURS at initial price => the PRICE starts to FALL => SIGNAL to PRODUCERS that CONSUMERS WANT LESS of this product.

• If SUPPLY RISES => SURPLUS OCCURS at initial price => the PRICE starts to FALL => SIGNAL to PRODUCERS that CONSUMERS WANT LESS of this product..

• If SUPPLY FALLS => SHORTAGE OCCURS at initial price => the PRICE starts to RISE => SIGNAL to PRODUCERS that CONSUMERS WANT MORE of this product.

• SIGNALS FOR CONSUMERS:

• If DEMAND RISES => SHORTAGE OCCUIRS => the PRICE starts to RISE => SIGNALS to CONSUMERS that the OPPORTUNITY COST of consuming this product has INCREASED, so consumers WANT LESS.

• If DEMAND FALLS => SURPLUS OCCURS => the PRICE starts to FALL => SIGNALS to CONSUMERS that the OPPORTUNITY COST of consuming this product has DECREASED so consumers WANT MORE.

• If SUPPLY RISES => SURPLUS OCCURS => the PRICE starts to FALL => SIGNALS to CONSUMERS that the OPPORTUNITY COST of consuming this product has DECREASED so consumers WANT MORE.

• If SUPPLY FALLS => SHORTAGE OCCURS => the PRICE starts to RISE => SIGNALS to CONSUMERS that the OPPORTUNITY COST of consuming this product has INCREASED, so consumers WANT LESS.

--How did the founders of TES actually know that there was a demand for IN INTERNATIONAL EDUCATION in Singapore?--

• The 'INCENTIVE FUNCTION' of price refers to how PRODUCERS are INCENTIVIZED TO LISTEN TO THE CONSUMER and provide them the goods and services they wish for, as they have the INCENTIVE (REWARD) of GREATER PROFIT as price and quantity increase, which in a market economy, they can keep the majority of for themselves (Unlike in a planned economy). Hence a good with a rising price will motivate them to supply more, whereas a falling price will INCENTIVISE PRODUCERS to CUT THEIR LOSSES and SUPPLY LESS.

• The 'INCENTIVE FUNCTION' of price also refers to how CONSUMERS are INCENTIVIZED TO MAXIMISE THEIR SATISFACTION by BUYING MORE when the price FALLS, or BUYING LESS when the price RISES.

• • • INCENTIVES FOR PRODUCERS:

• If DEMAND RISES => SHORTAGE OCCURS at initial price => the PRICE starts to RISE => SIGNAL to PRODUCERS that CONSUMERS WANT MORE of this product => INCENTIVISES PRODUCERS to supply more as they make MORE PROFIT.

• If DEMAND FALLS => SURPLUS OCCURS at initial price => the PRICE starts to FALL => SIGNAL to PRODUCERS that CONSUMERS WANT LESS of this product => INCENTIVISES PRODUCERS to supply less as they make LESS PROFIT (or LOSSES)

• If SUPPLY RISES => SURPLUS OCCURS at initial price => the PRICE starts to FALL => SIGNAL to PRODUCERS that CONSUMERS WANT LESS of this product. => INCENTIVISES PRODUCERS to supply less as they make LESS PROFIT (or LOSSES)

• If SUPPLY FALLS => SHORTAGE OCCURS at initial price => the PRICE starts to RISE => SIGNAL to PRODUCERS that CONSUMERS WANT MORE of this product INCENTIVISES PRODUCERS to supply more as they make MORE PROFIT.

• INCENTIVES FOR CONSUMERS:

• If DEMAND RISES => SHORTAGE OCCUIRS => the PRICE starts to RISE => SIGNALS to CONSUMERS that the OPPORTUNITY COST of consuming this product has INCREASED => INCENTIVISES SOME CONSUMERS to REDUCE THEIR CONSUMPTION and enjoy ALTERNATIVE CHEAPER SUBSTITUTES. 

• If DEMAND FALLS => SURPLUS OCCURS => the PRICE starts to FALL => SIGNALS to CONSUMERS that the OPPORTUNITY COST of consuming this product has DECREASED => INCENTIVISES SOME CONSUMERS that the OPPORTUNITY COST of consuming this good has DECREASED so they should INCREASE THEIR CONSUMPTION and enjoy LESS MORE EXPENSIVE SUBSTITUTES. 

• If SUPPLY RISES => SURPLUS OCCURS => the PRICE starts to FALL => SIGNALS to CONSUMERS that the OPPORTUNITY COST of consuming this product has DECREASED => INCENTIVISES SOME CONSUMERS that the OPPORTUNITY COST of consuming this good has DECREASED so they should INCREASE THEIR CONSUMPTION and enjoy LESS MORE EXPENSIVE SUBSTITUTES. .

• If SUPPLY FALLS => SHORTAGE OCCURS => the PRICE starts to RISE => SIGNALS to CONSUMERS that the OPPORTUNITY COST of consuming this product has INCREASED => INCENTIVISES SOME CONSUMERS to REDUCE THEIR CONSUMPTION and enjoy ALTERNATIVE CHEAPER SUBSTITUTES. 

--Do you think any entrepreneur would risk starting a business without the incentive of making profits? Would this school have opened if the founders were not incentivised by the prospect of profit? Do you think this school would exist in a socialist state? Do you think the X-BOX or the i-phone would have been invented in the first place? why not?--

• -WHAT IS THE 'REALLOCATION FUNCTIION' OF THE PRICE SYSTEM? When the signals occur and with the incentive of profit and/or loss reduction, producers will REALLOCATE their productive resources accordingly. 

• If the PRICE of a good is RISING, the producer will ALLOCATE MORE RESOURCES TO THIS PRODUCT and the quantity supplied will rise, similarly, 

• if the PRICE of the good is FALLING, the producer will ALLOCATE LESS RESOURCES TO THIS PRODUCT and reduce the quantity supplied, and in turn reallocate these resources to the market for the good, which is rising in price.

--Over the past few years have you noticed any SUBJECT areas becoming MORE POPULAR while others are becoming LESS POPULAR? How has the school reacted, in terms of ALLOCATION OF THEIR RESOURCES?--

• Explain using the 'FUNCTIONS OF THE PRICE MECHANISM' mentioned above how and why the owner of a Coffee shop made the decision to close down, refurbish, and open a bubble tea shop at the local mall.