Price Determination under a Freely Operating Market System Essay

Price Determination under a Freely Operating Market System - Essay Example This helps in the determination of the type of goods to be produced and the quantity of that particular that is required to be produced. Now, whether a consumer of the goods would buy it or not helps in the determination of the quantity of a particular type of goods to be produced (Haber, 2000, p.10). The recent fall in prices of residential properties in UK has been explained using the market theory in this study. Determination of Price in a Market A market can be considered to be composed of two of its fundamental components. They are: supply and demand. The price of a commodity is determined through the interaction of these two market forces, i.e. supply and demand of the commodity in the market. As discussed earlier market is a place where exchange of commodities takes place between the suppliers and buyers. However this type of transaction can take place only when both the sellers and buyers have agreed upon a price for the particular commodity that is involved in the transactio n. Supply can be defined as the quantity of goods or services a business firm has in offer for sale in the market and it is offered at a pre-determined price set by the business firm. On the other hand, demand is the quantity of goods or services which the consumers are willing to buy at a specified price (Goldberg, 2000, p.72). In a freely operating market system, the sellers and buyers are free to carry out the transaction of goods and services at a mutually agreed price and they are not intervened by any other individuals or entities. Thus in a free market the prices of the goods or services are freely set and are based on the supply and demand of the transacted goods or services. Some of the key determinants of a free market economy are: a) Prices determined freely, b) Rights and incentives associated with the property, c) Freedom of trading at home or abroad, d) Government’s role, and e) the private organisation’s role (Taylor, 2006, p.14-15). Equilibrium Price Fi gure-1 shown below represents two different curves which are the supply and demand curves. Both of these curves are found to intersect at a point which is known as the point of equilibrium. It is actually the market’s equilibrium (Government of Alberta: Agriculture and Rural Development, 2012). The corresponding quantity and price of products at the point of equilibrium are known as equilibrium quantity and the equilibrium price. It is the actions taken by the sellers and the buyers which help in driving the market towards this equilibrium price or in other words the equilibrium of the supply and demand (Mankiw, 2011, p.77). Figure-1 Equilibrium Price Supply Equilibrium Equilibrium Price Demand Equilibrium Quantity Source: (Author’s Creation) Residential Property Prices in UK It has been observed that the prices of residential properties in United Kingdom (UK) have fallen considerably over the past few years. This observed phenomenon can be explained through the market theory involving the two market components, namely, supply and demand of the residential properties in UK. The world economy along with UK experienced a housing boom