12.2+The+Market+Mechanism

=The market mechanism =

The market mechanism describes how the forces of demand and supply determine the relative prices of goods and services, which then ultimately determine the way our productive resources are allocated in the economy.

Consider the following:

Relative prices are simply determined by the price of one good divided by the price of another.

Consider the following information from the Coles website:





At this point in time the price of pink lady apples is approximately equal to twice the price of a packham pear (written as 2:1). A farmer can choose to allocate his/her scarce resource of land to the production of apples and of pears. Generally speaking there is greater demand for apples than pears which may be one reason why their price is more expensive.

If the relative prices changes then one would expect there would be a reallocation of land, labour and capital to the production of each good and service. Let's assume that the price of Packham Pears increase because ACA and Today Tonight run stories on the healing properties of pear seeds. As a result the factor of demand tastes and preferences changes and there is an increase in demand for Packham pears. This shifts the demand curve to the right and results in a shortage in the market. To clear the market, customers who really want the pears will be prepared to pay more and the price will be bid up. As a result relative prices have changed. Pears have increased to 4.98 per kilo.

The new relative price of apples compared to pears is now 1:1. This will affect the incentives of producers and consumers who are likely to change their behaviour.

What will the farmer do?

Leave your answer here....


 * //Name// || //Response// ||
 * //Random// || //I think the farmer will probably retire because the farmer recently found out that his land is filled with gold........how do I know this? I know him.// ||
 * Andrew || The farmer should distribute the resources of land, labour and capital to the production of both pears and pink lady apples. The reason for this is, they are both proving to be profitable. However, due to the fact that the price of pears are rapidly increasing, it may be worth while to reallocate resources to the production of pears early, in order to capitalize on future profit. ||
 * Eugene || The farmer will then reallocate his/her resources in order to grow more Packham pears than PinkLady Apple, or maybe in the same level, as these gtwo products worth the same now, so it doesnt really matter the ratio between these two fruits. However, under the influence from the television. consumers may change their taste and preferences, which will drive them to purchase more pears, therefore the farmer may have more willingness to produce more pears in order to satisfy the market's need. ||
 * Dave || Previously, the farmer would have allocated more of his resources to producing apples, than pears. However, as the price of pears equals the price of apples, the farmer will allocate equal resources to each, as they are the same price. If demand continues to increase for pears, and the price increases, the farmer will decide to allocate mroe resources to the production of pears. ||
 * John Nguyen || The farmer should continue to supply apples. The reason for this is that,while both fruits are equally profitable, the farmer would have to reallocate resources and spend a significant amount of time growing pears. Therefore, the opportunity cost of growing these pears is continued profit gained from selling apples. Furthermore, if the rate of supply for pears keeps increasing (as other speculative farmers look to make profit), there may soon be a surplus in supply and this would make reallocation of resources into the production of pears bear little fruit. ||
 * David T || The farmer will notice that he can gain a higher return on his investment to produce the pears now than he could before, therefore he would reallocate his land, nature and capital resources to toward the production of pears. This would allow him to seek a greater profits than he could before. ||

Why heavier people should pay more to fly 

Read more: [|http://www.theage.com.au/business/why-heavier-people-should-pay-more-to-fly-20120111-1puti.html#ixzz1j7Z3YPof]  El asticity of demand

Have a look at this article. What does it tell you about the price elasticity of demand? Should the government intervene in the market?