Assesment 2 Coursework Example | Topics and Well Written Essays - 1500 words

Assesment 2 - Coursework Example In a market economy the price system automatically acts as a rationing instrument. With the help of the diagram given above we can easily explain the determination of market price and at the given demand and supply functions and the system will not allow either of the agents to exploit other. The horizontal and vertical axes measure quantity and price respectively. D is the market demand curve showing the one to one correspondence between price and market demand. S is the market supply curve that reflects the producers’ behaviour. S is nothing but the one to one correspondence between market price and supply of it. Equilibrium is achieved at point E where market demand equals market supply. The equilibrium level of price is OP* and quantity is OQ*. Now we consider that producers want to exploit the consumers by charging higher price. What will be the impact$2 Let’s consider that the producer charges new price OP**. At that price level the producers will be willing to supply OQ** amount of output while the consumers are willing to purchase OQd amount of the product. Hence at price OP** the market will face excess demand to the extent AB. This excess demand would cause a downward pressure on price as the producers have the unsold stock in the hand. Price fall would be followed by contraction in supply (movement from B to E) and extension in demand (movement from A to E). This process is continued unless the previous equilibrium is achieved. Here automatic adjustment of price will control the quantity in the market. To answer the aforesaid question we need to know what wealth is. Generally wealth can be defined as something that can generate income or can satisfy human wants. Wealth must be measurable tangible, transferable and scarce in nature. When the goods are produced through the production process it adds to the stock of wealth of the nation. As good is measurable, tangible