Today’s Wonder of the Day was inspired by Lincoln. Lincoln Wonders, “Why are things raising their retail price?” Thanks for WONDERing with us, Lincoln!
When was the last time you heard a friend or family member complaining about the high price of something? Chances are, you were at the gas station. High gas prices have been a source of much complaining for quite a while now.
You may have done some complaining of your own, too, though. Have you been to the movie theater recently? How about the video game store? If so, you’ve probably seen how prices on just about everything tend to go up over time.
But have you ever stopped to WONDER about how those prices are set? There are many, many factors that go into setting prices. In fact, there are too many to cover in a single Wonder of the Day.
For example, taxes and government regulations often impact prices of certain goods and services. We’ll put those factors aside for now. Instead, let’s look at the basic economic principles that affect prices in a normal free market economy.
Any particular good or service is ultimately only worth what buyers are willing to pay for it. That leads us to the concepts of supply and demand.The supply of a good or service is how much producers are willing to make at a given price. The demand for a good or service is how much consumers are willing to buy at a given price.
Supply and demand interact with two other factors: quantity and price. Quantity is how much of the good or service ends up in the market. Price means what is charged for the product or service given supply, demand, and quantity in the market.
All these factors influence each other. To see how they work together, let’s look at a real-world example. Do you remember the last time a new must-have gadget came on the market? Demand was very high. Everyone had to have it. Unfortunately, supply was low. It was brand new and the manufacturer had yet to make many of them.
What was the price of the item? It was likely extremely high. You wouldn’t be able to find it on sale. In fact, you probably couldn’t even find it in stores. That’s because it was being bought as quickly as it could be produced.
Of course, over time, the opposite can also happen. When a new model of that gadget comes out, the older model will sit on shelves. Demand goes down. Because people aren’t buying the item, supply rises. What will happen to its price? It will likely fall quickly.
As the price falls, more people will want to buy it for the lower price. Sooner or later, the price will settle at a lower amount. This will balance the supply with the public’s demand for the product.
This happens constantly and automatically as we go about our daily lives. Manufacturers make decisions about how many items to supply based upon their estimates of demand. Demand can often be influenced by advertising and other factors. Consumers’ actual purchases affect the quantity of items available and prices change accordingly.
Can you think of any other examples of supply and demand? When have you seen the price of a product rise or fall? Many factors play a part in setting prices. Pay close attention and you may notice they can change rapidly!
Standards: C3.D2.Eco.5, CCRA.L.3, CCRA.L.6, CCRA.R.1, CCRA.R.2, CCRA.R.4, CCRA.R.10, CCRA.SL.1