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# Economics: GED Test Prep (page 2)

By LearningExpress Editors
LearningExpress, LLC

### The Marketplace

In predominantly market economies like the United States, prices are determined by the principle of supply and demand. Supply is the amount of goods and services available for purchase. Demand is determined by how many people want to buy those goods and services. Generally, when demand increases, supply increases, because more producers want to get into the market. Similarly, when demand decreases, supply decreases, because producers stop producing the unpopular product and instead start producing something they believe will sell better.

Producers and consumers both act out of self-interest. Businesses attempt to earn a profit—money in excess of the amount it costs to manufacture a product or deliver a service. Thus, they will charge the highest price they believe they can get for their goods or services. Consumers, on the other hand, look for the lowest price they can find. This, along with competition among producers for consumer dollars, is what drives prices down. (When there is no competition, there is no force to drive prices down. Businesses that control a market—called monopolies—may essentially set prices at whatever level they wish.)

When companies make the exact amount of a product or service at a price that customers are willing to buy, they have reached a point of equilibrium. If the price is greater than this point, demand drops and there may be a surplus, which is when there are more goods produced than customers are willing to buy. If the price falls below the point of equilibrium, demand may increase and create a shortage in supply.

For example, Company X is introducing a new cell phone model, the XLZ. (See graph.) The business wants to find out the equilibrium point so that it will not have a surplus or shortage of the product. To cover its costs and make a profit, Company X can supply 10 phones for \$1,100.As the price increases, the company can offer more phones for sale. However, few customers are willing to pay high prices for the phones. As the price drops, demand increases.

Exercise 1 (see answers below)

Refer to the graph "Supply and Demand Curves for Cell Phone XLZ" to answer the following questions.

1. At what price does the supply of cell phone model XLZ equal that of demand?
1. \$1,400
2. \$1,300
3. \$1,250
4. \$1,500
5. \$1,550
2. If the market price for cell phone model XLZ increased to \$1,600, what would be the likely result?
1. Stores would quickly run out of product.
2. Demand would decrease.
3. The manufacturer would not be able to keep up with demand.
4. The manufacturer would produce the cell phone model at the same rate.
5. The manufacturer would go out of business.

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