[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

Chapter 3
DEMAND, SUPPLY,
AND PRICE
∂
Choice in the face of scarcity is the fundamental concern of economics. But
if scarcity is such a concern for economists, why is it that whenever I go to
my local grocery store it has all the tomatoes I want to buy? Tomatoes might
be more expensive one week and less expensive the next, but they are always available.
In what sense are tomatoes scarce? The same is true for most goods most of
the time; as long as I am willing to pay the market price, I can buy the good. A key
economic insight is that when the forces of supply and demand operate freely, the
price of a good measures its scarcity. If bad weather destroys part of the tomato crop,
tomatoes are more scarce, and their price will rise to reflect that condition. But price
does more than simply measure scarcity. Prices also convey critical economic information.
When the price of a resource—such as land, labor, or capital—used by a firm
is high, the company has a greater incentive to economize on its use. When the price
of a good that the firm produces is high, the company has a greater incentive to produce
more of that good, and its customers have an incentive to economize on its use.
Thus, prices provide our economy with incentives to use scarce resources efficiently,
and a major objective of economists is to understand the forces that determine prices.
This chapter describes how prices are determined in competitive market economies.
The Role of Prices
The price of a good or service is what must be given in exchange for the good. Usually
we identify the price of something with how much it costs in dollars. But price can
include other factors—for example, if you have to wait to buy something, the total price
includes the value of your time spent in line. For most of our discussion, however,
we will keep things simple and just think of the price as the number of dollars paid
to obtain a good or service.
53